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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 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 $530,000 long-term loan from Gulfport State Bank, $115,000 of which will be used to bolster the Cash account and $415,000 of which will be used to modernize equipment. The companys financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	82,000	$	180,000
Marketable securities		0		21,000
Accounts receivable, net		516,000		330,000
Inventory		980,000		625,000
Prepaid expenses		22,000		25,000
Total current assets		1,600,000		1,181,000
Plant and equipment, net		1,570,200		1,400,000
Total assets	$	3,170,200	$	2,581,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	815,000	$	460,000
Bonds payable, 12%		750,000		750,000
Total liabilities		1,565,000		1,210,000
Stockholders' equity:
Common stock, $15 par		720,000		720,000
Retained earnings		885,200		651,000
Total stockholders equity		1,605,200		1,371,000
Total liabilities and stockholders' equity	$	3,170,200	$	2,581,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,150,000	$	4,440,000
Cost of goods sold		3,905,000		3,480,000
Gross margin		1,245,000		960,000
Selling and administrative expenses		659,000		554,000
Net operating income		586,000		406,000
Interest expense		90,000		90,000
Net income before taxes		496,000		316,000
Income taxes (30%)		148,800		94,800
Net income		347,200		221,200
Common dividends		113,000		92,000
Net income retained		234,200		129,200
Beginning retained earnings		651,000		521,800
Ending retained earnings	$	885,200	$	651,000

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 $280,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $530,000.)

f. The operating cycle.

g. The total asset turnover. (The total assets at the beginning of last year were $2,510,000.)

h. The debt-to-equity ratio.

i. The times interest earned ratio.

j. The equity multiplier. (The total stockholders equity at the beginning of last year totaled $1,361,000.)

2. For both this year and last year:

a. Present the balance sheet in common-size format.

b. Present the income statement in common-size format down through net income.

Req 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. (Round your answers to 2 decimal places.) c. The acid-test ratio. (Round your answers to 2 decimal places.) d. The average collection period. (The accounts receivable at the beginning of last year totaled $280,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.) e. The average sale period. (The inventory at the beginning of last year totaled $530,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.) f. The operating cycle. (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.) g. The total asset turnover. (The total assets at the beginning of last year were $2,510,000.) (Round your answers to 2 decimal places.) h. The debt-to-equity ratio. (Round your answers to 2 decimal places.) i. The times interest earned ratio. (Round your answers to 2 decimal places.) j. The equity multiplier. (The total stockholders equity at the beginning of last year totaled $1,361,000.) (Round your answers to 2 decimal places.)

Req 2a

Present the balance sheet in common-size format. (Round your answers to 1 decimal place.)

Sabin Electronics Common-Size Balance Sheets This Year Last Year 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 equity % %

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