CHAPTER 3: FINANCIAL STATEMENTS AND RATIO ANALYSIS

51 The firm's earnings available to common shareholders for 2005 were:

Sales Revenue 3,060.00

Cost of goods sold (1,800.00)
Gross profit 1,260.00
Total operating expenses (600.00)
EBIT 660.00
Interest expense 126.00
EBT 534.00
Tax expense (40% Tax rate) (213.60)
Net income 320.40
Preferred stock dividends 18.00
Earnings available to common shareholders 302.40 C

52 The firm's earnings per share, rounded to the nearest cent, for 2005 was

Sales Revenue 3,060.00

Cost of goods sold (1,800.00)
Gross profit 1,260.00
Total operating expenses (600.00)
EBIT 660.00
Interest expense 126.00
EBT 534.00
Tax expense (40% Tax rate) (213.60)
Net income 320.40
Preferred stock dividends 18.00
Earnings available to common shareholders 302.40
Number of common shares outstanding 1,000.00
Earnngs per share 0.30 D

53 The firm's net profit after taxes for 2005 was

Sales Revenue 3,060.00

Cost of goods sold (1,800.00)
Gross profit 1,260.00
Total operating expenses (600.00)
EBIT 660.00
Interest expense 126.00
EBT 534.00
Tax expense (40% Tax rate) (213.60)
 Net income 320.40 C

56 Firm ABC had operating profits of $100,000, taxes of $17,000, interest

expense of $34,000 and preferred dividends of $5,000. What was the firm's
net profit after taxes?

Operating proft 100,000.00

Interest Expense (34,000.00)
EBT 66,000.00
Tax expense (17,000.00)
Net profit after taxes 49,000.00 B

57 Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34
percent, and it paid preferred stock dividends of $50,000. There were 100,000
shares outstanding and no interest expense. What were Candy Corporation's
earnings per share?

Pretax profit 1,200,000.00

Interest Expense (34%) (408,000.00)
Net profit 792,000.00
Preferred stock dividends (50,000.00)
Earnings available to common shareholders 742,000.00
Shares outstanding 100,000.00
Earnings per share 7.42 C

58 A firm had year end 2004 and 2005 retained earnings balances of $670,000
and $560,000, respectively. The firm paid $10,000 in dividends in 2005. The
firm's net profit after taxes in 2002 was

Retained earnings, 2005 560,000.00

Dividends paid 10,000.00
Retained earnings, 2006 (670,000.00)
Net loss after taxes (100,000.00) A

59 A corporation had year end 2004 and 2005 retained earnings balances of
$320,000 and $400,000, respectively. The firm reported net profits after taxes
of $100,000 in 2005. The firm paid dividends in 2005 of

Net profit after taxes 100,000.00

Retained earnings, 2005 400,000.00
Retained earnings, 2004 (320,000.00) (80,000.00)
Dividends paid, 2005 20,000.00 B
60 A corporation had a year end 2004 retained earnings balance of $220,000. The
firm reported net profits after taxes of $50,000 in 2005 and paid dividends in
2005 of $30,000. The firm's retained earnings balance at year end 2005 was

Retained earnings, 2004 220,000.00

Net profit after taxes, 2005 50,000.00
Dividends paid, 2005 (30,000.00)
Retained earnings, 2005 240,000.00

61 A firm had year end 2004 and 2005 retained earnings balance of $670,000 and
$560,000, respectively. The firm reported net profits after taxes of $100,000 in
2005. The firm paid dividends in 2005 of

Retained earnings, 2004 670,000.00

Net profit after taxes, 2005 100,000.00
Retained earnings, 2005 (560,000.00)
Dividends paid, 2005 210,000.00 D

65 Ag Silver Mining, Inc. has $500,000 of earnings before interest and taxes at
the year end. Interest expenses for the year were $10,000. The firm expects to
distribute $100,000 in dividends. Calculate the earnings after taxes for the firm
assuming a 40 percent tax on ordinary income.

