(Ratio Computation and Analysis; Liquidity) As loan analyst for Utrillo Bank, you have been presented the following information. Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Because your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
Toulouse Co. Lautrec Co.
Assets
Cash $120,000 $320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets9 10,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000
Liabilities and Stockholders
Current liabilities $301,600 $350,600
Long-term liabilities 404,300 499,300
Capital stock and retained earnings
713,600 904,200
Total liabilities and stockholders' Equity
$1,419,500 $1,754,100
Annual sales $ 931,300 $1,506,700
Rate of gross profit on sales30% 40%

Utrillo Bank

Ratio Computation and Analysis: Liquidity Ratios:

Based on the computed liquidity ratios below, the loan should be advanced to Lautrec Co.  It has better performing liquidity ratios than Toulouse Co.

Explanation:

a) Data and Calculations:

Loan request = $50,000

Period of loan = 6 months with no collateral

Account balances:

                                            Toulouse Co.            Lautrec Co.

Assets

Cash                                      $120,000               $320,000

Receivables                            220,000                 302,000

Inventories                             570,000                  518,000

Total current assets              9 10,000                1,140,000

Other assets                          500,000                 612,000

Total assets                        $1,410,000            $1,752,000

Liabilities and Stockholders

Current liabilities                 $301,600              $350,600

Long-term liabilities              404,300                499,300

Capital stock and

retained earnings                  713,600               904,200

Total liabilities and

stockholders' Equity        $1,419,500            $1,754,100

Annual sales                     $ 931,300           $1,506,700

Rate of gross profit on sales     30%                     40%

Current Ratio = Current assets/Current liabilities

                                           Toulouse Co.      Lautrec Co.

Current Ratio               $910,000/$301,600  $1,140,000/$350,600

=                                              3.02                      3.25

Quick Ratio = (Current assets - Inventory)/Current liabilities

                                           Toulouse Co.      Lautrec Co.

Quick Ratio  $910,000-570,000/$301,600  $1,140,000-518,000/$350,600

=                                              1.13                      1.77

Operating Cash Flow Ratio = Cash/Current liabilities

                                           Toulouse Co.                 Lautrec Co.

Operating Cash Flow Ratio = $120,000/$301,600  $320,000/$350,600

=                                                0.39                                0.91

Days Receivable outstanding = Average receivables/Sales * 365

                                                Toulouse Co.                 Lautrec Co.

Days Receivable Outstanding  $220,000/$931,300 $302,000/$1,506,700

* 365 days

=                                                86 days                           73 days

steering wheels are always situated on the left side of the car.

always drive on the right side of the road.

white lines separate lanes of traffic traveling the same direction.

hashed or broken lines means you may change lanes when it is safe.

solid white lines mean stay in your lane.

yellow lines separate traffic moving in opposing directions.

hashed or broken yellow lines mean you can carefully pass, paying attention to oncoming traffic.

never cross a solid yellow line (or double yellow line).

when turning left at an intersection, pass in front of any cars that are turning left from the opposing direction (do not try to pass behind them).

use the left lane to pass other cars traveling your direction.

do not pass in the right lane unless absolutely necessary.

if you are driving in the far left hand lane and someone would like to pass you, move over to the right lane when it is safe to do so and allow them to pass.

you must always yield to pedestrians.

come to a complete stop whenever you see pedestrians trying to cross the street.

never pass a school bus if it has flashing red lights. wait until the lights have stopped.

be aware of bicyclists. often they share the road with cars and are supposed to also follow general traffic laws.

be particularly careful about driving in cities with bike lanes -- always check before turning that a bike is not coming.

it is mandatory to pull over or stop at an intersection to allow an emergency vehicle to pass you if you see one traveling with lights flashing and/or a siren running.

do not overuse your car horn. horns are used almost exclusively for emergency situations or for when you feel unsafe.

explanation:

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