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# Ch03sol - H3.1 Solution to Problem 3.2 n 3.2 Calculating...

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H3.1. Solution to Problem 3.2 n 3.2. Calculating Profitability Ratios: Timber Line, Inc. has sales of \$29million, total assets of \$37million, and total debts of \$13million. If the profit margin is 8.8 percent, what is net income? What is ROA? What is ROE? We need to find net income first. So: Profit margin = Net income / Sales Net income = Sales(Profit margin) = (\$29M)(0.088) = \$2,552,000 ROA = Net income / TA = \$2.552M / \$37M = 6.9% To find ROE, we need to find total equity. TL & OE = TD + TE TE = TL & OE – TD = \$37M – 13M = \$24M ROE = Net income / TE = \$2.552M / \$24M = 10.63%

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H3.2. Solution to Problem 3.10 n 3.10. Calculating Average Payables Period: For 2006, BDJ, Inc., had a cost of goods sold of \$13,168. At the end of the year, the accounts payable balance was \$2,810. How long on average did it take the company to pay off its suppliers during the year? What might a large value for this ratio imply? Payables turnover = COGS / Accounts payable = \$13,168 / \$2,810 = 4.69 times Days’ sales in payables = 365 days / Payables turnover = 365 / 4.69 = 77.89 days The company left its bills to suppliers outstanding for 77.89 days on average. A large value for this ratio could imply that either (1) the company is having liquidity problems, making it difficult to pay off its short-term obligations, or (2) that the company has successfully negotiated lenient credit terms from its suppliers.
H3.3. Solution to Problem 3.13-3.17 Straw Saws PLC reports the following balance sheet information for 2006 and 2007. Use this information to work problems 13 through 17. Straw Saws PLC 2006 and 2007 Balance Sheet Assets Liabilities and Owners’ Equity 2006 2007 2006 2007 Current assets Current liabilities Cash 10,168 10,683 Accounts payable 73,185 59,309 A/R 27,145 28,613 Notes payable 39,125 48,168 Inventory 59,324 64,853 Total 112,310 107,477 Total 96,637 104,149 Long-term debt 50,000 62,000 Fixed assets Owners equity Net plant and Common stock and equipment 304,165 347,168 paid-in surplus 80,000 80,000 Retained earnings 158,492 201,840 Total 238,492 281,840 Total assets 400,802 451,317 Total liabilities and owners’ equity 400,802 451,317

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H3.4. Solution to Problem 3.13-3.15 n 3.13.-3.15.: Prepare the 2006 and 2007 common-size balance sheets, the 2007 common-base year balance sheet, and the 2007 combined common-size, common- base year balance sheet for Straw Saws. The common-size balance sheet answers are found by dividing each category by total assets. For example, the cash percentage for 2006 is: £10,168 / £400,802 = .0254 or 2.54% This means that cash is 2.54% of total assets.
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