At the end of 2005, the Long Life Light Bulb Company announced it had
66
produced a gross profit of $1 million. The company has also established that
over the course of this year it has incurred $345,000 in operating expenses
and $125,000 in interest expenses. The company is subject to a 30% tax rate
and has declared $57,000 total preferred stock dividends.

(a) How much is the earnings available for common stockholders?

(b) Compute the increased retained earnings for 2005 if the company were to
declare a $4.25 common stock dividend. The company has 15,000 shares of
common stock outstanding.
67 Reliable Auto Parts has 5,000 shares of common stock outstanding. The
company also has the following amounts in revenue and expense accounts.

Calculate

(a) gross profits.

(b) operating profits.
(c) net profits before taxes.
(d) net profits after taxes (assume a 40 percent tax rate).
(e) cash flow from operations.
(f) earnings available to common stockholders.
(g) earnings per share.
68 Colonial Furniture's net profits before taxes for 2002 totaled $354,000. The
company's total retained earnings were $338,000 for 2004 year end and
$389,000 for 2005 year end. Colonial is subject to a 26 percent tax rate. How
large was the cash dividend declared by Colonial Furniture in 2005?

On December 31, 2004, the Bradshaw Corporation had $485,000 as an ending

69 balance for its retained earnings account. During 2005, the corporation
declared a $3.50/share dividend to its stockholders. The Bradshaw
Corporation has 35,000 shares of common stock outstanding. When the
books were closed for 2005 year end, the corporation had a final retained
earnings balance of $565,000. What was the net profit earned by Bradshaw
Corporation during 2005?

70 The Sunshine Company had a retained earnings balance of $850,000 at the

beginning of 2005. By the end of 2005, the company's retained earnings
balance was $950,000. During 2005, the company earned $245,000 as net
profits after paying its taxes. The company was then able to pay its preferred
stockholders $45,000. Compute the common stock dividend per share in 2005
assuming 10,000 shares of common stock outstanding.
 If Nico Corporation has cost of goods sold of $300,000 and inventory of
30
$30,000, then the inventory turnover is ________ and the average age of
inventory is ________.

Inventory turnover = Cost of goods sold/Inventory = 300,000/30,000 = 10x

Average age of inventory = 365 days/Inventory turnover = 365/10 = 36.5 or 37 days

31 If Nico Corporation has annual purchases of $300,000 and accounts payable

of $30,000, then average purchases per day are ________ and the average
payment period is ________.

Average purchases per day = Annual purchases/365 = 300,000/365 = 821.92

Average payment period = 365/Accounts payable turnover

Accounts payable turnover = Annual purchases/Accounts payable = 300,000/30,000 = 10
Average payment period = 365/10 =36.5

Information (2010 values)

1. Sales totaled $110,000

2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
 8. The debt ratio was 53.8 percent.

12 Inventory for CEE in 2010 was ________. (See Table 3.1)

Inventory turnover = Cost of goods sold/Inventory C

Cost of goods sold = Sales x 75% = 110,000*0.75 = 82, 500

3.00 = 82,500/Inventory
Inventory = 82,500/3.00 = 27,500

13 Notes payable for CEE in 2010 was ________. (See Table 3.1)

Average collection period = 360/Accounts receivable turnover D

65 = 360/Accounts receivable turnover
Accounts receivable turnover = 360/65 = 5.538461538

Accounts receivable turnover = Sales/Accounts receivable

5.538461538 = 110,000/Accounts Receivable
Accounts receivable = 110,000/5.538461538 = 19,861.11111

Current ratio = Current Assets/Current Liabilities

2.40 = (4,500 + 27,500 + 19,861.111)/Current liabilities
Current liabilities = (4,500+27,500+19,861.111)/2.40 = 21,608.7963

Current liabilities = Accounts payable + Notes payable + Accruals

21,608.7963 = 10,000 + Notes payable + 1,000
Notes payable = 21,608.7963 - 10,000 - 1,000 = 10,608.7963 or 10,609

