Question 44: Paul Sabin organized Sabin Electronics 10 years ago to produce and
ID: 2587011 • Letter: Q
Question
Question 44: 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 $690,000 long-term loan from Gulfport State Bank, $195,000 of which will be used to bolster the Cash account and $495,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
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.
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 average collection period. (The accounts receivable at the beginning of last year totaled $440,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)
The total asset turnover. (The total assets at the beginning of last year were $3,112,000.) (Round your answers to 2 decimal places.)
Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
Question 44: 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 $690,000 long-term loan from Gulfport State Bank, $195,000 of which will be used to bolster the Cash account and $495,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
Solution:
1-a) Working Capital = Total Current Assets – Total Current Liabilities
Current Year
Last Year
Total Current Assets (A)
2,043,000
1,672,000
Total Current Liabilities (B)
895,000
410,000
Working Capital (A-B)
1148,000
1262,000
Numerator
/
Denominator
=
Ratio
1-b)
Current Ratio
Current Assets
/
Current Liabilities
=
Current Ratio
times
Current Ratio (This year)
2,043,000
/
895,000
=
2.28
times
Current Ratio (last year)
1,672,000
/
410,000
=
4.08
times
1-c)
Acid Test Ratio
Current Assets - Inventory - Prepaid Expenses
/
Current Liabilities
=
Acid Test Ratio
times
Acid Test Ratio (This Year)
870000
(2043000-38000-1135000)
/
895,000
=
0.97
times
Acid Test Ratio (Last Year)
846000
(1672000-41000-785000)
/
410,000
=
2.06
times
1-d)
Average Collection Period
number of days in a year x Average Accounts Receivable
/
Net Credit Sales
=
Average Collection Period
days
Average Collection Period (This Year)
221555000
(365*( (724000+490000)/2)
/
5950000
=
37.2
days
Average Collection Period (Last Year)
169725000
(365*( (490000+440000)/2)
/
4920000
=
34.5
days
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining parts.
Current Year
Last Year
Total Current Assets (A)
2,043,000
1,672,000
Total Current Liabilities (B)
895,000
410,000
Working Capital (A-B)
1148,000
1262,000
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