3-33. Solution:
Griggs Corporation
Sales/Total assets = 2.4 times
Cash = 2% of total assets
Sales/Accounts receivable = 8 times
Sales/Inventory = 10 times
3-33. (Continued)
Fixed assets = Total assets – Current assets
Current asset = $10,000 + $150,000 +
Current assets/Current debt = 2
Total debt/Total assets = 61%
Equity = Total assets – Total debt
Griggs Corporation
Balance Sheet
Cash….….…..….…..…..….….. $ 10,000 Current debt….……………….. $140,000
Total current assets 280,000
Fixed assets…..….…………… 220,000 Equity……..….…………………. 195,000
stockholders’
equity
34. Using ratios to determine account balances (LO2) We are given the following information for
the Pettit Corporation.
Sales (credit)….….…..…..….…..….…..…..…………..………….. $3,549,000
Cash….….…..….…..…..….…..….…..…..….…..….…..…………… 179,000
Inventory..…..…..….…..….…..…..….…..….…..…………..…..… 911,000
Current liabilities…..…..…..….…..….…..…………….…..…….. 788,000
Asset turnover……..….…..….…..…..….…..….…..…….……….. 1.40 times
Current ratio….…..….…..….…..…..….…..….…..………….……. 2.95 times
Debt-to-assets ratio….…..….…..…..….…..….………….………. 40%
Receivables turnover….…..….…..….…..…..….…..….…..….... 7 times
Current assets are composed of cash, marketable securities, accounts receivable, and inventory.
Calculate the following balance sheet items.
a. Accounts receivable.
b. Marketable securities.
c. Fixed assets.
d. Long-term debt.
3-34. Solution:
Pettit Corporation
a. Accounts receivable = Sales/Receivable turnover
b. Marketable securities = Current assets – (Cash +
Accounts rec. + Inventory)
Current assets = Current ratio × Current liabilities
Marketable securities = $2,324,600 – ($179,000 +
3-34. (Continued)
c. Fixed assets = Total assets – Current assets
Total assets = Sales/Asset turnover
d. Long-term debt = Total debt – Current liabilities
Total debt = Debt to assets × Total assets
35. Using ratios to construct financial statements (LO2) The following information is from
Harrelson Inc.’s, financial statements. Sales (all credit) were $28.50 million for last year.
Sales to total assets………..…..….…..….…..………….. 1.90 times
Total debt to total assets…….…..….…………….…..… 35%
Current ratio….…..….…..….…..…..….…..….…..…..…. 2.50 times
Inventory turnover….…..….…..…..….…..….……….... 10.00 times
Average collection period…..….…..….…..…..….…... 20 days
Fixed asset turnover….…..…..….………………………. 5.00 times
Fill in the balance sheet:
Cash….….…..….…………………… ______ Current debt….…..….…..…..….…..………..…… ______
Accounts receivable………....... ______ Long-term debt…….….…..…..….………….…… ______
Inventory….…..….…..…..….……. ______ Total debt…..…..….…..…..….………….………. ______
Total current assets………….... ______ Equity…..…..….…..….…..…..….…..….…..…….. ______
Fixed assets…..….…..…..….……. ______ Total debt and equity………..….……………… ______
Total assets…..….…..…..….…… ______
3-35. Solution:
Harrelson Inc.
Sales/Total assets = 1.90
Sales/inventory = 10x
3-35. (Continued)
$28.50 million
Accounts receivable = $1,583,333
360
20
=
Cash = Current assets – Accounts receivable –
Inventory
Current liabilities = Current assets/2.50
Long-term debt = Total debt – Current debt
Equity = Total assets – Total debt
3-35. (Continued)
Cash……………. $ 4.87 million Current debt……….. $ 3.72 million
Accounts
36. Comparing all the ratios (LO2) Using the financial statements for the Snider Corporation,
calculate the 13 basic ratios found in the chapter.
