Tioga Chemical Corporation has a line of credit from the Southern Tier National Bank that is due to be renewed February 1, 20x2

Tioga Chemical Corporation has a line of credit from the Southern Tier National Bank that is due to be renewed February 1, 20x2. The bank has requested the current income statement and comparative balance sheets for December 31, 20x0 and 20x1, which follow: Tioga Chemical Corporation Income and Retained Earnings Statement For the Year Ended December 31, 20x1 (in thousands) Revenue: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $64,500 Case 21–42 Interpretation and Use of Financial Ratios (LO 1, LO 5) Chapter 21 Analyzing Financial Statements 79 Expenses: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,500 Selling and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,625 Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,875 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,500 Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Income tax expense (40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,400 Less: Dividends to common stockholders ($3.86 per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,550 Net income added to retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,850 Retained earnings, 1/1/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,550 Retained earnings, 12/31/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,400 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.18 Tioga Chemical Corporation Comparative Balance Sheets December 31, 20x1 and 20x0 (in thousands) Assets 20x1 20x0 Current assets: Cash and marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,950 $ 1,575 Receivables, less allowance for doubtful accounts ($84 in 20x1 and $105 in 20x0) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600 3,750 Inventories (at lower of cost or market) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,875 4,650 Prepaid items and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 225 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,800 $10,200 Other assets: Investments (at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,950 $ 7,950 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 600 Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,700 $ 8,550 Property, plant, and equipment: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 900 $ 900 Buildings and equipment, less accumulated depreciation ($9,450 in 20x1 and $9,150 in 20x0) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,100 $18,600 Total property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,000 $19,500 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,500 $38,250 Liabilities and Stockholders’ Equity 20x1 20x0 Current liabilities: Short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,650 $ 1,800 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400 5,325 Salaries, wages, and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,950 2,025 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 $ 9,150 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 12,825 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,000 $21,975 Stockholders’ equity: Common stock, at par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,300 $ 3,150 Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800 4,575 Total paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,100 $ 7,725 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,400 8,550 Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,500 $16,275 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,500 $38,250 The bank also has requested that Tioga Chemical Corporation calculate several ratios and report the latest industry ratios. The firm’s ratios have not been calculated for 20x1. However, the accounting staff has gathered the following industry ratios, which are the latest available. Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86 Acid-test ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85 Debt-equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.23 Interest coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.78 Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.57% Return on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.42% Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.37% Return on equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.48% Required: 1. Explain why the bank would be interested in the comparative financial statements and the preceding financial ratios. 2. Calculate the following financial ratios for 20x1 for Tioga: a. Return on sales. b. Return on assets. c. Return on equity. d. Current ratio. e. Acid-test ratio. f. Debt-equity ratio. g. Interest coverage. h. Dividend payout ratio. 3. By comparing the ratios calculated in requirement 2 with the industry ratios, evaluate Tioga’s operations. (CMA, adapted)

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