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 $580,000 long-term loan from Gulfport State Bank, $140,000 of which will be used to bolster the Cash account and $440,000 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	$	100,000	$	230,000
Marketable securities		0		26,000
Accounts receivable, net		581,000		380,000
Inventory		1,025,000		675,000
Prepaid expenses		26,000		30,000
Total current assets		1,732,000		1,341,000
Plant and equipment, net		1,759,600		1,450,000
Total assets	$	3,491,600	$	2,791,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	840,000	$	510,000
Bonds payable, 12%		650,000		650,000
Total liabilities		1,490,000		1,160,000
Stockholders' equity:
Common stock, $15 par		930,000		930,000
Retained earnings		1,071,600		701,000
Total stockholders’ equity		2,001,600		1,631,000
Total liabilities and equity	$	3,491,600	$	2,791,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,400,000	$	4,590,000
Cost of goods sold		3,955,000		3,530,000
Gross margin		1,445,000		1,060,000
Selling and administrative expenses		669,000		564,000
Net operating income		776,000		496,000
Interest expense		78,000		78,000
Net income before taxes		698,000		418,000
Income taxes (30%)		209,400		125,400
Net income		488,600		292,600
Common dividends		118,000		97,000
Net income retained		370,600		195,600
Beginning retained earnings		701,000		505,400
Ending retained earnings	$	1,071,600	$	701,000

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 $330,000.) (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 $580,000.) (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 $2,660,000.) (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 $1,621,000.) (Round your answers to 2 decimal places.)

          

Answer 1

		This year	Last year
a	Current assets	1732000	1341000
	Current liabilities	840000	510000
	Working capital = Current assets - current liabilities
	Working capital	892000	831000
b	Current ratio = Current assets / current liabilities
	Current ratio	2.06	2.63
c	Acid test ratio = Liquid assets / current liabilities
	Liquid assets = current assets - prepaid expense - merchandise inventory
	Liquid assets	681000	636000
	Current liabilities	840000	510000
	Acid test ratio	0.81	1.25
	Accounts receivable turnover = net credit sales /Average accounts receivable
	Net sales	5400000	4590000
	Beginning accounts receivable	380000	330000
	Ending accounts receivable	581000	380000
	Average accounts receivable	480500	355000
	Accounts receivable turnover	11.2	12.9
d	Days sales outstanding = 365 / accounts receivable tunover
	Days sales outstanding	32.5	28.2	Days
	Inventory turnover = Cost of goods sold / Average inventory
	Cost of goods sold	3955000	3530000
	Beginning inventory	675000	580000
	Ending inventory	1025000	675000
	Average inventory	850000	627500
	Average inventory = (Beginning + Ending )/2
	Inventory turnover	4.7	5.6
e	Days sale in inventory = 365 / inventory turnover
	Days sales in inventory	78.4	64.9	Days
f	Operating cycle = days sales in inventory + average collection period
	Operating cycle	110.9	93.1	Days
g	Assets turnover ratio = Net sales / average total assets
	Net sales	5400000	4590000
	Beginning total assets	2791000	2660000
	Ending total assets	3491600	2791000
	Average total assets	3141300	2725500
	Assets turnover ratio	1.72	1.68