Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 340601 • 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 $660,000 long-term loan from Gulfport State Bank, $180,000 of which will be used to bolster the Cash account and $480,000 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.
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 $660,000 long-term loan from Gulfport State Bank, $180,000 of which will be used to bolster the Cash account and $480,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
a. The amount of working capital. This Year Last Year Working capital b. The current ratio. (Round your answers to 2 decimal places.) This Year Last Year Current ratio c. The acid-test ratio. (Round your answers to 2 decimal places.) his Year Last Year Acid-test ratio d. The average collection period. (The accounts receivable at the beginning of last year totaled $410,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.) This Year Last Year Average collection period days daysExplanation / Answer
a The amount of working capital Working Capital=(Current assets) minus (Current liabilities) This year Last year A Current assets $ 1,952,000 $ 1,576,000 B Current liabilities $ 880,000 $ 460,000 C=A-B Working Capital $ 1,072,000 $ 1,116,000 This year Last year Working Capital $ 1,072,000 $ 1,116,000 b Current ratio=(Current asset)/(Current liabilities) This year Last year A Current assets $ 1,952,000 $ 1,576,000 B Current liabilities $ 880,000 $ 460,000 C=A/B Current ratio 2.22 3.43 This year Last year Current Ratio 2.22 3.43 c Acid Test Ratio Acid Test Ratio= (Quick assets)/(current liabilities) Quick asset is the current assets that can be quickly converted into cash It excludes inventory and prepaid expenses This year Last year A Quick Assets $ 813,000 $ 783,000 B Current liabilities $ 880,000 $ 460,000 C=A/B Current ratio 0.92 1.70 This year Last year Current Ratio 0.92 1.70 d Average Collection Period Average collection period=((Average accounts receivable)/(Credit sales))*365 days This year Last year A Beginning Accounts receivable $ 460,000 $ 410,000 B Ending accounts receivable $ 685,000 $ 460,000 C=(A+B)/2 Average accounts receivable $ 572,500 $ 435,000 D Credit sales during the year $ 5,800,000 $ 4,830,000 E=(C/D)*365 Average collection period 36.02801724 32.87267081 This year Last year Average collection period 36 days 33 days