Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2525456 • 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 $650,000 long-term loan from Gulfport State Bank, $175,000 of which will be used to bolster the Cash account and $475,000 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 $400,000.) (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 $3,024,000.) (Round your answers to 2 decimal places.)
Please provide this and last year for all answers
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 $650,000 long-term loan from Gulfport State Bank, $175,000 of which will be used to bolster the Cash account and $475,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
Solution:
Part 1a – Working Capital
Working Capital =
Current Assets
-
Current Liabilities
=
Working Capital
This Year
1931000
-
875000
=
1056000
Last Year
1544000
-
450000
=
1094000
Numerator
/
Denominator
=
Ratio
1-b)
Current Ratio
Current Assets
/
Current Liabilities
=
Current Ratio
times
Current Ratio (This year)
1,931,000
/
875,000
=
2.21
times
Current Ratio (last year)
1,544,000
/
450,000
=
3.43
times
1-c)
Acid Test Ratio
Current Assets - Inventory - Prepaid Expenses
/
Current Liabilities
=
Acid Test Ratio
times
Acid Test Ratio (This Year)
802000
/
875,000
=
0.92
times
Acid Test Ratio (Last Year)
762,000
/
450,000
=
1.69
times
1-d)
Average Collection Period
number of days in a year x Average Accounts Receivable
/
Net Credit Sales
=
Average Collection Period
days
Average Collection Period (This Year)
204765000
[(365 * (672,000 + 450,000)/2]
/
5750000
=
35.6
days
Average Collection Period (Last Year)
155125000
{(365* (400,000 + 450,000)/2]
/
4800000
=
32.3
days
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Pls ask separate question for remaining parts.
Working Capital =
Current Assets
-
Current Liabilities
=
Working Capital
This Year
1931000
-
875000
=
1056000
Last Year
1544000
-
450000
=
1094000