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 $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 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 | $ | 70,000 | $ | 150,000 |
Marketable securities | 0 | 18,000 | ||
Accounts receivable, net | 480,000 | 300,000 | ||
Inventory | 950,000 | 600,000 | ||
Prepaid expenses | 20,000 | 22,000 | ||
Total current assets | 1,520,000 | 1,090,000 | ||
Plant and equipment, net | 1,480,000 | 1,370,000 | ||
Total assets | $ | 3,000,000 | $ | 2,460,000 |
Liabilities and Stockholders Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 800,000 | $ | 430,000 |
Bonds payable, 12% | 600,000 | 600,000 | ||
Total liabilities | 1,400,000 | 1,030,000 | ||
Stockholders' equity: | ||||
Common stock, $15 par | 750,000 | 750,000 | ||
Retained earnings | 850,000 | 680,000 | ||
Total stockholders’ equity | 1,600,000 | 1,430,000 | ||
Total liabilities and equity | $ | 3,000,000 | $ | 2,460,000 |
Sabin Electronics | ||||
Comparative Income Statement and Reconciliation | ||||
This Year | Last Year | |||
Sales | $ | 5,000,000 | $ | 4,350,000 |
Cost of goods sold | 3,875,000 | 3,450,000 | ||
Gross margin | 1,125,000 | 900,000 | ||
Selling and administrative expenses | 653,000 | 548,000 | ||
Net operating income | 472,000 | 352,000 | ||
Interest expense | 72,000 | 72,000 | ||
Net income before taxes | 400,000 | 280,000 | ||
Income taxes (30%) | 120,000 | 84,000 | ||
Net income | 280,000 | 196,000 | ||
Common dividends | 110,000 | 95,000 | ||
Net income retained | 170,000 | 101,000 | ||
Beginning retained earnings | 680,000 | 579,000 | ||
Ending retained earnings | $ | 850,000 | $ | 680,000 |
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 $250,000.) (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 $500,000.) (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 $2,420,000.) (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 $1,420,000.) (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., 0.123 should be entered as 12.3).) |
b. |
Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).) |
As per policy, only four parts are allowed to answer at a time, here answering 10 parts. For rest parts, please post the question with requirements again.
1) Ratios : | ||||||
ratio | formula | calculation - This yr | Result-This Year | calculation - Last yr | Result-Last Year | |
a | working capital | CA-CL | 1520000-800000 | 720000 | 1090000-430000 | 660000 |
b | current ratio | CA/CL | 1520000/800000 | 1.9 | 1090000/430000 | 2.5 |
c | acid-test ratio | (CA-INV.)/CL | (1520000-950000)/800000 | 0.7 | (1090000-600000)/430000 | 1.1 |
d | average collection period | Credit sale/avg. AR | 5000000*2/(480000+300000) | 12.8 | 4350000/(300000+250000) | 7.9 |
e | average sale period | COGS/avg. Inv. | 3875000*2/(950000+600000) | 5.0 | 3450000*2/(600000+500000) | 6.3 |
f | Operating cycle | Avg. collection + avg. sales period | 17.8 | 14.2 | ||
g | total asset turnover | Sales / avg TA | 5000000*2/(3000000+2460000) | 1.8 | (4350000*2)/(2460000+2420000) | 1.8 |
h | debt to equity ratio | Debt/SH eq. | 1400000/1600000 | 0.9 | 1030000/1430000 | 0.7 |
i | times interest earned ratio | EBIT / Int. exp. | 472000/72000 | 6.6 | 352000/72000 | 4.9 |
j | equity multiplier | Sh eq. / TA | 1600000/3000000 | 0.5 | 1430000/2460000 | 0.6 |
Problem 15-18 Common-Size Statements and Financial Ratios for a Loan Application [LO15-1, LO15-2, LO15-3, LO15-4] Paul...
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Paul Sabin organized Sabin Electronics 10 years ago to produce and se 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 $150.000 of which w e used to bolster the Cash account and $450,000 of which will be used to modernize equipment. The company's financial statements for the two most recent...
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