Problem no.

BALANCE SHEET ANALYSIS Complete the balance sheet and sales information using the
following financial data:

Debt ratio: 50%

Current ratio: 1.8x
Total assets turnover: 1.5x
Days sales outstanding: 36.5 days
Gross profit margin on sales: (Sales - Cost of goods sold)/Sales = 25%
Inventory turnover ratio: 5x
Calculation is based on a 365-day year.

BALANCE SHEET

Cash _____ Accounts payable _____

Accounts receivable _____ Long-term debt 60,000
Inventories _____ Common stock _____
Fixed assets _____ Retained earnings 97,500
Total assets $ 300,000 Total liabilities and equity _____
Sales _____ Cost of goods sold _____

Workings:
Total assets turnover is 1.5x, the total assets are $ 300,000.

Sales

𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑆𝑎𝑙𝑒𝑠
1. 5 $300,000
𝑆𝑎𝑙𝑒𝑠 = 1. 5 𝑥 $300, 000
= $450,000

Thus, the total sales are $450,000.

Accounts receivable
Day Sales Outstanding is 36.5 days.

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝐷𝑆𝑂 = 𝑆𝑎𝑙𝑒𝑠
𝑥 365

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
36. 5 $450,000
𝑥 365

Accounts receivable = $45,000

Thus, accounts receivable is $45,000.

Inventory

The inventory turnover ratio is 5.

𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

$450,000
5= 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

$450,000
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 5

= $90,000

Thus, inventory is $90,000.

Fixed assets

The fixed asset turnover ratio is 3.

𝑆𝑎𝑙𝑒𝑠
𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

$450,000
3= 𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡

$450,000
𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 = 3

= $150,000

Thus, the fixed asset is $150,000.

Cash

Total Assets = Cash + Accounts Receivable + Inventory + Fixed Assets

300,000 = Cash + 45,000 + 90,000 + 150,000

Cash = 300,000 - 285,000
= $ 15,000

The total cash is $ 15,000.

Sales

Total Asset turnover ratio = Sales x 365

Total Assets
1.5 = Sales
300,000
Sales = 1.5 x 300,000
= $450,000

The total sales are $450,000

Accounts Receivable

Day sales outstanding is 36.5 days

DSO = Accounts Receivable x 365

x 365

36.5 = Accounts Receivable x 365

450,000
= 45,000

Accounts Receivable is $45,000

Inventory

The inventory ratio is 5

Inventory turnover = Sale X 5 = 450,000

Inventory Inventory
 Inventory = 450,000 = $90,000
5

The total inventory is $90,000

Fixed Assets

The fixed asset turnover ratio is 3

Fixed asset turnover = Sales

Fixed Assets

3 = 450,000 = $150,000
3

The fixed asset is $150,000

Current Liabilities

The current ratio is 2

Current Ratio = Current Assets

Current Liabilities
= Cash + Accounts Receivable + Inventory
Current Liabilities

2 = 15,000 + 45,000 + 90,000 = 150,000

Current Liabilities 2

Current Liabilities = $75,000

Current Liabilities is $75,000

Common Stock

Total liabilities = Long-term debt + Current liabilities + Retained earnings + Common stock
$300,000 = $60, 000 + $75, 000 + $97, 500 + Common stock

Common stock = $300, 000 - $232, 500

= $67,500
The common stock is $67,500.

Cost of goods sold

The gross profit margin is 25%.

Cost of goods sold = Sales × (1 - Gross profit margin)

= $450,000 x (1-0.25)
= $337,500

The cost of goods sold is $337,500.

Balance Sheet

Cash $15,000 Current Liabilities $75,000

Accounts Receivable $45,000 Long - Term Debt $60,000

Inventories $90,000 Common Stock $67,500

Fixed Assets $150,000 Retained Earnings $97,500

Total Assets $300,000 Total Liabilities & Equity $300,000

Sales $450,000 Cost of Goods Sold $337,500

Problem 4:
In this task, we are asked to perform a financial analysis of the company using the DuPont
equation.

A. Calculate those ratios that you think would be useful in this analysis.

- A couple of ratios that we need to calculate in order to resolve the DuPont

equation are:

1. Total asset turnover ratio - determines the effectiveness of the company's

usage of assets to generate sales.

Givens:
Total Sales - $795
Total Asset - $450
Total asset turnover ratio (industry average) - 3%

Formula:
Total asset turnover ratio = Sales/Total Assets
​
Solution:
Total asset turnover ratio = $795/$450

Total asset turnover ratio = 1.77%

2. Return on total assets - a percentage of the total asset compared to the

realized net income.

Givens:
Net Income - $27
Total Asset - $450
Return on asset (industry average) - 9%

Formula:
Return on Asset = Net Income/ Total Asset
​
Solution:
Return on Asset = $27/$450 x 100
= 0.06 x 100
Return on Asset = 6%
 3. Return on equity - a percentage of return earned on the common stock.

Givens:
Net Income - $27
Equity - $315
Return on equity (industry average) - 12.86%

Formula:
Return on Equity = Net Income/ Equity
​
Solution:
Return on Equity = $27/$315 x 100
= 0.0857 x 100
Return on Asset = 8.57%

4. Profit Margin - a percentage of sales to profit.

Givens:
Net Income - $27
Sales - $795
Profit margin (industry average) - 3%

Formula:
Profit Margin = Net Income/Sales
​
Solution:
Profit Margin = $27/$795 x 100
= 0.034 x 100
Return on Asset = 3.4 %

B. Construct a DuPont equation and compare the company's ratios to the industry average
ratios.

Profit Margin = Net Income / Net Sales

= 3.4%

Total Asset Turnover = Net sales / Average Total Assets

= 795.0 / 450
= 1.77%
 Financial Leverage = Total Assets / Total Equity
= 450 / 450
= 1

ROE = Profit Margin X Total Asset Turnover X Financial Leverage

= 3.4 X 1.77 X 1
= 8.57 %

Firm Industry Comment

Profit Margin 3.4 % 3% Good

Total Asset 1.77% 3x Poor

Turnover

Financial 1
Leverage

C. Do the balance sheet accounts or the income statement figures seem to be primarily
responsible for the low profits?
- When we compare the firm's ratios to those of its industry. We can observe that the profit
margin on the income statement, at 3.4%, compares fairly to the industry average.
However, the total assets turnover ratio, fixed assets turnover ratio, inventory turnover,
ROE, and ROA are all much lower than the industry average. This leads to the
conclusion that the balance sheet accounts are to blame for the firm's bad performance.

We conclude that the company's ROA is lower than the industry's ROA because its
assets are too huge in relation to its net income. When we compare this to the firm's
turnover ratios, we observe that the company appears to be inefficient in asset
management, with turnover ratios that are significantly lower than the industry average
and out of date assets.

D. Which specific accounts seem to be most out of line relative to other firms in the industry?
- A review of inventory turnover ratios reveals that other companies in the industry appear
to be able to get by with half as much inventory per unit of sales as the firm. If the
company's inventory could be reduced, revenues may be generated to retire debt,
lowering interest charges, increasing profits, and strengthening the debt position. A little
lower-than-average fixed assets turnover ratio suggests that there may be some surplus
investment in fixed assets, possibly indicating excess capacity.
E. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how
might that affect the validity of your ratio analysis? How might you correct for such potential
problems?
- The validity of the ratio analysis may be impacted by the firm's seasonal sales pattern or
year-over-year growth, which might alter key figures in the income statement and
balance sheet. When computing turnover ratios, it is preferable to utilize average data
from impacted accounts to help offset such issues.