Problem 17

The statement of financial position for Bryan Corporation is shown below. Sales for the year
were 3,040,000 with 75 percent of sales on credit.

A. Compute the current ratio.

Current Assets = Cash + A/R + Inventory

= 50,000 + 280,000 + 240,000
CA= 570,000

Current Liabilities = A/P + Accrued Taxes

= 220,000 + 80,000
CL = 300,000
Current Ratio
= 570,000
300,000
Current Ratio = 1.9

B. Quick ratio
= 330,000
300,000

Quick ratio = 1.1

C. Debt-to-total-assets ratio
= 418,000
950,000
= 44 %
D. Asset turnover
= 3,040,000
950,000
= 3.2
E. Average collection period

= 280,000 3,040,000 x 0.75

360 days
= 280,000
6,333 per day

= 44.21 days

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 Problem 18

A. Alpha Industries had an asset turnover of 1.4 times per year. If the return on total assets
(investments) was 8.4 percent, what was Alpha’s profit margin?

Asset turnover = 1.4 x

Return on total assets is 8.4%
Return on Total assets = Total turnover x Profit Margin
8.4% = 1.4 x Profit Margin

Profit margin = 8.4%

1.4
P.M = 6.0% / 6%

B. The following year, on the same level of assets, Alpha’s asset turnover declined to 1.2 times and
its profit margin was 7 percent. How did the return on total assets change from that of the
previous year?

Profit margin = 7%

Assets turnover ratio = 1.2 x

Return on total assets = 1.2 x 7 %

= 1.2 x 0.07%

=8.4 %

Problem 19

A. King Company has a return on assets (Investment) ratio of 12 percent. If the debt-to-total ratio
is 40 percent, what is the return on equity?

Return on equity = = 12%

0.60
= 20 %

B. If the firm had no debt, what would the return- on -equity ratio be?

Same as return on assets of 12% because with no debt, the denominator would be 1.

Problem 20

A firm has sales of 1.2 million and 10 percent of the sales are for the cash. The year-end accounts
receivable balance is 180,000. What is the average collection period? (Use a 360-day year)

= 180,000

3,000/DAY = 60days

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 Problem 21

Charlie Corporation has accounts receivable turnover equal to 12 times. If accounts receivable is
equal to 90,000 what is the value for average daily credit sales?

Average credit sales = turnover * Accounts Receivable

= 12 x 90,000

= 1,080,000

A/R turnover = 12 times

A/R = 9,000 x 12 = 1,080,000

Average daily credit sales = 3,000

Problem 22

Jerry Company has 4,000,000 in yearly sales. The firm earns 3.5 percent on each peso os sales
and turns over its assets 2.5 times per year. It has 100,000 in current liabilities and 300,000 in long term
liabilities.

A. Return on stockholder’s equity

= 4,000,000 x 3.5
Net income = 140,000

=4,000,000/ 2.5
Total assets = 1,600,000

=100,000+300,000
Total liabilities = 400,000

Stockholder’s equity
= 1,600,000 – 400,000 = 1,200,000

Return on stockholders’ equity = Net income/ Stockholders’ equity

=140,000 / 1,200,000
= 11.67% (Return on stockholders’ equity)

B. The new level of sales will be:

= 1,600,000 x 3
Sales = 4,800,000 Return on stockholders’ equity

= 168,000
= 4,800,000 x 3.5%
1,200,000
Net Income = 168,000
= 14 %

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 Problem 23

Global Corporation has three subsidiaries.

Med. Supplies Heavy Machinery Electronics

Sales 20,000,000 5,000,000 4,000,000

Net income after taxes 1,200,000 190,000 320,000

Assets 8,000,000 8,000,000 3,000,000

A.) Which has the lowest return?

Med. Supplies Heavy Machinery Electronics

Net income after taxes 1,200,000 190,000 320,000

Sales 20,000,000 5,000,000 4,000,000

Return on sales 6.00% 3.80% 8.00%

So, Heavy machinery has the lowest return on sales. = 3.80%

B.) Which has the highest return?

