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# Ch3 - Chapter 3 Introduction to Financial Statement...

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Chapter 3 Introduction to Financial Statement Analysis E 3-1 Computation of Ratios 1. Debt ratio = \$85,000 / \$215,000 = 39.5% 2. Current ratio = \$70,000 / \$45,000 = 1.56 3. Return on sales = \$30,000 / \$340,000 = 8.8% 4. Asset turnover = \$340,000 / \$215,000 = 1.58 5. Return on equity = \$30,000 / \$130,000 = 23.1% 6. Price-earnings ratio = \$250,000 / \$30,000 = 8.33 E 3-3 Computations Using Ratios 1. Total assets Debt ratio = Total liabilities / Total assets 0.40 = \$100,000 / Total assets Total assets = \$250,000 2. Sales Asset turnover = Sales / Total assets 2.0 = Sales / \$250,000 Sales = \$500,000 3. Net income Return on sales = Net income / Sales 0.10 = Net income / \$500,000 Net income = \$50,000 4. Price-earnings ratio Price-earnings ratio = Market value / Net income Price-earnings ratio = \$600,000 / \$50,000 Price-earnings ratio = 12 E 3-9 DuPont Framework 1. Iffy Model Cash 120 900 Accounts receivable 600 4,500 Inventory 480 6,000 Property, plant, and equipment 3,440 15,000 Total assets 4,640 26,400 ROE = Return on Sales × Asset Turnover × Assets/Equity Iffy 6.9% 1.0% 2.16 3.20 (\$100/\$1,450) (\$100/\$10,000) (\$10,000/\$4,640) (\$4,640/\$1,450) Model 36.4% 4.0% 2.84 3.20

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(\$3,000/\$8,250) (\$3,000/\$75,000) (\$75,000/\$26,400) (\$26,400/\$8,250) 2. Iffy’s return on equity of 6.9% is lower than Model’s return on equity of 36.4% because Iffy is both less profitable and less efficient than Model. Iffy’s return on sales is only 1.0%,
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Ch3 - Chapter 3 Introduction to Financial Statement...

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