Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2492442 • Letter: P
Question
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 $680,000 long-term loan from Gulfport State Bank, $190,000 of which will be used to bolster the Cash account and $490,000 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 3/10, 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 $430,000.) (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 $3,150,000.) (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 $680,000 long-term loan from Gulfport State Bank, $190,000 of which will be used to bolster the Cash account and $490,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
Ratios:
Common Size Balance Sheet:
Common Size Income Statement:
S.no. Ratio Formula This Year Last Year a Working Capital current assets - current liabilities 2009000-850000 = 1159000 1640000-400000 = 1240000 b current ratio current assets/current liabilities 2009000/850000 = 2.36 1640000/400000 = 4.10 c Acid-Test Ratio Quick Assets /current liabilities 884000/850000 = 1.04 865000/400000 = 2.16 d Average Collection Period Average Accounts Receivable *365 / Credit Sales 595500 *365 / 5900000 =36.84 days 455000 * 365 / 4890000 = 33.96 days e Average Sale Period Average Inventory *365 / Purchases or COGS 950000 * 365 / 4055000 = 85.51 days 727500 * 365 / 3630000 = 73.15 days f The Operating Cycle Collection period + Sales period 36.84 + 85.51 = 122.35 days 33.96 + 73.15 = 107.11 days g Total Asset Turnover Sales / Average total assets 5900000/3722000 = 1.59 4890000/3170000 = 1.54 h Debt / Equity ratio Total Debt/Total Equity 1650000/2604000 = 0.63 1200000/1990000 = 0.60 i Times Interest Earned Ratio EBIT / Interest 1156000/96000 = 12 times 676000/96000 = 7 times j Equity Multiplier Total Equity / Total Assets 2604000/3722000 = 0.70 1990000/3170000 = 0.63