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 $640,000 long-term loan from Gulfport State Bank, $170,000 of which will be used to bolster the Cash account and $470,000 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 $ 126,000 659,000 1,020,000 34,000 1,839,000 2,084,600 $ 3,923,600 290,000 11,000 440,000 735,000 36,000 1,512,000 1,470,000 2,982,000 $ 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 Liabilities: Current liabilities Bonds payable, 12% Total liabilities Stockholders' equity: Common stock, $15 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ 870,000 800,000 1,670,000 440,000 800,000 1,240,000 830,000 1,423,600 830,000 912,000 1,742,000 $ 2,982,000 $ 3,923,600 Sabin Electronics Comparative Income Statement and Reconciliation This Year $ 5.700.000 Last Year $4.770.000 Sales

Answer 1

Ans. 1
Ans. A	Working capital =     Total current assets - Total current liabilities
	This year	$1,839,000 - $870,000	$969,000
	Last year	$1,512,000 - $440,000	$1,072,000
Ans. B	Current ratio   =   Total current assets / Total current liabilities
	This year	$1,839,000 / $870,000	2.11 : 1
	Last year	$1,512,000 / $440,000	3.44 : 1
Ans. C	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	This year	($1,839,000 - $1,020,000 - $34,000) / $870,000	0.90 : 1
	Last year	($1,512,000 - $735,000 - $36,000) / $440,000	1.68 : 1
Ans. D	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
	This year	365 / $5,700,000 * $549,500	35.19	days
	Last year	365 / $4,770,000 * $415,000	31.76	days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	This year	($440,000 + $659,000) / 2	$549,500
	Last year	($390,000 + $440,000) / 2	$415,000
Ans. E	Average sales period   =   No. of days in year / Cost of goods sold * Average inventory
	This year	365 / $4,015,000 * $877,500	79.77	days
	Last year	365 / $3,590,000 * $687,500	69.90	days
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	This year	($735,000 + $1,020,000) / 2	$877,500
	Last year	($640,000 + $735,000) / 2	$687,500
Ans. F	Operating cycle = Average collection period + Average sales period
	This year	35.19 + 79.77	114.96	days
	Last year	31.76 + 69.90	101.66	days
Ans. G	Total assets turnover = Sales / Average assets
	This year	$5,700,000 / $3,452,800	1.65	times
	Last year	$4,770,000 / $2,962,000	1.61	times
	*Average assets = (Beginning assets + Ending assets) / 2
	This year	($2,982,000 + $3,923,600) / 2	$3,452,800
	Last year	($2,942,000 + $2,982,000) / 2	$2,962,000
Ans. H	Debt to equity ratio   =   Total liabilities / Total stockholder's equity
	This year	$1,670,000 / $2,253,600	0.74
	Last year	$1,240,000 / $1,742,000	0.71
Ans. i	Time interest earned = Net operating income / Interest expenses
	This year	$1,004,000 / $96,000	10.46	times
	Last year	$604,000 / $96,000	6.29	times
Ans. J	Equity multiplier   =   Average assets / Average stockholder's equity
	This year	$3,452,800 / $1,997,800	1.73	times
	Last year	$2,962,000 / $1,737,000	1.71	times
	*Average equity = (Beginning equity + Ending equity) / 2
	This year	($1,742,000 + $2,253,600) / 2	$1,997,800
	Last year	($1,732,000 + $1,742,000) / 2	$1,737,000

Ans. 2A SABIN ELECTRONICS Common - Size Balance Sheets This Year Amount Last Year Amount % $126,000 $0 $659,000 $1,020,000 $34,000 $1,839,000 $2,084,600 $3,923,600 3.2% 0.0% 16.8% 26.0% 0.9% 46.9% 53.1% 100.0% $290,000 $11,000 $440,000 $735,000 $36,000 $1,512,000 $1,470,000 $2,982,000 9.7% 0.4% 14.8% 24.6% 1.2% 50.7% 49.3% 100.0% Assets Current Assets: Cash Marketable securities Accounts receivable (net) Inventory Prepaid expenses Total current assets Plant and equipment (net) Total assets Liabilities and Stockholder's Equity: Liabilities: Current Liabilities Notes payable, 10% Total liabilities Stockholder's equity: Common stock Retained earnings Total stockholder's equity Total liabilities and owner's equity 22.2% $870,000 $800,000 $1,670,000 20.4% 42.6% $440,000 $800,000 $1,240,000 14.8% 26.8% 41.6% 27.8% 30.6% $830,000 $1,423,600 $2,253,600 $3,923,600 21.2% 36.3% 57.4% 100.0% $830,000 $912,000 $1,742,000 $2,982,000 58.4% 100.0%

*In a common size balance sheet, all precentages are calculated on the base of total assets. Amount is percentage for this year = Particular amount of This year / Total assets * 100 Amount is percentage for Last year = Particular amount of Last year / Total assets * 100 Ans. 2B Last Year % Sales Cost of goods sold Gross profit Selling and administrative expenses Net operating income Interest expense Net income before taxes Income taxes Net income SABIN ELECTRONICS Common - Size Income Statements This Year Amount % $5,700,000 100.00% $4,015,000 70.44% $1,685,000 29.56% $681,000 11.95% $1,004,000 17.61% $96,000 1.68% $908,000 15.93% $272,400 4.78% $635,600 11.15% Amount $4,770,000 $3,590,000 $1,180,000 $576,000 $604,000 $96,000 $508,000 $152,400 $355,600 100.00% 75.26% 24.74% 12.08% 12.66% 2.01% 10.65% 3.19% 7.45% *In a common size income statement, all percentages are calculated on the basis of sales. Amount is percentage for this year = Particular amount of This year / Sales * 100 Amount is percentage for Last year = Particular amount of Last year / Sales * 100