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	$	66,500		$	115,000
Marketable securities		—			14,000
Accounts receivable, net		467,600			230,000
Inventory		938,000			460,000
Prepaid expenses		18,900			16,600
Total current assets		1,491,000			835,600
Plant and equipment, net		1,140,000			1,064,400
Total assets	$	2,631,000		$	1,900,000
Liabilities and Shareholders’ Equity
Liabilities:
Current liabilities	$	780,000		$	557,500
Bonds payable, 12%		400,000			400,000
Total liabilities		1,180,000			957,500
Shareholders’ equity:
Preferred shares, no par ($6; 20,080 shares issued)		251,000			251,000
Common shares, no par (unlimited authorized,        29,000 issued)		290,000			290,000
Retained earnings		910,000			401,500
Total shareholders’ equity		1,451,000			942,500
Total liabilities and shareholders’ equity	$	2,631,000		$	1,900,000

SABIN ELECTRONICS
Comparative Income Statement
	This Year			Last Year
Sales	$	4,900,000		$	4,000,000
Less: Cost of goods sold		3,759,000			3,160,000
Gross margin		1,141,000			840,000
Less: Operating expenses		637,000			499,000
Net operating income		504,000			341,000
Less: Interest expense		48,000			48,000
Net income before taxes		456,000			293,000
Less: Income taxes (30%)		136,800			87,900
Net income		319,200			205,100
Dividends paid:
Preferred dividends		20,000			20,000
Common dividends		88,200			68,650
Total dividends paid		108,200			88,650
Net income retained		211,000			116,450
Retained earnings, beginning of year		615,400			498,950
Retained earnings, end of year	$	826,400		$	615,400

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 $228,000).
e.	The inventory turnover in days (the inventory at the beginning of last year totalled $456,000).
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

Common Size Balance Sheet - base as Total Asset and Total Liability as 100% base  

Common Size Balance Sheet		This Year	%	Last Year	%
Asset		(Amnt$)		(Amnt$)
Current Asset
Cash		66,500	3%	1,15,000	6%
Marketable Securities			0%	14,000	1%
Accounts Receivable		4,67,600	18%	2,30,000	12%
Inventory		9,38,000	36%	4,60,000	24%
Prepaid Exp		18,900	1%	16,600	1%
Current Asset Total		14,91,000	57%	8,35,600	44%
Plan & Equipment ( Net)		11,40,000	43%	10,64,400	56%
Total Assets		26,31,000	100%	19,00,000	100%
Liability
Current Liability		7,80,000	30%	5,57,500	29%
Bond Payable		4,00,000	15%	4,00,000	21%
Total Liability		11,80,000	45%	9,57,500	50%
Shareholders Equity			0%		0%
Preferred Shares		2,51,000	10%	2,51,000	13%
$6, 20080 shares)			0%		0%
Common Shares		2,90,000	11%	2,90,000	15%
( 29000 shares)			0%		0%
Retained Earnings		9,10,000	35%	4,01,500	21%
Shareholders EquityTotal		14,51,000	55%	9,42,500	50%
Total Liability+ Shareholders Equity		26,31,000	100%	19,00,000	100%

Income Statement common size - Revenue consider as 100% and others allocate on the basis of Revenue

Common Size Income Statement		This Year	%	Last Year	%
Sales		49,00,000	100%	40,00,000	100%
Less
Cost of Goods Sold		37,59,000	77%	31,60,000	79%
Gross Margin		11,41,000	23%	8,40,000	21%
Operating Expenses		6,37,000	13%	4,99,000	12%
Net Operating Income		5,04,000	10%	3,41,000	9%
Less- Interest Exp		48,000	1%	48,000	1%
Net Income before Tax		4,56,000	9%	2,93,000	7%
Less - income Tax		1,36,800	3%	87,900	2%
Net Income		3,19,200	7%	2,05,100	5%
Dividend Paid			0%		0%
Preference		20,000	0%	20,000	1%
Common		88,200	2%	68,650	2%
Total Dividend		1,08,200	2%	88,650	2%
Net Income Earned		2,11,000	4%	1,16,450	3%
Retained Earning @ start		6,15,400	13%	4,98,950	12%
Retained Earning @ End		8,26,400	17%	6,15,400	15%

		This Year	Last Year
Assets		(Amnt$)	(Amnt$)
Current Asset
Cash		66,500	1,15,000
Marketable Securities			14,000
Accounts Receivable		4,67,600	2,30,000
Inventory		9,38,000	4,60,000
Prepaid Exp		18,900	16,600
Total Current Assets		14,91,000	8,35,600

Working capital		This Year	Last Year
Current Asset - Current Liability		(Amnt$)	(Amnt$)
Current Asset		14,91,000	8,35,600
Current Liability		7,80,000	5,57,500
Working capital		7,11,000	2,78,100
Current Ratio		This Year	Last Year
Current Asset/ Current Liability		(Amnt$)	(Amnt$)
Current Asset		14,91,000	8,35,600
Current Liability		7,80,000	5,57,500
Current Ratio		1.91	1.50
Acid Test ratio		This Year	Last Year

Acid Test ratio		This Year	Last Year
( Quick Asset)		(Amnt$)	(Amnt$)
Current Asset - Inventory - prepaid
Current Asset		14,91,000	8,35,600
Inventory		9,38,000	4,60,000
Prepaid		18,900	16,600
Quick Asset		5,34,100	3,59,000
Current Liability		7,80,000	5,57,500
Acid Test ratio
Quick Asset/ Current Liability		0.68	0.64

The Average age receivable		This Year	Last Year
365*(avg Collection Receivable)/Sales Revenue		(Amnt$)	(Amnt$)
Avg Collection Receivable
Accounts Receivable		4,67,600	2,30,000
Avg Collection Receivable		3,48,800
Accounts Receivable		2,30,000	2,28,000
Avg Collection Receivable			2,29,000
Sales Revenue		49,00,000	40,00,000
365*(avg Collection Receivable)/Sales Revenue		26	21

		This Year	Last Year
Purchase		(Amnt$)	(Amnt$)
Cost of Goods Sold		37,59,000
+ Closing Stock		9,38,000
-Opening Stock		(4,60,000)
Purchase		42,37,000
Purchase
Cost of Goods Sold			31,60,000
+ Closing Stock			4,60,000
-Opening Stock			(4,56,000)
Purchase			31,64,000
Average Inventory
365*(Purchase)/Avg Inventory		60.22	52.84

Average Inventory		6,99,000	4,58,000
		This Year	Last Year
Debt to Equity Ratio		(Amnt$)	(Amnt$)
Total Debt		11,80,000	9,57,500
Total Equity		14,51,000	9,42,500
Debt to Equity Ratio		0.81	1.02
( Debt/ Equity)

The Time Interest Earned Ratio		This Year	Last Year
EBIT/Interest		(Amnt$)	(Amnt$)
EBIT		5,04,000	3,41,000
Interest		48,000	48,000
( Interest on Bond Payable
12% on 400,000
EBIT/Interest		11	7

Average Collection - (Opening+ Closing Receivable)/2

Average Inventory - (Opening+ Closing Stock)/2