Question

In: Accounting

Paul Sabin organized Sabin Electronics 10 years ago in order to produce and sell several electronic...

Paul Sabin organized Sabin Electronics 10 years ago in order 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 $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the cash account and $400,000 of which will be used to modernize certain key items of 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 $ 50,900 $ 79,000
     Marketable securities 9,200
     Accounts receivable, net 354,800 158,000
     Inventory 710,000 316,000
     Prepaid expenses 15,300 11,800
  Total current assets 1,131,000 574,000
  Plant and equipment, net 1,000,000 726,000
  Total assets $ 2,131,000 $ 1,300,000
Liabilities and Shareholders’ Equity
  Liabilities:
     Current liabilities $ 588,000 $ 455,500
     Bonds payable, 12% 300,000 300,000
  Total liabilities 888,000 755,500
  Shareholders’ equity:
     Preferred shares, no par ($6; 14,320 shares issued) 179,000 179,000
     Common shares, no par (unlimited authorized,
       17,000 issued)
170,000 170,000
     Retained earnings 894,000 195,500
  Total shareholders’ equity 1,243,000 544,500
  Total liabilities and shareholders’ equity $ 2,131,000 $ 1,300,000
SABIN ELECTRONICS
Comparative Income Statement
This Year Last Year
  Sales $ 3,700,000 $ 3,400,000
  Less: Cost of goods sold 2,847,000 2,680,000
  Gross margin 853,000 720,000
  Less: Operating expenses 481,000 427,000
  Net operating income 372,000 293,000
  Less: Interest expense 36,000 36,000
  Net income before taxes 336,000 257,000
  Less: Income taxes (30%) 100,800 77,100
  Net income 235,200 179,900
  Dividends paid:
     Preferred dividends 20,000 20,000
     Common dividends 66,600 58,450
  Total dividends paid 86,600 78,450
  Net income retained 148,600 101,450
  Retained earnings, beginning of year 525,400 423,950
  
  Retained earnings, end of year $ 674,000 $ 525,400

     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. Assume that the following ratios are typical of firms in the electronics industry:

  Current ratio 2.5 to 1
  Acid-test (quick) ratio 1.3 to 1
  Average age of receivables 18 days
  Inventory turnover in days 60 days
  Debt-to-equity ratio 0.90 to 1
  Times interest earned 6.0 times
  Return on total assets 13 %
  Price–earnings ratio 12
Required:
1.

To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year (Use 365 days a year. Round your intermediate calculations to 1 decimal place. Round Debt-to-equity ratio to 3 decimal places and other answers to 2 decimal places.):

a. The amount of working capital.
b. The current ratio.
c. The acid-test (quick) ratio.
d.

The average age of receivables (the accounts receivable at the beginning of last year totalled $156,000).

e.

The inventory turnover in days (the inventory at the beginning of last year totalled $312,000).

f. The debt-to-equity ratio.
g. The times interest earned.
2. For both this year and last year:
(a)

Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place.)

(b)

Present the income statement in common-size format down through net income. (Input all values as positive values. Round your answers to 1 decimal place.)

Solutions

Expert Solution

Solution:

1a)

Working Capital

This Year

Last Year

Total Current Assets (A)

$1,131,000

$574,000

Total Current Liabilities (B)

$588,000

$455,500

Working Capital (Total Current Assets - Total Current Liabilities)

$543,000

$118,500

1-b

Current Ratio

This Year

Last Year

Total Current Assets

$1,131,000

$574,000

Total Current Liabilities

$588,000

$455,500

Current Ratio (Current Assets / Current Liabilities)

1.9

1.26

Times

Times

1-c

Acid Test Ratio (Quick Ratio)

This Year

Last Year

Quick Assets

Total Current Assets

$1,131,000

$574,000

Less: Inventory

-$710,000

-$316,000

Less: Prepaid Expenses

-$15,300

-$11,800

Quick Assets

$405,700

$246,200

Current Liabilities

$588,000

$455,500

Acid Test Ratio (Quick Assets / Current Liabilities)

0.7

0.54

Times

Times

1-d

Accounts Receivable Turnover

This Year

Last Year

Net Credit Sales (A)

$3,700,000

$3,400,000

Avg Accounts Receivable (Refer Note below)

$256,400

$157,000

Accounts Receivable Turnover (A/B)

14.43

21.66

Times

Times

Average Accounts Receivable (AR)

Beginning AR

$158,000

$156,000

Ending AR

$354,800

$158,000

Average Accounts Receivable (Beg + End)/2

$256,400

$157,000

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