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 $600,000 long-term loan from Gulfport State Bank, $150,000 of which will be used to bolster the Cash account and $450,000 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	$	110,000	$	250,000
Marketable securities		0		28,000
Accounts receivable, net		607,000		400,000
Inventory		1,045,000		695,000
Prepaid expenses		30,000		32,000
Total current assets		1,792,000		1,405,000
Plant and equipment, net		1,946,400		1,470,000
Total assets	$	3,738,400	$	2,875,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	850,000	$	400,000
Bonds payable, 12%		750,000		750,000
Total liabilities		1,600,000		1,150,000
Stockholders' equity:
Common stock, $15 par		790,000		790,000
Retained earnings		1,348,400		935,000
Total stockholders equity		2,138,400		1,725,000
Total liabilities and equity	$	3,738,400	$	2,875,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,500,000	$	4,650,000
Cost of goods sold		3,975,000		3,550,000
Gross margin		1,525,000		1,100,000
Selling and administrative expenses		673,000		568,000
Net operating income		852,000		532,000
Interest expense		90,000		90,000
Net income before taxes		762,000		442,000
Income taxes (30%)		228,600		132,600
Net income		533,400		309,400
Common dividends		120,000		99,000
Net income retained		413,400		210,400
Beginning retained earnings		935,000		724,600
Ending retained earnings	$	1,348,400	$	935,000

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 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. (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 $350,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

e.	The average sale period. (The inventory at the beginning of last year totaled $600,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

f.	The operating cycle. (Round your answers to 1 decimal place.)

g.	The total asset turnover. (The total assets at the beginning of last year were $2,790,000.) (Round your answers to 2 decimal places.)

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

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

j.	The equity multiplier. (The total stockholders equity at the beginning of last year totaled $1,715,000.) (Round your answers to 2 decimal places.)

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).)

AssetsCurrent assets:Cash% %

Marketable securities

Accounts receivable, net

Inventory

Prepaid expenses

Total current assets0.00.0

Plant and equipment, net

Total assets0.0% 0.0%

Liabilities and Stockholders Equity

Liabilities:Current liabilities% %

Bonds payable, 12%

Total liabilities0.00.0

Stockholders equity:Common stock, $15 par

Retained earnings

Total stockholders equity0.00.0

Total liabilities and equity0.0% 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).)