Med. Supplies Heavy Machinery Electronics

Net income after taxes 1,200,000 190,000 320,000

Assets 8,000,000 8,000,000 3,000,000

Return on sales 15.00% 2.38% 10.67%

So, Medical supplies has highest return on assets. = 15.00%

C.) Return on assets=

Return on assets for the entire corporation = Total net income after taxes/ Total assets

= (1,200,000 + 190,000 + 320,000) / (8,000,000 +8,000,000 + 3,000,000)

= 1,710,000 / 19,000,000 = 9%

D.) Since 8,000,000 of Heavy machinery assets are sold off and invested in medical supplies, the
new investment in medical supplies will be:

8,000,000 + 8,000,000 = 16,000,000

= 16,000,000 * 1,200,000 /8,000,000 =2,400,000

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 =2,400,000 + 320,000 = 2,720,000
Assets employed = 16,000,000 for M.S + 3,000,000 for electronics= 19,000,000
Return on assets = 2,720,000/ 19,000,000 * 100 = 14.32%

Problem 24

Construct the current assets section of the statement of financial position from the following
data:

Yearly sales (credit) 420,000

Inventory turnover 7 times

Current liabilities 80,000

Current ratio 2

Average collection period 36 days

Current assets

Cash 58,575

A/R 41,425

Inventory 60,000

Total Current Assets 160,000

Solution:
Inventory Accounts receivables:
7= 420000/ Inventory 36days=(365 x A/R)/420,000
Inventory = 420000/7 A/R=36 x 420,000/365
Inventory = 60,000 A/R=41,425

Total Current assets:

Current ratio: 2
Cash:
Current
Problemassets/Current
25 liabilities =2
Cash= 160,000-41,425-60,000
Current assets=2 x Current liabilities
ShannonxCorporation has cred Cash = 58,575
Current assets=2 80,000
Current assets = 160,000

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 its sales of 750,000. Given the following ratios, fill in the statement of financial position below.

Total assets turnover 2.5 times

Cash to total assets 2.0 times

Acc receivable turnover 10.0 times

Inventory turnover 15.0 times

Current ratio 2.0 times

Debt to total assets 45.0 percent

Assets Liabilities and OE’s equity

Cash 6,000 Current debt 65,000

A/R 75,000 Long term debt 69,500

Inventory 50,000 Total debt 135,000

Total C/A 131,000 Net worth 165,000

Fixed assets 169,000 Total liabilities and owners’

Total assets 300,000 equity 300,000

Solution:

Total assets = Credit sales

Total assets turnover
Total assets = 750,000
2.5
Total assets = 300,000

Cash = Cash to total assets x Total assets

Cash = 2% * 300,000
Cash = 0.02 * 300,000
Cash = 6,000
Accounts receivable = 750,000
10
Accounts receivable = 75,000

Inventory = 750,000

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 15
Inventory = 50,000

Total current assets = Cash + Accounts receivable + Inventory

Total current assets = 6,000 + 75,000 + 50,000
Total current assets = 131,000

Fixed asset = Total assets - Total current assets

Fixed asset = 300,000 - 131,000
Fixed asset = 169,000

Current debt = Total current assets/Current ratio

Current debt = 131,000
2
Current debt = 65,500

Total debt = Debt to assets ratio X Total assets

Total debt = 45% * 300,000
Total debt = 0.45 * 300,000
Total debt = 135,000

Long-term debt = Total debt - Current debt

Long-term debt = 135,000 - 65,500
Long-term debt = 69,500

Net worth = Total assets - Total debt

Net worth = 300,000 - 135,000
Net worth = 165,000

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 Problem 26

We are given the following information for Cathy Corporation.

Sales ( Credit ) 3,000,000

Cash 150,000

Inventory 850,000

Current liabilities 700,000

Asset turnover 1.25 times

Current ratio 2.50 times

Debt-to-assets ratio 40%

Receivables turnover 6 times.

A.) Receivable turnover = Net sales/ Accounts receivable

6= 3,000,000 / Accounts receivable
A/R = 3,000,000 / 6 = 500,000

B.) Current ratio = Current assets/ Current liabilities

2.5 = Current assets / 700,000
Current assets = 2.5 * 700,000 = 1,750,000
Current assets = Cash + MS +AR + Inventory
1,750,000 = 150,000 + Marketable securities +500,00 + 850,000

Marketable securities = 1,750,000 – (150,000 + 500,000 + 850,000)

= 1,750,000 – 1,500,000 = 250,000

C.) 1.25 = 3,000,000/ Total assets

Total assets = 3,000,000 / 1.25 = 2,400,000
Fixed assets= Total assets- Current assets
= 2,400,000-1,750,000 = 650,000

D.) Debt to assets ratio = Total debt/ total assets

1.40 = Total debt/2,400,000

Total debt = 0.40 * 2,400,000 = 960,000

Long term debt = Total debt- Current liabilities

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 = 960,000 – 700,000 = 260,000

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