1. Griffey Junior Wear has $800,000 in assets and $200,000 of total debt.

It reports net
income of $100,000.
a. What is its ROA (return on assets)?
b. What is the return on shareholders’ equity?
c. If the firm has an asset turnover ratio of 2.75 times, what is the profit margin?
2. Bunny Hip and Hop Brewery has $750,000 in assets and $300,000 of debt. It reports net
income of $55,000.
a. What is its ROA?
b. What is the return on shareholders’ equity?
c. If the firm has an asset turnover ratio of 2.2 times, what is the profit margin?
3. The Haines Corp. shows the following financial data for 20XX and 20XY:

20XX 20XY

$3,370,00
Sales $3,230,000
0

Cost of goods sold 2,130,000 2,850,000

Gross profit $1,100,000 $ 520,000

Selling & administrative expense 298,000 227,000

Operating profit $ 802,000 $ 293,000

Interest expense 47,200 51,600

Income before taxes $ 754,800 $ 241,400

Taxes (35%) 264,180 84,490

Income after taxes $ 490,620 $ 156,910

For each year, compute the following and indicate whether it is increasing or decreasing profitability in
20XY as indicated by the ratio:
a. Cost of goods sold to sales.
b. Selling and administrative expense to sales.
c. Interest expenses to sales.
4. Diet Health Foods Inc. has two divisions. Division A has a profit of $100,000 on sales of
$2,000,000. Division B is able to make only $25,000 on sales of $300,000. On the basis of
profit margin, which division is superior?

5. Dr. Gupta Diagnostics’ income statement for 20XX is as follows:

Sales $2,000,000

Cost of goods sold 1,400,000

 Gross profit 600,000

Selling and administrative

300,000
expense

Operating profit 300,000

Interest expense 50,000

Income before taxes 250,000

Taxes (30%) 75,000

Income after taxes $ 175,000

a. Compute the profit margin in 20XX.
b. Assume in 20XY sales increase by 10 percent and cost of goods sold increases by
20 percent. The firm is able to keep all other expenses the same. Once again,
assume a tax rate of 30 percent. What are the income after taxes and profit
margin in 20XY?
6. Watson Data Systems is considering expanding into a new product line. New assets to
support expansion will cost $500,000. It is estimated that Watson can generate $1.2
million in annual sales, with a 6 percent profit margin. What would net income and return
on assets (investment) be for the year?
7. Walker Glove and Bat Shop can open a new store that will have annual sales of $1,250,000.
It will turn over its assets 3.4 times per year. The profit margin on sales will be 8 percent.
What would net income and return on assets (investment) for the year be?
8. Hugh Snore Bedding has assets of $400,000 and turns over its assets 1.5 times per year.
ROA is 12 percent. What is the firm’s profit margin?
9. Billy’s Crystal Stores Inc. has assets of $5,960,000 and turns over its assets 1.9 times per
year. Return on assets is 8 percent. What is the firm’s profit margin (return on sales)?
10. Sharpe Razor Company has total assets of $2,500,000 and current assets of $1,000,000. It
turns over its capital assets five times a year and has $700,000 of total debt. Its return on
sales is 3 percent. What is Sharpe’s return on shareholder’s equity?
11. Fondren Machine Tools has total assets of $3,310,000 and current assets of $879,000. It
turns over its fixed assets 3.6 times per year. Its return on sales is 4.8 percent. It has
$1,750,000 of debt. What is its return on shareholders’ equity?
12. Global Healthcare Products has the following ratios compared to its industry for 20XX.

Global Healthcare Industry

Return on sales 2% 10%

Return on assets 18% 12%

Explain, with supporting calculations, why the return‐on‐assets ratio is so much more
favourable than the return‐on‐sales ratio, compared to the industry.
13. Acme Transportation Company has the following ratios compared to its industry for 20XX.

