Paul Sabin organized Sabin Electronics 10 years ago in order 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 certain key items of 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 $ 70,400 $ 124,000 Marketable securities — 15,200 Accounts receivable, net 495,800 248,000 Inventory 995,000 496,000 Prepaid expenses 19,800 17,800 Total current assets 1,581,000 901,000 Plant and equipment, net 1,200,000 1,149,000 Total assets $ 2,781,000 $ 2,050,000 Liabilities and Shareholders’ Equity Liabilities: Current liabilities $ 828,000 $ 583,000 Bonds payable, 12% 400,000 400,000 Total liabilities 1,228,000 983,000 Shareholders’ equity: Preferred shares, no par ($6; 21,520 shares issued) 269,000 269,000 Common shares, no par (unlimited authorized, 32,000 issued) 320,000 320,000 Retained earnings 964,000 478,000 Total shareholders’ equity 1,553,000 1,067,000 Total liabilities and shareholders’ equity $ 2,781,000 $ 2,050,000 SABIN ELECTRONICS Comparative Income Statement This Year Last Year Sales $ 5,200,000 $ 4,150,000 Less: Cost of goods sold 3,987,000 3,280,000 Gross margin 1,213,000 870,000 Less: Operating expenses 676,000 517,000 Net operating income 537,000 353,000 Less: Interest expense 48,000 48,000 Net income before taxes 489,000 305,000 Less: Income taxes (30%) 146,700 91,500 Net income 342,300 213,500 Dividends paid: Preferred dividends 20,000 20,000 Common dividends 93,600 71,200 Total dividends paid 113,600 91,200 Net income retained 228,700 122,300 Retained earnings, beginning of year 640,000 517,700 Retained earnings, end of year $ 868,700 $ 640,000 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. Assume that the following ratios are typical of firms in the electronics industry: Current ratio 2.5 to 1 Acid-test (quick) ratio 1.3 to 1 Average age of receivables 18 days Inventory turnover in days 60 days Debt-to-equity ratio 0.90 to 1 Times interest earned 6.0 times Return on total assets 13 % Price–earnings ratio 12 Required: 1. To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year (Use 365 days a year. Round your intermediate calculations to 1 decimal place. Round Debt-to-equity ratio to 3 decimal places and other answers to 2 decimal places.): a. The amount of working capital. b. The current ratio. c. The acid-test (quick) ratio. d. The average age of receivables (the accounts receivable at the beginning of last year totalled $246,000). e. The inventory turnover in days (the inventory at the beginning of last year totalled $492,000). f. The debt-to-equity ratio. g. The times interest earned. 2. For both this year and last year: (a) Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place.) (b) Present the income statement in common-size format down through net income. (Input all values as positive values. Round your answers to 1 decimal place.)

Paul Sabin organized Sabin Electronics 10 years ago in order 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 certain key items of 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 $ 70,400 $ 124,000 Marketable securities — 15,200 Accounts receivable, net 495,800 248,000 Inventory 995,000 496,000 Prepaid expenses 19,800 17,800 Total current assets 1,581,000 901,000 Plant and equipment, net 1,200,000 1,149,000 Total assets $ 2,781,000 $ 2,050,000 Liabilities and Shareholders’ Equity Liabilities: Current liabilities $ 828,000 $ 583,000 Bonds payable, 12% 400,000 400,000 Total liabilities 1,228,000 983,000 Shareholders’ equity: Preferred shares, no par ($6; 21,520 shares issued) 269,000 269,000 Common shares, no par (unlimited authorized, 32,000 issued) 320,000 320,000 Retained earnings 964,000 478,000 Total shareholders’ equity 1,553,000 1,067,000 Total liabilities and shareholders’ equity $ 2,781,000 $ 2,050,000 SABIN ELECTRONICS Comparative Income Statement This Year Last Year Sales $ 5,200,000 $ 4,150,000 Less: Cost of goods sold 3,987,000 3,280,000 Gross margin 1,213,000 870,000 Less: Operating expenses 676,000 517,000 Net operating income 537,000 353,000 Less: Interest expense 48,000 48,000 Net income before taxes 489,000 305,000 Less: Income taxes (30%) 146,700 91,500 Net income 342,300 213,500 Dividends paid: Preferred dividends 20,000 20,000 Common dividends 93,600 71,200 Total dividends paid 113,600 91,200 Net income retained 228,700 122,300 Retained earnings, beginning of year 640,000 517,700 Retained earnings, end of year $ 868,700 $ 640,000 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. Assume that the following ratios are typical of firms in the electronics industry: Current ratio 2.5 to 1 Acid-test (quick) ratio 1.3 to 1 Average age of receivables 18 days Inventory turnover in days 60 days Debt-to-equity ratio 0.90 to 1 Times interest earned 6.0 times Return on total assets 13 % Price–earnings ratio 12 Required: 1. To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year (Use 365 days a year. Round your intermediate calculations to 1 decimal place. Round Debt-to-equity ratio to 3 decimal places and other answers to 2 decimal places.): a. The amount of working capital. b. The current ratio. c. The acid-test (quick) ratio. d. The average age of receivables (the accounts receivable at the beginning of last year totalled $246,000). e. The inventory turnover in days (the inventory at the beginning of last year totalled $492,000). f. The debt-to-equity ratio. g. The times interest earned. 2. For both this year and last year: (a) Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place.) (b) Present the income statement in common-size format down through net income. (Input all values as positive values. Round your answers to 1 decimal place.)

