Problem 14-18 Common-Size Statements and Financial Ratios for aLoan Application [LO14-1, LO14-2, LO14-3, LO14-4]

Paul Sabin organized Sabin Electronics 10 years ago to produceand sell several electronic devices on which he had securedpatents. Although the company has been fairly profitable, it is nowexperiencing a severe cash shortage. For this reason, it isrequesting a $570,000 long-term loan from Gulfport State Bank,$135,000 of which will be used to bolster the Cash account and$435,000 of which will be used to modernize equipment. Thecompany’s financial statements for the two most recent yearsfollow:

Sabin Electronics
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	98,000	$	220,000
Marketable securities		0		25,000
Accounts receivable, net		568,000		370,000
Inventory		1,015,000		665,000
Prepaid expenses		26,000		29,000
Total current assets		1,707,000		1,309,000
Plant and equipment, net		1,686,200		1,400,000
Total assets	$	3,393,200	$	2,709,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	835,000	$	500,000
Bonds payable, 12%		600,000		600,000
Total liabilities		1,435,000		1,100,000
Stockholders' equity:
Common stock, $15 par		760,000		760,000
Retained earnings		1,198,200		849,000
Total stockholders’ equity		1,958,200		1,609,000
Total liabilities and stockholders' equity	$	3,393,200	$	2,709,000

Sabin Electronics
Comparative Income Statement andReconciliation
	This Year		Last Year
Sales	$	5,350,000	$	4,560,000
Cost of goods sold		3,945,000		3,520,000
Gross margin		1,405,000		1,040,000
Selling and administrative expenses		667,000		562,000
Net operating income		738,000		478,000
Interest expense		72,000		72,000
Net income before taxes		666,000		406,000
Income taxes (30%)		199,800		121,800
Net income		466,200		284,200
Common dividends		117,000		96,000
Net income retained		349,200		188,200
Beginning retained earnings		849,000		660,800
Ending retained earnings	$	1,198,200	$	849,000

During the past year, the company introduced several new productlines and raised the selling prices on a number of old productlines in order to improve its profit margin. The company also hireda new sales manager, who has expanded sales into several newterritories. Sales terms are 3/10, n/30. All sales are onaccount.

Required:

To assist in approaching the bank about the loan, Paul has askedyou to compute the following ratios for both this year and lastyear:

a. The amount of working capital.
b. The current ratio. (Round your answers to 2 decimalplaces.)
c. The acid-test ratio. (Round your answers to 2 decimalplaces.)
d. The average collection period. (The accounts receivable at thebeginning of last year totaled $320,000.) (Use 365 days in a year.Round your intermediate calculations and final answers to 2 decimalplace.)
e. The average sale period. (The inventory at the beginning of lastyear totaled $570,000.) (Use 365 days in a year. Round yourintermediate calculations and final answers to 2 decimalplace.)
f. The operating cycle. (Use 365 days in a year. Round yourintermediate calculations and final answers to 2 decimalplace.)
g. The total asset turnover. (The total assets at the beginning oflast year were $2,630,000.) (Round your answers to 2 decimalplaces.)
h. The debt-to-equity ratio. (Round your answers to 2 decimalplaces.)
i. The times interest earned ratio. (Round your answers to 2decimal places.)
j. The equity multiplier. (The total stockholders’ equity at thebeginning of last year totaled $1,599,000.) (Round your answers to2 decimal places.)

	This Year		Last Year
Workingcapital
Currentratio
Acid-testratio
Averagecollection period		days		days
Averagesale period		days		days
Operatingcycle		days		days
Totalasset turnover
Debt-to-equity ratio
Timesinterest earned ratio
Equitymultiplier