Don't mind the required questions.

Please answer this:

1. In the case study, it was stated that the company is facing a severe cash shortage then why is the proportion of loan that will be allotted to the improvement of equipment is higher than the amount allocated to boost the cash account?

2. Based on the case, the sales manager added new sales territories, however, the inventory still increased for the current year and the cash available decreased. What do you think is the cause and possible solutions for this problem?

PROBLEM 14-18 Common-Size Statements and Financial Ratios for a Loan Application LO14-1, LO14-2, LO14-3, LO14-4 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 modern- ize 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 $ 430,000 600,000 Bonds payable, 12% 600,000 Total liabilities 1,400,000 1,030,000 Stockholders' equity: 750,000 750,000 850,000 680,000 1,600,000 1,430,000 $3,000,000 $2,460,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year $5,000,000 $4,350,000 3,875,000 3,450,000 1,125,000 900,000 653,000 548,000 472,000 352,000 72,000 72,000 400,000 280,000 120,000 84,000 280,000 196,000 110,000 95,000 170,000 101,000 680,000 579,000 $ 850,000 $ 680,000 Common stock, $15 par Retained earnings... Total stockholders' equity Total liabilities and stockholders' equity ... Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income Interest expense.. Net income before taxes. Income taxes (30%) Net income Common dividends Net income retained Beginning retained earnings Ending retained earnings 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 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 ratio. j. The 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 companies in the electronics industry: 2.5 Current ratio Acid-test ratio 1.3 18 days Average collection period 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 industry. Do you think that the company is likely to get its loan application approved