84 PA RT 2 Financial Statements and Long-Term Financial Planning

10. Industry-Specific Ratios [LO2] There are many ways of using standardized
financial information beyond those discussed in this chapter. The usual goal is
to put firms on an equal footing for comparison purposes. For example, for auto
manufacturers, it is common to express sales, costs, and profits on a per-car basis.
For each of the following industries, give an example of an actual company and dis-
cuss one or more potentially useful means of standardizing financial information:
a. Public utilities. d. Online services.
b. Large retailers. e. Hospitals.
c. Airlines. f. College textbook publishers.
11. Statement of Cash Flows [LO4] In recent years, several manufacturing compa-
nies have reported the cash flow from the sale of Treasury securities in the cash
from operations section of the statement of cash flows. What is the problem with
this practice? Is there any situation in which this practice would be acceptable?
12. Statement of Cash Flows [LO4] Suppose a company lengthens the time it takes to
pay suppliers. How would this affect the statement of cash flows? How sustainable
is the change in cash flows from this practice?
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QUESTIONS AND PROBLEMS

BASIC 1. Calculating Liquidity Ratios [LO2] SDJ, Inc., has net working capital of $2,710,
(Questions 1–17) current liabilities of $3,950, and inventory of $3,420. What is the current ratio?
What is the quick ratio?
2. Calculating Profitability Ratios [LO2] Diamond Eyes, Inc., has sales of $18 mil-
lion, total assets of $15.6 million, and total debt of $6.3 million. If the profit margin
is 8 percent, what is net income? What is ROA? What is ROE?
3. Calculating the Average Collection Period [LO2] Boom Lay Corp. has a current
accounts receivable balance of $327,815. Credit sales for the year just ended were
$4,238,720. What is the receivables turnover? The days’ sales in receivables? How
long did it take on average for credit customers to pay off their accounts during the
past year?
4. Calculating Inventory Turnover [LO2] The Cape Corporation has ending inven-
tory of $483,167, and cost of goods sold for the year just ended was $4,285,131.
What is the inventory turnover? The days’ sales in inventory? How long on average
did a unit of inventory sit on the shelf before it was sold?
5. Calculating Leverage Ratios [LO2] Perry, Inc., has a total debt ratio of .46. What
is its debt–equity ratio? What is its equity multiplier?
6. Calculating Market Value Ratios [LO2] That Wich Corp. had additions to
retained earnings for the year just ended of $375,000. The firm paid out $175,000
in cash dividends, and it has ending total equity of $4.8 million. If the company
currently has 145,000 shares of common stock outstanding, what are earnings per
share? Dividends per share? Book value per share? If the stock currently sells for
$79 per share, what is the market-to-book ratio? The price–earnings ratio? If the
company had sales of $4.7 million, what is the price–sales ratio?
7. DuPont Identity [LO4] If Roten Rooters, Inc., has an equity multiplier of 1.45,
total asset turnover of 1.80, and a profit margin of 5.5 percent, what is its ROE?
8. DuPont Identity [LO4] Kindle Fire Prevention Corp. has a profit margin of 4.6
percent, total asset turnover of 2.3, and ROE of 19.14 percent. What is this firm’s
debt–equity ratio?

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 86 PA RT 2 Financial Statements and Long-Term Financial Planning

16. Sources and Uses of Cash [LO4] For each account on this company’s balance sheet,
show the change in the account during 2012 and note whether this change was a
source or use of cash. Do your numbers add up and make sense? Explain your answer
for total assets as compared to your answer for total liabilities and owners’ equity.
17. Calculating Financial Ratios [LO2] Based on the balance sheets given for Just
Dew It, calculate the following financial ratios for each year:
a. Current ratio.
b. Quick ratio.
c. Cash ratio.
d. NWC to total assets ratio.
e. Debt–equity ratio and equity multiplier.
f. Total debt ratio and long-term debt ratio.
INTERMEDIATE 18. Using the DuPont Identity [LO3] Y3K, Inc., has sales of $6,189, total assets of
(Questions 18–30) $2,805, and a debt–equity ratio of 1.40. If its return on equity is 13 percent, what is
its net income?
19. Days’ Sales in Receivables [LO2] A company has net income of $179,000, a profit
margin of 8.3 percent, and an accounts receivable balance of $118,370. Assuming
70 percent of sales are on credit, what is the company’s days’ sales in receivables?
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20. Ratios and Fixed Assets [LO2] The Caughlin Company has a long-term debt
ratio of .35 and a current ratio of 1.30. Current liabilities are $910, sales are $6,430,
profit margin is 9.5 percent, and ROE is 18.5 percent. What is the amount of the
firm’s net fixed assets?
21. Profit Margin [LO4] In response to complaints about high prices, a grocery chain
runs the following advertising campaign: “If you pay your child $2 to go buy $50
worth of groceries, then your child makes twice as much on the trip as we do.” You’ve
collected the following information from the grocery chain’s financial statements:

