Finance Chapter 3 Math

Chapter 03
Financial Analysis
Q1. Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of
$156,000 on sales of $2,010,000. Division B is able to make only $28,800 on sales of
$329,000. Based on the profit margins (returns on sales), which division is superior?
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Q3. Polly Esther Dress Shops Inc. can open a new store that will do an annual sales
volume of $837,900. It will turn over its assets 1.9 times per year. The profit margin on
sales will be 8 percent. What would net income and return on assets (investment) be
for the year?
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8. Easter Egg and Poultry Company has $2,000,000 in assets and $1,400,000 of debt. It
reports net income of $200,000.
a) What is the firm’s return on assets?
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Q9. Network Communications has total assets of $1,500,000 and current assets of
$612,000. It turns over its fixed assets three times a year. It has $319,000 of debt. Its
return on sales is 8 percent. What is its return on stockholders’ equity?
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Q11. Baker Oats had an asset turnover of 1.6 times per year.
a) If the return on total assets (investment) was 11.2 percent, what was Baker’s profit
margin?
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Q18. 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.)
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Q19. Martin Electronics has an account receivable turnover equal to 15 times. If
accounts receivables are equal to $80,000, what is the value for average daily credit
sales?
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Q21. a)
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b)
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Q 22.
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Q24:
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* Change: The Griggs Corporation has Total sales of
Math 33 / Griggs Corp.
$12,00,000 and Cash sales is 10% of total sales.
pg - 86 pdf S0, Credit sales will be (12, 00,000 * 90%) = 10,80,000

Total assets turnover .................................... 2.4 times
Cash to total assets ...................................... 2.0%
Accounts receivable turnover ......................8.0 times
Inventory turnover ......................................10.0 times
Current ratio .................................................2.0 times

Debt to total assets ........................................61.0%
*Workings

Need to do workings of followings
-Fixed Asset
-Long term Liability

-Owner Equity

Griggs Corp. Balance Sheet
33
Asset $ Liabilities & owner $
equity
❑ Current Asset ❑ Current debt/ 1,32,500
Liability: (d)
Cash 10,000
Account Receivable 1,35,000 Long term Debt/ 1,72,500
liability ( c - d)
Inventory 1,20,000
Total Debt/ Lib (c) 3,05,000
Total Current Asset (a)
2,65,000
❑ Owners Equity (b-c) 1,95,000

❑ Fixed Asset (b - a) 2,35,000
❖ Total Liabilities &
5,00,000
❖ Total Asset (b) 5,00,000 owner equity
35. Sales to total Asset= Sales/Total Asset=1.9 times
Total Asset=Sales/1.9
= $28.50 million/1.90
=$15 million
Debt to total asset= debt/total asset=35%

Debt= Total Asset*35%
= $15mil*35%=$5.25mil
Inventory turnover= Sales/Inventory

Inventory= Sales/Inventory turnover
= $28.5 mil/ 10times= $2.85mil
Total credit sales = $28.5mil
Average daily credit sales= $28.5mil/360= $0.079167mil
Average Collection period = Accounts receivable/ Average
daily credit sales
Accounts Receivable= Average Collection period*
Average daily credit sales
=20days*$0.079167mil=$1.583mil
Fixed Asset turnover= Sales/Fixed Asset

Fixed Asset=Sales/ Fixed Asset turnover
=$28.5/ 5times= $5.7mil
Current Asset= Total Asset- Fixed Asset

=$15- $5.7mil= $9.3mil
Current Asset= Cash+ Accounts Receivable+ inventory
Cash= Current Asset- (Accounts Receivable+
inventory)
=$9.3mil- ($1.583mil+$2.85mil) = $4.867mil
Current Ratio= Current Assets/ Current Liabilities

Current Liabilities= Current Assets/ Current Ratio
= $9.3mil/2.50= $3.72mil
Total Debt= Current Liabilities + Long term Liabilities

