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 $560,000 long-term loan from Gulfport State Bank, $130,000 of which will be used to bolster the Cash account and $430,000 of which will be used to modernize equipment. The company's financial statements for the two most recent years follow. This Year Last Year 5 94,000 $ Sabin Electronics Comparative Balance Sheet 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 Stockholders' equity: Common stock, $15 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 555,000 1,005,000 26,000 1,680,000 1,665,400 $ 3,345,400 210,000 24,000 360,000 655,000 28,000 1,277,000 1,430,000 $ 2,707,000 $ $ 830,000 900,000 1.730,000 490,000 900.000 1,390,000 750,000 865,400 1,615,400 $ 3, 345,400 750,000 567,000 1.317,000 $ 2,707,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Sales $ 5,300,000 Cost of goods sold 3,935,000 Gross margin 1,365,000 Selling and administrative expenses 665,000 Net operating income 700,000 Interest expense 108,000 Net income before taxes 592,000 Income taxes (30%) 177,600 Net income 414,400 Common dividends 116,000 Net income retained 298,400 Beginning retained earnings 567,000 $ Ending retained earnings 865,400 Last Year $ 4,530,000 3,510,000 1,020,000 560,000 460,000 108,000 352,000 105,600 246,400 95,000 151,400 415,680 $ 567,000 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 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 $310,000.) e. The average sale period. (The inventory at the beginning of last year totaled $560,000.) f. The operating cycle. 9. The total asset turnover. (The total assets at the beginning of last year were $2,600,000) h. The debt-to-equity ratio. 1. The times interest earned ratio. J. The equity multiplier (The total stockholders' equity at the beginning of last year totaled $1,307,000) 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 This Year Last Year a. Working capital b. Current ratio c. Acid-test ratio d. Average collection period e. Average sale period f. Operating cycle g. Total asset turnover h. Debt-to-equity ratio Times interest earned ratio i. Equity multiplier days days days days days days Req 2A > Last Year % Sabin Electronics Common-Size Income Statements This Year Sales % Cost of goods sold Gross margin 0.0 Selling and administrative expenses Net operating income 0.0 Interest expense Net income before taxes 0.0 Income taxes Net income 0.0 % 0.0 0.0 0.0 0.01%
