aul 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 $610,000 long-term loan from Gulfport State Bank, $155,000 of which will be used to bolster the Cash account and $455,000 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 $ 114,000 $ 260,000 Marketable securities 0 29,000 Accounts receivable, net 620,000 410,000 Inventory 1,055,000 705,000 Prepaid expenses 30,000 33,000 Total current assets 1,819,000 1,437,000 Plant and equipment, net 1,977,800 1,480,000 Total assets $ 3,796,800 $ 2,917,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 855,000 $ 410,000 Bonds payable, 12% 800,000 800,000 Total liabilities 1,655,000 1,210,000 Stockholders' equity: Common stock, $15 par 800,000 800,000 Retained earnings 1,341,800 907,000 Total stockholders’ equity 2,141,800 1,707,000 Total liabilities and stockholders' equity $ 3,796,800 $ 2,917,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales $ 5,550,000 $ 4,680,000 Cost of goods sold 3,985,000 3,560,000 Gross margin 1,565,000 1,120,000 Selling and administrative expenses 675,000 570,000 Net operating income 890,000 550,000 Interest expense 96,000 96,000 Net income before taxes 794,000 454,000 Income taxes (30%) 238,200 136,200 Net income 555,800 317,800 Common dividends 121,000 100,000 Net income retained 434,800 217,800 Beginning retained earnings 907,000 689,200 Ending retained earnings $ 1,341,800 $ 907,000 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 3/10, 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 $360,000.) e. The average sale period. (The inventory at the beginning of last year totaled $610,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year were $2,890,000.) 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 totaled $1,697,000.) 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.

aul 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 $610,000 long-term loan from Gulfport State Bank, $155,000 of which will be used to bolster the Cash account and $455,000 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 $ 114,000 $ 260,000 Marketable securities 0 29,000 Accounts receivable, net 620,000 410,000 Inventory 1,055,000 705,000 Prepaid expenses 30,000 33,000 Total current assets 1,819,000 1,437,000 Plant and equipment, net 1,977,800 1,480,000 Total assets $ 3,796,800 $ 2,917,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 855,000 $ 410,000 Bonds payable, 12% 800,000 800,000 Total liabilities 1,655,000 1,210,000 Stockholders' equity: Common stock, $15 par 800,000 800,000 Retained earnings 1,341,800 907,000 Total stockholders’ equity 2,141,800 1,707,000 Total liabilities and stockholders' equity $ 3,796,800 $ 2,917,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales $ 5,550,000 $ 4,680,000 Cost of goods sold 3,985,000 3,560,000 Gross margin 1,565,000 1,120,000 Selling and administrative expenses 675,000 570,000 Net operating income 890,000 550,000 Interest expense 96,000 96,000 Net income before taxes 794,000 454,000 Income taxes (30%) 238,200 136,200 Net income 555,800 317,800 Common dividends 121,000 100,000 Net income retained 434,800 217,800 Beginning retained earnings 907,000 689,200 Ending retained earnings $ 1,341,800 $ 907,000 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 3/10, 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 $360,000.) e. The average sale period. (The inventory at the beginning of last year totaled $610,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year were $2,890,000.) 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 totaled $1,697,000.) 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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 $610,000 long-term loan from Gulfport State Bank, $155,000 of which will be used to bolster the Cash account and $455,000 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	$	114,000	$	260,000
Marketable securities		0		29,000
Accounts receivable, net		620,000		410,000
Inventory		1,055,000		705,000
Prepaid expenses		30,000		33,000
Total current assets		1,819,000		1,437,000
Plant and equipment, net		1,977,800		1,480,000
Total assets	$	3,796,800	$	2,917,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	855,000	$	410,000
Bonds payable, 12%		800,000		800,000
Total liabilities		1,655,000		1,210,000
Stockholders' equity:
Common stock, $15 par		800,000		800,000
Retained earnings		1,341,800		907,000
Total stockholders’ equity		2,141,800		1,707,000
Total liabilities and stockholders' equity	$	3,796,800	$	2,917,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales	$	5,550,000	$	4,680,000
Cost of goods sold		3,985,000		3,560,000
Gross margin		1,565,000		1,120,000
Selling and administrative expenses		675,000		570,000
Net operating income		890,000		550,000
Interest expense		96,000		96,000
Net income before taxes		794,000		454,000
Income taxes (30%)		238,200		136,200
Net income		555,800		317,800
Common dividends		121,000		100,000
Net income retained		434,800		217,800
Beginning retained earnings		907,000		689,200
Ending retained earnings	$	1,341,800	$	907,000

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 3/10, 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 $360,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $610,000.)

f. The operating cycle.

g. The total asset turnover. (The total assets at the beginning of last year were $2,890,000.)

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 totaled $1,697,000.)

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.

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