7.1 The December 31, 2014, balance sheet and income statement for May-berry Cafeterias, Inc.

are
given. Compute the specified ratios, and compare them to the industry average (better or worse).
Balance sheet

Cash 17 Accounts payable 7

Marketable securities 5 Notes payable 3

Accounts receivables 3 Taxes payables 2

Inventory 16 Other accruals 3

Prepaid expenses 6 Current liabilities 15
Current assets 47 Long term debt 35
Plant and equipment 126 Preferred stock 10
Less: Acc. Depreciation (57) Common stock 20
Net plant and
equipment 69 Capital in excess of par 10
Retained earnings 26
Total assets 116 Total liabilities & equity 116

Income statement
Net sales 1,072
Cost of goods sold 921
Gross profit 151
Selling expenses 86
General and administrative expenses 26
Depreciation expenses 6
118
Net operating income 33
Interest expenses 4
Profit before tax 29
Taxes 12
Net income 17

better or Industry
Ratios to compute May-berry
Worse Average
Current 2.86
Quick 2.31
Debt to equity 0.51
Time interest period 12.36
Average collection period 1.06
Inventory turnover 95.71
Fixed asset turnover 16.15
Operating profit margin 3.6%
Net profit margin 1.9%

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 Book return on assets 19.2%
Book return on equity 27.1%
7.2 On January 1, 2016, you appointed Tanya Dawkins as financial planner and manager for your
family owned local chain of seafood restaurants. Using the company’s balance sheets for the last
three years, evaluate the performance in each of the following areas: improving the firm’s short
term solvency, asset utilization and profitability.

Balance sheet 31-Dec-13 31-Dec-14 31-Dec-15

Cash 27 28 32
Marketable securities 16 18 13
Accounts receivables 21 18 13
Inventory 13 17 18
Current assets 77 81 76
Plant and equipment 192 198 219
Less: Acc. Depreciation (61) (66) (74)

Net plant and equipment 131 132 145

Total assets 208 213 221

Accounts payable 29 26 20
Wages payable 3 3 4
Notes payable 52 56 60
Current liabilities 84 85 84
Long term debt 60 60 60
Common stock 20 20 20
Capital in excess of par 20 20 20
Retained earnings 24 28 37

Total liabilities & equity 208 213 221

Income statement 2013 2014 2015

Net sales 912 921 942

Cost of goods sold 827 833 851

Gross profit 85 88 91
Selling expenses 37 41 46
General and administrative 27 24 10
Depreciation expenses 4 5 7
68 70 63
Net Operating Income 17 18 28
Interest expenses 12 11 10
Profit before tax 5 7 18

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 Taxes 2 3 7
Net income 3 4 11

Co.
Ratios Ind. 2015
2013 Co. 2014 Co. 2015
Current ratio 1.36
Quick ratio 1.21
Debt to equity 1.03
Time interest earned 4.51
Average collection period 4.96
Inventory turnover 117.80
Fixed asset turnover 7.60
Operating profit margin 3.60%
Net profit margin 1.20%
Book return on assets 9.80%
Book return on equity 11.30%

7.3 Given the ratio values for the following firm, fill in the blanks in its balance sheet and income
statement.
Balance sheet
Cash 100,000 Accounts payable 150,000
Marketable securities 50,000 Notes payable 50,000
Accounts receivables Current liabilities
Inventory   Long term debt
Current assets Common stock
Net plant and
equipment Retained earnings 200,000
Total assets 1,000,000 Total liabilities & equity  

Income statement Ratios:

Sales 1,200,000 Current 2.00

Cost of goods sold   Quick 1.50
Gross profit Time interest earned 6
Operating expenses   Debt to equity 1
Net operating income Gross profit margin 30%
Interest expenses   Book return on equity 2%
Profit before tax
Taxes 40000
Net income  

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7.4 The balance sheet and income statement of Genco Olive Oil Co. as of December 31, 2015 are as
follows:
Balance sheet Income statement
Cash 26 Accounts payable 42 Sales 835
Marketable securities 3 Notes payable 31 Cost of goods sold 631
Accounts receivables 13 Current liabilities 73 Gross profit 204
Inventory 28 Long term debt 43 Operating expenses 187
Current assets 70 Common stock 38 Net operating income 17
Net plant and
equipment 114 Retained earnings 30 Interest expenses 11

Total assets 184 Total liabilities & equity 184 Profit before tax 6
Taxes 3
Net income 3
Genco is considering the purchase of some oil processors on credit from your firm. Mr. Jenkins of
the collections department reports that another firm, Barzini Oil, is considered a marginal client
because of its high credit risk and recommends that your firm not extend credit to any firm riskier
than Barzini. Barzini's current ratio is 0.98, its quick ratio is 0.81, and its inventory turnover is 36.1.
Compute these ratios for Genco and, on that basis, decide whether or not credit should be
extended.

7.5 At the same time, Genco applies to a bank for a three-year loan. The bank had loaned money
earlier to Barzini and, based on past experience, has decided not to lend money to any firm riskier
than Barzini. However, the bank uses different ratios for making the decision—the debt to equity
ratio and the times interest ratio. If these two ratios for Barzini are 1.32 and 2.56, respectively,
would the bank loan money to Genco?

