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Problem 14-18 Common-Size Statements and Financial Ratios for a Loan Application [LO14-1, LO14-2, LO14-3, LO14-4] Paul Sabin organized Sabin Electronics 10 years ago to produce

Problem 14-18 Common-Size Statements and Financial Ratios for a Loan Application [LO14-1, LO14-2, LO14-3, LO14-4]

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 companys financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
This Year Last Year
Assets
Current assets:
Cash $ 82,000 $ 180,000
Marketable securities 0 21,000
Accounts receivable, net 516,000 330,000
Inventory 980,000 625,000
Prepaid expenses 22,000 25,000
Total current assets 1,600,000 1,181,000
Plant and equipment, net 1,570,200 1,400,000
Total assets $ 3,170,200 $ 2,581,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities $ 815,000 $ 460,000
Bonds payable, 12% 750,000 750,000
Total liabilities 1,565,000 1,210,000
Stockholders' equity:
Common stock, $15 par 720,000 720,000
Retained earnings 885,200 651,000
Total stockholders equity 1,605,200 1,371,000
Total liabilities and stockholders' equity $ 3,170,200 $ 2,581,000

Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 5,150,000 $ 4,440,000
Cost of goods sold 3,905,000 3,480,000
Gross margin 1,245,000 960,000
Selling and administrative expenses 659,000 554,000
Net operating income 586,000 406,000
Interest expense 90,000 90,000
Net income before taxes 496,000 316,000
Income taxes (30%) 148,800 94,800
Net income 347,200 221,200
Common dividends 113,000 92,000
Net income retained 234,200 129,200
Beginning retained earnings 651,000 521,800
Ending retained earnings $ 885,200 $ 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.

Req 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. (Round your answers to 2 decimal places.) c. The acid-test ratio. (Round your answers to 2 decimal places.) d. The average collection period. (The accounts receivable at the beginning of last year totaled $280,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.) e. The average sale period. (The inventory at the beginning of last year totaled $530,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.) f. The operating cycle. (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.) g. The total asset turnover. (The total assets at the beginning of last year were $2,510,000.) (Round your answers to 2 decimal places.) h. The debt-to-equity ratio. (Round your answers to 2 decimal places.) i. The times interest earned ratio. (Round your answers to 2 decimal places.) j. The equity multiplier. (The total stockholders equity at the beginning of last year totaled $1,361,000.) (Round your answers to 2 decimal places.)

Req 2a

Present the balance sheet in common-size format. (Round your answers to 1 decimal place.)

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
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 equity %

%

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