PROBLEM 15″18 Common-Size Statements and Financial Ratios for a Loan Application [LO15″1,
LO15″2, LO15″3, LO15″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 ye ars f ollow:
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 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
708 Chapter 15
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 a mount of w orking capital.
b. The c urrent r atio.
c. The a cid-test r atio.
d. 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 ope rating c ycle.
g. The total asset turnover. (The total assets at the beginning of last year were $2,420,000.)
h. The de bt-to-equity r atio.
i. The t imes i nterest e arned r atio.
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 t he ba lance s heet i n c ommon-size f ormat.
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 companies
in the electronics industry:
Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
Acid-test ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3
Average collection period . . . . . . . . . . . . . . . . . . 18 days
Average sale period . . . . . . . . . . . . . . . . . . . . . . 60 days
Debt-to-equity ratio . . . . . . . . . . . . . . . . . . . . . . 0.90
Times interest earned ratio . . . . . . . . . . . . . . . . 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?