Chapter 03: Financial Analysis
3-17. (Continued)
Although not requested in the question, one could show the
following:
Net income Net income / Total assets
Stockholders’ equity (1 Debt/Assets)
=
−
18. Average collection period (LO2) A firm has sales of $3 million, and 10 percent of the
sales are for cash. The year-end accounts receivable balance is $285,000. What is the
average collection period? (Use a 360-day year.)
3-18. Solution:
Chapter 03: Financial Analysis
Accounts receivable
Average collection period Average daily credit sales
($3,000,000 90%)
$285,000/ 360 days
$285,000
$7,500 per day
38 days
=
=
=
=
19. Average daily sales (LO2) Martin Electronics has an accounts receivable turnover equal to
15 times. If accounts receivable are equal to $80,000, what is the value for average daily
credit sales?
3-19. Solution:
Martin Electronics
Credit sales
Average daily credit sales 360
=
To determine credit sales, multiply accounts receivable by
accounts receivable turnover.
$80,000 15 $1,200,000=
$1,200,000
Average daily credit sales $3,333
360
==
Chapter 03: Financial Analysis
Cash……………………………………….
$ 163,000
Accounts receivable……………………….
889,000
Inventory…………………………………..
411,000
Net plant and equipment…………………..
520,000
Total assets……………………………
$1,983,000
a. Compute the following:
1. Accounts receivable turnover.
2. Inventory turnover.
3. Fixed asset turnover.
4. Total asset turnover.
b. In 20X2, sales increased to $5,740,000 and the assets for that year were as follows:
Cash…………………………………………
$ 163,000
Accounts receivable………………………..
924,000
Inventory……………………………………
1,063,000
Net plant and equipment……………………
520,000
Total assets……………………………..
$2,670,000
Once again, compute the four ratios.
c. Indicate if there is an improvement or decline in total asset turnover, and based on the
other ratios, indicate why this development has taken place.
Chapter 03: Financial Analysis
$5,740,000 11.04
520,000 x=
4. Total asset turnover
$5, 740,000 2.15
2,670,000 x=
c. There is a decline in total asset turnover from 2.43 to 2.15.
This development has taken place because of the slowdown in
inventory turnover (11.73 down to 5.4). The other two ratios
are slightly improved.
22. Overall ratio analysis (LO2) The balance sheet for Stud Clothiers is shown next. Sales for
the year were $2,400,000, with 90 percent of sales sold on credit.
STUD CLOTHIERS
Balance Sheet 20X1
Assets
Liabilities and Equity
Cash……………………
$ 60,000
Accounts payable……………..
$ 220,000
Accounts receivable……
240,000
Accrued taxes…………………
30,000
Inventory………………
350,000
Bonds payable
(long-term)……………………
150,000
Plant and equipment……
410,000
Common stock………………..
80,000
Paid-in capital…………………
200,000
Retained earnings……………..
380,000
Total assets…………
$1,060,000
Total liabilities and equity…
$1,060,000
Compute the following ratios:
a. Current ratio.
b. Quick ratio.
c. Debt-to-total-assets ratio.
d. Asset turnover.
e. Average collection period.
3-22. Solution:
Chapter 03: Financial Analysis
Stud Clothiers
Current assets
Current ratio Current liabilities
=
Chapter 03: Financial Analysis
Income before fixed charges and taxes
$124, 000
$49,300
2.52x
=
=
24. Debt utilization and Du Pont system of analysis (LO3) Using the income statement for
Times Mirror and Glass Co., compute the following ratios:
a. The interest coverage.
b. The fixed charge coverage.
The total assets for this company equal $80,000. Set up the equation for the Du Pont
system of ratio analysis, and compute c, d, and e.
c. Profit margin.
d. Total asset turnover.
e. Return on assets (investment).
PASTE MANAGEMENT COMPANY
Sales ……………………………………………………….………….. $126,000
Less: Cost of goods sold ……………………………………….. 93,000
Gross profit …………………………………………………………. 33,000
Less: Selling and administrative expense ………………… 11,000
Less: Lease expense ……………………………………………… 4,000
Operating profit* ………………………………………………….. $ 18,000
Less: Interest expense …………………………………………… 3,000
Earnings before taxes ……………………………………………. $ 15,000
Less: Taxes (30%)………………………………………………… 4,500
Earnings after taxes ………………………………………………. $ 10,500
*Equals income before interest and taxes.
3-24. Solution:
Times Mirror and Glass Co.
Chapter 03: Financial Analysis
Income before interest and taxes
$3,000
6x
=