Long term Liabilities= Total Debt- Current Liabilities
= $5.25mil - $3.72mil= $1.53mil
Equity= Total Asset- Total Debt

= $15mil- $5.25mil= $9.75mil
Fill in the balance sheet:
Cash……………………$4.867mil Current debt……………$3.72mil
Accounts receivable……$1.583mil Long term debt………...$1.53mil
Inventory………………$2.85mil Total debt………………$5.25mil
Total Current Asset……$9.3mil Equity…………………..$9.75mil
Fixed Asset……………...$5.7mil
Total Asset………………$15mil Total debt & Equity…....$15mil
37. Ratio Analysis for Jones Corporation:
► 1) Profit Margin= Net Income/ Sales
► =$92,500/$1,250,000= 7.4%
2) Return on Assets= Net Income/ Total assets

=$92,500/$500,000= 18.50%
3) Return on Equity= Net Income/ Equity
Equity=$150,000+$70,000+$ 100,000
=$92,500/$320,000 =$320,000
=28.90%
4) Receivable turnover= Sales (credit)/ Accounts receivable

=$1,250,000/$80,000= 15.625times
► 5) Average Collection Period= Accounts receivable/ Average daily credit Sales
► Credit Sales=$1,250,000
► Average daily credit Sales= $1,250,000/360=$3472.222
► Average Collection Period=$80,000/$3472.222= 23.04days
6) Inventory Turnover= Sales/Inventory

= $1,250,000/$50,000= 25times
7) Fixed asset Turnover= Sales/Fixed Asset

=$1,250,000/$350,000=3.57times
8) Total Asset Turnover= Sales/Total Asset

=$1,250,000/$500,000= 2.5times
► 9) Current Ratio= Current Assets/Current Liabilities
► Current Asset = Cash+ Inventory+ Accounts receivable
► = $20,000+ $80,000+ $50,000=$150,000
► Current ratio= $150,000/$100,000= 1.5 times
10) Quick Ratio= (Current Assets- Inventory)/Current Liabilities

=($150,000- $50,000)/ /$100,000 =1 times
11) Debt to Total Asset= Total debt/ Total Asset

Debt= Current Liabilities + Long Term
Liabilities
= Accounts payable + Bonds Payable
=$100,000 + $80,000= $ $180,000
Debt to Total Asset= $180,000/$500,000= 36%
► 12) Times interest earned= Income before interest and taxes/ interest
► =Operating Profit/Interest
► =$193,000/$8000= 24.125times
► 13) Fixed Charge Coverage= Income before fixed charges and taxes/ Fixed
Charges
► =(Operating Profit+ Lease Payment)/ (Lease Payment+
Interest)
► =($193,000+ $7000)/($7000+ $8000)
► = $200,000/$15,000= 13.33times
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►4) Receivable turnover= Sales (credit)/ Accounts receivable
► =$1,000,000/$70,000= 14.28times
► 5) Average Collection Period= Accounts receivable/ Average daily credit Sales

► Credit Sales=$1,000,000
► Average daily credit Sales= $1,000,000/360=$2777.78
► Average Collection Period=$70,000/$2777.78= 25.19days
► 6) Inventory Turnover= Sales/Inventory
► = $1,000,000/$75,000= 13.33times
► 7) Fixed asset Turnover= Sales/Fixed Asset
► =$1,000,000/$250,000=4times
► 8) Total Asset Turnover= Sales/Total Asset
► =$1,000,000/$437,500= 2.28times
Ratio Analysis for Smith Corporation:
1) Profit Margin= Net Income/ Sales
► =$52,500/$1,000,000= 5.25%
► 2) Return on Assets= Net Income/ Total assets

