Azuro, Archelle Marie

Accounting 2
Fontanilla, Ann Mary
BABA 4A
Higgins, Ma. Isabel
Magbanua, Uziel Anne
Saturnino, Michael Carlo

Management

SPRINGFIELD NATIONAL BANK CASE STUDY

1.) Statement of the Problem
Dawson Stores, Inc. is a deposit customer of the Springfield
National Bank and they would like to obtain a credit line of $1,000,000
on an unsecured basis to cover their short-term needs. The problem
resides on the loan officer of the bank, Stefanie Anderson, as to
whether or not she would approve the credit line considering the credit
risk of the company.
2.) Statement of Objectives

Evaluate the financial statements of Dawson Stores Inc. using

ratio analysis
Select appropriate financial ratios to highlight the companys
liquidity and profitability
Determine the credit risk of the company based on gathered
results

3.) Areas of Consideration

Ms. Anderson should first evaluate the financial statements with
the help of financial ratios to make the decision regarding the
credit line.
Financial Ratios that should be used are Liquidity Ratios,
Profitability Ratios and cash flow ratios.
Ms. Anderson should also evaluate the current standing of the
business in the industry.
Not only should Ms. Anderson evaluate the financials of the
business, but also the physical operations of the business.
4.) Analysis and Alternative Courses of Action

LIQUIDITY RATIOS:
Current Ratio =

Current Assets
Current Liabilities

2000
2.12

Current Ratio

2001
2.02

2002
1.74

2003
1.67

Supporting Computations:
Yr . 2000=

5, 639
5, 631
=2.12 Yr . 2001=
=2.02
2, 656
2, 782

Yr . 2002=

6, 999
7, 848
=1.74 Yr . 2003=
=1.67
4, 013
4, 692

The current ratio determines the liquidity of the company on a shortterm basis considering as to how current assets can be able to pay off its
short-term debt. Based on the computations, the current ratio keeps on
decreasing from year to year. This means that the liquidity of the company is
weak and it may be hard for them to repay the short-term loan.
WorkingCapital=Current AssetsCurrent Liabilities

Working Capital

2000
2, 983

2001
2, 849

2002
2, 986

2003
3, 156

Supporting Computations:
Yr . 2000=5,6392, 656=2, 983 Yr .2001=5, 6312,782=2, 849

Yr . 2002=6, 9994, 013=2, 986Yr . 2003=7, 8484, 692=3, 156

The working capital on the other hand measures the companys ability
to repay current liabilities using only current assets. Based on the computed
result, the working capital for 2013 is positive which contradicts the result

computed using the current ratio. Other factors should still be considered
and more liquidity ratios are to be evaluated.
Acid Test Ratio=

Quick Assets
Current Liabilities

Current Ratio 1 (With LIFO)

2000
1.12

2001
1.13

2002
1.02

2003
1.00

2002
5.83

2003
5.59

Supporting Computations:
Yr . 2000=

107+ 2862
141+ 3007
=1. 12 Yr . 2001=
=1.13
2, 656
2,782

Yr . 2002=

709+3378
916+3767
=1. 02Yr . 2003=
=1.00
4, 013
4, 692

Inventory Turnover =Cost of Goods Sold/ Average Inventory

2000
4.93

Inventory Turnover

2001
5.57

Supporting Computations:
Yr . 2000=

12816
13884
=4.93 Y r . 2001=
=5.57
2600
2600+ 2383
2

Y r . 2002=

15163
16527
=5.83 Y r .2003=
=5.59
2383+2821
2821+3090
2
2

The increase in the inventory turnover and shorter inventory days

signifies a faster conversion of inventory into sales.

Receivable Turnover=

Net Credit Sales

Ave .Trade Receivables

2000
6.39

Receivable Turnover

2001
6.66

2002
6.88

2003
6.75

Supporting Computations:
19558
=6.39Y r . 2001=
=6.66
( 18297
)
2862
2862+3007

Yr . 2000=

2
21976
24128
=6.88Y r . 2003=
=6.75
3378+3007
3378+ 3767
2
2

Yr . 2002=

(ASSUMPTION: all sales are credit sales) In addition, these ratios

could also explain a part of the working capital and current ratio. (See
Working Capital and Current Ratio discussion)
Payable Turnover =

Net Credit Purchases

Ave . Trade Payables

2000
13.37

Payable Turnover

2001
11.79

2002
10.64

2003
8.32

Supporting Computations:
13667
=10.37 Y r . 2001=
=11.79
( 15416
)
1153
1153 +1166

Yr . 2000=

Yr . 2002=

15601
16796
=10.64 Y r .2003=
=8.32
1166+1767
1767+2272
2
2

(ASSUMPTION: all purchases are credit purchases)Trade Payables

of the company are not being paid at a faster rate hence the increase
in accounts payables. Which in turn is the reason for the decrease in
the current ratio and quick asset ratio.

PROFITABILITY RATIOS
Return on sales=Net Income/ Net Sales

2000
1.94%

Return on Sales

2001
1.68%

2002
3.04%

2003
3.54%

2002
31.00%

2003
31.50%

Supporting Computations:
Yr . 2000=

355
328
=1.94 Yr .2001=
=1.68
18297
19558

Yr . 2002=

667
854
=3.04 Yr . 2003=
=3 .54
21976
24128

Gross Profit Rate=Gross Profit /Net Sales

2000
29.96%

Gross Profit Rate

2001
29.01%

Supporting Computations:
Yr . 2000=

5481
5674
=29.96 Yr . 2001=
=29.01
18297
19558

Yr . 2002=

6 813
7601
=3 1.00 Yr . 2003=
=3 1.50
21976
24128

Increasing profitability ratio indicates a good sign for the

company. Since return on sales and gross profit rate is increasing it
may signify that the company is profitable making it more attractive, in
a creditor's perspective, to provide credit to the company. However
there are a lot of things to consider before giving that assumption.

CASH FLOW RATIOS

Total Debt Coverage=Total Liabilities/Cash flow operation

Total Debt Coverage

2000
11.97

2001
7.84

2002
4.98

2003
5.70

Supporting Computations:
Yr . 2000=

6416
6504
=11.97 Yr .2001=
=7.84
536
830

Yr . 2002=

7393
7936
=4.98Yr . 2003=
=5.70
1485
1393

Despite that Cash flow from operations are increasing and debts are not
being paid, debts are also increasing, which makes us conclude that the
company is paying the liabilities at a slower rate.

5.) Conclusion and Recommendation