CHAP 3 GITMAN SOLVED EXERCISES

Exercises:
P3.14 Josh liquidity ratio.
ACCOUNT
AMOUNT
Classification
Cash
$3,200.00
A.C.
Negotiable values
1,000.00
A.C.
Checking accounts
800.00
A.C.
Credit card payments
1,200.00
PC
Invoices payable short term
900.00
PC

a) Calculate Josh's quick ratio.

Liquidity ratio = AC/PC

5,000.00
2.38

2,100.00

b) Several of Josh's friends have told him that they have liquidity ratios of approximately
1.8 How would you analyze Josh's liquidity in relation to that of his friends?
Josh's liquidity is acceptable, he has the capacity to meet his short-term obligations, since
for every $1 of debt he has $2.38 to solve it, or 238% to solve his obligations. Likewise,
Josh's friends have acceptable liquidity, for every $1 of debt he has $1.80 to pay it.

P3.15 Wilkins Manufacturing Inventory Management

Quarter
Inventory
1
$400,000.00
2
800,000.00
3
1,200,000.00
4
200,000.00

a) Calculate the average quarterly inventory and use it to determine the company's
inventory turnover and the average age of inventory.
Quarter
Inventory
1
$400,000.00
2
800,000.00
3
1,200,000.00
4
200,000.00

AVERAGE
$650,000.00

Sales
$4,000,000.00
Gross profit 40%
1,600,000.00
Cost of goods sold
2,400,000.00
Inventory Average
650,000.00

Inventory rotation
Cost of Sales ÷ Inventory
$2,400,000 ÷ $650,000
3.69 Times

Average inventory age = (365 ÷ 3.69) = 98.85 days

b) Assuming the company is in an industry with an average inventory turnover of 2.0, how
would you evaluate Wilkins' inventory activity?

Wilkins Manufacturing company's inventory turnover is acceptable since it exceeds the

industry average ratio. But it would be necessary to analyze more deeply why this excess
is due, since as it may be that good inventory management is being carried out, it may
also be that it is selling its merchandise at lower prices taking into account the strategies of
its competitors, such as due to festive seasons, discounts, promotions, etc., but this also
has an impact on the level of inventories with which the company must operate and then it
will not be able to meet the demand for the products.

P3.16 Accounts Receivable Management Blair Supply.

Month
Amount Receivable
July
$3,875.00
August
$2,000.00
September
34,025.00
October
15,100.00
November
52,000.00
December
193,000.00
Accounts receivable at the end of the year
$300,000.00

Annual sales = $2,400,000.00

Credit conditions = 30 days.
a) Use the year-end total to evaluate this company's collection system.
Average collection period = Accounts receivable ÷ average daily sales/365 days.

Average collection period

$300,000.00
45 days

$2,400,000/365 days

The company Blair Supply takes 45 days to recover its accounts receivable, which
indicates that it exceeds 15 days compared to the collection policy of 30 days, this means
that it must pay attention to the management of accounts receivable and follow up on the
collections department which is showing deficiencies in its management.

b) If 70% of the company's sales occur between July and December, would this affect the
validity of the conclusion you obtained in part a? explain.

70% sales between July and December

$2,400,000 x 70% = $1,680,000.00

Average collection period

$300,000.00
= 65 days

$1. 680,000.00/365

It does not affect the conclusion of subsection a), it can be seen that taking these data as
references, the company mostly exceeds 65 days of collections based on the 30-day
policy. It can be seen that there are deficiencies in the management of accounts
receivable, since credit sales for the months of October and November are insolvent with
more than 30 days of delays.

P3.17 Interpretation of liquidity and activity ratios Bluegrass Natural Foods, inc.
Reason
Bluegrass
Industry Standard
Current Liquidity
4.50
4.00
Quick Reason
2.00
3.10
Inventory rotation
6.00
10.40
Average Collection Period
73 days
52 days
Average Payment Period
31 days
40 days

a) What recommendations regarding inventory quantity and management would you

make to owners?
Perform a review of your inventories since if you analyze the inventory turnover it is low
compared to the industry which may mean that Bluegrass has excess inventory, which can
be supported with the liquidity ratio and the quick ratio. Although the liquidity ratio is above
the industry, when determining the quick ratio it can be seen that it is low in relation to the
industry, which alerts us that there is excess inventory for reasons that sales have
decreased and may even There is inventory that is not in a condition to be sold due to
shrinkage or deterioration.