► =$52,500/$437,500= 12%
► 3) Return on Equity= Net Income/ Equity Equity=$75,000+$30,000+$ 47,500
► =$52,500/$152,500 =$152,500
► =34.42%
►9) Current Ratio= Current Assets/Current Liabilities
► Current Asset = Cash+ Marketable securities+ Inventory+ Accounts receivable
=$35,000+ $7500+ $70,000+ $75,000=$187,500
► Current ratio= $187,500/$75,000= 2.5times
► 10) Quick Ratio= (Current Assets- Inventory)/Current Liabilities

► =($187,500- $75,000)/ /$75,000 =1.5times
► 11) Debt to Total Asset= Total debt/ Total Asset
► Debt= Current Liabilities + Long Term Liabilities
► = Accounts payable + Bonds Payable
► =$75,000 + $210,000= $ $285,000
► Debt to Total Asset= $285,000/$437,500=65.14%
►12) Times interest earned= Income before interest and taxes/ interest
► =Operating Profit/Interest
► =$126,000/$21000=6times
► 13) Fixed Charge Coverage= Income before fixed charges and taxes/ Fixed
Charges
► =(Operating Profit+ Lease Payment)/ (Lease Payment+
Interest)
► =($126,000+ $7000)/($7000+ $21,000)
► = $133,000/$28,000= 4.75times
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Comparison between JONES & SMITH CORPORATIONS:
Ratios JONES SMITH
1. Profit Margin 7.4% 5.25%
1. Return on Assets 18.50% 12%
1. Return on Equity 28.90% 34.42%
1. Receivable turnover 16.625Times 14.28Times
1. Average collection Period 23.04days 25.19days
1. Inventory Turnover 25times 13.33times
1. Fixed Asset Turnover 3.57times 4times
1. Total Asset turnover 2.5times 2.28times
1. Current Ratio 1.5times 2.5times
1. Quick Ratio 0.7times 1.5times
1. Debt to total asset 36% 65.14%
1. Times interest earned 24.125times 6times
1. Fixed Charge coverage 13.33times 4.75times

► a) As a credit Manager I would approve the extension of trade credit with
Smith Corporation, because it has higher liquidity ratios compare to Jones
Corporation.
► b) Stockholders are more interested in Profitability ratios. Between the two
Corporations Jones has higher profitability ratio, So, I would buy the stocks of
Jones Corporation.
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Chapter 03

❑ Owners Equity (b-c) 1,95,000

Debt to total asset= debt/total asset=35%

Inventory turnover= Sales/Inventory

Fixed Asset turnover= Sales/Fixed Asset

Current Asset= Total Asset- Fixed Asset

Current Ratio= Current Assets/ Current Liabilities

Total Debt= Current Liabilities + Long term Liabilities

Equity= Total Asset- Total Debt

2) Return on Assets= Net Income/ Total assets

4) Receivable turnover= Sales (credit)/ Accounts receivable

6) Inventory Turnover= Sales/Inventory

7) Fixed asset Turnover= Sales/Fixed Asset

8) Total Asset Turnover= Sales/Total Asset

10) Quick Ratio= (Current Assets- Inventory)/Current Liabilities

11) Debt to Total Asset= Total debt/ Total Asset

► 5) Average Collection Period= Accounts receivable/ Average daily credit Sales

► 2) Return on Assets= Net Income/ Total assets

► 10) Quick Ratio= (Current Assets- Inventory)/Current Liabilities

1. Profit Margin 7.4% 5.25%

1. Return on Assets 18.50% 12%

1. Return on Equity 28.90% 34.42%

1. Receivable turnover 16.625Times 14.28Times

1. Average collection Period 23.04days 25.19days

1. Inventory Turnover 25times 13.33times

1. Fixed Asset Turnover 3.57times 4times

1. Total Asset turnover 2.5times 2.28times

1. Current Ratio 1.5times 2.5times

1. Quick Ratio 0.7times 1.5times

1. Debt to total asset 36% 65.14%

1. Times interest earned 24.125times 6times

1. Fixed Charge coverage 13.33times 4.75times

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