Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic

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 $700,000 long-term loan from Gulfport State Bank, $200,000 of which will be used to bolster the Cash account and $500,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:

Sabin ElectronicsComparative Balance Sheet This YearLast Year  Assets       Current assets:         Cash$150,000$350,000      Marketable securities 0 17,000      Accounts receivable, net 737,000 500,000      Inventory 1,145,000 795,000      Prepaid expenses 38,000 42,000      Total current assets 2,070,000 1,704,000    Plant and equipment, net 2,300,800 1,530,000      Total assets$4,370,800$3,234,000      Liabilities and Stockholders Equity       Liabilities:         Current liabilities$900,000$420,000      Bonds payable, 12% 900,000 900,000      Total liabilities 1,800,000 1,320,000      Stockholders' equity:         Common stock, $15 par 870,000 870,000      Retained earnings 1,700,800 1,044,000      Total stockholders’ equity 2,570,800 1,914,000      Total liabilities and equity$4,370,800$3,234,000    

Sabin ElectronicsComparative Income Statement and Reconciliation This YearLast Year  Sales$6,000,000$4,950,000    Cost of goods sold 4,075,000 3,650,000      Gross margin 1,925,000 1,300,000    Selling and administrative expenses 693,000 588,000      Net operating income 1,232,000 712,000    Interest expense 108,000 108,000      Net income before taxes 1,124,000 604,000    Income taxes (30%) 337,200 181,200      Net income 786,800 422,800    Common dividends 130,000 109,000      Net income retained 656,800 313,800    Beginning retained earnings 1,044,000 730,200      Ending retained earnings$1,700,800$1,044,000    
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 3/10, 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 amount of working capital.

b. The current ratio.

c. The acid-test ratio.

d. The average collection period. (The accounts receivable at the beginning of last year totaled $450,000.)

e. The average sale period. (The inventory at the beginning of last year totaled $700,000.)

f. The operating cycle

g. The total asset turnover. (The total assets at the beginning of last year were $3,194,000.)

h. The debt-to-equity ratio.

i. The times interest earned ratio.

j. The equity multiplier.(The total stockholders’ equity at the beginning of last year totaled $1,904,000.)