Your assignment for this week is to complete the following questions and problems from Chapter 3. Please submit your…

Chapter 3 Questions

(3-3) Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a
drop in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed
assets turnover ratio have remained constant. What explains these changes?

(3-5) How might (a) seasonal factors and (b) different growth rates distort a comparative ratio
analysis? Give some examples. How might these problems be alleviated?

(3-6) Why is it sometimes misleading to compare a company’s financial ratios with those of
other firms that operate in the same industry?

Chapter 3 Problems

(3-1) Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What
is the level of its accounts receivable? Assume there are 365 days in a year.

(3-2) Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25
million in long-term debt. What is the debt ratio?

(3-3) Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its
balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and
$6 billion in common equity. It has 800 million shares of common stock outstanding.
What is Winston’s market/book ratio?

(3-7) Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5,
and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s
level of inventories?

(3-11) Complete the balance sheet and sales information in the table that follows for J. White
Industries using the following financial data:

Total assets turnover: 1.5
Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%
Total liabilities-to-assets ratio: 40%
Quick ratio: 0.80
Days sales outstanding (based on 365-day year): 36.5 days
Inventory turnover ratio: 3.75

Partial Income Statement Information
Sales _______
Cost of goods sold _______
Balance Sheet
Cash _______
Accounts payable ______
Accounts receivable _______
Long-term debt 50,000
Inventories _______
Common stock ______
Fixed assets _______
Retained earnings 100,000
Total assets $400,000
Total liabilities and equity ______

(3-13) Data for Lozano Chip Company and its industry averages follow.

a. Calculate the indicated ratios for Lozano.
b. Construct the extended Du Pont equation for both Lozano and the industry.
c. Outline Lozano’s strengths and weaknesses as revealed by your analysis.

Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands
of Dollars)

Cash $ 225,000
Accounts payable $ 601,866
Receivables 1,575,000
Notes payable 326,634
Inventories 1,125,000
Other current liabilities 525,000
Total current assets $2,950,000
Total current liabilities $1,453,500
Net fixed assets 1,350,000
Long-term debt 1,068,750
__________ Common equity 1,752,750
Total assets $4,275,000
Total liabilities and equity $4,275,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2013
(Thousands of Dollars)

Sales $ 7,500,000
Cost of goods sold 6,375,000
Selling, general, and administrative expenses 825,000
Earnings before interest and taxes (EBIT) $ 300,000
Interest expense 111,631
Earnings before taxes (EBT) $ 188,369
Federal and state income taxes (40%) 75,348
Net income $ 113,022

Ratio Lozano Industry Average
Current assets/Current liabilities__________ 2.0
Days sales outstanding (365-day year)__________ 35.0 days
COGS/Inventory __________ 6.7
Sales/Fixed assets __________ 12.1
Sales/Total assets __________ 3.0
Net income/Sales __________ 1.2%
Net income/Total assets __________ 3.6%
Net income/Common equity __________ 9.0%
Total debt/Total assets __________ 30.0%
Total liabilities/Total assets__________ 60.0%