b) What recommendations regarding the amount and management of accounts receivable

would you make to the owners?
Bluegrass must review its credit policies which may be deficient for the administration of its
accounts receivable, in the same way it must review the management of the collections
department since clients may be behind or in default, and there is no proper follow-up.
This can be seen in that the average collection period is 73 days, which exceeds the
industry's 52 days.
c) What recommendations regarding the amount and management of accounts payable
would you make to owners?
Bluegrass should take a hard look at whether paying accounts payable in 31 days versus
the industry standard of 40 days is efficient and convenient for you. Since it can mean a
risk in your liquidity ratio and quick ratio because it takes 21 days longer to recover your
credit sales, you have a low inventory turnover and you are making your payments 9 days
in advance Bluegrass.
d) What general results do you expect from your recommendations? Why might your
recommendations not be effective?
The overall results are for Bluegrass to increase its inventory turnover equal to the industry
average through increased sales with promotions or discounts, or by reducing the
purchasing or manufacturing of inventory and discarding damaged or shrink inventory. We
also implement a policy of efficient credit that allows your clients to pay on time or sooner
by implementing discounts for prompt payment, this would keep your liquidity ratios and
quick ratio stable in relation to the industry. In the case of accounts payable, you could
make the payment under the established conditions so as not to compromise your liquidity
or negotiate discounts for prompt payments with your suppliers.
They could not be effective due to their lack of implementation, since it requires the
company to analyze and adjust its payment and credit policies, which can lead to the loss
of its clients and suppliers due to implementing strict policies.

P3.18 Creek Enterprises Debt Analysis.

Reason
Creek Enterprise
Industry average

Debt ratio
0.73
0.51

Fixed interest charge ratio

3.00
7.30

Fixed payment coverage ratio

1.19
1.85

Debt ratio
PT/AT
36,500,000.00
0.73

50,000,000.00

Fixed interest charge ratio

EBIT/INTEREST
3,000,000.00
3.00

1,000,000.00

Fixed payment coverage ratio

UAII + LEASES
INTEREST + LEASES + (MAIN PGO + ACC DIVIDEND. PREF.) X ({1 / (1- T})

3,000,000 +200,000
1,000,000 + 200,000 + (800,000 + 100,000) x (1 / { 1 - 0.4})

3,200,000.00
1.19
2,700,000.00

The loan should be rejected as Creek Enterprise is over-leveraged and its repayment
capacity is much lower than necessary compared to the industry.

P3.19 Common Size AnalysisCreek Enterprises.

CREEK ENTERPRISE
PROFIT AND LOSS STATEMENT COMMON SIZE
Description
2012
2011
Income
100.00%
100.00%
Cost of Sale
70.00%
65.90%
Gross profit
30.00%
34.10%
Operating expenses

Sales Cats
10.00%
12.70%
General and adminsitrative expenses
6.00%
6.30%
Lease Expenses
0.67%
0.60%
Depreciation Expenses
3.33%
3.60%
Total Operating Expenses
20.00%
23.20%
Operating Profit
10.00%
10.90%
Cats Interests
3.33%
1.50%
Profit before taxes
6.67%
9.40%
Taxes
2.67%
3.80%
Profit after taxes
4.00%
5.60%
Preferred stock dividends
0.33%
0.10%
Earnings Available Common Stock
3.67%
5.50%

What areas require further analysis?

It can be seen that sales have decreased and the cost of sales has increased. Operating
expenses have decreased, which may be favorable, although it may also be poor sales
management. For this reason, sales have decreased and interest on debt has increased,
which means that the company has too much debt.
Areas of further analysis should include increasing cost of sales and debt level and
declining sales.
P3.20 Relationship between financial leverage and financial profit.
On this page it is resolved in English:
http://isites.harvard.edu/fs/docs/icb.topic988467.files/Chapter_3_Solutions%20.pdf

P3.21 Mastery of reasons McDougal Printing Inc.

McDougal Printing Inc. Year 20122

Sales
40,000,000.00
Gross profit margin
80%
Operating profit margin
35%
Net profit margin
8%Performance total assets
16%
Equity performance
twenty%
Total asset turnover
2%
Average collection period
62.2 days

Determine:
a) Gross profit
$32,000,000.00
b) Cost of goods sold
8,000,000.00
c) Operating profit
14,000,000.00
d) Operating expenses
18,000,000.00
e) Earnings for common shares
3,200,000.00
f) Total assets
20,000,000.00
g) Total capital common shares
16,000,000.00
h) Accounts receivable
6,816,438.29

P3.22 Analysis of a representative sample Fox Manufacturing.

a) Prepare and interpret a complete analysis of the reasons for the company's operations
in 2012.

Reason
Industry Standard
Fox 2012
Current Liquidity
2.35
1.84
Quick Reason
0.87
0.75
Inventory rotation
4.55
5.61
Average Collection Period
35.8 days
20.5 days
Total asset turnover
1.09
1.47
Debt ratio
0.3
0.55
Fixed interest charge ratio
12.3
8
Gross profit margin
0.202
0.233
Operating profit margin
0.135
0.133
Net profit margin
0.091
0.072
Total asset performance
0.099
0.105
Equity performance
0.167
0.234
Share Earnings
$3.10
$2.15

Liquidity: They show a deficit compared to the industry standard.

