Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2492815 • 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 $570,000 long-term loan from Gulfport State Bank, $135,000 of which will be used to bolster the Cash account and $435,000 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. Do calculations for this year and last year. Answering all of them would be extremely appreciated
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 $320,000.) (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 $2,630,000.) (Round your answers to 2 decimal places.)
Explanation / Answer
a) Working Capital
B) The Current ratio
Current ratio = Current assets/Current liabilities
c)Acid Test ratio
Acid test ratio = Cash +MArktable securities+Accounts Receivable/Current liablilites
d) Average Collection Period = Number of working days/Debtors turnover ratio
Debtors turnover ratio = Net credit sales /Average Accounts receivalbe
Debtors turnover ratio = 5350000/(320000+568000)/2 = 5350000/444000 = 12.04
Average Collection Period Present year = 365/12.05 = 30.29 days
Average Collection Period last year = 365/[4560000/(370000+320000)/2] =365/13.21 = 27.63 days
e) Average Sales Period = Days in year /Inventory turnover
Inventory Turnover ratio = Cost of goods sold/Average Inventory
Inventory Turnover ratioPresent year = 3945000/(1015000+570000)/2 = 3945000/792500 = 4.97
Average sales period = 365/4.97 = 73.44 days
Inventory turnover ratio last year = 3520000/(570000+665000)/2 = 5.70
Average Sales period last year = 365/5.7 = 64.04 days
f) Operating cycle = Days sales in inventory+Average Collection period
Opearating cycle present year = 365/4.97+365/30.29 = 73.44+12.05 = 85.49
Operating cycle last year = 365/5.70+365/27.63 = 64.04+13.21 = 77.25 days
g) the Total assets turnover = Net slaes/Average total Assets
Average Total Assets present year = (2630000+3393200)/2 = 3011600
Total Assets Turnover present year = 5350000/3011600 = 1.78
Average total Assets last year = (2709000+2630000)/2 = 2669500
Total Assets Turnover last year = 4560000/2669500 = 1.71
i) The times interest Earned ratio = EBIT/Interest expense
Times Interest earned ratio Present year = 738000/72000 = 10.25
Times Interest earned ratio last year = 478000/72000 = 6.34
j) The Equity multiplier = total Assts/Total stockholders equity
the Equity multiplier present year = 3393200/1958200 = 1.73
Equty Multiplier last year = 2709000/1609000 = 1.68
Present Year Last year working Capital = Current Assets- Current liabilities working Capital = Current Assets- Current liabilities Working Capital = 1707000-835000 = 872000 Working Capital = 1309000 - 500000 = $809000