SNIDER CORPORATION
Balance Sheet
December 31, 20X1
Assets
Current assets:
Cash….….…..….…..…..….…..….……..…………. $ 52,200
Marketable securities………………..………..… 24,400
Accounts receivable (net)……………..………. 222,000
Inventory….…..….…..…..….…..….…..…..….…. 238,000
Total current assets………..….…..…..….…… $536,000
Investments……..….…..….…..…..….…..……….... 65,900
Plant and equipment….…..….…..…..…….……… 615,000
Less: Accumulated depreciation.………..….. (271,000)
Net plant and equipment………………….….... 344,000
Total assets….….…..…..….…..….…..…..….……… $946,500
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable…..….…..….…………………. $93,400
Notes payable….…..….…..….…..…….………... 70,600
Accrued taxes….…..….…..…..….………………. 17,000
Total current liabilities……….…..…….……. 181,000
Long-term liabilities:
Bonds payable…..….…..….…..…………………. $153,200
Total liabilities…..…..….…..…..….…..………… $334,200
Stockholders’ equity
Preferred stock, $50 per value…..………...... 100,000
Common stock, $1 par value……………….... 80,000
Capital paid in excess of par…….…….……… 190,000
Retained earnings………..…..….…..…….…….. 242,300
Total stockholders’ equity…..…..………….. 612,300
Total liabilities and stockholders’ equity....... $946,500
SNIDER CORPORATION
Income statement
For the Year Ending December 31, 20X1
Sales (on credit)…..….…..…..….…..….…..…..….…..….…..…..….…..…….……….. $2,064,000
Less: Cost of goods sold
…..…..….…..….…..…..….…..….…..…..….…..….…..…..….…..….…..…………. 1,313,000
Gross profit…….…..….…..…..….…..….…..…..….…..….…..…..….………………..… 751,000
Less: Selling and administrative expenses
…..…..….…..….…..…..….…..….…..…..….…..….…..…..….…..….…..…………. 496,000*
Operating profit (EBIT)…..…..….…..….…..…..….…..….…..…..….…..….…..…… 255,000
Less: Interest expense
…..…..….…..….…..…..….…..….…..…..….…..….…..…..….…..….…..…………. 26,900
Earnings before taxes (EBT)….…..…..….…..….…..…..….…..….…………………. 228,100
Less: Taxes
…..…..….…..….…..…..….…..….…..…..….…..….…..…..….…..….…..…………. 83,300
Earnings after taxes (EAT)…….…..….…..….…..…..….…..….…..…….………..…. $ 144,800
*Includes $36,100 in lease payments.
3-36. Solution:
Snider Corporation
Profitability ratios
Assets utilization ratios
Receivable turnover = $2,064,000 /$222,000 = 9.30x
Liquidity ratio
Debt utilization ratios
Debt to total assets = $334,200/$946,500 = 35.31%
37. Ratio computation and analysis (LO2) Given the financial statements for Jones Corporation and
Smith Corporation shown here:
a. To which one would you, as credit manager for a supplier, approve the extension of
(short-term) trade credit? Why? Compute all ratios before answering.
b. In which one would you buy stock? Why?
JONES CORPORATION
Current Assets Liabilities
Cash….….…..….…..…..….…..….…..….... $ 20,000 Accounts payable
…..…..….…..….…..…..….…..….……. $100,000
Accounts receivable…..…..….…..…..… 80,000 Bonds payable (long-term)
…..…..….…..….…..…..….…..….……. 80,000
Inventory….…..….…..…..….…..………... 50,000
Long-Term Assets Stockholders’ Equity
Fixed assets…..….…..…..….…..………… $500,000 Common stock
…..…..….…..….…..…..….…..….……. $150,000
Less: Accumulated depreciation
(150,000)
Paid-in capital
…..…..….…..….…..………….……….
70,000
Net fixed assets*……….…..….…………. 350,000 Retained earnings
…..…..….…..….…..………….……….
