Chapter 2: Q3-6DQ (page 75)
Why is trend analysis helpful in analyzing ratios?
Trend analysis represents the changes in the ratios over time. It allows one to see changes that occur in the profitability, capital employed, etc. of the company over time.
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A firm has net income before interest and taxes of \(193,000 and interest expense of \)28,100.
a. What is the times-interest-earned ratio?
The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.
Stud Clothier | |||
Balance sheet 20X1 | |||
Assets | Liabilities and Equity | ||
Cash | \)60,000 | Account payable | \(220,000 |
Account receivable | 240,000 | Accrued taxes | 30,000 |
Inventory | 350,000 | Bonds payable (long term) | 150,000 |
Plant and equipment | 410,000 | Common stock | 80,000 |
Paid in capital | 200,000 | ||
Retained earnings | 380,000 | ||
Total assets | \)1,060,000 | Total LIbilities and Equity | $1,060,000 |
Compute the following:
b. Quick ratio.
Baker Oats had an asset turnover of 1.6 times per year.
a. If the return on total assets (investment) was 11.2 percent, what was Baker’sprofit margin?
In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status
Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.
c. Now assume income increased by 10 percent each year. What effect would this have on your preceding answers? (A comment is all that is necessary.)
Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders’ equity
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