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 $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 equipment. The company’s financial statements for the two most recent years follow:

Sabin Electronics

Comparative Income Statement and Reconciliation

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.

c. The acid-test ratio.

d. The average collection period. (The accounts receivable at the beginning of last year totaled $250,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $500,000.)

f. The operating cycle.

g. The total asset turnover. (The total assets at the beginning of last year were $2,420,000.)

h. The debt-to-equity ratio.

i. The times interest earned ratio.

j. The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,420,000.)

2. For both this year and last year:

a. Present the balance sheet in common-size format.

b. Present the income statement in common-size format down through net income.

3. Paul Sabin has also gathered the following financial data and ratios that are typical of companies in the electronics industry:

Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         2.5

Acid-test ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1.3

Average collection period . . . . . . . . . . . . . . . . . . . . . . . . . . 18 days

Average sale period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 days

Debt-to-equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        0.90

Times interest earned ratio . . . . . . . . . . . . . . . . . . . . . . . . .        6.0

Comment on the results of your analysis in (1) and (2) above and compare Sabin Electronics’ performance to the benchmarks from the electronics industry. Do you think that the company is likely to get its loan application approved?

Transcribed Image Text:

Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: $ 70,000 $ 150,000 18,000 Cash ... Marketable securities Accounts receivable, net 480,000 300,000 Inventory .... Prepaid expenses 950,000 600,000 20,000 22,000 Total current assets 1,520,000 1,090,000 Plant and equipment, net 1,480,000 1,370,000 Total assets $3,000,000 $2,460,000 Liabilities and Stockholders' Equity Liabilities: $ 800,000 600,000 $ 430,000 600,000 Current liabilities.. Bonds payable, 12% Total liabilities 1,400,000 1,030,000 Stockholders' equity: Common stock, $15 par 750,000 750,000 Retained earnings 850,000 680,000 Total stockholders' equity 1,600,000 1,430,000 Total liabilities and stockholders' equity... $3,000,000 $2,460,000