Acme Transportation Industry

Return on assets 9% 6%

Return on equity 12% 24%

 Explain, with supporting calculations, why the return‐on‐equity ratio is so much less
favourable than the return‐on‐assets ratio, compared to the industry.
14. The King Card Company has a ROA (investment) ratio of 12 percent.
a. If the debt‐to‐total‐assets ratio is 40 percent, what is the ROE?
b. If the firm had no debt, what would the ROE be?
15. Using the DuPont method, evaluate the effects of the following relationships for the Lollar
Corporation.
a. Lollar Corporation has a profit margin of 5 percent and its ROA (investment) is
13.5 percent. What is its asset turnover?
b. If Lollar Corporation has a debt‐to‐total‐assets ratio of 60 percent, what would
the firm’s ROE be?
c. What would happen to the ROE if the debt‐to‐total‐assets ratio decreased to 40
percent?
16. Pony Express Company has $750,000 in assets and $300,000 of debt. The income for the
year is $55,000.
a. Calculate the ROA.
b. Determine the return on shareholders’ equity.
c. If the asset turnover ratio is 2.2 times, what is the profit margin?
17. Baker Oats had an asset turnover of 1.6 times per year.
a. If the return on total assets (investment) was 11.2 percent, what was Baker’s
profit margin?
b. The following year, on the same level of assets, Baker’s assets turnover declined
to 1.4 times and its profit margin was 8 percent. How did the return on total
assets change from that of the previous year?
18. K Y Shoe Stores has $2,000,000 in sales and turns over its assets 2.5 times per year. The
firm earns 3.8 percent on each sales dollar. It has $60,000 in current liabilities and
$140,000 in long‐term liabilities.
a. What is its return on shareholders’ equity?
b. If the asset base remains the same as computed in part a, but total asset
turnover goes up to 3, what will be the new return on shareholders’ equity?
Assume the profit margin stays the same as does current and long‐term
liabilities.

19. Assume the following data for Interactive Technology and Silicon Software.

Interactive Technology (IT) Silicon Software (SS)

Net income $ 15,000 $ 50,000

Sales 150,000 1,000,000

Total assets 160,000 400,000

Total debt 60,000 240,000

Shareholders’ equity 100,000 160,000

a. Compute return on shareholders’ equity for both firms. Which firm has the
higher return?
 b. Compute the following ratios for both firms:
Net income/sales
Net income/total assets
Sales/total assets
Debt/total assets
c. Discuss the factors that added or detracted from each firm’s return on
shareholders’ equity.
20. A firm has sales of $1.2 million, and 10 percent of the sales are for cash. The year‐end
accounts receivable balance is $360,000. What is the average collection period?
21. The Chamberlain Corporation has accounts receivable turnover equal to 12 times. If
accounts receivable are $90,000, what is the value for average daily credit sales?
22. 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?

23. 2GFU Corporation the following financial data for the years 20XX and 20XY:

20XX 20XY

Sales $3,500,000 $4,200,000

Cost of goods sold 2,500,000 3,500,000

Inventory 250,000 300,000

a. Compute inventory turnover based on sales for each year.
b. Compute inventory turnover based on cost of goods sold for each year.
c. What observations can you reach based on the calculations in parts a and b?
24. Jim Kovacs Company makes supplies for schools. Sales in 20XX were $4,000,000. Assets
were as follows:

Cash $ 100,000

Accounts receivable 800,000

Inventory 400,000

Net plant and

500,000
equipment

Total assets $1,800,000

a. Compute the following:

1. Accounts receivable turnover
2. Inventory turnover
3. Capital asset turnover
 4. Total asset turnover
b. In 20XY, sales increased to $5,000,000 and the assets for that year were as
follows:

Cash $ 100,000

Accounts receivable 900,000

Inventory 975,000

Net plant and equipment 550,000

Total assets $2,525,000

Compute the same four ratios as in part a.
c. Indicate if there is an improvement or decline in total asset turnover, and based
on the other ratios, explain the reasons this development has taken place.
25. The balance sheet for Bryan Corporation is given below. Sales for the year were
$3,040,000, with 75 percent of sales sold on credit.
1.
BRYAN CORPORATION

Balance Sheet Dec. 31, 20XX

Assets Liabilities and Equity

Cash $ 60,000 Accounts payable $ 220,000

Accounts receivable 240,000 Accrued taxes 30,000

Inventory 350,000 Bonds payable (long term) 150,000

Plant and equipment 410,000 Common stock 280,000

Retained earnings 380,000

Total assets $1,060,000 Total liabilities and equity $1,060,000

Compute the following ratios:
a. Current ratio
b. Quick ratio
c. Debt‐to‐total‐assets ratio
d. Asset turnover
e. Average collection period
26. The Simmons Corporation’s income statement is given below.
a. What is the times interest earned ratio?
b. What would be the fixed charge coverage ratio?

