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 $530,000 long-term loan from Gulfport State Bank, $115,000 of which will be used to bolster the Cash account and $415,000 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 $ 82,000 Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders Equity Liabilities: Current liabilities Bonds payable, 12% Total liabilities 516,000 980,000 22,000 1,600,000 1,570, 200 $ 3,170,200 $ 180,000 21,000 330,000 625,000 25,000 1,181,000 1,400,000 $ 2,581,000 $ $ 815,000 750,000 1,565,000 460,000 750,000 1,210,000 Stockholders' equity: Common stock, $15 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 720,000 885,200 1,605,200 $ 3,170,200 720,000 651,000 1,371,000 $ 2,581,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Sales $ 5,150,000 Cost of goods sold 3,905,000 Gross margin 1, 245,000 Selling and administrative expenses 659,000 Net operating income 586,000 Interest expense 90,000 Net income before taxes 496,000 Income taxes (30%) 148,800 Net income 347,200 Common dividends 113,000 Net income retained 234, 200 Beginning retained earnings 651,000 Ending retained earnings $ 885,200 Last Year $ 4,440,000 3,480,000 960,000 554,000 406,000 90,000 316,000 94,800 221,200 92,000 129,200 521,800 $ 651,000 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. 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 $280,000.) e. The average sale period. (The inventory at the beginning of last year totaled $530,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year were $2,510,000.) 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 $1,361,000.) 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
