Renbud Computer Services Co. (RCS) specializes in customized software development for the broadcast


Question Description:

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Renbud Computer Services Co. (RCS) specializes in customized software development for the broadcast and telecommunications industries. The company was started by three people in 1973 to develop software primarily for a national network to be used in broadcasting national election results. After sustained and manageable growth for many years, the company has grown very fast over the last three years, doubling in size. This growth has placed the company in a challenging financial position. Within thirty days, RCS will need to renew its $300,000 loan with the Third State Bank of San Marcos. This loan is classified as a current liability on RCS’s balance sheet. Harvey Renbud, president of RCS, is concerned about renewing the loan. The bank has requested RCS’s most recent financial statements, which appear below, including balance sheets for this year and last year. The bank has also requested four ratios relating to operating performance and liquidity. Renbud Computer Services Co. Income Statement For the Year Ended December 31 (in thousands) Sales $2,500 Expenses: Cost of services provided $1,500 Selling and administrative 300 Depreciation and amortization 200 Interest 60 Income taxes 150 Total expenses 2,210 Net income $290 Renbud Computer Services Co. Balance Sheet December 31 (in thousands) Assets This Year Last Year CashAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦. $50 $50 Accounts receivable, netAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦ 350 250 Other current assetsAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦ 70 160 Equipment, netAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦ 1,100 800 Furniture and fixtures, netAc€¦Ac€¦Ac€¦Ac€¦Ac€¦ 120 100 Other noncurrent assetsAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦240 200 Total assetsAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦ $1,930 $1,560 Liabilities and stockholdersAc€?c equity Accounts payableAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦. $150 $130 Taxes payableAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦.. 140 120 Note payable (Third State Bank)Ac€¦Ac€¦Ac€¦Ac€¦.300 200 Bonds payable (due in seven years)Ac€¦Ac€¦400 400 Total liabilitiesAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦ 990 850 Capital stock (1,000 shares)Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦100 100 Retained earningsAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦ 840 610 Total stockholdersAc€?c equityAc€¦Ac€¦Ac€¦Ac€¦Ac€¦Ac€¦.. 940 710 Total liabilities and stockholdersAc€?c equityAc€¦ $1,930 $1,560 Required: a. Explain why the Third State Bank of San Marcos would be interested in reviewing Renbud Computer Services Co.’s comparative financial statements and its financial ratios before renewing the loan. b. Calculate the following financial ratios for Renbud Computer Services Co.: 1. The current ratio for both this year and last year. 2. Accounts receivable turnover for this year. 3. Return on common stockholders’ equity for this year. 4. The debt-to-equity ratio for both this year and last year. c. Discuss briefly the limitations and difficulties that can be encountered in using ratio analysis.

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