Question

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

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 $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 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	$	86,000	$	190,000
Marketable securities		0		22,000
Accounts receivable, net		529,000		340,000
Inventory		960,000		635,000
Prepaid expenses		22,000		26,000
Total current assets		1,597,000		1,213,000
Plant and equipment, net		1,631,600		1,410,000
Total assets	$	3,228,600	$	2,623,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	820,000	$	470,000
Bonds payable, 12%		800,000		800,000
Total liabilities		1,620,000		1,270,000
Stockholders' equity:
Common stock, $15 par		810,000		810,000
Retained earnings		798,600		543,000
Total stockholders’ equity		1,608,600		1,353,000
Total liabilities and equity	$	3,228,600	$	2,623,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,200,000	$	4,470,000
Cost of goods sold		3,915,000		3,490,000
Gross margin		1,285,000		980,000
Selling and administrative expenses		661,000		556,000
Net operating income		624,000		424,000
Interest expense		96,000		96,000
Net income before taxes		528,000		328,000
Income taxes (30%)		158,400		98,400
Net income		369,600		229,600
Common dividends		114,000		93,000
Net income retained		255,600		136,600
Beginning retained earnings		543,000		406,400
Ending retained earnings	$	798,600	$	543,000

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

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

	This Year	Last Year
Current Ratio

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

	This Year	Last Year
Acid-test ratio

d.	The average collection period. (The accounts receivable at the beginning of last year totaled $290,000.) (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	days

e.	The average sale period. (The inventory at the beginning of last year totaled $540,000.) (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	Days

g.	The total asset turnover. (The total assets at the beginning of last year were $2,540,000.) (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	LastYear
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

j.	The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,343,000.) (Round your answers to 2 decimal places.)

	This Year	Last Year
Equity multiplier

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		%		%
Marketable securities
Account 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		%		%

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		%		%
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes
Net Income		%		%