Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 341217 • 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 modemize equipment. The company's financial statements for the two most recent years follow Sabin Electronics Comparative Balance Sheet 128 000310.000 recelvable, net 1.10 -ahlen assets and equipment ne Total msels 4013,000 Total labilites Common stock 383.000 4013.000 Total stockholdensequity Tolal labilities and equity 3026.000 Sabin Electronics Seling and administaive expenses 90 00040 Ending wared eanngs 1633 000106000 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 Required: t To assist in approaching the bank about the loan, Paul has asked you to compute the following ratios for both this year and last yearExplanation / Answer
Current year Last Year 1 Average Sale Period =Average Inventory *365 Net Credit Sales Opening Inventory (a) 755000 660000 Closing Inventory (b) 1105000 755000 Average Inventory (a+b)/2 930000 707500 Net Sales 5800000 4830000 Ratio (in days) 58.53 53.47 2 Operating Cycle ('c) =Average Inventory *365 84.13 71.53 Cost of Goods Sold (d) =Average Inventory *365 58.53 53.47 as above Net Credit Sales (e) =Accounts Payable *365 79.60 46.51 Cost of Goods Sold Ratio (c+d-e) 63.05 78.49 3 Total Asset Turnover Ratio =Net Credit Sales Average Total Assets Opening Total Assets (f) 3026000 2986000 Closing Total Assets (g) 4013000 3026000 Average Total Assets (f+g)/2 3519500 3006000 Ratio 1.65 1.61 4 Debt to Equity Ratio =Debt Equity Debt 750000 750000 Equity 2383000 1816000 Ratio 0.31 0.41 4 Times Interest Earned Ratio =EBIT Interest EBIT 1080000 640000 Interest 90000 90000 Ratio 12.00 7.11 4 Equity Multiplier =Average Total Assets Average Equity Opening Equity (h) 1816000 1806000 Closing Equity (i) 2383000 1816000 Average Equity (h+i)/2 2099500 1811000 Ratio 1.68 1.66