Analysis of Financial Statements

Practice Problems
1. Gem Products has total assets of $5 million, a total asset turnover of 5 times for the year, net income of $500,000, and a total debt to total asset ratio of 0.20. a) b) What is its (1) net rofit mar!ins, (2) return on total assets, and (") return on e#uity$ %y ma&in! $1 million in investments to re lace outmoded e#ui ment (thereby increasin! total assets by $1 million), Gem can increase its net rofit mar!in to " ercent. 'f sales remain the same, as does the total debt to total asset ratio, (hat is the ne( (1) return on total assets and (2) return on e#uity$ )o( could Gem have achieved the same return on e#uity obtained in (b) by chan!es in the total debt to total asset ratio, instead of increasin! total assets and net rofit mar!in$

c)

2.

*om lete the balance sheet for +,* usin! the information that follo(s it. %alance sheet +,* 'ndustries -une "0, 1../ *ash $"0,000 0ccounts ayable $120,000 1ar&. 2ec. 25,000 3otes ayable 44444444 0ccounts 5ec. 4444444 0ccruals 20,000 'nventories 4444444 6otal *.7. 44444444 6otal *.0. 4444444 7on! term 8ebt 44444444 3et fi9ed assets 4444444 2t. holder:s ;#uity $<00,000 6otal liabilities = 6otal assets 4444444 2t. )older:s ;#uity 44444444 'nformation i. 2ales totaled $1,>00,000. ii. 6he !ross rofit mar!in (as 25 ercent. iii. 'nventory turnover (as <.0. iv. 6here are "<0 days in the year. v. 6he avera!e collection eriod (as ?0 days. vi. 6he current ratio (as 1.<0. vii. 6he total asset turnover ratio (as 1.20.

". ,rom the value of the different ratios !iven belo(, calculate the missin! balance sheet items and com lete the balance sheet. 2ales 0vera!e *ollection Period 'nventory 6urn over 8ebt to 0ssets 5atio *urrent 5atio 6otal 0sset 6urnover ,i9ed 0sset 6urnover 0ssets *ash 0ccounts 5ec. 'nventory Pre aid ;9 enses 6otal *urrent 0ssets ,i9ed 0ssets 6otal 0ssets 5s.<000 444444 444444 444444 444444 444444 444444 6otal 7iabilityB ;#uity 44444 5s.100,000 55@days 15 .? or ?0A " 1.< 2.. 7iabilities B ;#uity 0ccounts Payable 3otes Payable 0ccured ;9 enses 6otal *urrent 7iabilities %onds Payable *ommon 2toc& 5etained ;arnin!s <000 4444 <00 4444 4444 1<,000 44444

?.

8e(an 2alman has 5s.1,/50,000 in current assets and 5s./00,000 in current liabilities. 'ts initial inventory level is 5s.500,000, and it (ill raise funds as additional short term notes ayable and use them to increase inventory. )o( much can 8e(an:s short term debt(notes ayable) increase (ithout violatin! a current ratio of 2 to 1$ What (ill be the firm:s #uic& ratio after 8e(an has raised the ma9imum amount of short term debt$

Class Assignment Problems

1. C *o has made lan for the ne9t year.'t is estimated that the com any (ill em loy total assets of 5s.>00,000D 50A of the assets bein! financed by borro(ed ca ital at an interest of >A er year. 6he direct costs for the year are estimated at 5s.?>0,000 and all other o eratin! e9 enses are estimated at 5s.>0,000. 6he !oods (ill be sold to customers at 150 er cent of the direct costs. 6a9 rate is assumed to be 50 ercent. Eou are re#uired to calculateF (i) net rofit mar!inD (ii) return on assetsD (iii) assets turnover and (iv) return on o(ners: e#uity. 2. *om lete the balance sheet and sales information in the table that follo(s for CEG *om any, usin! the follo(in! financial dataF 8ebt ratioF 50A Huic& ratioF 0.> 6otal asset turnoverF 1.5 0vera!e collection eriodF "< days Gross rofit mar!inF 25A 'nventory turnover ratioF 5 *ash 0ccount receivable 'nventories ,i9ed assets 6otal assets 2ales 4444444 4444444 4444444 4444444 200,000 4444444 0ccounts ayable 7on!@term debt common stoc& 5etained earnin!s 6otal 7iab. = e#uity *ost of !oods sold 4444444 ?0,000 444444 <5,000 444444 444444

". 6he follo(in! information is available on the Ianier *or . %alance 2heet as of -une "0, 1... *ash = 1.2 0ccounts receivable 'nventories *urrent assets 2,<50 3et fi9ed assets $ *.2 = 5.; ",/50 $ 500 $ $ $ 0ccounts Payable %an& loan 0ccruals *urrent liabilities 7on! term debt $ ?00 $ 200 $

6otal 7iabilities 6otal 0ssets $ Income Statement for 1999 *redit sales *ost of !oods sold Gross rofit 2ellin! = 0dmin ;9 . 'nterest e9 ense Profit before ta9es 6a9es ( ??A rate) Profit after ta9es ?00 $ $ $ $ >,000 $ $ $ and ;#uity $

Jther information. *urrent ratio 8e reciation 3et rofit mar!in 8ebt K e#uity ratio 0v!. collection eriod 'nventory turnover " $500 /A 1 ?5 days "

0ssumin! that the sales and roduction are steady throu!hout a "<0@ day year, com lete the balance sheet and income statement.

?.

0bott Procesin! has a total asset turnover of 2.0 and an o eratin! rofit mar!in of 20A. 6he com any uses no financial levera!e and faces a 50A income ta9 rate *om ute the net rofit mar!in and return on total assets.