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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 $680,000 long-term loan from Gulfport State Bank, $190,000 of which will be used to bolster the Cash account and $490,000 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 $ 135,000 $ 330,000
Marketable securities 0 15,000
Accounts receivable, net 711,000 480,000
Inventory 1,125,000 775,000
Prepaid expenses 38,000 40,000
Total current assets 2,009,000 1,640,000
Plant and equipment, net 2,245,000 1,550,000
Total assets $ 4,254,000 $ 3,190,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities $ 850,000 $ 400,000
Bonds payable, 12% 800,000 800,000
Total liabilities 1,650,000 1,200,000
Stockholders' equity:
Common stock, $15 par 810,000 810,000
Retained earnings 1,794,000 1,180,000
Total stockholders equity 2,604,000 1,990,000
Total liabilities and equity $ 4,254,000 $ 3,190,000

Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 5,900,000 $ 4,890,000
Cost of goods sold 4,055,000 3,630,000
Gross margin 1,845,000 1,260,000
Selling and administrative expenses 689,000 584,000
Net operating income 1,156,000 676,000
Interest expense 96,000 96,000
Net income before taxes 1,060,000 580,000
Income taxes (30%) 318,000 174,000
Net income 742,000 406,000
Common dividends 128,000 107,000
Net income retained 614,000 299,000
Beginning retained earnings 1,180,000 881,000
Ending retained earnings $ 1,794,000 $ 1,180,000

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.
This Year Last Year
Working capital $

b. The current ratio. (Round your answers to 2 decimal places.)
This Year Last Year
Current ratio

c. The acid-test ratio. (Round your answers to 2 decimal places.)

This Year Last Year
Acid-test ratio

d.

The average collection period. (The accounts receivable at the beginning of last year totaled $430,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

This Year Last Year
Average collection period

e. The average sale period. (The inventory at the beginning of last year totaled $680,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

This Year Last Year
Average sale period

f. The operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

This Year Last Year
Operating cycle

g.

The total asset turnover. (The total assets at the beginning of last year were $3,150,000.) (Round your answers to 2 decimal places.)

This Year Last Year
Total asset turnover

h. The debt-to-equity ratio. (Round your answers to 3 decimal places.)

This Year Last Year
Debt-to-equity ratio

i. The times interest earned ratio. (Round your answers to 1 decimal place.)

This Year Last Year
Times interest earned ratio

j. The equity multiplier. (The total stockholders equity at the beginning of last year totaled $1,980,000.)(Round your answers to 2 decimal places.)

This Year Last Year
Equity multiplier

2. For both this year and last year:

a.

Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Sabin Electronics
Common-Size Balance Sheets
This Year Last Year
Assets
Current assets:
Cash % %
Marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets 0.0 0.0
Plant and equipment, net
Total assets 0.0 % 0.0 %
Liabilities and Stockholders Equity
Liabilities:
Current liabilities % %
Bonds payable, 12%
Total liabilities 0.0 0.0
Stockholders equity:
Common stock, $15 par
Retained earnings
Total stockholders equity 0.0 0.0
Total liabilities and equity 0.0 % 0.0 %

b.

Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Sabin Electronics
Common-Size Income Statements
This Year Last Year
Sales % %
Cost of goods sold
Gross margin 0.0 0.0
Selling and administrative expenses
Net operating income 0.0 0.0
Interest expense
Net income before taxes 0.0 0.0
Income taxes
Net income 0.0 % 0.0 %

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