CHAPTER 3
WORKING WITH FINANCIAL STATEMENTS
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space
and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to
have occurred. However, the final answer for each problem is found without rounding during any step in the problem.
Basic
1.
Using the formula for NWC, we get:
NWC = CA – CL
CA = CL + NWC = $3,720 + 1,370 = $5,090
So, the current ratio is:
Current ratio = CA / CL = $5,090/$3,720 = 1.37 times
And the quick ratio is:
Quick ratio = (CA – Inventory) / CL = ($5,090 – 1,950) / $3,720 = 0.84 times
2.
We need to find net income first. So:
Profit margin = Net income / Sales
Net income = Sales(Profit margin)
Net income = ($29,000,000)(0.08) = $2,320,000
ROA = Net income / TA = $2,320,000 / $17,500,000 = .1326 or 13.26%
To find ROE, we need to find total equity.
TL & OE = TD + TE
TE = TL & OE – TD
TE = $17,500,000 – 6,300,000 = $11,200,000
ROE = Net income / TE = 2,320,000 / $11,200,000 = .2071 or 20.71%
3.
Receivables turnover = Sales / Receivables
Receivables turnover = $3,943,709 / $431,287 = 9.14 times
Days’ sales in receivables = 365 days / Receivables turnover = 365 / 9.14 = 39.92 days
The average collection period for an outstanding accounts receivable balance was 39.92 days.
4.
Inventory turnover = COGS / Inventory
Inventory turnover = $4,105,612 / $407,534 = 10.07 times
Days’ sales in inventory = 365 days / Inventory turnover = 365 / 10.07 = 36.23 days
On average, a unit of inventory sat on the shelf 36.23 days before it was sold.
5.
Total debt ratio = 0.63 = TD / TA
Substituting total debt plus total equity for total assets, we get: