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 $510,000 long-term loan from Gulfport State Bank, $105,000 of which will be used to bolster the Cash account and $405,000 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 Marketable securities Accounts receivable, net Inventory Prepaid expenses $ 74,000 $160,000 19,000 490,000 310,000 955,000 605,000 23,000 0 23,000 Total current assets 1,542,000 1,117,000 Plant and equipment, net 1,376,400 1,300,000 Total assets $2,918,400 s2417.000 Liabilities and Stockholders Equity Liabilities Current liabilities Bonds payable, 12% $ 750,000 $440,000 650,000 650,000 Total liabilities 1,400,000 ,090,000 Stockholders' equity: Common stock, $15 par Retained earnings 720,000 720,000 798,400 607,000 1,518,400 1,327,000 $2,918,400 s2,417,000 Total stockholders' equity Total liabilities and equity Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales Cost of goods sold Gross margin $5,050,000 $4,380,000 3,885,000 3,460,000o 1,165,000 920,000 Selling and administrative expenses 655,000 550,000 Net operating income 510,000 370,000 Interest expense 78,000 78,000 Net income before taxes 432,000 292,000 Income taxes (30%) 29,600 87,600 Net income 302,400 204,400 Common dividends 111,000 90,000 Net income retained 191,400 114,400 Beginning retained earnings 607,000 492,600 Ending retained earnings $ 798,400 $607,000

Answer 1

Answer to Question 1:

Answer a.

This Year:

Working Capital = Current Assets - Current Liabilities
Working Capital = $1,542,000 - $750,000
Working Capital = $792,000

Last Year:

Working Capital = Current Assets - Current Liabilities
Working Capital = $1,117,000 - $440,000
Working Capital = $677,000

Answer b.

This Year:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $1,542,000 / $750,000
Current Ratio = 2.06

Last Year:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $1,117,000 / $440,000
Current Ratio = 2.54

Answer c.

This Year:

Acid-test Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
Acid-test Ratio = ($1,542,000 - $955,000 - $23,000) / $750,000
Acid-test Ratio = 0.75

Last Year:

Acid-test Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
Acid-test Ratio = ($1,117,000 - $605,000 - $23,000) / $440,000
Acid-test Ratio = 1.11

Answer d.

This Year:

Average Accounts Receivable = ($490,000 + $310,000) / 2
Average Accounts Receivable = $400,000

Average Collection Period = 365 * Average Accounts Receivable / Sales
Average Collection Period = 365 * $400,000 / $5,050,000
Average Collection Period = 28.91 days

Last Year:

Average Accounts Receivable = ($310,000 + $260,000) / 2
Average Accounts Receivable = $285,000

Average Collection Period = 365 * Average Accounts Receivable / Sales
Average Collection Period = 365 * $285,000 / $4,380,000
Average Collection Period = 23.75 days

Answer e.

This Year:

Average Inventory = ($955,000 + $605,000) / 2
Average Inventory = $780,000

Average Sales Period = 365 * Average Inventory / Cost of Goods Sold
Average Sales Period = 365 * $780,000 / $3,885,000
Average Sales Period = 73.28 days

Last Year:

Average Inventory = ($605,000 + $510,000) / 2
Average Inventory = $557,500

Average Sales Period = 365 * Average Inventory / Cost of Goods Sold
Average Sales Period = 365 * $557,500 / $3,460,000
Average Sales Period = 58.81 days

Answer f.

This Year:

Operating Cycle = Average Collection Period + Average Sales Period
Operating Cycle = 28.91 + 73.28
Operating Cycle = 102.19 days

Last Year:

Operating Cycle = Average Collection Period + Average Sales Period
Operating Cycle = 23.75 + 58.81
Operating Cycle = 82.56 days

Answer g.

This Year:

Average Total Assets = ($2,918,400 + $2,417,000) / 2
Average Total Assets = $2,667,700

Total Asset Turnover = Sales / Average Total Assets
Total Asset Turnover = $5,050,000 / $2,667,700
Total Asset Turnover = 1.89

Last Year:

Average Total Assets = ($2,417,000 + $2,397,000) / 2
Average Total Assets = $2,407,000

Total Asset Turnover = Sales / Average Total Assets
Total Asset Turnover = $4,380,000 / $2,407,000
Total Asset Turnover = 1.82