Problem 15-18 Common-Size Statements and Financial Ratios for a Loan Application

Question

Problem 15-18 Common-Size Statements and Financial Ratios for a Loan Application [LO15-1, LO15-2, LO15-3, LO15-4]

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 $600,000 long-term loan from Gulfport State Bank, $150,000 of which will be used to bolster the Cash account and $450,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:

     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.

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:

          

            

            

The average collection period. (The accounts receivable at the beginning of last year totaled $350,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

            

            

            

The total asset turnover. (The total assets at the beginning of last year were $2,790,000.) (Round your answers to 2 decimal places.)

            

            

          

          

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).)

            

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).)

            

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 $600,000 long-term loan from Gulfport State Bank, $150,000 of which will be used to bolster the Cash account and $450,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:

Explanation / Answer

Working Capital = CA-CL 192,000 The current ratio= CA/CL 1.12 The acid-test ratio= (CA-Stock)/CL 0.466875 The average collection period =365/Debtors turnover ratio 33.4 Days DTR =credit sales/avg debtors 10.9 The average sale period =365/Inventory Turnover 79.9 ITR =COGS/average inv 4.6 The operating cycle 106.8 Purchases made = CS-OS+COGS 4325000 Credit Sales Given 5,500,000 Average Inventories OS+CS/2 870000 Average AR Ope. AR+CloS AR/2 503500 The total asset turnover =sales/avg. Total Assets 1.66 The debt-to-equity ratio Debt/Equity 0.748 The times interest earned ratio Profit before int./Interest 9.47 The equity multiplier total Assets/Equity 3.093 Comparative Income Statement and Reconciliation This year Last Year   Sales 100% 100%   Cost of goods sold 72% 76%    0% 0%   Gross margin 28% 24%   Selling and administrative expenses 12% 12%    0% 0%   Net operating income 15% 11%   Interest expense 2% 2%    0% 0%   Net income before taxes 14% 10%   Income taxes (30%) 4% 3%    0% 0%   Net income 10% 7%   Common dividends 2% 2%    0% 0%   Net income retained 8% 5%   Beginning retained earnings 17% 16%    0% 0%   Ending retained earnings 25% 20%   Assets This year Last Year   Current assets:      Cash 3% 9%      Marketable securities 0% 1%      Accounts receivable, net 16% 14%      Inventory 28% 24%      Prepaid expenses 1% 1%    0% 0%   Total current assets 48% 49%   Plant and equipment, net 52% 51%    0%   Total assets 100% 100%      Liabilities and Stockholders Equity   Liabilities:      Current liabilities 40% 14%      Bonds payable, 12% 35% 26%    0%   Total liabilities 75% 40%    0%   Stockholders' equity: 0%      Common stock, $15 par 37% 27%      Retained earnings 63% 33%    0%   Total stockholders’ equity 100% 60%    0%   Total liabilities and equity 175% 100%    0% 0%

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