SIMMONS CORPORATION

Sales $200,000

Cost of goods sold 116,000

 SIMMONS CORPORATION

Gross profit 84,000

Fixed charges (other than interest) 24,000

Income before interest and taxes 60,000

Interest 12,000

Income before taxes 48,000

Taxes 24,000

Income after taxes $ 24,000

27. Using the income statement for the Sports Car Tire Company, compute the following ratios:
a. The interest coverage
b. The fixed charge coverage
The total assets for this company equal $40,000. Set up the formula for the DuPont system
of ratio analysis, and compute c, d, and e.
c. Profit margin
d. Total asset turnover
e. Return on assets (investment)

THE SPORTS CAR TIRE COMPANY

Sales $20,000

Less: Cost of goods sold 9,000

Gross profit 11,000

Less: Selling and administrative expense 4,000

Less: Lease expense 1,000

Operating profit* 6,000

Less: Interest expense 500

Earnings before taxes 5,500

Less: Taxes (40%) 2,200

Earnings after taxes $ 3,300

f. *Equals income before interest and taxes
28. Century Plaza Enterprises has three subsidiaries:

Grand Vista Bronte Caledon

Sales $16,000,000 $4,000,000 $8,000,000

Net income after tax 1,000,000 160,000 600,000

 Grand Vista Bronte Caledon

Assets 5,000,000 2,000,000 5,000,000

a. Which subsidiary has the lowest return on sales?
b. Which subsidiary has the highest ROA?
c. Calculate the ROA for the whole company.
d. If Century Plaza sells the $5,000,000 investment in Caledon and reinvests same
amount in Grand Vista at the same rate of ROA as currently in Grand Vista,
calculate the new ROA for the whole company.
29. In January 2010 the Status Quo Company was formed. Total assets were $500,000, of which
$300,000 consisted of capital assets. Status Quo uses straight‐line amortization, and in 2010 it
estimated its capital assets to have useful lives of 10 years. Aftertax income has been $26,000 per
year each of the last 10 years. Other assets have not changed since 2010.
a. Compute ROA at year‐end for 2010, 2012, 2015, 2017, and 2019.
b. To what do you attribute the phenomenon shown in part a?
c. Now assume income increased by 10 percent each year. What effect would this
have on your above answers? Comment.
30. JAS Clocks Corp. shows the following data:

Year Net Income Total Assets Shareholders’ Equity Total Debt

20XW $110,000 $1,500,000 $ 750,000 $ 750,000

20XX 125,000 1,900,000 825,000 1,075,000

20XY 150,000 2,400,000 900,000 1,500,000

20XZ 175,000 3,000,000 1,000,000 2,000,000

a. Compute the ratio of net income to total assets for each year and comment on
the trend.
b. Compute the ratio of net income to shareholders’ equity and comment on the
trend. Explain why there may be a difference in the trends between
parts a and b.
31. Quantum Moving Company has the following data. Industry information is also shown.

Company Data Industry Data on

Year Net Income Total Assets Net Income/Total Assets

20XX $ 350,000 $ 2,800,000 11.5%

20XY 375,000 3,200,000 8.4

20XZ 375,000 3,750,000 5.5

Year Debt Total Assets Debt/Total Assets

20XX $1,624,000 $2,800,000 54.1%

20XY 1,730,000 3,200,000 42.0

20XZ 1,900,000 3,750,000 33.4

As an industry analyst comparing the firm to the industry, are you likely to praise or criticize the firm in
terms of:
a. Net income/total assets?
b. Debt/total assets?
32. The United World Corporation has three subsidiaries.

Computers Magazines Cable TV

Sales $ 16,000,000 $4,000,000 $8,000,000

Net income (after taxes) 1,000,000 160,000 600,000

Assets 5,000,000 2,000,000 5,000,000

a. Which division has the lowest return on sales?
b. Which division has the highest ROA?
c. Compute the ROA for the entire corporation.
d. If the $5,000,000 investment in the cable TV division is sold and redeployed in
the computer subsidiary at the same rate of ROA currently achieved in the
computer division, what will be the new ROA for the entire corporation?
33. The Quinn Corporation shows the following income statement. The firm uses FIFO inventory
accounting.

