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Problem 14-18 Common-Size Statements and Financial Ratios for a Loan Application [LO14-1, LO14-2, LO14-3, LO14-4] Paul...

Problem 14-18 Common-Size Statements and Financial Ratios for a Loan Application [LO14-1, LO14-2, LO14-3, LO14-4]

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 $570,000 long-term loan from Gulfport State Bank, $135,000 of which will be used to bolster the Cash account and $435,000 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 $ 98,000 $ 220,000
Marketable securities 0 25,000
Accounts receivable, net 568,000 370,000
Inventory 1,015,000 665,000
Prepaid expenses 26,000 29,000
Total current assets 1,707,000 1,309,000
Plant and equipment, net 1,686,200 1,400,000
Total assets $ 3,393,200 $ 2,709,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities $ 835,000 $ 500,000
Bonds payable, 12% 600,000 600,000
Total liabilities 1,435,000 1,100,000
Stockholders' equity:
Common stock, $15 par 760,000 760,000
Retained earnings 1,198,200 849,000
Total stockholders’ equity 1,958,200 1,609,000
Total liabilities and stockholders' equity $ 3,393,200 $ 2,709,000
Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 5,350,000 $ 4,560,000
Cost of goods sold 3,945,000 3,520,000
Gross margin 1,405,000 1,040,000
Selling and administrative expenses 667,000 562,000
Net operating income 738,000 478,000
Interest expense 72,000 72,000
Net income before taxes 666,000 406,000
Income taxes (30%) 199,800 121,800
Net income 466,200 284,200
Common dividends 117,000 96,000
Net income retained 349,200 188,200
Beginning retained earnings 849,000 660,800
Ending retained earnings $ 1,198,200 $ 849,000

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 3/10, 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.

c. The acid-test ratio.

d. The average collection period. (The accounts receivable at the beginning of last year totaled $320,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $570,000.)

Homework Answers

Answer #1
Current Year Previous Year
a Working capital(Current Assets - Current Liabilities) $8,72,000 $8,09,000
b Current Ratio(Current Assets/Current liabilities) 2.04 2.62
c Acid-test Ratio[(Current Assets - Inventories - Prepaid expenses)/Current laibilities] 0.80 1.23
Average accounts receivable =(Beginning Accounts Receivable+Clsoing Accounts Receivable)/2 469000 345000
Accounts receivable turnover =Net sales / Average accounts receivable 11.41 13.22
d Average collection period =365 days/Accounts receivable turnover 32 28
Average Inventory =(Opening Inventory + Closing Inventory)/2 840000 617500
Inventory Turnover ratio =Cost of goods sold / Average Inventory 4.70 5.70
e Avearage Sales period =365 days / Inventory Turnover ratio 78 64
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