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
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=
=
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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
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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
Stud Clothiers
Current assets
Current ratio Current liabilities
$650,000
$250,000
2.6x
=
=
=
Chapter 03: Financial Analysis
Income before fixed charges and taxes
$96,500 27,500
$21,800 27,500
$124, 000
$49,300
2.52x
+
=
+
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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
a.
Income before interest and taxes
Times interest earned Interest
$18,000
$3,000
6x
=
=
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Chapter 03: Financial Analysis
b. If the firm’s lease payments are $48,500, what is the fixed charge coverage?
3-25. Solution:
Income before interest and taxes
$193,000
$28,100
6.87x
=
=
b.
IBIT + Before tax fixed charges
Fixed charge coverage Interest + Fixed charges
$193,000 $48,500
$28,100 $48,500
$241,500
$76,600
3.15x
=
+
=
+
=
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26. Return on assets analysis (LO2) In January 2007, the Status Quo Company was formed.
Total assets were $544,000, of which $306,000 consisted of depreciable fixed assets. Status
Quo uses straight-line depreciation of $30,600 per year, and in 2007 it estimated its fixed
assets to have useful lives of 10 years. Aftertax income has been $29,000 per year each of
the last 10 years. Other assets have not changed since 2007.
a. Compute return on assets at year-end for 2007, 2009, 2012, 2014, and 2016.
(Use $29,000 in the numerator for each year.)
b. To what do you attribute the phenomenon shown in part a?
c. Now assume income increased by 10 percent each year. What effect would this have
on your preceding answers? (A comment is all that is necessary.)
