Question

Problem 13-18A Common-Size Statements and Financial Ratios for a Loan Application [LO13-1, LO13-2, LO13-3, LO13-4]

ALL ANSWERS ENTERED ARE CORRECT, PLEASE HELP FILL IN THE BLANKS. THANK YOU!

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 $650,000 long-term loan from Gulfport State Bank, $175,000 of which will be used to bolster the Cash account and $475,000 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	$	130,000	$	300,000
Marketable securities		0		12,000
Accounts receivable, net		672,000		450,000
Inventory		1,095,000		745,000
Prepaid expenses		34,000		37,000
Total current assets		1,931,000		1,544,000
Plant and equipment, net		2,099,400		1,520,000
Total assets	$	4,030,400	$	3,064,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	875,000	$	450,000
Bonds payable, 12%		750,000		750,000
Total liabilities		1,625,000		1,200,000
Stockholders' equity:
Common stock, $15 par		720,000		720,000
Retained earnings		1,685,400		1,144,000
Total stockholders’ equity		2,405,400		1,864,000
Total liabilities and equity	$	4,030,400	$	3,064,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,750,000	$	4,800,000
Cost of goods sold		4,025,000		3,600,000
Gross margin		1,725,000		1,200,000
Selling and administrative expenses		683,000		578,000
Net operating income		1,042,000		622,000
Interest expense		90,000		90,000
Net income before taxes		952,000		532,000
Income taxes (30%)		285,600		159,600
Net income		666,400		372,400
Common dividends		125,000		104,000
Net income retained		541,400		268,400
Beginning retained earnings		1,144,000		875,600
Ending retained earnings	$	1,685,400	$	1,144,000

     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.

	This Year	Last Year
Working Capital	$1,056,000	$1,094,000

b.

The current ratio. (Round your answers to 2 decimal places.)

	This Year	Last Year
Current ratio	2.21	3.43

c. The acid-test ratio. (Round your answers to 2 decimal places.)

	This Year	Last Year
Acid-test ratio	0.92	1.69

d. The average collection period. (The accounts receivable at the beginning of last year totaled $400,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

	This Year		Last Year
Average collection period		days	32.3	days

e.  

The average sale period. (The inventory at the beginning of last year totaled $650,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

	This Year		Last Year
Average sale period		days		days

f. The operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

	This Year		Last Year
Operating cycle		days	102.9	days

g.	The total asset turnover. (The total assets at the beginning of last year were $3,024,000.) (Round your answers to 2 decimal places.)

	This Year	Last Year
Total asset turnover

h.	The debt-to-equity ratio. (Round your answers to 3 decimal places.)

	This Year	Last Year
Debt-to-equity ratio

i.	The times interest earned ratio. (Round your answers to 1 decimal place.)

	This Year	Last Year
Times interest earned ratio	11.6	6.9

j.	The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,854,000.) (Round your answers to 2 decimal places.)

	This Year	Last Year
Equity multiplier		1.64

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., 0.1234 should be entered as 12.3).)

Sabin Electronics

Common-Size Balance Sheets
	This Year		Last Year
Assets
Current assets:
Cash	3.2	%	9.8	%
Marketable securities	0.0		0.4
Accounts receivable, net	16.7		14.7
Inventory	27.2		24.3
Prepaid expenses	0.8		1.2
Total current assets	47.9		50.4
Plant and equipment, net	52.1		49.6
Total assets	100.0	%	100.0	%
Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities	21.7	%	14.7	%
Bonds payable, 12%	18.6		24.5
Total liabilities	40.3		39.2
Stockholders’ equity:
Common stock, $15 par	17.9		23.5
Retained earnings	41.8		37.3
Total stockholders’ equity	59.7		60.8
Total liabilities and equity	100.0	%	100.0	%

b. Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Sabin Electronics
Common-Size Income Statements
	This Year		Last Year
Sales	100.0	%	100.0	%
Cost of goods sold	70.0		75.0
Gross margin	30.0		25.0
Selling and administrative expenses	11.9		12.0
Net operating income	18.1		13.0
Interest expense	1.6		1.9
Net income before taxes	16.5		11.1
Income taxes	5.0		3.3
Net income	11.5	%	7.8	%

Answer 1

	This Year
Average collection period
Avg Accounts receivable/Sales*365	35.6	Days
	561000/5750000*365
Avg Accounts receivable
(672000+450000)/2	561000
e)
Average sale period
Avg Inventory/COGS*100	83.4	70.7	days
	920000/4025000*365	697500/3600000*365
Avg Inventory	920000	697500
	(1095000+745000)/2	(650000+745000)/2
f
Operating cycle
Avg collection period+Avg sale period	119.0	103.0
	35.6+83.4	70.7+32.3
g)
Total asset Turnover	1.62	1.58
	5750000/((4030400+3064000)/2)	4800000/((3024000+3064000)/2)
h)
Debt equity ratio	0.676	0.644
	1625000/2405400	1200000/1864000
j) Equity multiplier	1.66
Avg assets/Avg equity	3547200/(2405400+1864000)/2)
Avg assets	3547200
	((4030400+3064000)/2)