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.The amount of working capitalThe current ratioThe acid-test ratioThe average collection period (The accounts receivable at the beginning of last year totaled $250,000)The average sales period (The inventory at the beginning of last year totaled $500,000)The operating cycleThe total asset turnover. (The total assets at the beginning of last year were $2,420,000)The debt-to-equity ratioThe times interest earned ratioThe equity multiplier (The total stockholder’s equity at the beginning of last year totaled $1,420,000) Could you please help me answer 4-6? 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 asever 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 tomodernize equipment. The company's financial statements for the two recent years follow:Sabin ElectronicsComparative Balance SheetAssetsCurrent Assets:CashMarketable SecuritiesAccounts Receivable, NetInventoryPrepaid ExpensesTotal Current AssetsPlant and Equipment, NetTotal AssetsLiabilities and Stockholder's EquityLiabilities:Current LiabilitiesBonds Payable, 12%Total LiabilitiesThis Year Last Year70,0000150,00018,000480,000300,000950,000 600,00020,00022,0001,520,000 1,090,0001,480,000 1,370,0003,000,000 2,460,000800,000 430,000600,000 600,0001,400,000 1,030,000Stockholder's EquityCommon Stock, $15 ParRetained EarningsTotal Stockholder's Equity1,600,000 1,430,000Total Liabilities and Stockholder's Equity 3,000,000 2,460,000750,000 750,000850,000 680,000 Sabin ElectronicsComparative Income StatementSalesCost of Goods SoldGross MarginSelling and Administrative ExpensesNet Operating IncomeInterest ExpenseNet Income Before TaxesIncome Taxes (30%)Net Income Before TaxesCommon DividendsNet Income RetainedBeginning Retained EarningsEnding Retained EarningsThis Year5,000,0003,875,0001,125,000653,000472,00072,000400,000120,000280,000110,000170,000680,000850,000Last Year4,350,0003,450,000900,000548,000352,00072,000270,00084,000196,00095,000101,000579,000680,000

Formula used: Average collection period=Average accounts receivableSales×365 days Average sales…

Answered: To assist in approaching the bank about…

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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Question

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.

The amount of working capital
The current ratio
The acid-test ratio
The average collection period (The accounts receivable at the beginning of last year totaled $250,000)
The average sales period (The inventory at the beginning of last year totaled $500,000)
The operating cycle
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 stockholder’s equity at the beginning of last year totaled $1,420,000)

Could you please help me answer 4-6?

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
sever 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 recent years follow:
Sabin Electronics
Comparative Balance Sheet
Assets
Current Assets:
Cash
Marketable Securities
Accounts Receivable, Net
Inventory
Prepaid Expenses
Total Current Assets
Plant and Equipment, Net
Total Assets
Liabilities and Stockholder's Equity
Liabilities:
Current Liabilities
Bonds Payable, 12%
Total Liabilities
This Year Last Year
70,000
0
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
800,000 430,000
600,000 600,000
1,400,000 1,030,000
Stockholder's Equity
Common Stock, $15 Par
Retained Earnings
Total Stockholder's Equity
1,600,000 1,430,000
Total Liabilities and Stockholder's Equity 3,000,000 2,460,000
750,000 750,000
850,000 680,000

Sabin Electronics
Comparative Income Statement
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 Before Taxes
Common Dividends
Net Income Retained
Beginning Retained Earnings
Ending Retained Earnings
This Year
5,000,000
3,875,000
1,125,000
653,000
472,000
72,000
400,000
120,000
280,000
110,000
170,000
680,000
850,000
Last Year
4,350,000
3,450,000
900,000
548,000
352,000
72,000
270,000
84,000
196,000
95,000
101,000
579,000
680,000

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Step 1

Formula used:

$\begin{array}{rcl} A v e r a g e c o l l e c t i o n p e r i o d & = & \frac{A v e r a g e a c c o u n t s r e c e i v a b l e}{S a l e s} \times 365 d a y s \end{array}$

$\begin{array}{rcl} A v e r a g e s a l e s p e r i o d & = & \frac{365 d a y s}{I n v e n t o r y t u r n o v e r} \end{array}$

$\begin{array}{rcl} O p e r a t i n g c y c l e (l a s t y e a r) & = & A v e r a g e c o l l e c t i o n p e r i o d (l a s t y e a r) + A v e r a g e s a l e s p e r i o d (l a s t y e a r) \end{array}$

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