QUINN CORPORATION

Income Statement for 20XX

Sales $ 100,000 (10,000 units at $10)

Cost of goods sold 50,000 (10,000 units at $5)

Gross profit 50,000

Selling and administrative expense 5,000

Amortization 10,000

Operating profit 35,000

Taxes (34%) 11,900

Aftertax income $ 23,100

a. Assume that the same 10,000 unit volume is maintained in 2016, but the sales
price increases by 10 percent. Because of FIFO inventory policy, old inventory
will still be charged off at $5 per unit. Also assume that selling and
administrative expense will be 5 percent of sales and amortization will be
unchanged. The tax rate is 34 percent. Compute aftertax income for 20XY. Page
91
b. In part a, by what percent did aftertax income increase as a result of a 10
percent increase in the sales price? Explain why this impact occurred.
c. Now assume in 20XZ the volume remains constant at 10,000 units, but that the
sales price decreases by 15 percent from its 20XY level. Also, because of FIFO
inventory policy, cost of goods sold reflects the inflationary conditions of the
 prior year and is $5.50 per unit. Further assume that selling and administrative
expense will be 5 percent of sales and amortization will be unchanged. The tax
rate is 34 percent. Compute aftertax income.
34. Construct the current assets section of the balance sheet from the following data.

Yearly sales (credit) $420,000

Inventory turnover (from sales) 7 times

Current liabilities $ 80,000

Current ratio 2

Quick ratio 1.25

Average collection period 36 days

Current assets:

Cash $_______

Accounts receivable _______

Inventory _______

Total current assets _______

35. The Shannon Corporation has sales of $750,000, all on credit and COGS of $500,000. Given the
following ratios, fill in the balance sheet below.

Total assets turnover 2.5 times

Cash to total assets 2.0%

Accounts receivable turnover 10.0 times

Inventory turnover 10.0 times

Current ratio 2.0 times

Debt to total assets 45.0%

SHANNON CORPORATION

Balance Sheet Dec. 31, 20XX

Liabilities and Shareholders’

Assets
Equity

Cash _________ Current debt _________

Accounts receivable _________ Long-term debt _________

Inventory _________ Total debt _________

 Total current
_________ Equity _________
assets

Capital assets _________ Total debt and

Total assets _________ shareholders’ equity _________

36. We are given the following information for Pettit Corporation.
Sales (credit) $3,000,000

Cash 150,000

Inventory 850,000

Current liabilities 700,000

Asset turnover 1.25 times

Current ratio 2.50 times

Debt-to-assets ratio. 40%

Receivables turnover 6 times

Current assets are composed of cash, marketable securities, accounts receivable, and inventory. Calculate
the following balance sheet items:
a. Accounts receivable
b. Marketable securities
c. Capital assets
d. Long‐term debt
37. The following data are from U Guessed It Company’s financial statements.
U Guessed It manufactures board games for young adults, and it competes with Marker Brothers and
Bilton Radley. Sales (all credit) were $20 million for 20XX. COGS were 80 percent of sales.

Sales to total assets 2.0 times

Total debt to total assets 40%

Current ratio 3.0 times

Inventory turnover 4.0 times

Average collection period 18.0 days

Capital asset turnover 5.0 times

Fill in the brief balance sheet:

Cash _________ Current debt _________

Accounts receivable _________ Long-term debt _________

Inventory _________ Total debt _________

 Total current
_________ Equity _________
assets

Capital assets _________ Total debt and

_________
Total assets _________ shareholders’ equity

38.Using the financial statements for the Snider Corporation, calculate the 13 basic ratios found in the
chapter.

SNIDER CORPORATION

Balance Sheet December 31, 20XX

Assets

Current assets:

Cash $ 50,000

Marketable securities 20,000

Accounts receivable (net) 160,000

Inventory 200,000

Total current assets 430,000

Investments 60,000

Plant and equipment 600,000

Accumulated amortization 190,000

Net plant and equipment 410,000

Total assets $900,000

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable $ 90,000

Notes payable 70,000

Accrued taxes 10,000

Total current liabilities 170,000

Long-term liabilities:

Bonds payable 150,000

Total liabilities 320,000

 SNIDER CORPORATION

Balance Sheet December 31, 20XX

Assets

Shareholders’ equity

Preferred stock 100,000

Common stock 270,000

Retained earnings 210,000

Total shareholders’ equity 580,000

Total liabilities and shareholders’ equity $900,000

SNIDER CORPORATION

Income Statement

Year ending December 31, 20XX

Sales (on credit) $ 1,980,000

Cost of goods sold 1,280,000

Gross profit 700,000

Selling and administrative expenses* 475,000

Operating profit (EBIT) 225,000

Interest expense 25,000

Earnings before taxes (EBT) 200,000

Taxes 80,000

Earnings after taxes (EAT) $ 120,000

38. *Includes $35,000 in lease payments.
39. Using the financial statements of Jet Boat Ltd., calculate the 13 basic ratios found in this chapter.
Comment briefly on the ratios that might be worth further investigation. Explain why.
JET BOAT LTD.

