BA350 Principles of Finance
Week 2 Assignment
Questions 3-3, 3-5, 3-6
Problems 3-1, 3-6, 3-11
Q3-3
Over the past years, M. D. Rryngaert & Co. has realized an increase in its current ratio and 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?
Q3-5
How might (a) seasonal factors and (b) different growth rates distort a comparative ratio analysis? Give some examples. How might these problems be alleviated?
Q3-6
Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?
P3-1- 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.
P3-6 Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? What is the firm’s equity multiplier?
P3-11: Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data:
Debt ratio: 50%
Quick ratio: 0.80
Total assets turnover: 1.5
Day’s sales outstanding: 36.5 days
Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%
Inventory turnover ratio: 5.0
Calculation is based on a 365-day year.
Balance Sheet:
Cash_______________
Accounts receivable________
Fixed Assets_____________
Total Assets $300,000
Accounts payable_____________
Long-term Debt 60,000
Common Stock____________
Retained Earnings 97,500
Total liabilities and equity__________
Sales-__________________
Cost of Goods Sold_________________
PRODUCT DESCRIPTION
BA 350 Week 2 Assignment,
(3-3) Decrease in total asset turnover where no changes in sales occurred means that total assets increased.  Since fixed assets remained the same, this means that only the current assets have increased.  Since current ratio increased but quick ratio remained the same, this means that
3-6) While it makes sense to compare the financial ratios of the company with other firms that operate in the same industry, it can be misleading at times because even companies that operate in the same industries differ in several ways
Problems

(3-1)
Days Sales Outstanding (DSO) = Receivables/Ave Sales per day
Days Sales Outstanding (DSO) = Receivables/(Annual Sales/365 days)
20 days = Receivables / $20,000 per day
Receivables = $20,000 per day x 20 days
Receivables = $400,000
Balance Sheet
Cash $       27,000 Accounts payable $       90,000
Accounts receivable $       45,000 Long-term debt $       60,000
BA 350 Week 2 Assignment,
(3-3) Decrease in total asset turnover where no changes in sales occurred means that total assets increased.  Since fixed assets remained the same, this means that only the current assets have increased.  Since current ratio increased but quick ratio remained the same, this means that
3-6) While it makes sense to compare the financial ratios of the company with other firms that operate in the same industry, it can be misleading at times because even companies that operate in the same industries differ in several ways
Problems

(3-1)
Days Sales Outstanding (DSO) = Receivables/Ave Sales per day
Days Sales Outstanding (DSO) = Receivables/(Annual Sales/365 days)
20 days = Receivables / $20,000 per day
Receivables = $20,000 per day x 20 days
Receivables = $400,000
Balance Sheet
Cash $       27,000 Accounts payable $       90,000
Accounts receivable $       45,000 Long-term debt $       60,000