Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 341079 • 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 $510,000 long-term loan from Gulfport State Bank, $105,000 of which will be used to bolster the Cash account and $405,000 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.
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:
For both this year and last year:
For both this year and last year:
For both this year and last year:
For both this year and last year:
The average collection period. (The accounts receivable at the beginning of last year totaled $260,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)
For both this year and last year:
For both this year and last year:
For both this year and last year:
The total asset turnover. (The total assets at the beginning of last year were $2,397,000.) (Round your answers to 2 decimal places.)
For both this year and last year:
For both this year and last year:
For both this year and last year:
For both this year and last year:
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 $510,000 long-term loan from Gulfport State Bank, $105,000 of which will be used to bolster the Cash account and $405,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
Ratio Analysis
current Year
previous year
a-
amount of working capital
total of current assets-total of current liabilities
792000
677000
total of current assets
1542000
1117000
total of current liabilities
750000
440000
b-
current ratio
current assets/current liabilities
2.056
2.538636
total of current assets
1542000
1117000
total of current liabilities
750000
440000
c-
Acid test ratio
Quick assets/current liabilities
0.752
1.111364
total of quick assets
1542000-955000-23000
564000
1117000-605000-23000
489000
total of current liabilities
750000
440000
d-
average collection period
365/accounts receivable turnover ratio
28.9
23.8
accounts receivable turnover ratio
sales/average accounts receivables
12.625
15.36842
sales
5050000
4380000
average accounts receivables
(490000+310000)/2
400000
(310000+260000)/2
285000
e-
average sales period
365/inventory turn over ratio
inventory turnover ratio
cost of goods sold/average inventory
5.0
11.1
cost of goods sold
3885000
6460000
average inventory
(955000+605000)/2
780000
(655000+510000)/2
582500
f-
operating cycle
average collection period+averages sales period
28.9+5
33.9
23.8+11.1
34.9
g-
total asset turnover
sales/average total assets
1.89
1.82
sales
5050000
4380000
total average assets
(2918400+2417000)/2
2667700
(2397000+2417000)/2
2407000
h-
debt to equity ratio
total of liabilities/total shareholders equity
0.922
0.821
total of liabilities
1400000
1090000
total of equity
1518400
1327000
i-
times interest earned
ebit/interest
6.5
4.7
ebit
510000
370000
interest
78000
78000
j-
equity multiplier
total assets/average total equity
2.05
1.83
total assets
2918400
2417000
average total equity
(1518400+1327000)/2
1422700
(1317000+1327000)/2
1322000
Ratio Analysis
current Year
previous year
a-
amount of working capital
total of current assets-total of current liabilities
792000
677000
total of current assets
1542000
1117000
total of current liabilities
750000
440000
b-
current ratio
current assets/current liabilities
2.056
2.538636
total of current assets
1542000
1117000
total of current liabilities
750000
440000
c-
Acid test ratio
Quick assets/current liabilities
0.752
1.111364
total of quick assets
1542000-955000-23000
564000
1117000-605000-23000
489000
total of current liabilities
750000
440000
d-
average collection period
365/accounts receivable turnover ratio
28.9
23.8
accounts receivable turnover ratio
sales/average accounts receivables
12.625
15.36842
sales
5050000
4380000
average accounts receivables
(490000+310000)/2
400000
(310000+260000)/2
285000
e-
average sales period
365/inventory turn over ratio
inventory turnover ratio
cost of goods sold/average inventory
5.0
11.1
cost of goods sold
3885000
6460000
average inventory
(955000+605000)/2
780000
(655000+510000)/2
582500
f-
operating cycle
average collection period+averages sales period
28.9+5
33.9
23.8+11.1
34.9
g-
total asset turnover
sales/average total assets
1.89
1.82
sales
5050000
4380000
total average assets
(2918400+2417000)/2
2667700
(2397000+2417000)/2
2407000
h-
debt to equity ratio
total of liabilities/total shareholders equity
0.922
0.821
total of liabilities
1400000
1090000
total of equity
1518400
1327000
i-
times interest earned
ebit/interest
6.5
4.7
ebit
510000
370000
interest
78000
78000
j-
equity multiplier
total assets/average total equity
2.05
1.83
total assets
2918400
2417000
average total equity
(1518400+1327000)/2
1422700
(1317000+1327000)/2
1322000