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 $510,000 long-term loan from Gulfport State Bank, $105,000 of which will be used to bolster the Cash account and $405,000 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	$	74,000	$	160,000
Marketable securities		0		19,000
Accounts receivable, net		490,000		310,000
Inventory		955,000		605,000
Prepaid expenses		23,000		23,000
Total current assets		1,542,000		1,117,000
Plant and equipment, net		1,376,400		1,300,000
Total assets	$	2,918,400	$	2,417,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	750,000	$	440,000
Bonds payable, 12%		650,000		650,000
Total liabilities		1,400,000		1,090,000
Stockholders' equity:
Common stock, $15 par		720,000		720,000
Retained earnings		798,400		607,000
Total stockholders’ equity		1,518,400		1,327,000
Total liabilities and equity	$	2,918,400	$	2,417,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,050,000	$	4,380,000
Cost of goods sold		3,885,000		3,460,000
Gross margin		1,165,000		920,000
Selling and administrative expenses		655,000		550,000
Net operating income		510,000		370,000
Interest expense		78,000		78,000
Net income before taxes		432,000		292,000
Income taxes (30%)		129,600		87,600
Net income		302,400		204,400
Common dividends		111,000		90,000
Net income retained		191,400		114,400
Beginning retained earnings		607,000		492,600
Ending retained earnings	$	798,400	$	607,000

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.

For both this year and last year:

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:

For both this year and last year:

a.	The amount of working capital.

          

For both this year and last year:

b.	The current ratio. (Round your answers to 2 decimal places.)

            

For both this year and last year:

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

            

For both this year and last year:

d.	The average collection period. (The accounts receivable at the beginning of last year totaled $260,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

            

For both this year and last year:

e.	The average sale period. (The inventory at the beginning of last year totaled $510,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

            

For both this year and last year:

f.	The operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

            

For both this year and last year:

g.	The total asset turnover. (The total assets at the beginning of last year were $2,397,000.) (Round your answers to 2 decimal places.)

            

For both this year and last year:

h.	The debt-to-equity ratio. (Round your answers to 3 decimal places.)

            

For both this year and last year:

i.	The times interest earned ratio. (Round your answers to 1 decimal place.)

          

For both this year and last year:

j.	The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,317,000.) (Round your answers to 2 decimal places.)

          

For both this year and last year:

2.	For both this year and last year:

Answer 1

Ratio Analysis
				current Year		previous year
a-	amount of working capital	total of current assets-total of current liabilities		792000		677000
	total of current assets			1542000		1117000
	total of current liabilities			750000		440000
b-	current ratio	current assets/current liabilities		2.056		2.538636
	total of current assets			1542000		1117000
	total of current liabilities			750000		440000
c-	Acid test ratio	Quick assets/current liabilities		0.752		1.111364
	total of quick assets		1542000-955000-23000	564000	1117000-605000-23000	489000
	total of current liabilities			750000		440000
d-	average collection period	365/accounts receivable turnover ratio		28.9		23.8
	accounts receivable turnover ratio	sales/average accounts receivables		12.625		15.36842
	sales			5050000		4380000
	average accounts receivables	(490000+310000)/2		400000	(310000+260000)/2	285000
e-	average sales period	365/inventory turn over ratio
	inventory turnover ratio	cost of goods sold/average inventory		5.0		11.1
	cost of goods sold			3885000		6460000
	average inventory		(955000+605000)/2	780000	(655000+510000)/2	582500
f-	operating cycle	average collection period+averages sales period	28.9+5	33.9	23.8+11.1	34.9
g-	total asset turnover	sales/average total assets		1.89		1.82
	sales			5050000		4380000
	total average assets		(2918400+2417000)/2	2667700	(2397000+2417000)/2	2407000
h-	debt to equity ratio	total of liabilities/total shareholders equity		0.922		0.821
	total of liabilities			1400000		1090000
	total of equity			1518400		1327000
i-	times interest earned	ebit/interest		6.5		4.7
	ebit			510000		370000
	interest			78000		78000
j-	equity multiplier	total assets/average total equity		2.05		1.83
	total assets			2918400		2417000
	average total equity		(1518400+1327000)/2	1422700	(1317000+1327000)/2	1322000