Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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 $700,000 long-term loan from Gulfport State Bank, $200,000 of which will be used to bolster the Cash account and $500,000 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 $ 150,000 $ 350,000
Marketable securities 0 17,000
Accounts receivable, net 737,000 500,000
Inventory 1,145,000 795,000
Prepaid expenses 38,000 42,000
Total current assets 2,070,000 1,704,000
Plant and equipment, net 2,300,800 1,530,000
Total assets $ 4,370,800 $ 3,234,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 900,000 $ 420,000
Bonds payable, 12% 900,000 900,000
Total liabilities 1,800,000 1,320,000
Stockholders' equity:
Common stock, $15 par 890,000 890,000
Retained earnings 1,680,800 1,024,000
Total stockholders equity 2,570,800 1,914,000
Total liabilities and stockholders' equity $ 4,370,800 $ 3,234,000

Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 6,000,000 $ 4,950,000
Cost of goods sold 4,075,000 3,650,000
Gross margin 1,925,000 1,300,000
Selling and administrative expenses 693,000 588,000
Net operating income 1,232,000 712,000
Interest expense 108,000 108,000
Net income before taxes 1,124,000 604,000
Income taxes (30%) 337,200 181,200
Net income 786,800 422,800
Common dividends 130,000 109,000
Net income retained 656,800 313,800
Beginning retained earnings 1,024,000 710,200
Ending retained earnings $ 1,680,800 $ 1,024,000

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 $450,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $700,000.)

f. The operating cycle.

g. The total asset turnover. (The total assets at the beginning of last year were $3,194,000.)

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 $1,904,000.)

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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Theory Conceptual Issues In A Political And Economic Environment

Authors: Harry I. Wolk, James L. Dodd, John J. Rozycki

7th Edition

1412953456, 978-1412953450

More Books

Students also viewed these Accounting questions

Question

What is ad continuity?

Answered: 1 week ago