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 $590,000 long-term loan from Gulfport State Bank, $145,000 of which will be used to bolster the Cash account and $445,000 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	$	104,000	$	240,000
Marketable securities		0		27,000
Accounts receivable, net		594,000		390,000
Inventory		1,035,000		685,000
Prepaid expenses		26,000		31,000
Total current assets		1,759,000		1,373,000
Plant and equipment, net		1,751,000		1,420,000
Total assets	$	3,510,000	$	2,793,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	845,000	$	520,000
Bonds payable, 12%		700,000		700,000
Total liabilities		1,545,000		1,220,000
Stockholders' equity:
Common stock, $15 par		960,000		960,000
Retained earnings		1,005,000		613,000
Total stockholders’ equity		1,965,000		1,573,000
Total liabilities and equity	$	3,510,000	$	2,793,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,450,000	$	4,620,000
Cost of goods sold		3,965,000		3,540,000
Gross margin		1,485,000		1,080,000
Selling and administrative expenses		671,000		566,000
Net operating income		814,000		514,000
Interest expense		84,000		84,000
Net income before taxes		730,000		430,000
Income taxes (30%)		219,000		129,000
Net income		511,000		301,000
Common dividends		119,000		98,000
Net income retained		392,000		203,000
Beginning retained earnings		613,000		410,000
Ending retained earnings	$	1,005,000	$	613,000

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. (Round your answers to 2 decimal places.)

            

c.	The acid-test ratio. (Round your answers to 2 decimal places.)

            

d.	The average collection period. (The accounts receivable at the beginning of last year totaled $340,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

            

e.	The average sale period. (The inventory at the beginning of last year totaled $590,000.) (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 $2,690,000.) (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 $1,563,000.) (Round your answers to 2 decimal places.)

          

2.	For both this year and last year:

a.

Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) Sabin Electronics Common-Size Balance Sheets This Year Last Year Assets Current assets: Cash % % Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets 0.0 0.0 Plant and equipment, net Total assets 0.0 % 0.0 % Liabilities and Stockholders’ Equity Liabilities: Current liabilities % % Bonds payable, 12% Total liabilities 0.0 0.0 Stockholders’ equity: Common stock, $15 par Retained earnings Total stockholders’ equity 0.0 0.0 Total liabilities and equity 0.0 % 0.0 %

b.	Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

	Sabin Electronics Common-Size Income Statements This Year Last Year Sales % % Cost of goods sold Gross margin 0.0 0.0 Selling and administrative expenses Net operating income 0.0 0.0 Interest expense Net income before taxes 0.0 0.0 Income taxes Net income 0.0 % 0.0 %

Answer 1

		This year	Last year
a	Current assets	1759000	1373000
	Current liabilities	845000	520000
	Working capital = Current assets - current liabilities
	Working capital	914000	853000
b	Current ratio = Current assets / current liabilities
	Current ratio	2.08	2.64
c	Acid test ratio = Liquid assets / current liabilities
	Liquid assets = current assets - prepaid expense - merchandise inventory
	Liquid assets	698000	657000
	Current liabilities	845000	520000
	Acid test ratio	0.83	1.26
	Accounts receivable turnover = net credit sales /Average accounts receivable
	Net sales	5450000	4620000
	Beginning accounts receivable	390000	340000
	Ending accounts receivable	594000	390000
	Average accounts receivable	492000	365000
	Accounts receivable turnover	11.1	12.7
d	Average collection period = 365 / accounts receivable tunover
	Average collection period	33.0	28.8	Days
	Inventory turnover = Cost of goods sold / Average inventory
	Cost of goods sold	3965000	3540000
	Beginning inventory	685000	590000
	Ending inventory	1035000	685000
	Average inventory	860000	637500
	Average inventory = (Beginning + Ending )/2
	Inventory turnover	4.6	5.6
e	Average sales period = 365 / inventory turnover
	Average sales period	79.2	65.7	Days
f	Operating cycle = days sales in inventory + average collection period
	Operating cycle	112.1	94.6	Days
g	Assets turnover ratio = Net sales / average total assets
	Net sales	5450000	4620000
	Beginning total assets	2793000	2690000
	Ending total assets	3510000	2793000
	Average total assets	3151500	2741500
	Assets turnover ratio	1.73	1.69