Present the balance sheet in common-size format

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Reference no: EM131413507

Assignment PROBLEM

Common-Size Statements and Financial Ratios for a Loan Application

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patentsAlthough the company has been fairly profitable, it is now expe-riencing a severe cash shortageFor 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 equipmentThe company's financial statements for the two most recent years follow:

Sabin Electronics Comparative Balance Sheet

                                                                This Year                       Last Year
Assets
                                                                     0                             18,000
Accounts receivable, ne
Current assets:
Cash                                                          $ 70,000                      $ 150,000
Marketable securities                                    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%                                   600,000                        600,000
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 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%)                                    120,000                        84,000
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

Chapter 15

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 marginThe company also hired a new sales manager, who has expanded sales into several new territoriesSales terms are 2/10, n/30All 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 ratiodThe 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 totaled $500,000.)
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 ratiojThe equity multiplier(The total stockholders' equity at the beginning of last year totaled $1,420,000.)

2. For both this year and last year:

a. Present the balance sheet in common-size format

b. Present the income statement in common-size format down through net income

3. Paul Sabin has also gathered the following financial data and ratios that are typical of compa-nies in the electronics industry:

Current ratio                             2.5
Acid-test ratio                           1.3
Average collection period            18 days
Average sale period                   60 days
Debt-to-equity ratio                  0.90
Times interest earned ratio         6.0

Comment on the results of your analysis in (1) and (2) above and compare Sabin Electronics' performance to the benchmarks from the electronics industryDo you think that the company is likely to get its loan application approved?

Reference no: EM131413507

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