Average collection period lo2 a firm has sales of 3

18. Average collection period (LO2) 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.)

23. Debt utilization ratios (LO2) The Lancaster Corporation’s income statement is given
next.
a . What is the times-interest-earned ratio?
b . What would be the fixed-charge-coverage ratio?
LANCASTER CORPORATION
Sales .............................................................................. $246,000
Cost of goods sold ......................................................... 122,000
Gross profit ................................................................... 124,000
Fixed charges (other than interest) ................................ 27,500
Income before interest and taxes ................................... 96,500
Interest ........................................................................... 21,800
Income before taxes ...................................................... 74,700
Taxes (35%) .................................................................. 26,145
Income after taxes ......................................................... $ 48,555
3-23. Solution:
Lancaster Corporation

a.
Income before interest and taxes
Times interested earned
Interest
$96,500
21,800
4.43x



b.
Income before fixed charges and taxes
Fixed charge coverage
Fixed charges
$96,500 27,500
$21,800 27,500
$124,000
$49,300
2.52x






24. Debt utilization and Du Pont system of analysis (LO3) Using the income statement for
Times Mirror and Glass Co., compute the following ratios:
a . The interest coverage.
b . The fixed charge coverage.
The total assets for this company equal $80,000. Set up the equation for the Du Pont
system of ratio analysis, and compute c, d , and e .
c . Profit margin.
d . Total asset turnover.
e . Return on assets (investment).
PASTE MANAGEMENT COMPANY
Sales .............................................................................. $126,000
Less: Cost of goods sold ............................................... 93,000
Gross profit ................................................................... 33,000
Less: Selling and administrative expense ..................... 11,000
Less: Lease expense ...................................................... 4,000
Operating profit* ........................................................... $ 18,000
Less: Interest expense ................................................... 3,000

Earnings before taxes .................................................... $ 15,000
Less: Taxes (30%) ......................................................... 4,500
Earnings after taxes ....................................................... $ 10,500

*Equals income before interest and taxes.
3-24. Solution:
Times Mirror and Glass Co.
a.
Income before interest and taxes
Times interest earned
Interest
$18,000
$3,000
6x



3
-24. (Continued)
b.
Income before fixed charges and taxes
Fixed charge coverage
Fixed charges
$18,000 4,000
$3,000 $4,000
$22,000
$7,000
3.14x






c.
Net income
Profit margin
Sales
$10,500
$126,000
8.33%




d.
Sales
Total asset turnover
Total assets
$126,000
$80,000
1.575x



e.
Net income Sales
Return on assets (investments)
Sales Total assets
8.33% 1.575x
13.12%
 
 

25. Debt utilization (LO2) A firm has net income before interest and taxes of $193,000 and
interest expense of $28,100.
a . What is the times-interest-earned ratio?
b . If the firm’s lease payments are $48,500, what is the fixed charge coverage?
Chapter 4
28. Percent-of-sales method (LO3) The Manning Company has financial statements as shown
next, which are representative of the company’s historical average.