100,000
Total assets…….….…..….…..………... $500,000 Total liab. and equity
…..…..….…..….…..…..….…..….……. $500,000
Sales (on credit)…..….…..…..….…..….…..…..….…..….…..…..….………….……………..$1,250,000
Cost of goods sold….….…..…..….…..….…..…..….…..….…..…..….…..….…..…..……… 750,000
Gross profit….…..…..….…..….…..…..….…..….…..…..….…..….…..…..….…..….…..……500,000
Selling and administrative expense†…..…..….…..…..….…..….…..…..….…………..257,000
Less: Depreciation expense…..….…..….…..…..….…..….…..…..….…..…….……….. 50,000
Operating profit…..….…..…..….…..….…..…..….…..….…..…..….…..….…..…..…………193,000
Interest expense…..…..….…..…..….…..….…..…..….…..….…..…..….…..….…..………... 8,000
Earnings before taxes…..….…..…..….…..….…..…..….…..….…..…..….…..….………....185,000
Tax expense….…..…..….…..….…..….…..…..….…..….…..…..….…..….…..…..…….……. 92,500
Net income….…..….…..….…..…..….…..….…..…..….…..….…..…..….………….…………$ 92,500
*Use net fixed assets in computing fixed asset turnover.
†Includes $7,000 in lease payments.
SMITH CORPORATION
Current Assets Liabilities
Cash….….…..…………..…..….. $ 35,000 Accounts payable….……..……….. $ 75,000
Marketable securities.......... 7,500 Bonds payable (long-term)........ 210,000
Accounts receivable…......... 70,000
Inventory….…..….…..…..….… 75,000
Long-Term Assets Stockholders’ Equity
Fixed assets…..….…..…..….… $500,000 Common stock………..……………. $ 75,000
Less: Accum. dep……….…. (250,000) Paid-in capital……….…..…..….….. 30,000
Net fixed assets*…..…..…..… 250,000 Retained earnings…….……………. 47,500
Total assets….….…..…….. $437,500 Total liab. and equity…….……… $437,500
*Use net fixed assets in computing fixed asset turnover.
SMITH CORPORATION
Sales (on credit)…..….…..…..….…..….…..…..….…..….…..…..….………….……………..$1,000,000
Cost of goods sold….….…..…..….…..….…..…..….…..….…..…..….…..….…..…..……… 600,000
Gross profit….…..…..….…..….…..…..….…..….…..…..….…..….…..…..….…..….…..……400,000
Selling and administrative expense†…..…..….…..…..….…..….…..…..….…………..224,000
Less: Depreciation expense…..….…..….…..…..….…..….…..…..….…..…….……….. 50,000
Operating profit…..….…..…..….…..….…..…..….…..….…..…..….…..….…..…..…………126,000
Interest expense…..…..….…..…..….…..….…..…..….…..….…..…..….…..….…..………... 21,000
Earnings before taxes…..….…..…..….…..….…..…..….…..….…..…..….…..….………....105,000
Tax expense….…..…..….…..….…..….…..…..….…..….…..…..….…..….…..…..…….……. 52,500
Net income….…..….…..….…..…..….…..….…..…..….…..….…..…..….………….…………$ 52,500
†Includes $7,000 in lease payments.
3-37. Solution:
Jones and Smith Comparison
One way of analyzing the situation for each company is to compare the respective ratios for
each. Examining those ratios which would be most important to a supplier or short-term lender
and a stockholder.
Jones Corp. Smith Corp.
Profit margin 7.4% 5.25%
Return on assets (investments) 18.5% 12.00%
3-37. (Continued)
a. Since suppliers and short-term lenders are most concerned with liquidity ratios, Smith
Corporation would get the nod as having the best ratios in this category. One could argue,
b. Stockholders are most concerned with profitability. In this category, Jones has much better
ratios than Smith. Smith does have a higher return on equity than Jones, but this is due to its
Smith and its lower liquidity ratios could reflect better short-term asset management. This point
was covered in part a.
SMITH CORPORATION
Sales (on credit) ….….…..…..….…..….…..…..….…..….…..…..…….…. $1,000,000
Includes $7,000 in lease payments.