14 Accounts receivable for CEE in 2010 was ________. (See Table 3.1)

Average collection period = 360/Accounts receivable turnover B

65 = 360/Accounts receivable turnover
Accounts receivable turnover = 360/65 = 5.538461538

Accounts receivable turnover = Sales/Accounts receivable

5.538461538 = 110,000/Accounts Receivable
Accounts receivable = 110,000/5.538461538 = 19,861.11111 or 19,861

15 Total assets for CEE in 2010 were ________. (See Table 3.1)

Total asset turnover = Sales/Total assets A

1.13 = 110,000/Total assets
Total assets = 110,000/1.13 = 97,345.13274
 Total assets = Total current assets + Net fixed assets
97,345.13274 = 4,500 + 27,500 + 19,861.111 + Net fixed assets
Net fixed assets = 97,345.13274 - 4,500 - 27,500 - 19,861.111 = 45,484.02163 or 45,484

16 Total assets for CEE in 2010 were ________. (See Table 3.1)

Total asset turnover = Sales/Total assets D

1.13 = 110,000/Total assets
Total assets = 110,000/1.13 = 97,345.13274 or 97,345

17 Long-term debt for CEE in 2010 was ________. (See Table 3.1)

Debt ratio = Total debt/Total assets

53.8% = Total debt/97,345.13274
Total debt = 53.8% * 97,345.13274 = 52,371.6814

Total debt = Accounts payable + Notes payable + Accruals + Long-term debt

52,371.6814 = 10,000 + 10,608.7963 + 1,000 + Long-term debt
Long-term debt = 52,371.6814 - 10,000 - 10,608.7963 - 1,000 = 52,371.6814 or 52,372

15 A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets
of $1,500,000, and total liabilities of $750,000 has a return on equity of

Return on equity = Net income/Common equity D

Return on equity = 30,000/(1,500,000 - 750,000) = 4%

Table 3.2
Dana Dairy Products Key Ratios

Income Statement
 For the Year Ended December 31, 2010

Balance Sheet
December 31, 2010

18 The current ratio for Dana Dairy Products in 2010 was ________. (See Table 3.2)

Current ratio = Current assets/Current liabilities D

Current ratio = 14,250/15,675 = 0.90909... or 0.91

20 The net working capital for Dana Dairy Products in 2010 was ________. (See Table 3.2)

Net working capital = Current assets - Current liabilities C

Net working capital = 14,250 - 15,675 = -1,245
21 The inventory turnover for Dana Dairy Products in 2010 was ________. (See Table 3.2)

Inventory turnover = Cost of goods sold/Inventory C

Inventory turnover = 87,000/4,350 = 20

23 The average collection period for Dana Dairy Products in 2010 was (See Table 3.2)

Average collection period = 365/Accounts receivable turnover A

Accounts receivable turnover = Sales/Accounts receivable
Accounts receivable turnover = 100,000/8,900 = 11.2359550561

Average collection period = 365/11.2359550561 = 32.49 or 32.5 days

26 The debt ratio for Dana Dairy Products in 2010 was ________.(See Table 3.2)

Debt ratio = Total debt/Total assets C

Debt ratio = 19,800/36,000 = 55%

28 The gross profit margin and net profit margin for Dana Dairy Products in 2010
were ________. (See Table 3.2)

Gross profit margin = Gross profit/Sales A

Gross profit margin = 13,000/100,000 = 13%

Net profit margin = Net profits after taxes/Sales

Net profit margin = 900/100,000 = 0.9%

29 The return on total assets for Dana Dairy Products for 2010 was ________. (See Table 3.2)

Return on total assets = Net profits after taxes/Total assets D

Return on total assets = 900/36,000 = 2.5%

30 The return on equity for Dana Dairy Products for 2010 was ________. (See Table 3.2)

Return on equity = Net profits after taxes/Total common equity B

Return on equity = 900/16,200 = 5.55... or 5.6%

31 Using the modified DuPont formula allows the analyst to break Dana Dairy
Products return on equity into 3 components: the net profit margin, the total
asset turnover, and a measure of leverage (the financial leverage multiplier).
Which of the following mathematical expressions represents the modified
DuPont formula relative to Dana Dairy Products' 2010 performance?
 Return on equity = Net profits after taxes/Total common equity A
Return on equity =900/16,200 = 5.55... or 5.6%

