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.

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 $400,000.) (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 $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.)

          

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).)

            

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).)

            

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.

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 $400,000.) (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 $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.)

          

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).)

  

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).)

            

Answer 1

Amount of Working Capital	This Year	Last Year
Current Assets (a)	19,31,000	15,20,000
Current liabilities (b)	8,75,000	4,50,000
c = a-b	10,56,000	10,70,000

Current Ratio	This Year	Last Year
Current Assets (a)	19,31,000	15,20,000
Current liabilities (b)	8,75,000	4,50,000
c = a/b	2.21	3.38

Acid Test Ratio	This Year	Last Year
Current Assets	19,31,000	15,20,000
Less:
Inventory	10,95,000	7,45,000
Prepaid expense	34,000	37,000
Quick assets (a)	8,02,000	7,38,000
Current liabilities (b)	8,75,000	4,50,000
c = a/b	0.92	1.64

d. Average collection period = (365 days * Average Debtors) / sales

Average Debtors	This Year	Last Year
Opening	4,50,000	4,00,000
Closing	6,72,000	4,50,000
Average	5,61,000	4,25,000
Average Collection period
Average Debtors	5,61,000	4,25,000
Sales	5750000	4800000
Average Collection period	35.61	32.32

Avearge Sale period = Days in year / Inventory turnover

Inventory Turnover	This Year	Last Year
Opening	7,45,000	6,50,000
Closing	10,95,000	7,45,000
Average	9,20,000	6,97,500
Cost of goods sold	40,25,000	36,00,000
Inventory Turnover	4.38	5.16
Average sale period
Days	365	365
Inventory Turnover	4.38	5.16
Average sale period	83.43	70.72

Asset Turnover Ratio = Net sales / Average Total Assets

Average Total Assets	This Year	Last Year
Opening	30,64,000	30,24,000
Closing	40,30,400	30,64,000
Average	35,47,200	30,44,000
Sales	57,50,000	48,00,000
Assets Turnover	1.62	1.58

Debt to Equity Ratio = Debt / Equity

Debt Equity Ratio.	This Year	Last Year
Debt	16,25,000	12,00,000
Equity	24,05,400	18,64,000
Debt Equity Ratio.	0.68	0.64

Times interest earned ratio = EBIT / Interest charges

Times interest earned ratio	This Year	Last Year
EBIT	9,52,000	5,32,000
Interest	90,000	90,000
Debt Equity Ratio.	10.58	5.91

equity multiplier.

Equity multiplier	This Year	Last Year
Total Assets	40,30,400	30,64,000
Total average Equity
Opening (a)	18,64,000	18,54,000
Closing (b)	24,05,400	18,64,000
Average a/b	21,34,700	18,59,000
Equity multiplier	1.89	1.65

Sabin Electronics
Common Balance Sheet
Particulars	This Year		Last Year
	$	%	$	%
Assets
Current Assets
Cash	130000	3.23%	300000	9.79%
Marketable Securities	0	0.00%	12000	0.39%
accounts receivable	672000	16.67%	450000	14.69%
Inventory	1095000	27.17%	745000	24.31%
Prepaid expense	34000	0.84%	37000	1.21%
Total current assets	1931000	47.91%	1544000	50.39%
Plant and equipment, net	2099400	52.09%	1520000	49.61%
Total assets	4030400	100	3064000	100
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	875000	21.71%	450000	14.69%
Bonds payable, 12%	750000	18.61%	750000	24.48%
Total liabilities	1625000	40.32%	1200000	39.16%
Stockholders' equity:
Common stock, $15 par	720000	17.86%	720000	23.50%
Retained earnings	1685400	41.82%	1144000	37.34%
Total stockholders’ equity	2405400	59.68%	1864000	60.84%
Total liabilities and equity	4030400	100	3064000	100

Sabin Electronics
Common size Income Statement
Particulars	This Year		Last Year
	$	%	$	%
Sales	5750000	100%	4800000	100%
COGS	4025000	70.00%	3600000	75.00%
Gross Margin	1725000	30.00%	1200000	25.00%
Selling & Admin expenses	683000	11.88%	578000	12.04%
Net operating income	1042000	18.12%	622000	12.96%
Interest Expense	90000	1.57%	90000	1.88%
Net Income before taxes	952000	16.56%	532000	11.08%
Income taxes (30%)	285600	4.97%	159600	3.33%
Net income	666400	11.59%	372400	7.76%
Common dividends	125000	2.17%	104000	2.17%
Net income retained	541400	9.42%	268400	5.59%
Beginning retained earnings	1144000		875600
Ending retained earnings	1685400		1144000