Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2575749 • 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 $580,000 long-term loan from Gulfport State Bank, $140,000 of which will be used to bolster the Cash account and $440,000 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 $330,000.) (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 $2,660,000.) (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).)
please explain and show how you got the solutions. thanks!
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 $580,000 long-term loan from Gulfport State Bank, $140,000 of which will be used to bolster the Cash account and $440,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
Ratio Analysis
Common size Balance Sheet
current year
last year
Sabin Electronics
working capital
total of current assets- total of current liabilities
892,000
831000
Comparative Balance Sheet
total of current assets
1,732,000
1341000
This Year
Last Year
total of current liabilities
840,000
510000
Assets
Current assets:
In value
%
In value
%
current ratio
total of current assets/total of current liabilities
2.061904762
2.6294118
Cash
100,000
2.86%
230000
8.24%
total of current assets
1732000
1341000
Marketable securities
0
0.00%
26000
0.93%
total of current liabilities
840000
510000
Accounts receivable, net
581,000
16.64%
380000
13.62%
Inventory
1,025,000
29.36%
675000
24.18%
Acid test ratio
quick assets/current liabilities
0.810714286
1.2470588
Prepaid expenses
26,000
0.74%
30000
1.07%
Quick Assets = current assets- inventory-prepaid expenses
681,000
636000
total of current liabilities
840000
510000
Total current assets
1,732,000
49.60%
1341000
48.05%
Plant and equipment, net
1,759,600
50.40%
1450000
51.95%
Average collection perion
365/ sales/average accounts receivables
32.48
28.23
sales
5,400,000
4590000
Total assets
3,491,600
100%
2791000
100.00%
average accounsts receivables =(opening +closing)/2
480500
355000
Liabilities and Stockholders Equity
Average sales period
365/(cogs/average inventory)
76.13780025
62.298159
Liabilities:
COGS
3,955,000
3530000
Current liabilities
840,000
24.06%
510000
18.27%
average inventory =(opening +clsoing)/2
825000
602500
Bonds payable, 12%
650,000
18.62%
650000
23.29%
Operating cycle
average collection period+average sales period)
108.62
90.53
Total liabilities
1,490,000
42.67%
1160000
41.56%
Average collection perion
32.48
28.23
Average sales period
76.13780025
62.298159
Stockholders' equity:
Common stock, $15 par
930,000
26.64%
930000
33.32%
total asset turnover
sales/(average total assets)
1.719033521
1.6840947
Retained earnings
1,071,600
30.69%
701000
25.12%
sales
5,400,000
4590000
average total assets =(opening +closing)/2
3141300
2725500
Total stockholders’ equity
2,001,600
57.33%
1631000
58.44%
DEBT TO EQUITY RATIO
TOTAL OF LIABILITIES/TOTAL OF EQUITY
0.744404476
0.7112201
Total liabilities and equity
3,491,600
100%
2791000
100.00%
TOTAL OF LIABILITIES
1,490,000
1160000
TOTAL OF EQUITY
2,001,600
1631000
TIMES INTEREST EARNED
EBIT/INTERES
9.948717949
6.3589744
EBIT
776,000
496000
INTEREST
78000
78000
EQUITY MULTIPLIER
AVERAGE TOTAL ASSETS/TOTAL OF EQUITY
1.569394484
1.6710607
average total assets =(opening +closing)/2
3141300
2725500
TOTAL OF EQUITY
2,001,600
1631000
Common size income statement
Comparative Income Statement and Reconciliation
This Year
Last Year
Sales
5,400,000
100%
4590000
100.00%
Cost of goods sold
3,955,000
73.24%
3530000
76.91%
Gross margin
1,445,000
26.76%
1060000
23.09%
Selling and administrative expenses
669,000
12.39%
564000
12.29%
Net operating income
776,000
14.37%
496000