Activity: They show rapid turnover compared to the industry. It will be necessary to analyze
in more detail because a high inventory turnover rate can mean a low level of inventory,
which results in a lack of inventory of merchandise and a decrease in sales. In the case of
the average collection period, it may mean that the collections department is very efficient
or that not many credit sales are made.
Debt: Shows a higher debt ratio than the industry average, which means it has more fixed
interest obligations that may affect the ability to meet obligations.
Profitability: Shows a higher gross profit margin in relation to the industry, which means an
increase in sales prices or a reduction in sales costs. In the case of the operating profit
margin, it is the same as the industry. In the case of net profit there is a decrease which
may mean that the financial interests are higher than the industry standard. Here it is
confirmed that in the debt ratio the company presents excess compared to the industry. It
can be seen that the return on equity is higher than the industry, which means an increase
in financial leverage.
b) Summarize your findings and make recommendations.
Fox Manufacturing must improve its liquidity ratios and reduce its financial obligations, it
has greater leverage than the industry this means that due to this it results in a higher
return on equity but may have greater financial risks.
Ratio calculations:
Current Liquidity
138,300.00
1.84

75,000.00

Quick Reason
138300 - 82000
0.75

75,000.00

Inventory rotation
460,000.00
5.61

82,000.00
Average Collection Period
365
65.06

5.61

Total asset turnover

600,000
1.47

408,300.00

Debt ratio
225,000
0.55408,300.00

Fixed interest charge ratio

80,000
8.00

10,000.00

Gross profit margin

600000 - 460000
0.23

600,000.00

Operating profit margin

80,000
0.13

600,000.00

Net profit margin

42,900
0.07

600,000.00

Total asset performance

42,900
0.11

408,300.00

Equity performance
42,900
0.39

110,200.00
Share Earnings
42,900
2.15

20,000

P3.23 Analysis of financial statements Zach Indutries.

P3.24 Comprehensive Analysis of Sterling Company ratios.

Reason
2010 royal
2011 royal
Industry
2012 royal
Current Liquidity
1.40
1.55
1.85
1.67
Quick Reason
1.00
0.92
1.05
0.88
Inventory rotation
9.52
9.21
8.60
7.89
Average Collection Period
45.6 days
36.9 days
35.5 days
29.2 days
Average Payment Period
59.3 days
61.6 days
46.4 days
52.98 days
Total asset turnover
0.74
0.80
0.74
0.83
Debt ratio
0.20
0.20
0.30
0.35
Fixed interest charge ratio
8.20
7.30
8.00
6.50
Fixed payment coverage ratio
4.50
4.20
4.20
2.70
Gross profit margin
0.30
0.27
0.25
0.25
Operating profit margin
0.12
0.12
0.10
0.13
Net profit margin
0.062
0.062
0.053
0.06
Total asset performance
0.045
0.050
0.040
0.05
Equity performance
0.061
0.067
0.066
0.09
Share Earnings
$1.75
$2.20
$1.50
$3.05
Price/earnings ratio
12.00
10.50
11.20
12.95
Market/book ratio
1.20
1.05
1.10
1.16

Current Liquidity
2,000,000.00
1.67

1,200,000.00

Quick Reason
2000000 -950000
0.88

1,200,000.00

Inventory rotation
7,500,000.00
7.89

950,000.00

Average Collection Period

800,000
29.20

10000000 / 365

Average Payment Period

900,000
52.98
6200000 / 365

Total asset turnover

10,000,000
0.83

12,000,000.00

Debt ratio
4,200,000
0.35

12,000,000.00

Fixed interest charge ratio

1,300,000
6.50
200,000.00

Fixed payment coverage ratio

1300000 + 50000
1350000.00
2.7

200000 + 50000 + {(100000 + 50000) x {1/(1-0.4)

500000.00

Gross profit margin

2,500,000
0.25

10,000,000.00

Operating profit margin

1,300,000
0.13

10,000,000.00

Net profit margin

610,000
0.06

10,000,000.00
Total asset performance
610,000
0.05

12,000,000.00

Equity performance
610,000
0.090

6,800,000.00

Share Earnings
610,000
3.05

200,000

Price Earning Ratio

39.50
12.95

3.05
Market/book ratio
39.50
1.16

3. 4

Liquidity: It is below the industry standard, however it remains stable for three years.
Activity: The collection period has decreased which means that it has improved, it is
observed that inventory turnover has decreased compared to the industry. The average
payment period exceeds the industry although a decrease can be seen compared to the
previous two years.
Indebtedness: The debt ratio increase in relation to the previous two years slightly exceeds
the industry standard, the interest charge ratio has decreased in relation to the two years
and compared to the industry as well as the coverage of fixed payments indicating that the
company is at risk of not meeting its fixed charges and interest payments.
Profitability: The gross profit margin has decreased in relation to previous months although
it is the same with the industry, it may mean an increase in sales costs and a decrease in
sales. Operating and net profit margin have remained stable and are within the industry
range. Return on total assets and equity has increased over the past two years and
exceeds the industry standard. Earnings per share increased in 2012 compared to the
previous two years. The price-earnings ratio increased in relation to previous months and
exceeds the industry standard, which means an increase in the degree of confidence of
investors in the future.
Market: The market-book price of the company has remained stable although it decreased
in relation to 2010 and 2011 but increased in 2012.
Starling Company should not pay attention to its liquidity ratios and should avoid
increasing its debt ratios. Despite fluctuations in relation to previous years and the industry
standard, the financial situation is healthy.

P3.25 Dupont Johnson analysis system. Elizabeth worked

P3.26 Comprehensive analysis of reasons, identification of significant differences Home

Health. Elizabeth worked