Problem 13-18A Common-Size Statements and Financial Ratios for a Loan Applicatio
ID: 2584174 • Letter: P
Question
Problem 13-18A Common-Size Statements and Financial Ratios for a Loan Application [LO13-1, LO13-2, LO13-3, LO13-4]
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 $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 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 $290,000.) (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 $2,540,000.) (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 $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
This year Last year 1 Current assets 1597000 1213000 Current liabilities 820000 470000 Working capital = Current assets - current liabilities Working capital 777000 743000 2 Current ratio = Current assets / current liabilities Current ratio 1.9 2.6 3 Acid test ratio = Liquid assets / current liabilities Liquid assets = current assets - prepaid expense - merchandise inventory Liquid assets 615000 552000 Current liabilities 820000 470000 Acid test ratio 0.8 1.2 4 Accounts receivable turnover = net credit sales /Average accounts receivable Net sales 5200000 4470000.0 Beginning accounts receivable 340000 290000 Ending accounts receivable 529000 340000 Average accounts receivable 434500 315000 Accounts receivable turnover 12.0 14.2 5 Days sales outstanding = 365 / accounts receivable tunover Days sales outstanding 31 26 6 Inventory turnover = Cost of goods sold / Average inventory Cost of goods sold 3915000 3490000 Beginning inventory 635000 540000 Ending inventory 960000 635000 Average inventory 797500 587500 Average inventory = (Beginning + Ending )/2 Inventory turnover 4.9 5.9 7 Days sale in inventory = 365 / inventory turnover Days sales in inventory 74 61 Days 8 Operating cycle = days sales in inventory + average collection period Operating cycle 105 87 Days Debt to equity = total debt/ total Shareholders equity Total debt 1620000 1270000 Total shareholders equity 1608600 1353000 Debt to equity 1.007 0.939 Times interest charged = EBIT / interest expense EBIT = net income + income tax + interest expense Interest expense 96000 96000 EBIT 624000 424000 Times interest charged 6.5 4.4 times Total assets turnover = Net sales / total assets Net sales 5200000 4470000 total assets 3228600 2623000 Fixed assets turnover 1.61 1.70