Reference no: EM1316063

Explain Analysis of the financial statements with comparison of industry averages

Heartland Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Heartland has decided that it must grow if it is going to survive.  It has approached the bank for a sizable five-year loan, and the bank has requested its most recent financial statement as part of the loan package.

The industry in which Heartland operates consists of approximately 20 companies relatively equal in size. The trade association to which all of the competitors belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their statements to the association for this purpose.

Heartland\'s controller is aware that the bank has access to this survey and is very concerned about how the company fared this past year compared with the rest of the industry. The ratios included in the publication, and the averages for the past year, are as follows:

Ratio	Industry Average
Current ratio	1.23
Acid-test (quick) ratio	0.75
Accounts receivable turnover	33 times
Inventory turnover	29 times
Debt-to-equity ratio	0.53
Times interest earned	8.65 times
Return on sales	6.57%
Asset turnover	1.95 times
Return on assets	12.81%
Return on common stockholders\' equity	17.67%

The financial statements to be submitted to the bank in connection with the loan follow:

Heartland Inc.

Statement of Income and Retained Earnings

For the Year Ended December 31, 2007

(thousands omitted)

Sales revenue	$542,750
Cost of goods sold	(435,650)
Gross profit	$107,100
Selling, general, and administrative expenses	$(65,780)
Loss on sales of securities	(220)
Income before interest and taxes	$41,100
Interest expense	(9,275)
Income before taxes	$31,825
Income tax expense	(12,730)
Net income	$19,095
Retained earnings, January 1, 2007	58,485
	$77,580
Dividends paid on common stock	(12,000)
Retained earnings, December 31, 2007	$65,580

Heartland Inc.

Comparative Statements of Financial Position

(thousands omitted)

	2007	2008
Assets
Current assets:
Cash	$1,135	$750
Marketable securities	1,250	2,250
Accounts receivables, net of allowances	15,650	12,380
Inventories	12,680	15,870
Prepaid items	385	420
Total current assets	$31,100	$31,670
Long-term investments	$425	$425
Property, plan, and equipment:
Land	$32,000	$32,000
Building and equipment, net of accumulated depreciation	216,000	206,000
Total property, plant, and equipment	$248,000	$238,000
Total assets	$279,525	$270,095
Liabilities and Stockholders\' Equity
Current Liabilities:
Short-term loans	$8,750	$12,750
Accounts payable	20,090	14,380
Salaries, wages, and other	1,975	2,430
Income taxes payable	3,130	2,050
Total current liabilities	$33,945	$31,610
Long-term bonds payable	$80,000	$80,000
Stockholders\' equity:
Common stock, at par	$100,000	$100,000
Retained earnings	65,580	58,485
Total stockholders\' equity	$165,580	$158,485
Total liabilities and stockholders\' equity	$279,525	$270,095

Question:

Prepare a columnar report for the controller of Heartland Inc., comparing the industry average for the ratio published by the trade association with the comparable ratios for Heartland. For Heartland, compute the ratios as of December 31, 2007, or for the year ending December 31, 2007, whichever is appropriate