10.81%
Interest expense
78,000
1.44%
78000
1.70%
Net income before taxes
698,000
12.93%
418000
9.11%
Income taxes (30%)
209,400
3.88%
125400
2.73%
Net income
488,600
9.05%
292600
6.37%
Common dividends
118,000
2.19%
97,000
Net income retained
370,600
6.86%
195600
4.26%
Beginning retained earnings
701,000
505,400
Ending retained earnings
1,071,600
701,000
Ratio Analysis
Common size Balance Sheet
current year
last year
Sabin Electronics
working capital
total of current assets- total of current liabilities
892,000
831000
Comparative Balance Sheet
total of current assets
1,732,000
1341000
This Year
Last Year
total of current liabilities
840,000
510000
Assets
Current assets:
In value
%
In value
%
current ratio
total of current assets/total of current liabilities
2.061904762
2.6294118
Cash
100,000
2.86%
230000
8.24%
total of current assets
1732000
1341000
Marketable securities
0
0.00%
26000
0.93%
total of current liabilities
840000
510000
Accounts receivable, net
581,000
16.64%
380000
13.62%
Inventory
1,025,000
29.36%
675000
24.18%
Acid test ratio
quick assets/current liabilities
0.810714286
1.2470588
Prepaid expenses
26,000
0.74%
30000
1.07%
Quick Assets = current assets- inventory-prepaid expenses
681,000
636000
total of current liabilities
840000
510000
Total current assets
1,732,000
49.60%
1341000
48.05%
Plant and equipment, net
1,759,600
50.40%
1450000
51.95%
Average collection perion
365/ sales/average accounts receivables
32.48
28.23
sales
5,400,000
4590000
Total assets
3,491,600
100%
2791000
100.00%
average accounsts receivables =(opening +closing)/2
480500
355000
Liabilities and Stockholders Equity
Average sales period
365/(cogs/average inventory)
76.13780025
62.298159
Liabilities:
COGS
3,955,000
3530000
Current liabilities
840,000
24.06%
510000
18.27%
average inventory =(opening +clsoing)/2
825000
602500
Bonds payable, 12%
650,000
18.62%
650000
23.29%
Operating cycle
average collection period+average sales period)
108.62
90.53
Total liabilities
1,490,000
42.67%
1160000
41.56%
Average collection perion
32.48
28.23
Average sales period
76.13780025
62.298159
Stockholders' equity:
Common stock, $15 par
930,000
26.64%
930000
33.32%
total asset turnover
sales/(average total assets)
1.719033521
1.6840947
Retained earnings
1,071,600
30.69%
701000
25.12%
sales
5,400,000
4590000
average total assets =(opening +closing)/2
3141300
2725500
Total stockholders’ equity
2,001,600
57.33%
1631000
58.44%
DEBT TO EQUITY RATIO
TOTAL OF LIABILITIES/TOTAL OF EQUITY
0.744404476
0.7112201
Total liabilities and equity
3,491,600
100%
2791000
100.00%
TOTAL OF LIABILITIES
1,490,000
1160000
TOTAL OF EQUITY
2,001,600
1631000
TIMES INTEREST EARNED
EBIT/INTERES
9.948717949
6.3589744
EBIT
776,000
496000
INTEREST
78000
78000
EQUITY MULTIPLIER
AVERAGE TOTAL ASSETS/TOTAL OF EQUITY
1.569394484
1.6710607
average total assets =(opening +closing)/2
3141300
2725500
TOTAL OF EQUITY
2,001,600
1631000
Common size income statement
Comparative Income Statement and Reconciliation
This Year
Last Year
Sales
5,400,000
100%
4590000
100.00%
Cost of goods sold
3,955,000
73.24%
3530000
76.91%
Gross margin
1,445,000
26.76%
1060000
23.09%
Selling and administrative expenses
669,000
12.39%
564000
12.29%
Net operating income
776,000
14.37%
496000
10.81%
Interest expense
78,000
1.44%
78000
1.70%
Net income before taxes
698,000
12.93%
418000
9.11%
Income taxes (30%)
209,400
3.88%
125400
2.73%
Net income
488,600
9.05%
292600
6.37%
Common dividends
118,000
2.19%
97,000
Net income retained
370,600
6.86%
195600
4.26%
Beginning retained earnings
701,000
505,400
Ending retained earnings
1,071,600
701,000