Question

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $620,000 long-term loan from Gulfport State Bank, $160,000 of which will be used to bolster the Cash account and $460,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	118,000	$	270,000
Marketable securities		0		30,000
Accounts receivable, net		633,000		420,000
Inventory		1,065,000		715,000
Prepaid expenses		30,000		34,000
Total current assets		1,846,000		1,469,000
Plant and equipment, net		1,969,200		1,490,000
Total assets	$	3,815,200	$	2,959,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	820,000	$	420,000
Bonds payable, 12%		850,000		850,000
Total liabilities		1,670,000		1,270,000
Stockholders' equity:
Common stock, $15 par		810,000		810,000
Retained earnings		1,335,200		879,000
Total stockholders’ equity		2,145,200		1,689,000
Total liabilities and stockholders' equity	$	3,815,200	$	2,959,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,600,000	$	4,710,000
Cost of goods sold		3,995,000		3,570,000
Gross margin		1,605,000		1,140,000
Selling and administrative expenses		677,000		572,000
Net operating income		928,000		568,000
Interest expense		102,000		102,000
Net income before taxes		826,000		466,000
Income taxes (30%)		247,800		139,800
Net income		578,200		326,200
Common dividends		122,000		101,000
Net income retained		456,200		225,200
Beginning retained earnings		879,000		653,800
Ending retained earnings	$	1,335,200	$	879,000

During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account.

Required:

1. To assist in approaching the bank about the loan, Paul has asked you to compute the following ratios for both this year and last year:

a. The amount of working capital.

b. The current ratio.

c. The acid-test ratio.

d. The average collection period. (The accounts receivable at the beginning of last year totaled $370,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $620,000.)

f. The operating cycle.

g. The total asset turnover. (The total assets at the beginning of last year were $2,919,000.)

h. The debt-to-equity ratio.

i. The times interest earned ratio.

j. The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,679,000.)

2. For both this year and last year:

a. Present the balance sheet in common-size format.

b. Present the income statement in common-size format down through net income.

Answer 1

Ratios are given at the bottom of the statements:

SABIN ELECTRONICS--BALANCE SHEET:
	This Year	Last Year
cash	118000	270000
marketable securities	0	30000
accounts receivable - net	633000	420000
inventory	1065000	715000
prepaid expenses	30000	34000
total current assets	1846000	1469000
plant & equipment - net	1969200	1490000
total assets	3815200	2959000
current liabilities	820000	420000
bonds payable	850000	850000
total liabilities	1670000	1270000
common stock	630000	630000
retained earnings	1515200	1059000
equity	2145200	1689000
total liability & equity	3815200	2959000
INCOME STATEMENT:
sales	5600000	4710000
cost of goods sold	3995000	3570000
gross profit	1605000	1140000
selling & admn expenses	677000	572000
operating profit	928000	568000
interest expense	102000	102000
net income before taxes	826000	466000
taxes	247800	139800
net income	578200	326200
common dividends	122000	101000
net income retained	456200	225200
beginning retained earnings	1059000	833800
ending retained earnings	1515200	1059000
a) amount of working capital	1026000	1049000
b) current ratio	2.25	3.50
c) acid test ratio	0.92	1.71
d) average collection period	34.3	30.6
e) average sale period	81.3	68.2
f) operating cycle	115.6	98.9
g) total asset turnover	1.65	1.60
h) debt to equity ratio	0.396	0.503
i) times interest earned ratio	9.1	5.6
j) equity multiplier	1.99	1.76