3-13. Continued
Silicon Software’s superior return on stockholders' equity is further
enhanced by a higher debt ratio than Interactive Technology (60% versus 37.5%). This means that a smaller percentage of Silicon Software’s total assets are being financed by stockholders' equity and thus the potentially higher return on stockholders' equity.
Although not requested in the question, one could show the following:
Net incomeStockholders' equity?Net income/Total asssets?1?debt/assets?Silicon Software?12.5%?1?.60??12.5%/.40?31.25% ?.937%?1?.375??9.37%/.625?15%Interactive Technology
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-14.
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.)
Solution:
Average collection period?Accounts receivableAverage daily credit sales?$285000/?$3,000,000?90%?360 days
?$285,000$7,500 per day?38 days
3-15.
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?
Solution:
Martin Electronics
Average daily credit sales ?Credit sales360
To determine credit sales, multiply accounts receivable by accounts receivable turnover.
$80,000 x 15 = $1,200,000
Average daily credit sales ?
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
$1,200,000360?$3,333
3-16.
Perez Corporation has the following financial data for the years 2003 and 2004: 2003 2004 Sales $8,000,000 $10,000,000 Cost of good sold 6,000,000 9,000,000 Inventory 800,000 1,000,000
a. Compute inventory turnover based on ratio number 6, sales/inventory, for
each year.
b. Compute inventory turnover based on an alternative calculation that is used by
many financial analysts, cost of goods sold/inventory, for each year. c. What conclusions can you draw from part a and part b?
Solution:
Perez Corporation
a.
2003
SalesInventory ?$8,000,000800,000$6,000,000800,000?10x2004
$10,000,0001,000,000$9,000,0001,000,000?10x
b.
Cost of goods soldInventory??7.5x?9x
c. Based on the sales to inventory ratio, the turnover has remained constant at 10x. However, based on the cost of goods sold to inventory ratio, it has improved from 7.5x to 9x.
The latter ratio may be providing a false picture of improvement in this example simply because cost of goods sold has gone up as percentage of sales (from 75 percent to 90 percent). Inventory is not really turning over any faster.
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-16. Continued
Nevertheless, cost of goods sold used by many analysis in the
numerator of the inventory turnover ratio because it is stated on a \basis as is inventory. This is an important theoretical consideration.
However, the authors prefer to use sales in the numerator of the
inventory turnover ratio because that is the procedure used by Dun & Bradstreet, the most widely quoted sources for ratio analysis. Furthermore, for privately traded companies there may be only information available on sales and not cost of goods sold.
3-17.
The balance sheet for the Stud Clothiers is given below. Sales for the year were $2,400,000, with 90 percent of sales sold on credit.
Stud Clothiers Balance Sheet 199X
Assets Liabilities and Equity
Cash ............................. $ 60,000 Accounts payable .................. $220,000 Accounts receivable ..... 240,000 Accrued taxes ........................ 30,000 Inventory ...................... 350,000 Bonds payable (long term) .... 150,000 Plant and equipment .... 410,000 Common stock....................... 80,000 Paid-in-capital ....................... 200,000 Retained earnings .................. 380,000 Total liabilities and equity ..... $1,060,000 Total assets................... $1,060,000
Compute the following ratios:
a. Current ratio. b. Quick ratio.
c. Debt-to-total-assets ratio. d. Asset turnover.
e. Average collection period.
Copyright ? 2005 by The McGraw-Hill Companies, Inc.
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3-17. Continued
Solution:
Stud Clothiers
a.Current ratio?Current assetsCurrent liabilities
b.Quick ratio
?$650,000$250,000
?2.6x??Current assets?inventory?Current liabilities?$650,000?$350,000$250,000
?$300,000$250,000?1.2xS-63
Copyright ? 2005 by The McGraw-Hill Companies, Inc.