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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SABIN ELECTRONICS
Comparative Balance Sheet
	This Year	Last Year
Assets
Current assets:
Cash	$	70,400	$	124,000
Marketable securities		—		15,200
Accounts receivable, net		495,800		248,000
Inventory		995,000		496,000
Prepaid expenses		19,800		17,800

Total current assets		1,581,000		901,000
Plant and equipment, net		1,200,000		1,149,000

Total assets	$	2,781,000	$	2,050,000

Liabilities and Shareholders’ Equity
Liabilities:
Current liabilities	$	828,000	$	583,000
Bonds payable, 12%		400,000		400,000

Total liabilities		1,228,000		983,000

Shareholders’ equity:
Preferred shares, no par ($6; 21,520 shares issued)		269,000		269,000
Common shares, no par (unlimited authorized, 32,000 issued)		320,000		320,000
Retained earnings		964,000		478,000

Total shareholders’ equity		1,553,000		1,067,000

Total liabilities and shareholders’ equity	$	2,781,000	$	2,050,000

SABIN ELECTRONICS
Comparative Income Statement
	This Year	Last Year
Sales	$	5,200,000	$	4,150,000
Less: Cost of goods sold		3,987,000		3,280,000

Gross margin		1,213,000		870,000
Less: Operating expenses		676,000		517,000

Net operating income		537,000		353,000
Less: Interest expense		48,000		48,000

Net income before taxes		489,000		305,000
Less: Income taxes (30%)		146,700		91,500

Net income		342,300		213,500

Dividends paid:
Preferred dividends		20,000		20,000
Common dividends		93,600		71,200

Total dividends paid		113,600		91,200

Net income retained		228,700		122,300
Retained earnings, beginning of year		640,000		517,700

Retained earnings, end of year	$	868,700	$	640,000

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. Assume that the following ratios are typical of firms in the electronics industry:


Current ratio	2.5	to 1
Acid-test (quick) ratio	1.3	to 1
Average age of receivables	18	days
Inventory turnover in days	60	days
Debt-to-equity ratio	0.90	to 1
Times interest earned	6.0	times
Return on total assets	13	%
Price–earnings ratio	12

Required:
1.	To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year (Use 365 days a year. Round your intermediate calculations to 1 decimal place. Round Debt-to-equity ratio to 3 decimal places and other answers to 2 decimal places.):

a.	The amount of working capital.
b.	The current ratio.
c.	The acid-test (quick) ratio.
d.	The average age of receivables (the accounts receivable at the beginning of last year totalled $246,000).
e.	The inventory turnover in days (the inventory at the beginning of last year totalled $492,000).
f.	The debt-to-equity ratio.
g.	The times interest earned.

2.	For both this year and last year:

(a)	Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place.)

(b)	Present the income statement in common-size format down through net income. (Input all values as positive values. Round your answers to 1 decimal place.)

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