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Common-size financial statements present all balance sheet account values as a percentage of:

a. The forecasted budget

b. Sales

c. Total equity

d. Total assets

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Reid Wolff
Reid WolffLv2
10 Feb 2020

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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.

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 % %

PROBLEM 15-15 Comprehensive Ratio Analysis (L015-2, L015-3, L015-4, L015-5, L015-6] You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety hel- mets. Your boss has asked you to perform a comprehensive analysis of the company's financial statements, including comparing Lydex's performance to its major competitors. The company's financial statements for the last two years are as follows: Lydex Company Comparative Balance Sheet This Year Last Year $ 960,000 0 2,700,000 3,900,000 240,000 7,800,000 9,300,000 $17,100,000 $ 1,260,000 300,000 1,800,000 2,400,000 180,000 5,940,000 8,940,000 $14,880,000 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. Note payable, 10% ................. Total liabilities .... .......... Stockholders' equity: Common stock, $78 par value ......... Retained earnings .................. Total stockholders' equity .............. Total liabilities and stockholders' equity.... $ 3,900,000 3,600,000 7,500,000 $2,760,000 3,000,000 5,760,000 7,800,000 1,800,000 9,600,000 $17,100,000 7,800,000 1,320,000 9,120,000 $14,880,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) ........... $15,750,000 $12,480,000 Cost of goods sold ...... 12,600,000 9,900,000 Gross margin ....................... 3,150,000 2,580,000 Selling and administrative expenses ...... 1,590,000 1,560,000 Net operating income.................. 1,560,000 1,020,000 Interest expense ...................... 360,000 300,000 Net income before taxes ............. 1,200,000 720,000 Income taxes (30%) .......... 360.000 216,000 Net income ....... 840,000 504,000 Common dividends .... 360,000 252,000 Net income retained. 480,000 252,000 Beginning retained earnings ............ 1,320,000 1,068,000 Ending retained earnings .......... $ 1,800,000 $ 1,320,000 PROBLEM 15-16 Common-Size Financial Statements [L015-1] Refer to the financial statement data for Lydex Company given in Problem 15-15. Required: For both this year and last year: 1. Present the balance sheet in common-size format. 2. Present the income statement in common-size format down through net income. 3. Comment on the results of your analysis.

EXERCISE 15-8 Selected Financial Ratios (L015-2, LO15-3, L015-4] The financial statements for Castile Products, Inc., are given below: Castile Products, Inc. Balance Sheet December 31 Assets Current assets: Cash.. Accounts receivable, net ................ Merchandise inventory ................. Prepaid expenses ..................... Total current assets ...................... Property and equipment, net ............... Total assets $ 6,500 35,000 70,000 3,500 115,000 185,000 $300,000 $ 50,000 80,000 130,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities .......... Bonds payable, 10% .......... Total liabilities ................. Stockholders' equity: Common stock, $5 per value ............. Retained earnings .... Total stockholders' equity ................. Total liabilities and equity ................. $ 30,000 140,000 170,000 $300,000 Castile Products, Inc. Income Statement For the Year Ended December 31 Sales ..... Cost of goods sold... Gross margin Selling and administrative expenses......... Net operating income ....... Interest expense......................... Net income before taxes .................. Income taxes (30%) Net income ............ ................ $420,000 292,500 127,500 89,500 38,000 8,000 30,000 9,000 $ 21,000 Account balances at the beginning of the year were: accounts receivable, $25,000; and inven tory, $60,000. All sales were on account. EXERCISE 15-9 Financial Ratios for Assessing Profitability and Managing Debt [L015-4, LO15-5] Refer to the financial statements for Castile Products, Inc., in Exercise 15-8. Assets at the begin- ning of the year totaled $280,000, and the stockholders' equity totaled $161,600. Required: Compute the following: 1. Gross margin percentage. 2. Net profit margin percentage. 3. Return on total assets. 4. Return on equity. 5. Was financial leverage positive or negative for the year? Explain.

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