Question
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
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 companys financial statements for the two most recent years follow:
Sabin Electronics Comparative Balance Sheet
|
This Year Last Year |
Assets | |||
Current Assets: | |||
Cash | $70,000 | $150,000 | |
Marketable securities | 0 | 18,000 | |
Accounts receivable, net | 480,000 | 300,000 | |
Inventory | 950,000 | 600,000 | |
Prepaid expenses | 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 stockholder's Equity | |||
Liabilities: | |||
Current liabilities | $800,000 | $430,000 | |
Bonds payable, 12% | 600,000 | 600,000 | |
Total liabilities | 1,400,000 | 1,030,000 | |
Stockholder's equity | |||
Common stock, 15% par | 750,000 | 750,000 | |
Retained earnings | 850,000 | 680,000 | |
Total stockholder's equity | 1,600,000 | 1,430,000 | |
Total liabilities and stockholder's equity | $3,000,000 | 2,460,000 |
Sabin Electronics Comparative Income Statement and Reconciliation |
This Year Last Year
Sales $ 5,000,000 $ 4,350,000
Cost of goods sold 3,875,000 3,450,000
Gross margin 1,125,000 900,000
Selling and administrative expenses 653,000 548,000
Net operating income 472,000 352,000
Interest expense 72,000 72,000
Net income before taxes 400,000 280,000
Income taxes (30%) 120,000 84,000
Net income 280,000 196,000
Common dividends 110,000 95,000
Net income retained 170,000 101,000
Beginning retained earnings 680,000 579,000
Ending retained earnings $ 850,000 $ 680,000
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 $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 for both this year and last year.
b. Present the income statement in common-size format down through net income for both this year and last year.
Present the balance sheet in common-size format for both this year and last year. (Round your answers to 1 decimal place.)
Sabin Electronics | ||||
Common-Size Balance Sheets | ||||
This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | not attempted | % | not attempted | % |
Marketable securities | not attempted | not attempted | ||
Accounts receivable, net | not attempted | not attempted | ||
Inventory | not attempted | not attempted | ||
Prepaid expenses | not attempted | not attempted | ||
Total current assets | 0.0 | 0.0 | ||
Plant and equipment, net | not attempted | not attempted | ||
Total assets | 0.0 | % | 0.0 | % |
Liabilities and Stockholders Equity | ||||
Liabilities: | ||||
Current liabilities | not attempted | % | not attempted | % |
Bonds payable, 12% | not attempted | not attempted | ||
Total liabilities | 0.0 | 0.0 | ||
Stockholders equity: | ||||
Common stock, $15 par | not attempted | not attempted | ||
Retained earnings | not attempted | not attempted | ||
Total stockholders equity | 0.0 | 0.0 | ||
Total liabilities and equity | 0.0 | % | 0.0 | % |
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