PROBLEM 1518 Common-Size Statements and Financial Ratios for a Loan Application [LO151, LO152, LO153, LO154] 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 expe-riencing 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 Stockholders Equity Liabilities: Current liabilities . . . . . . . . . . . . . . . . . . . . $ 800,000 $ 430,000 Bonds payable, 12% . . . . . . . . . . . . . . . . 600,000 600,000 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000 1,030,000 Stockholders equity: Common stock, $15 par . . . . . . . . . . . . . 750,000 750,000 Retained earnings . . . . . . . . . . . . . . . . . . 850,000 680,000 Total stockholders equity . . . . . . . . . . . . . . 1,600,000 1,430,000 Total liabilities and 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, 708Chapter 15 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. b. Present the income statement in common-size format down through net income. 3. Paul Sabin has also gathered the following financial data and ratios that are typical of compa-nies in the electronics industry: Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Acid-test ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Average collection period . . . . . . . . . . . . . . . . . . 18 days Average sale period . . . . . . . . . . . . . . . . . . . . . . 60 days Debt-to-equity ratio . . . . . . . . . . . . . . . . . . . . . . 0.90 Times interest earned ratio . . . . . . . . . . . . . . . . 6.0