7.6 The common-size balance sheet and income statement (in percent) for Lyon Publications as of
December 31, 2015 are given below. Lyon's level of cash on December 31, 2015 was $20,000 and
interest paid during 2015 was $90,000.
Balance sheet Income statement
Cash 5 Accounts payable 8 Sales 100
Marketable securities 3 Notes payable 5 Cost of goods sold 65
Accounts receivables 9 Wages payable 2 Gross profit 35
Inventory 12 Current liabilities 15 Operating expenses 21
Current assets 29 Long term debt 30 Net operating income 14
Net fixed assets 71 Common stock 30 Interest expenses 6
Retained earnings 25 Profit before tax 8

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 Total assets 100 Total liabilities & equity 100 Taxes 4
Net income 4
a) Determine Lyon's balance sheet and income statement (in dollars) as of December 31, 2015.
b) Calculate the following ratios for Lyon as of December 31, 2015.
1
) Current ratio 5) Average collection period 9) Net profit margin
2
) Quick ratio 6) Inventory turnover 10) Book return on assets
3
) Debt-equity ratio 7) Fixed-asset turnover 11) Book return on equity
4 Times interest
) earned 8) Operating profit margin
7.7 John Easterwood recently inherited a large sum of money and is considering the purchase of one
of two family-owned companies for sale in his hometown of Eastaboga, Alabama. The two firms
are the Ancel Grocery Store and Starks Furniture Store. The balance sheets and income state -
ments for these firms are given below.
Ancel Grocery Starks Furniture
Income statement
Net sales 1,200,000 200,000
Cost of goods sold 960,000 100,000
Gross profit 240,000 100,000
Operating expenses 210,000 32,000
Net Operating Income 30,000 68,000
Interest expenses 6,000 20,000
Profit before tax 24,000 48,000
Taxes 12,000 24,000
Net income 12,000 24,000
Balance sheet
Cash 30,000 15,000
Marketable securities 10,000 5,000
Accounts receivables 30,000 40,000
Inventory 20,000 60,000
Current assets 90,000 120,000
Net fixed assets 110,000 120,000
Total assets 200,000 240,000
Accounts payable 15,000 20,000
Notes payable 15,000 40,000
Current liabilities 30,000 60,000
Long term debt 25,000 30,000
Common stock 85,000 70,000
Retained earnings 60,000 80,000
Total liabilities & equity 200,000 240,000

a) Calculate the operating profit margin ratio, the net profit margin ratio, the book return on
assets, and the book return on equity for each firm.

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 b) What advice would you give to Mr. Easterwood? What are the weaknesses of a
recommendation to purchase either company using these data?

Q.1 ABC Limited: Balance Sheet As on December 31, 2008

Cash Rs.7,750 Account payable Rs.12,900

Receivables 33,600 Notes payable 8,400
Inventories 24,150 Other current liabilities 11,700
Total current assets 65,500 Total current liabilities 33,000
Net fixed assets 29,250 Long term debt 25,650
Common equity 36,100
Total 94,750 Total 94,750
ABC Limited: Income Statement for year ended December 31, 2008
Sales 160,750
Cost of goods sold: 139,250
Gross profit 21,500
Selling, general and administrative expenses 14,500
Earnings before interest and taxes (EBIT) 7,000
Interest expenses 2,450
Earning before taxes (EBT) 4,550
Federal and state income taxes (40%) 1,820
Net Income 2,730
RATIO BUCKNER INDUSTRY AVG.
Current assets/current liabilities 2.0x
Days sales outstanding 35 days
Sales/inventories 6.7x
Sales/total assets 3.0x
Net income/sales 1.2%
Net income/total assets 3.6%
Net income/equity 9.0%
Total debt/total assets 60.0%
a. Calculate the indicated ratios for ABC Limited
b. Construct the Du Pont equation for both ABC Ltd. and the industry.

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Q.2 The following data apply to A.L. Kaiser & Company (millions of rupees):

Cash and marketable securities Rs. 100.00

Fixed assets Rs. 283.50
Sales Rs. 1,000.00
Net income Rs 50.00
Quick ratio 2.0x
Current ratio 3.0x
DSO 40 days
ROE 12%
Kaiser has no preferred stock---only common equity, current liabilities, and long-term debt.
a) Find Kaiser's (1) accounts receivable (A/R), (2) current liabilities, (3) current assets, (4)
total assets, (5) ROA, (6) common equity; and (7) long-term debt.
b) In part a, you should have found Kaiser's accounts receivable (A/R). If Kaiser
could reduce its DSO from 40 days to 30 days while holding other things constant, how
much cash would it generate? If this cash were used to buy back common stock (at book
value), thus reducing the amount of common equity, how would this affect (1) the ROE,
(2) the ROA, and (3) the total debt-total Asset ratio?

Q.3 Ace Industries has current assets equal to Rs.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?

Q.4 Baker Brothers has a DSO of 40 days. The company's average daily sales are Rs.20,000.
What is the level of its accounts receivable? Assume there are 360 days in a year.

Q.5 Baker Brothers has a DSO of 50 days. The company's average daily sales are Rs.60,000.
What is the level of its accounts receivable? Assume there are 365 days in a year.

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