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
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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.)

   
   
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