In: Accounting
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.) |
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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