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 $650,000 long-term loan from Gulfport State Bank, $175,000 of which will be used to bolster the Cash account and $475,000 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	$	130,000	$	300,000
Marketable securities		0		12,000
Accounts receivable, net		672,000		450,000
Inventory		1,095,000		745,000
Prepaid expenses		34,000		37,000
Total current assets		1,931,000		1,544,000
Plant and equipment, net		2,099,400		1,520,000
Total assets	$	4,030,400	$	3,064,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	875,000	$	450,000
Bonds payable, 12%		750,000		750,000
Total liabilities		1,625,000		1,200,000
Stockholders' equity:
Common stock, $15 par		720,000		720,000
Retained earnings		1,685,400		1,144,000
Total stockholders’ equity		2,405,400		1,864,000
Total liabilities and equity	$	4,030,400	$	3,064,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,750,000	$	4,800,000
Cost of goods sold		4,025,000		3,600,000
Gross margin		1,725,000		1,200,000
Selling and administrative expenses		683,000		578,000
Net operating income		1,042,000		622,000
Interest expense		90,000		90,000
Net income before taxes		952,000		532,000
Income taxes (30%)		285,600		159,600
Net income		666,400		372,400
Common dividends		125,000		104,000
Net income retained		541,400		268,400
Beginning retained earnings		1,144,000		875,600
Ending retained earnings	$	1,685,400	$	1,144,000

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. e. The average sale period. (The inventory at the beginning of last year totaled $650,000.)(Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)              f. The operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)              g. The total asset turnover. (The total assets at the beginning of last year were $3,024,000.) (Round your answers to 2 decimal places.)              h. The debt-to-equity ratio. (Round your answers to 3 decimal places.)              i. The times interest earned ratio. (Round your answers to 1 decimal place.)            j. The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,854,000.) (Round your answers to 2 decimal places.) Please provide this and last year for all answers

Answer 1

e. The average sale period

For this period, Inventory turnover = COGS/Average Inventory = 4025000/(1,095,000+745000)/2 = 4.375

Average sales period = 365/Inventory turnover = 365/4.375 = 83.43

For last period, Inventory turnover = COGS/Average Inventory = 3600000/(650000+745000)/2 = 5.1613

Average sales period = 365/Inventory turnover = 365/5.1613 = 70.72

f. Accounts receivable turnover = Sales/Account receivable

Average Collection period = 365/Account receivable turnover

For this year. = 5,750,000/672000 = 8.56

Average Collection period = 365/8.56 = 42.66

For last year = 4,800,000/450000 = 10.67

Average Collection period = 365/10.67 = 34.22

Accounts Payable turnover = COGS/Account payable

Average payable period = 365/Account payable turnover

For this year. = 4,025,000/875000 = 4.6

Average payable period = 365/4.6 = 79.35

For last year = 3,600,000/450000 = 8

Average payable period = 365/8= 45.62

Operating cycle = Average sales period+Average Collection period-Average payable period

For this period, operating cycle = 83.43+42.66-79.35 = 46.74 days

For last period, operating cycle = 70.72+34.22-45.62 = 59.32 days

g. Total Asset turnover = Sales/Total assets

This period = 5,750,000/4,030,400 = 1.427

Last period = 4,800,000/3,064,000 = 1.567

h. Debt to equity = Debt/Equity

This period = 1,625,000/2,405,400 = 0.676

Last period = 1,200,000/1,864,000 = 0.644

i. Times interest earned = EBIT/Interest

This period = 1,042,000/90000 = 11.578

Last period = 622,000/90000 = 6.911

j. Equity multiplier = Total assets/Total Equity

This period = 4,030,400/2,405,400 = 1.676

Last period = 3,064,000/1,864,000 = 1.644