Question

  

Paul Sabin organized Sabin Electronics 10 years ago in order 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 certain key items of 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	$	71,700		$	127,000
Marketable securities		—			15,600
Accounts receivable, net		505,200			254,000
Inventory		1,014,000			508,000
Prepaid expenses		20,100			18,200
Total current assets		1,611,000			922,800
Plant and equipment, net		1,220,000			1,177,200
Total assets	$	2,831,000		$	2,100,000
Liabilities and Shareholders’ Equity
Liabilities:
Current liabilities	$	844,000		$	591,500
Bonds payable, 12%		400,000			400,000
Total liabilities		1,244,000			991,500
Shareholders’ equity:
Preferred shares, no par ($6; 22,000 shares issued)		275,000			275,000
Common shares, no par (unlimited authorized,        33,000 issued)		330,000			330,000
Retained earnings		982,000			503,500
Total shareholders’ equity		1,587,000			1,108,500
Total liabilities and shareholders’ equity	$	2,831,000		$	2,100,000

SABIN ELECTRONICS
Comparative Income Statement
	This Year			Last Year
Sales	$	5,300,000		$	4,200,000
Less: Cost of goods sold		4,063,000			3,320,000
Gross margin		1,237,000			880,000
Less: Operating expenses		689,000			523,000
Net operating income		548,000			357,000
Less: Interest expense		48,000			48,000
Net income before taxes		500,000			309,000
Less: Income taxes (30%)		150,000			92,700
Net income		350,000			216,300
Dividends paid:
Preferred dividends		20,000			20,000
Common dividends		95,400			72,050
Total dividends paid		115,400			92,050
Net income retained		234,600			124,250
Retained earnings, beginning of year		648,200			523,950
Retained earnings, end of year	$	882,800		$	648,200

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. Assume that the following ratios are typical of firms in the electronics industry:

Current ratio		2.5	to 1
Acid-test (quick) ratio		1.3	to 1
Average age of receivables		18	days
Inventory turnover in days		60	days
Debt-to-equity ratio		0.90	to 1
Times interest earned		6.0	times
Return on total assets		13	%
Price–earnings ratio		12

Required:
1.	To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year (Use 365 days a year. Round your intermediate calculations to 1 decimal place. Round Debt-to-equity ratio to 3 decimal places and other answers to 2 decimal places.):

a.	The amount of working capital.
b.	The current ratio.
c.	The acid-test (quick) ratio.
d.	The average age of receivables (the accounts receivable at the beginning of last year totalled $252,000).
e.	The inventory turnover in days (the inventory at the beginning of last year totalled $504,000).
f.	The debt-to-equity ratio.
g.	The times interest earned.

2.	For both this year and last year:

(a)	Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place.)

(b)	Present the income statement in common-size format down through net income. (Input all values as positive values. Round your answers to 1 decimal place.)

Answer 1

1) a) Calculation of Working Capital (Amounts in $)

	This Year	Last Year
Total Current Assets (A)	1,611,000	922,800
Total Current Liabilities (B)	844,000	591,500
Working Capital (A-B)	767,000	331,300

b) Calculation of Current Ratio (Amounts in $)

	This Year	Last Year
Total Current Assets (A)	1,611,000	922,800
Total Current Liabilities (B)	844,000	591,500
Current Ratio (A/B)	1.91	1.56

c) Calculation of Quick Ratio (Amounts in $)

	This Year	Last Year
Total Current Assets (A)	1,611,000	922,800
Inventory (i)	1,014,000	508,000
Prepaid Expenses (ii)	20,100	18,200
Total Quick Assets (C = A-i-ii)	576,900	396,600
Total Current Liabilities (B)	844,000	591,500
Quick Ratio (C/B)	0.68	0.67

d) Calculation of Age of Accounts Receivable (Amounts in $)

	This Year	Last Year
A) Beginning Accounts Receivable	254,000	252,000
B) Ending Accounts Receivable	505,200	254,000
C) Average Accounts Receivable [(A+B)/2]	379,600	253,000
D) Sales	5,300,000	4,200,000
E) Total days in a year	365 days	365 days
Age of Accounts Receivable [(E*C)/D]	26.14 days	21.99 days

It is assumed that all sales are on account.

e) Calculation of Inventory Turnover (Amounts in $)

	This Year	Last Year
A) Beginning Inventory	508,000	504,000
B) Ending Inventory	1,014,000	508,000
C) Average Inventory [(A+B)/2]	761,000	506,000
D) Cost of Goods Sold	4,063,000	3,320,000
E) Total days in a year	365 days	365 days
Inventory Turnover [(E*C)/D]	68.36 days	55.63 days

f) Calculation of Debt to Equity Ratio (Amounts in $)

	This Year	Last Year
i) Total Liabilities	1,244,000	991,500
ii) Total Shareholder's Equity	1,587,000	1,108,500
iii) Debt to Equity Ratio (i/ii)	0.784	0.894

g) Calculation of The times Interest Earned Ratio (Amounts in $)

	This Year	Last Year
A) Earning before interest and income taxes (net operating income in this case)	548,000	357,000
B) Interest Expense	48,000	48,000
Times Interest Earned (A/B)	11.42	7.44