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 500,000 long-term loan from Gulfport State Bank,100,000 of which will be used to bolster the Cash account and 400,000 of which will be used to modernize equipment. The company's financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash 70,000 150,000 Marketable securities 0 18,000 Accounts receivable, net 480,000 300,000 Inventory 950,000 600,000 Prepaid expenses 20,000 22,000 Total current assets 1,520,000 1,090,000 Plant and equipment, net 1,480,000 1,370,000 Total assets 3,000,000 2,460,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities 800,000 430,000 Bonds payable, 12 Total liabilities 1,400,000 1,030,000 Stockholders' equity: Common stock,15 par 750,000 750,000 Retained earnings 850,000 680,000 Total stockholders' equity 1,600,000 1,430,000 Total liabilities and stockholders' equity 3,000,000 2,460,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales 5,000,000 4,350,000 Cost of goods sold 3,875,000 3,450,000 Gross margin 1,125,000 900,000 Selling and administrative expenses 653,000 548,000 Net operating income 472,000 352,000 Interest expense 72,000 72,000 Net income before taxes 400,000 280,000 Income taxes (30 Net income 280,000 196,000 Common dividends 110,000 95,000 Net income retained 170,000 101,000 Beginning retained earnings 680,000 579,000 Ending retained earnings 850,000 680,000 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. Required: 1. 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: a. The amount of working capital. b. The current ratio. c. The acid-test ratio. d. The average collection period. (The accounts receivable at the beginning of last year totaled 250,000. ) e. The average sale period. (The inventory at the beginning of last year totaled500,000. ) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year were 2,420,000. ) h. The debt-to-equity ratio. i. The times interest earned ratio. j. The equity multiplier. (The total stockholders' equity at the beginning of last year totaled1,420,000. ) 2. For both this year and last year: a. Present the balance sheet in common-size format for both this year and last year. b. Present the income statement in common-size format down through net income for both this year and last year
