Question

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 $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 of which 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
Assets
Current assets:
Cash	$	86,000	$	190,000
Marketable securities		0		22,000
Accounts receivable, net		529,000		340,000
Inventory		960,000		635,000
Prepaid expenses		22,000		26,000
Total current assets		1,597,000		1,213,000
Plant and equipment, net		1,631,600		1,410,000
Total assets	$	3,228,600	$	2,623,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	820,000	$	470,000
Bonds payable, 12%		800,000		800,000
Total liabilities		1,620,000		1,270,000
Stockholders' equity:
Common stock, $15 par		730,000		730,000
Retained earnings		878,600		623,000
Total stockholders’ equity		1,608,600		1,353,000
Total liabilities and stockholders' equity	$	3,228,600	$	2,623,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,200,000	$	4,470,000
Cost of goods sold		3,915,000		3,490,000
Gross margin		1,285,000		980,000
Selling and administrative expenses		661,000		556,000
Net operating income		624,000		424,000
Interest expense		96,000		96,000
Net income before taxes		528,000		328,000
Income taxes (30%)		158,400		98,400
Net income		369,600		229,600
Common dividends		114,000		93,000
Net income retained		255,600		136,600
Beginning retained earnings		623,000		486,400
Ending retained earnings	$	878,600	$	623,000

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.

c. The acid-test ratio.

d. The average collection period. (The accounts receivable at the beginning of last year totaled $290,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $540,000.)

f. The operating cycle.

g. The total asset turnover. (The total assets at the beginning of last year were $2,540,000.)

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 $1,343,000.)

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

working capital	current assets - current liabilities
	this year ($)	last year ($)
total current assets	1597000	1213000
total current liabilities	820000	470000
working capital	777000	743000
current ratio	current assets / current liabilities
	this year ($)	last year ($)
total current assets	1597000	1213000
total current liabilities	820000	470000
current ratio	1.95	2.58
acid-test ratio	acid assets / current liabilities
	this year ($)	last year ($)
cash	86000	190000
marketable securities	0	22000
accounts receivable	529000	340000
total acid assets	615000	552000
total current liabilities	820000	470000
acid-test ratio	0.75	1.17
average collecion period	365 / accounts receivable turnover
accounts receivable turnover	sales / average accounts receivable
	this year ($)	last year ($)
sales	5200000	4470000
opening accounts receivable	340000	290000
closing accounts receivable	529000	340000
average accounts receivable	434500	315000
accounts receivable turnover	11.97	14.19
average collecion period in days	30	26
average sale period	365 / inventory turnover ratio
inventory turnover ratio	cost of goods sold / average inventory
	this year ($)	last year ($)
cost of goods sold	3915000	3490000
opening inventory	635000	540000
closing inventory	960000	635000
average inventory	797500	587500
inventory turnover ratio	4.91	5.94
average sale period in days	74	61
operating cycle	inventory period + accounts receivable period
	this year ($)	last year ($)
inventory period	74	61
accounts receivable period	30	26
operating cycle	104	87
total asset turnover ratio	net sales / average total assets
	this year ($)	last year ($)
net sales	5200000	4470000
opening assets	2623000	2540000
closing assets	3228600	2623000
average assets	2925800	2581500
total asset turnover ratio	1.78	1.73
debt-to-equity ratio	total liabilities / total equity
	this year ($)	last year ($)
total liabilities	1620000	1270000
tota equity	1608600	1353000
debt-to-equity ratio	1.01	0.94
times interest earned ratio	earnings before interest and tax / interest expense
	this year ($)	last year ($)
earnings before interest and tax	624000	424000
interest expense	96000	96000
times interest earned ratio	6.50	4.42
equity multiplier	total assets / shareholders equity
	this year ($)	last year ($)
total assets	3228600	2623000
shareholders equity	1608600	1353000
equity multiplier	2.01	1.94

formula for common siz-

balance sheet = (individual item / total assets(total liabilities)*100

income statement = (individual item / sales)*100

Sabin electronics	amount in $	common size in %
comparative balance sheet	this year	last year	this year	last year
assets
current assets
cash	86000	190000	2.66%	7.24%
marketable securities	0	22000	0.00%	0.84%
accounts receivable	529000	340000	16.38%	12.96%
inventory	960000	635000	29.73%	24.21%
prepaid expenses	22000	26000	0.68%	0.99%
total current assets	1597000	1213000	49.46%	46.24%
property, plant & equipment	1631600	1410000	50.54%	53.76%
total assets	3228600	2623000	100.00%	100.00%
liabilities
current liabilities	820000	470000	25.40%	17.92%
bonds payable	800000	800000	24.78%	30.50%
total liabilities	1620000	1270000	50.18%	48.42%
stockholders equity
common stock	730000	730000	22.61%	27.83%
retained earnings	878600	623000	27.21%	23.75%
total stockholers equity	1608600	1353000	49.82%	51.58%
total liabilities and stockholders equity	3228600	2623000	100.00%	100.00%

Sabin electronics	amount in $	common size in %
comparative income statement	this year	last year	this year	last year
sales	5200000	4470000	100.00%	100.00%
cost of goods sold	-3915000	-3490000	-75.29%	-78.08%
gross profit	1285000	980000	24.71%	21.92%
selling and administrative expense	-661000	-556000	-12.71%	-12.44%
net operating income	624000	424000	12.00%	9.49%
interest expense	-96000	-96000	-1.85%	-2.15%
net income before taxes	528000	328000	10.15%	7.34%
income tax	-158400	-98400	-3.05%	-2.20%
net income	369600	229600	7.11%	5.14%