Return on total assets = Net profits after taxes/Total assets

Return on total assets = 900/36,000 = 2.5%
*The terms 'return on total assets' and 'total asset turnover' are the same in this problem.

Equity multiplier or financial leverage = Total assets/Total equity

Equity multiplier = 36,000/16,200 = 2.22...
*Ambot ngano 2.24 sa test bank

Answer: 5.6(ROE) = 2.5(ROA) × 2.24(Financial leverage multiplier)

34 In an effort to analyze Clockwork Company finances, Jim realized that he was

missing the company's net profits after taxes for the current year. Find the
company's net profits after taxes using the following information.

Return on total assets = 2%

Total Asset Turnover = 0.5
Cost of Goods Sold = $105,000
Gross Profit Margin = 0.30

Sales (105,000/70%) 150,000.00

Cost of goods sold (1 - 0.30 = 70%) (105,000.00)
Gross profit (0.3 or 30%) 45,000.00

Total asset turnover = Sales/Total assets

0.5 = 150,000/Total assets
Total assets = 150,000/0.5 = 300,000

Return on total assets = Net profits after taxes/Total assets

2% = Net profits after taxes/300,000
Net profits after taxes = 2% * 300,000 = 6,000

Construct the DuPont system of analysis using the following financial data for
35
Key Wahl Industries and determine which areas of the firm need further
analysis.
 Total asset turnover = Net profits after taxes/Total assets
Total asset turnover = 337,500/6,750,000 = 5%

Debt ratio = Total liabilities/Total assets

Debt ratio = 3,375,000/6,750,000 =50%

Assets = Liabilities + Equity

6,750,000 = 3,375,000 + Equity
Equity = 6,750,000 - 3,375,000 = 3,375,000

Financial leverage = Total Assets/Total equity

Financial leverage = 6,750,000/3,375,000 = 2

Return on assets = Net profits after taxes/Total assets

Return on assets = 337,500/6,750,000 = 5%

Return on equity = Net profits after taxes/Common equity

Return on equity = 337,500/3,375,000 = 10%

Net profit margin = Net profits after taxes/Sales

Net profit margin = 337,500/4,500,000 = 7.5%

36 Given the following balance sheet, income statement, historical ratios and
industry averages, calculate the Pulp, Paper, and Paperboard, Inc. financial
ratios for the most recent year. Analyze its overall financial situation for the
most recent year. Analyze its overall financial situation from both a cross-
sectional and time-series viewpoint. Break your analysis into an evaluation of
the firm's liquidity, activity, debt, and profitability.

Income Statement
For the year ended December 31, 2005
 Balance Sheet
December 31, 2005

Historical and Industry Average Ratios

Answers
37 Complete the balance sheet for General Aviation, Inc. based on the following financial data.

Balance Sheet
December 31, 2005

Key Financial Data (2005)

1. Sales totaled $720,000.
2. The gross profit margin was 38.7 percent.
3. Inventory turned 6 times.
4. There are 360 days in a year.
5. The average collection period was 31 days.
6. The current ratio was 2.35.
7. The total asset turnover was 2.81.
8. The debt ratio was 49.4 percent.
9. Total current assets equal $159,565.

Answer
ALYSIS
 B

36.5 or 37 days

= 300,000/30,000 = 10
484.02163 or 45,484

71.6814 or 52,372
e Table 3.2)

__. (See Table 3.2)

_. (See Table 3.2)

(See Table 3.2)

______. (See Table 3.2)

. (See Table 3.2)

ame in this problem.
following financial data.