PROBLEM 15-18 Common-Size Statements and Financial Ratios for a Loan Application LO15-1, LO15-2, LO15-3, LO15-4 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 $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 company's financial statements for the two most recent years follow: Sabln Electronics Comparative Balance Sheet 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 $ 70,000 0 480,000 950,000 20,000 1,520,000 1,480,000 $3,000,000 $ 150,000 18,000 300,000 600,000 22,000 1,090,000 1,370,000 $2,460,000 $ 800,000 600,000 1,400,000 $ 430,000 600,000 1,030,000 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 stockholders' equity... 750,000 850,000 1,600,000 $3,000,000 750,000 680,000 1,430,000 $2,460,000 Sabin Electronics Comparative Income Statement and Reconclliation This Year Last Year Sales .. Cost of goods sold Gross margin... Selling and ative expenses Net operating income Interest expense. Net income before taxes Income taxes (30%) Net income Common dividends Net income retained Beginning retained earnings Ending retained earnings .......... $5,000,000 3,875,000 1,125,000 653,000 472,000 72,000 400,000 120,000 280,000 110,000 170,000 680,000 $ 850,000 $4,350,000 3,450,000 900,000 548,000 352,000 72.000 280,000 84.000 196,000 95.000 101,000 579,000 $ 680,000 C. 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. The acid-test ratio. d. The average collection period. (The accounts receivable at the beginning of last year totaled $250,000.) 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 companies in the electronics industry: e. Current ratio Acid-test ratio Average collection period Average sale period... Debt-to-equity ratio Times interest earned ratio 2.5 1.3 18 days 60 days 0.90 6.0 Comment on the results of your analysis in (1) and (2) above and compare Sabin Electronics' performance to the benchmarks from the electronics industry. Do you think that the company is likely to get its loan application approved