CHAPTER 3
WORKING WITH FINANCIAL
STATEMENTS
Answers to Concepts Review and Critical Thinking Questions
1. a. If inventory is purchased with cash, then there is no change in the current ratio. If inventory is
3. A current ratio of 0.50 means that the firm has twice as much in current liabilities as it does in current
CHAPTER 3 – 2
5. Common-size financial statements express all balance sheet accounts as a percentage of total assets
7. Return on equity is probably the most important accounting ratio that measures the bottom-line
CHAPTER 3 – 3
11. Reporting the sale of Treasury securities as cash flow from operations is an accounting “trick,” and as
Solutions to Questions and Problems
Basic
1. Using the formula for NWC, we get:
2. We need to find net income first. So:
CHAPTER 3 – 4
5. Total debt ratio = 0.46 = TD / TA
CHAPTER 3 – 5
8. This question gives all of the necessary ratios for the DuPont Identity except the equity multiplier, so,
using the DuPont Identity:
11. First, we need the enterprise value, which is:
CHAPTER 3 – 6
12. The equity multiplier is:
13. through 15:
2011
#13
2012
#13
#14
#15
Current assets
Cash
Accounts receivable
Inventory
Total
Total assets
Notes payable
Accumulated retained earnings
CHAPTER 3 – 7
CHAPTER 3 – 8
Intermediate
18. This is a multistep problem involving several ratios. The ratios given are all part of the DuPont Identity.
CHAPTER 3 – 9
19. This is a multistep problem involving several ratios. It is often easier to look backward to determine
20. The solution to this problem requires a number of steps. First, remember that CA + NFA = TA. So, if
we find the CA and the TA, we can solve for NFA. Using the numbers given for the current ratio and
the current liabilities, we solve for CA:
CHAPTER 3 – 10
Substituting the total equity into the equation and solving for long-term debt gives the following:
22. The solution requires substituting two ratios into a third ratio. Rearranging D/TA:
CHAPTER 3 – 11
23. This problem requires you to work backward through the income statement. First, recognize that
24. The only ratio given that includes cost of goods sold is the inventory turnover ratio, so it is the last
ratio used. Since current liabilities is given, we start with the current ratio:
26. Short-term solvency ratios:
CHAPTER 3 – 12
27. The DuPont identity is:
CHAPTER 3 – 13
28. SMOLIRA GOLF CORP.
Statement of Cash Flows
For 2012
CHAPTER 3 – 14
30. First, we will find the market value of the company’s equity, which is:
Using the book value of debt implicitly assumes that the book value of debt is equal to the market
