Question

In: Accounting

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on...

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).)


            

Solutions

Expert Solution

Solution:

Part 1a – Working Capital

Working Capital =

Current Assets

-

Current Liabilities

=

Working Capital

This Year

1931000

-

875000

=

1056000

Last Year

1544000

-

450000

=

1094000

Numerator

/

Denominator

=

Ratio

1-b)

Current Ratio

Current Assets

/

Current Liabilities

=

Current Ratio

times

Current Ratio (This year)

1,931,000

/

875,000

=

2.21

times

Current Ratio (last year)

1,544,000

/

450,000

=

3.43

times

1-c)

Acid Test Ratio

Current Assets - Inventory - Prepaid Expenses

/

Current Liabilities

=

Acid Test Ratio

times

Acid Test Ratio (This Year)

802000

/

875,000

=

0.92

times

Acid Test Ratio (Last Year)

762,000

/

450,000

=

1.69

times

1-d)

Average Collection Period

number of days in a year x Average Accounts Receivable

/

Net Credit Sales

=

Average Collection Period

days

Average Collection Period (This Year)

204765000

[(365 * (672,000 + 450,000)/2]

/

5750000

=

35.6

days

Average Collection Period (Last Year)

155125000

{(365* (400,000 + 450,000)/2]

/

4800000

=

32.3

days

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.


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