($ in millions)
Sales $680
Net income 13.6
Total assets 410
Total debt 280

Evaluate the grocery chain’s claim. What is the basis for the statement? Is this
claim misleading? Why or why not?
22. Return on Equity [LO2] Firm A and firm B have debt–total asset ratios of 45%
and 35% and returns on total assets of 9% and 12%, respectively. Which firm has a
greater return on equity?
23. Calculating the Cash Coverage Ratio [LO2] Hedgepeth Inc.’s net income for the
most recent year was $15,185. The tax rate was 34 percent. The firm paid $3,806 in
total interest expense and deducted $2,485 in depreciation expense. What was the
cash coverage ratio for the year?
24. Cost of Goods Sold [LO2] Saunders Corp. has current liabilities of $435,000, a
quick ratio of .95, inventory turnover of 6.2, and a current ratio of 1.6. What is the
cost of goods sold for the company?
25. Ratios and Foreign Companies [LO2] Prince Albert Canning PLC had a net loss
of £45,831 on sales of £198,352. What was the company’s profit margin? Does the

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 Chapter 3 Working with Financial Statements 87

fact that these figures are quoted in a foreign currency make any difference? Why?
In dollars, sales were $314,883. What was the net loss in dollars?
Some recent financial statements for Smolira Golf Corp. follow. Use this infor-
mation to work Problems 26 through 30.

SMOLIRA GOLF CORP.

2011 and 2012 Balance Sheets
Assets Liabilities and Owners’ Equity
2011 2012 2011 2012
Current assets Current liabilities
Cash $24,046 $ 24,255 Accounts payable $ 23,184 $ 27,420
Accounts
receivable 12,448 15,235 Notes payable 12,000 10,800
Inventory 25,392 27,155 Other 11,571 15,553
Total $61,886 $ 66,645 Total $ 46,755 $ 53,773
Long-term debt $ 80,000 $ 95,000
Owners’ equity
Common stock and
paid-in surplus $ 40,000 $ 40,000

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Accumulated
Fixed assets retained earnings 219,826 243,606
Net plant and
equipment 324,695 365,734 Total $259,826 $283,606
Total liabilities and
Total assets $386,581 $432,379 owners’ equity $386,581 $432,379

SMOLIRA GOLF CORP.

2012 Income Statement
Sales $366,996
Cost of goods sold 253,122
Depreciation 32,220
Earnings before interest and taxes $ 81,654
Interest paid 14,300
Taxable income $ 67,354
Taxes (35%) 23,574
Net income $ 43,780
Dividends $20,000
Retained earnings 23,780

26. Calculating Financial Ratios [LO2] Find the following financial ratios for Smolira
Golf Corp. (use year-end figures rather than average values where appropriate):
Short-term solvency ratios:
a. Current ratio
b. Quick ratio
c. Cash ratio
Asset utilization ratios:
d. Total asset turnover
e. Inventory turnover
f. Receivables turnover

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 88 PA RT 2 Financial Statements and Long-Term Financial Planning

Long-term solvency ratios:

g. Total debt ratio
h. Debt–equity ratio
i. Equity multiplier
j. Times interest earned ratio
k. Cash coverage ratio
Profitability ratios:
l. Profit margin
m. Return on assets
n. Return on equity

27. DuPont Identity [LO3] Construct the DuPont identity for Smolira Golf Corp.
28. Statement of Cash Flows [LO4] Prepare the 2012 statement of cash flows for
Smolira Golf Corp.
29. Market Value Ratios [LO2] Smolira Golf Corp. has 25,000 shares of common
stock outstanding, and the market price for a share of stock at the end of 2012 was
$43. What is the price–earnings ratio? What are the dividends per share? What is
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the market-to-book ratio at the end of 2012? If the company’s growth rate is 9 per-
cent, what is the PEG ratio?
30. Tobin’s Q [LO2] What is Tobin’s Q for Smolira Golf? What assumptions are you
making about the book value of debt and the market value of debt? What about the
book value of assets and the market value of assets? Are these assumptions realis-
tic? Why or why not?

MINICASE

Ratio Analysis at S&S Air, Inc.

Chris Guthrie was recently hired by S&S Air, Inc., to assist and one-half to two years to manufacture once the order is
the company with its financial planning and to evaluate the placed.
company’s performance. Chris graduated from college five Mark and Todd have provided the following financial state-
years ago with a finance degree. He has been employed in the ments. Chris has gathered the industry ratios for the light air-
finance department of a Fortune 500 company since then. plane manufacturing industry.
S&S Air was founded 10 years ago by friends Mark Sexton
S&S AIR, INC.
and Todd Story. The company has manufactured and sold light 2012 Income Statement
airplanes over this period, and the company’s products have
Sales $36,599,300
received high reviews for safety and reliability. The company
Cost of goods sold 26,669,496
has a niche market in that it sells primarily to individuals who
own and fly their own airplanes. The company has two mod- Other expenses 4,641,000
els; the Birdie, which sells for $53,000, and the Eagle, which Depreciation 1,640,200
sells for $78,000. EBIT $ 3,648,604
Although the company manufactures aircraft, its opera- Interest 573,200
tions are different from commercial aircraft companies. S&S Taxable income $ 3,075,404
Air builds aircraft to order. By using prefabricated parts, the Taxes (40%) 1,230,162
company can complete the manufacture of an airplane in Net income $ 1,845,242
only five weeks. The company also receives a deposit on each
Dividends $560,000
order, as well as another partial payment before the order is
Add to retained earnings 1,285,242
complete. In contrast, a commercial airplane may take one

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