Question

aul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Ithough the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a 660,000 long-term loan from Gulfport State Bank, $180,000 of which will be used to bolster the Cash account and $480,000 of thich will be used to modernize equipment. The company's financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year $ 128,000 685,000 1,105,000 34,000 1,952,000 2,061,000 $ 4,013,000 $ 310,000 13,000 460.000 755,000 38.000 1,576,000 1,450,000 $3,026,000 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 Isabilities: Current liabilities Bonds payable, 124 Total liabilities Stockholders' equity: Common stock, $15 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ 880,000 750,000 1,630,000 460,000 750,000 1,210,000 850,000 1,533.000 2,383,000 $ 4,013,000 850,000 966,000 1,816,000 $3,026,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales $5,800,000 $4,830,000 Cost of goods sold 4,035,000 3, 610,000 Gross margin 1,765,000 1,220,000 Selling and administrative expenses 685,000 SBO,000 Net operating income 1, OLO,000 640,000 Interest expense 90,000 90,000 Net income before taxes 990,000 550,000 Income taxes (305) 297,000 165,000 Net income 699,000 385,000 Common dividende 126,000 105,000 Net income retained 567,000 280,000 Beginning retained earnings 966,000 686,000 Ending retained earnings $1,533,000 $ 966,000 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. This Year a. Working capital b. Current ratio c. Acid-test ratio d. Average collection period e. Average sale period f. Operating cycle g. Total asset turnover h. Debt-to-equity ratio Times interest earned ratio j Equity multiplier 1,072,000 2.22 0.92 36.03 days days days Last Year 1,116,000 3 .43 1.70 32.88 days days days e. The average sale period. (The inventory at the beginning of last year totaled $660,000.) f. The operating cycle. 9. The total asset turnover. (The total assets at the beginning of last year were $2,986,000.) 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 $1,806,000.) 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.

Answer 1

Ratio	Formula	This Year		Last Year
		Calculation (Figures in $)	Ratio	Calculation	Ratio
Inventory Turnover	Cost of goods sold / average inventory	4035000/((1105000+755000)/2)	4.34	3610000/((660000+755000)/2)	5.10
Average Collection period (calculated)			36.03 days		32.88 days
e) Average Sale Period/Days sales in inventory	365 days / inventory turnover	365 days / 4.34	84.10 days	365 days / 5.10	71.57 days
f) Opearating Cycle	Average sale period + Average Collection period	84.10 + 36.03	120.13 days	71.57 + 32.88	104.45 days
g) Total Asset Turnover	Net sales / average total asset	5800000/((4013000+3026000)/2)	1.65	4830000/((2986000+3026000)/2)	1.61
h) Debt/Equity ratio	Total Liabilities / Shareholders' Equity	1630000/2383000	0.68	1210000/1816000	0.67
i) Times Interest Earned Ratio	Earning Before Interest and tax / Interest Expense	1080000/90000	12	640000/90000	7.11
j) Equity Multiplier	Total Assets / Total stockholders' equity	4013000/((1816000+2383000)/2)	1.91	3026000/((1806000+1816000)/2)	1.67

Sabin Electronics
Common Size Balance Sheet
	This Year		Last Year
ASSETS	Amount	Percentage	Amount	Percentage
Current Assets
Cash	$   1,28,000	3.19%	$   3,10,000	10.24%
Marketable Securities	$                -	0.00%	$       13,000	0.43%
Accounts Receivables, Net	$   6,85,000	17.07%	$   4,60,000	15.20%
Inventory	$ 11,05,000	27.54%	$   7,55,000	24.95%
Prepaid Expense	$       34,000	0.85%	$       38,000	1.26%
Total Current Assets	$ 19,52,000	48.64%	$ 15,76,000	52.08%
Plant and Equipment Net	$ 20,61,000	51.36%	$ 14,50,000	47.92%
Total Assets	$ 40,13,000	100.00%	$ 30,26,000	100.00%
LAIBILITIES AND STOCKHOLDERS EQUITY
Liabilities
Current Liabilities	$   8,80,000	21.93%	$   4,60,000	15.20%
Bonds Payable, 12%	$   7,50,000	18.69%	$   7,50,000	24.79%
Total Liabilities	$ 16,30,000	40.62%	$ 12,10,000	39.99%
Stockholders' Equity		0.00%		0.00%
Common Stock, $15 par	$   8,50,000	21.18%	$   8,50,000	28.09%
Retained Earnings	$ 15,33,000	38.20%	$   9,66,000	31.92%
Total Stockholders' Equity	$ 23,83,000	59.38%	$ 18,16,000	60.01%
Total Liabilities and Stockholders' equity	$ 40,13,000	100.00%	$ 30,26,000	100.00%

Sabin Electronics
Common Size Income Statement
	This Year		Last Year
Particulars	Amount	Percentage	Amount	Percentage
Sales	$ 58,00,000	100.00%	$ 48,30,000	100.00%
Cost of Goods sold	$ 40,35,000	69.57%	$ 36,10,000	74.74%
Gross Margin	$ 17,65,000	30.43%	$ 12,20,000	25.26%
Selling and Administrative Expenses	$   6,85,000	11.81%	$   5,80,000	12.01%
Net Operating Income	$ 10,80,000	18.62%	$   6,40,000	13.25%
Interest Expense	$       90,000	1.55%	$       90,000	1.86%
Net Income Before Taxes	$   9,90,000	17.07%	$   5,50,000	11.39%
Income Taxes (30%)	$   2,97,000	5.12%	$   1,65,000	3.42%
Net Income	$   6,93,000	11.95%	$   3,85,000	7.97%