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 $580,000 long-term loan from Gulfport State Bank, $140,000 of which will be used to bolster the Cash account and $440,000 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	$	100,000	$	230,000
Marketable securities		0		26,000
Accounts receivable, net		581,000		380,000
Inventory		1,025,000		675,000
Prepaid expenses		26,000		30,000
Total current assets		1,732,000		1,341,000
Plant and equipment, net		1,759,600		1,450,000
Total assets	$	3,491,600	$	2,791,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	840,000	$	510,000
Bonds payable, 12%		650,000		650,000
Total liabilities		1,490,000		1,160,000
Stockholders' equity:
Common stock, $15 par		770,000		770,000
Retained earnings		1,231,600		861,000
Total stockholders’ equity		2,001,600		1,631,000
Total liabilities and stockholders' equity	$	3,491,600	$	2,791,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,400,000	$	4,590,000
Cost of goods sold		3,955,000		3,530,000
Gross margin		1,445,000		1,060,000
Selling and administrative expenses		669,000		564,000
Net operating income		776,000		496,000
Interest expense		78,000		78,000
Net income before taxes		698,000		418,000
Income taxes (30%)		209,400		125,400
Net income		488,600		292,600
Common dividends		118,000		97,000
Net income retained		370,600		195,600
Beginning retained earnings		861,000		665,400
Ending retained earnings	$	1,231,600	$	861,000

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. 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

Sabin Electronics
Balance Sheet (Common size)
	This Year		Last Year
	Amount ($)	%	Amount ($)	%
Assets
Current assets:
Cash	100,000	2.86%	230,000	8.24%
Marketable securities	0	0.00%	26,000	0.93%
Accounts receivable, net	581,000	16.64%	380,000	13.62%
Inventory	1,025,000	29.36%	675,000	24.18%
Prepaid expenses	26,000	0.74%	30,000	1.07%
Total current assets	1,732,000	49.60%	1,341,000	48.05%
Plant and equipment, net	1,759,600	50.40%	1,450,000	51.95%
Total assets	3,491,600	100.00%	2,791,000	100.00%
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	840,000	24.06%	510,000	18.27%
Bonds payable, 12%	650,000	18.62%	650,000	23.29%
Total liabilities	1,490,000	42.67%	1,160,000	41.56%
Stockholders' equity:
Common stock, $15 par	770,000	22.05%	770,000	27.59%
Retained earnings	1,231,600	35.27%	861,000	30.85%
Total stockholders’ equity	2,001,600	57.33%	1,631,000	58.44%
Total liabilities and stockholders' equity	3,491,600	100%	2,791,000	100%
Sabin Electronics
Income Statement (Common size)
	This Year		Last Year
	Amount ($)	% of sales	Amount ($)	% of sales
Sales	5,400,000	100%	4,590,000	100%
Cost of goods sold	3,955,000	73%	3,530,000	77%
Gross margin	1,445,000	27%	1,060,000	23%
Selling and administrative expenses	669,000	12%	564,000	12%
Net operating income	776,000	14%	496,000	11%
Interest expense	78,000	1%	78,000	2%
Net income before taxes	698,000	13%	418,000	9%
Income taxes (30%)	209,400	4%	125,400	3%
Net income	488,600	9%	292,600	6%