Balance Sheet

December 31, 20XX

Assets

Current assets:

Cash $ 40,000
 JET BOAT LTD.

Balance Sheet

December 31, 20XX

Assets

Marketable securities 85,000

Accounts receivable (net) 100,000

Inventory 375,000

Total current assets 600,000

Net plant and equipment 600,000

Total assets $ 1,200,000

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable $ 100,000

Bank loans 125,000

Accrued expenses 25,000

Total current liabilities 250,000

Long-term liabilities:

Bonds payable* 500,000

Total liabilities 750,000

Shareholders’ equity:

Common stock 350,000

Retained earnings 100,000

Total shareholders’ equity 450,000

Total liabilities and shareholders’ equity $ 1,200,000

Table 2, titled JET BOAT LTD. Income Statement, year ending December 31, 20 XX, contains
two unlabelled columns.

*Sinking fund provision of $50,000 a year.

 JET BOAT LTD.

Income Statement

Year ending December 31, 20XX

Sales (on credit) $ 2,900,000

Less: cost of goods sold 2,465,000

Gross profit 435,000

Selling and administrative expenses 250,000

Operating profit (EBIT) 185,000

Interest expense 94,000

Earnings before taxes (EBT) 91,000

Taxes (20%) 18,200

Earnings after taxes (EAT) $ 72,800

40. The financial statements for Jones Corporation and Smith Corporation are shown below.
a. To which company would you, as credit manager for a supplier, approve the
extension of (short‐term) trade credit? Why? Compute all ratios before
answering.
b. In which corporation would you buy shares? Why?

JONES CORPORATION

Current Assets Liabilities

Cash $ 20,000 Accounts payable $100,000

Bonds payable (long-

Accounts receivable 80,000 80,000
term)

Inventory 50,000

Total current assets 150,000 Total liabilities 180,000

Long-Term Assets Shareholders’ Equity

Capital assets 500,000 Common stock 220,000

Acc. amortization 150,000 Retained earnings 100,000

Net capital assets 350,000

$500,000 $500,000

Sales (on credit) $ 1,250,000

Cost of goods sold 750,000

 JONES CORPORATION

Gross profit 500,000

Selling and administrative

257,000
expense*

Amortization expense 50,000

Operating profit 193,000

Interest expense 8,000

Earnings before taxes 185,000

Tax expense (50%) 92,500

Net income $ 92,500

*Includes $7,000 in lease payments.

Note: Jones Corporation has 75,000 shares outstanding.

SMITH CORPORATION

Current Assets Liabilities

Cash $ 35,000 Accounts payable $ 75,000

Bonds payable @
Marketable securities 7,500
10%

Accounts receivable 70,000 (long-term) 210,000

Inventory 75,000

Total current assets 187,500 Total liabilities 285,000

Long-Term Assets Shareholders’ Equity

Capital assets 500,000 Common stock 105,000

Acc. amortization 250,000 Retained earnings 47,500

Net capital assets 250,000

$437,500 $437,500

Sales (on credit) $ 1,000,000

Cost of goods sold 600,000

Gross profit 400,000

 SMITH CORPORATION

Selling and administrative

224,000
expense*

Amortization expense 50,000

Operating profit 126,000

Interest expense 21,000

Earnings before taxes 105,000

Tax expense (50%) 52,500

Net income $ 52,500

*Includes $7,000 in lease payments.

Note: Smith Corporation has 75,000 shares outstanding.
41. The following ratio calculations are based on three years of financial statements and are
compared to the industry standards. The retail company has had some growth during this period
but has found that its profitability is less than satisfactory. Examine the ratios to identify possible
reasons for the profitability concerns.

20XX 20XW 20XV Industry

Profit margin 4.3% 4.0% 3.5% 4.2%

Return on assets 5.6% 4.8% 3.9% 6.4%

Return on equity 11.2% 9.8% 7.7% 13.7%

Gross margin 43% 43% 43% 40%

Receivables turnover 7.8× 7.93× 8.1× 7.3×

Average collection period 47 days 46 days 45 days 50 days

Inventory turnover 8.1× 8.23× 8.3× 8.3×

Capital asset turnover 3.3× 3.03× 2.7× 3.5×

Total asset turnover 1.3× 1.23× 1.1× 1.5×

Current ratio 2.2 2.3 2.3 2.1

Quick ratio 1.9 2.0 2.0 1.7

Debt to total assets 50% 50% 50% 54%

Times interest earned 8.1× 8.23× 8.1× 7.2×

Fixed charge coverage 5.5× 4.53× 4.0× 5.1×