Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 66

Using Ratios to Compare Loan Requests from Two Companies
The 2013 financial statements for Royale and Cavalier companies are summarized here:

These two companies are in the same business and state but different cities. One-half of Royale s sales and one-quarter of Cavalier's sales are on credit. Each company has been in operation for about 10 years. Both companies received an unqualified audit opinion on the financial statements. Royale Company wants to borrow $75,000 cash, and Cavalier Company is asking for $30,000. The loans will be for a two-year period. Both companies estimate bad debts based on an aging analysis, but Cavalier has estimated slightly higher uncollectible rates than Royale. Neither company issued stock in 2013. Assume the end-of-year total assets and net property and equipment balances approximate, the year's average.
Required:
1. Calculate the ratios in Exhibit 13.5 for which sufficient information is available. Round all calculations to two decimal places.
2. Assume that you work in the loan department of a local bank. You have been asked to analyze the situation and recommend which loan is preferable. Based on the data given, your analysis prepared in requirement 1, and any other information (e.g., accounting policies and decisions), give your choice and the supporting explanation.