Question

Common-Size Statements and Financial Ratios for a Loan Application x

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 $680,000 long-term loan from Gulfport State Bank, $190,000 of which will be used to bolster the Cash account and $490,000 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	$	135,000	$	330,000
Marketable securities		0		15,000
Accounts receivable, net		711,000		480,000
Inventory		1,125,000		775,000
Prepaid expenses		38,000		40,000
Total current assets		2,009,000		1,640,000
Plant and equipment, net		2,245,000		1,550,000
Total assets	$	4,254,000	$	3,190,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	850,000	$	400,000
Bonds payable, 12%		800,000		800,000
Total liabilities		1,650,000		1,200,000
Stockholders' equity:
Common stock, $15 par		870,000		870,000
Retained earnings		1,734,000		1,120,000
Total stockholders’ equity		2,604,000		1,990,000
Total liabilities and stockholders' equity	$	4,254,000	$	3,190,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,900,000	$	4,890,000
Cost of goods sold		4,055,000		3,630,000
Gross margin		1,845,000		1,260,000
Selling and administrative expenses		689,000		584,000
Net operating income		1,156,000		676,000
Interest expense		96,000		96,000
Net income before taxes		1,060,000		580,000
Income taxes (30%)		318,000		174,000
Net income		742,000		406,000
Common dividends		128,000		107,000
Net income retained		614,000		299,000
Beginning retained earnings		1,120,000		821,000
Ending retained earnings	$	1,734,000	$	1,120,000

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 3/10, n/30. All sales are on account.

Required:

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

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

Sabin Electronics
Common Size Balance Sheet
Assets	Current Year	%	Prior year	%
Current Assets
Cash	135,000	3.2%	330,000	10.3%
Marketable securities	0	0.0%	15,000	0.5%
Accounts Receivable (Net)	711,000	16.7%	480,000	15.0%
Inventory	1,125,000	26.4%	775,000	24.3%
Prepaid Expense	38,000	0.9%	40,000	1.3%
Total Current Assets	2,009,000	47.2%	1,640,000	51.4%
Property Plant & Equipment (Net)	2,245,000	52.8%	1,550,000	48.6%
Total Assets	4,254,000	100.0%	3,190,000	100.0%
Liabilities & Stockholders' Equity
Liabilities
Current Liabilities	850,000	20.0%	400,000	12.5%
Bonds Payable, 12%	800,000	18.8%	800,000	25.1%
Total Liabilities	1,650,000	38.8%	1,200,000	37.6%
Stockholders' Equity
Common Stock. $ 15 par	870,000	20.5%	870,000	27.3%
Retained Earnings	1,734,000	40.8%	1,120,000	35.1%
Total Stockholders' Equity	2,604,000	61.2%	1,990,000	62.4%
Total Liabilities & Stockholders' Equity	4,254,000	100.0%	3,190,000	100.0%

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

Sabin Electronics
Common Size Income Statement
	This Year	%	Last Year	%
Sales	5,900,000	100.0%	4,890,000	100.0%
Cost of goods sold	4,055,000	68.7%	3,630,000	74.2%
Gross Margin	1,845,000	31.3%	1,260,000	25.8%
Selling and admin Expenses	689,000	11.7%	584,000	11.9%
Net operating Income	1,156,000	19.6%	676,000	13.8%
Interest Expense	96,000	1.6%	96,000	2.0%
Net Income before taxes	1,060,000	18.0%	580,000	11.9%
Income tax @ 30%	318,000	5.4%	174,000	3.6%
Net Income	742,000	12.6%	406,000	8.3%

Calculation:

Balance Sheet items

Balance Sheet Asset account Amount / Total Assets = % to total Assets

Balance Sheet Liability/ Shareholders account Amount / Total Liabilities & stockholders equity = % to total Liabiltiy &equity

Income Statement items:

Income statement account Amount / Total Sales = % to total Sales