# Ch13 - Chapter 13 Analyzing Financial Statements EXERCISES...

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Chapter 13 Analyzing Financial Statements EXERCISES E13–4 1. If the average sales volume remains the same, then the cost of goods sold will also remain the same. If the inventory decreases by 25%, the inventory turnover ratio will increase. 2. In a period of increasing prices, a change from FIFO to weighted average will cause inventory to decrease and cost of good sold to increase. Ratio Impact of change Profit margin = Net income / Net sales Decrease Fixed asset turnover = Net Sales / Average net fixed assets No effect Current ratio = Current assets /Current liabilities Decrease Quick ratio = (Cash + ST investments + A/R) / CL No effect E13–10 Current assets = \$38,914 + \$202,539 + \$389,905 + \$198,000 + \$11,163 = \$840,521 Current liabilities = \$71,635 + \$51,615 + \$43,694 + \$4,288 = \$171,232 Current ratio = Current assets / Current liabilities = \$840,521 /\$171,232 = 4.91 Quick ratio = Quick assets / Current liabilities = \$631,358 / \$171,232 = 3.69 Inventory turnover = Cost of goods sold / Average inventory = \$1,406,829 / [(\$216,412 + \$198,000) / 2] = 6.79 Receivables turnover = Net credit sales / Average net accounts receivable = \$2,568,776 x 60% / [(\$326,896 + \$389,905) / 2] = 4.30 The current ratio and the quick ratio indicate clearly that the company has sufficient current assets to pay its current liabilities. In fact, these ratios are relatively high. The inventory turns over about 7 times per year, once every two months. These levels seem reasonable but should be compared with similar ratios for the previous years to detect any improvement or deterioration over time. Comparisons with industry ratios are also useful. Furthermore, the average collection period of 85 days (365 / 4.30) should be

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compared with the company’s credit policy. It appears to be high given standard credit terms of 30 to 45 days. E13-11 Transaction Debt-to-equity ratio Times Interest Earned ratio Cash Coverage ratio a. Decrease No change No change b. Increase No change No change c. Decrease No change No change d. Increase Decrease No change e. No change No change No change E13–12 1. Car manufacturer (high inventory; high property and equipment; low inventory turnover) 2. Wholesale candy company (high inventory turnover) 3. Retail fur store (high gross profit; high inventory, low inventory turnover) 4. Advertising agency (low inventory; absence of gross profit) E13–16 Case 1 ROE = Net income = \$200,000 = 10% Average shareholders’ equity Average shareholders’ Equity Average shareholders’ equity = \$2,000,000 Case 2 Asset turnover = Net sales = \$8,000,000 = 8 Average total assets Average total assets Average total assets = \$1,000,000
Case 3 Asset turnover = Net sales = Net sales = 5 Average total assets \$1,000,000 Net Sales = \$5,000,000 Net profit margin = Net income = Net income = 10% Net sales \$5,000,000 Net income = \$500,000 ROE = Net income = \$500,000 = 15% Average shareholders’ equity Average shareholders’ equity Average shareholders’ equity = \$3,333,333

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## This note was uploaded on 12/09/2009 for the course ACCO comm 217 taught by Professor Mroz during the Fall '09 term at Concordia Canada.

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Ch13 - Chapter 13 Analyzing Financial Statements EXERCISES...

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