Problem 16-18 (Static) 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 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%	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 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%)	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

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:

e. The average sale period. (The inventory at the beginning of last year totaled $500,000.)

f. The operating cycle.

This Year Last Year Working capital 720,000 660,000 Current ratio 1.90 2.53 Acid-test ratio 0.69 1.09 Average collection period 28.5 days 23.1 days . Average sale period 73.0 days 58.2 X days Operating cycle 101.5 days 81.3 X days Total asset turnover 1.83 1.78 Debt-to-equity ratio 0.88 0.72 Times interest earned ratio 6.56 4.89 Equity multiplier 1.80 1.71