PROBLEM 16-18 Common-Size Statements and Financial Ratios for a Loan Application LO16-1. LO16-2, LO16-3, LO16-4 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 expe- riencing 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 $ Marketable securities 70.000 0 $ 150,000 18,000 Accounts receivable, net htt 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 Bonds payable, 12% 600,000 $ 430,000 600,000 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 stockholders' equity. $3,000,000 $2,460,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sabin Electronics Comparative Income Statement and Reconciliation Last Year This 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 AMA 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 Common dividends 280,000 196,000 wwwwww 110,000 95,000 Net income retained 170,000 101,000 Beginning retained earnings 680,000 579,000 Ending retained earnings anua 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. d. e. The acid-test ratio. The average collection period. (The accounts receivable at the beginning of last year totaled $250,000.) The average sale period. (The inventory at the beginning of last year totaled $500,000) f. The operating cycle. & h. 1. j. The total asset turnover. (The total assets at the beginning of last year were $2,420,000.) The debt-to-equity ratio. The times interest earned ratio. 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: 3. a. Present the balance sheet in common-size format. b. Present the income statement in common-size format down through net income. Paul Sabin has also gathered the following financial data and ratios that are typical of compa nies in the electronics industry: Current ratio Acid-test ratio Average collection period. Average sale period. Debt-to-equity ratio Times interest earned ratio 25 1.3 18 days 60 days 0.90 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? Sabin Electronics Comparative Income Statement and Reconciliation Last Year This 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 Common dividends 280,000 196,000 110,000 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. PROBLEM 16-18 Common-Size Statements and Financial Ratios for a Loan Application LO16-1, LO16-2, LO16-3, LO16-4 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 expe- riencing 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: Assets Current assets: Cash Marketable securities Sabin Electronics Comparative Balance Sheet Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current liabilities. This Year Last Year $ 70,000 $ 150,000 18,000 480,000 300,000 950,000 600,000 20,000 22,000 1,520,000 1,090,000 1.480,000 1,370,000 $3,000,000 $2,460,000 Bonds payable, 12% Total liabilities $ 800,000 600,000 1,400,000 $ 430,000 600,000 1,030,000 Stockholders' equity: Common stock, $15 par Retained earnings 750,000 850,000 750,000 680,000 Total stockholders' equity 1,600,000 1,430,000 Total liabilities and stockholders' equity.. $3,000,000 $2,460,000 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. d. The acid-test ratio. 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 compa- nies in the electronics industry: 2.5 Current ratio Acid-test ratio 1.3 Average collection period. 18 days Average sale period.. 60 days Debt-to-equity ratio Times interest earned ratio 0.90 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?