CENGAGE | MINDTAP

Ch 04-End-of-Chapter Problems - Analysis of Financial Statements

3. Problem 4.24 (DUPONT Analysis)

eBook

A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $2 million

sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:

Current ratio

Debt-to-capital ratio

Times interest earned

EBITDA coverage

Inventory turnover

Cash and equivalents

Accounts receivables

Inventories

Total current assets

Days sales

27days

outstanding

*Calculation is based on a 365-day year.

Gross fixed assets

Less depreciation

Net fixed assets

Total assets

Balance Sheet as of December 31, 2021 (millions of dollars)

$103

Accounts payable

Industry Average Ratios

Gross fixed assets

Less depreciation

Net fixed assets

Total assets

2x

21%

5x

8x

7x

Selling expenses

EBITDA

91

211

$405

Taxes (25%)

Net income

285

120

$165

$570

Fixed assets turnover

Total assets turnover

Profit margin

Return on total assets

Return on common

equity

Return on invested

capital

Current ratio

Other current liabilities

Notes payable

Total current liabilities

Long-term debt

Total liabilities

Income Statement for Year Ended December 31, 2021 (millions of dollars)

CENGAGE MINDTAP

Interest expense

Earnings before taxes (EBT)

Common stock

Retained earnings

Total stockholders' equity

Total liabilities and equity

Ch 04- End-of-Chapter Problems - Analysis of Financial Statements

Total current assets

$405

Total current liabilities

Long-term debt

285

120

$165

$570

Depreciation expense

Earnings before interest and taxes (EBIT)

6x

3x

3.75%

11.25%

14.10%

12.60%

$ 46

34

63

$143

40

$183

160

227

Income Statement for Year Ended December 31, 2021 (millions of dollars)

Net sales

$955.00

Cost of goods sold

Gross profit

$387

$570

X

Total liabilities

Common stock

Retained earnings

Total stockholders' equity

Total liabilities and equity

$143

40

$183

160

227

$387

$570

810.00

$ 145.00

79.50

65.50

14.00

$ 51.50

5.50

46.00

11.50

34.50

$

$

$

a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places.

Firm

Industry Average

2x

Search this course/nChow End or Chapter Problems - Antar

Times interest earned

EBITDA coverage

Inventory turnover

Days sales outstanding

Fixed assets turnover

Total assets turnover

Profit margin

Return on total assets

Return on common equity

Return on invested capital

Profit margin

Total assets turnover

Equity multiplier

x

days

X

%

IV

%

Statements

b. Construct a DuPont equation, and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

Firm

%

Industry

3.75%

3x

5x

7x

27days

c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?

1. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with

the industry average. Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales.

6x

3x

3.75%

11.25%

14.10%

12.60%

II. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given

the present level of sales, or the firm is carrying less assets than it needs to support its sales.

III. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment

in assets.

CENGAGE | MINDTAP

Ch 04- End-of-Chapter Problems - Analysis of Financial Statements

-Select-

-Select-

IV. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average

investment in assets.

V. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with

the industry average. Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales.

-Select-

d. Which specific accounts seem to be most out of line relative to other firms in the industry?

I. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity.

II. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit

Margin.

III. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on

1. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with

the industry average. Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales.

II. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given

the present level of sales, or the firm is carrying less assets than it needs to support its sales.

Search this course

III. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment

in assets.

IV. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average

investment in assets.

V. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with

the industry average. Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales.

ific accounts seem to be most out of line relative to other firms in the industry?

he accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity.

he accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit

largin.

III. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on

Equity.

IV. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on

Equity.

V. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return

on Equity.

-Select-

e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis?

1. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations.

II. Seasonal sales patterns would most likely affect the profitability ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.

III. Rapid growth would most likely affect the coverage ratios, with little effect on asset management ratios. Seasonal sales patterns would not substantially affect your analysis.

IV. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.

V. If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted.

|-Select

How might you correct for such potential problems?

1. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period./nCENGAGE MINDTAP

Ch 04-End-of-Chapter Problems - Analysis of Financial Statements

L. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity.

II. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit

Margin.

III. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on

Equity.

-ER:

IV. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on

Equity.

n. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis?

1. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations.

II. Sensonal sales patterns would most likely affect the profitability mhios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.

III. Hapid growth would most likely affect the coverage ratins, with little effect on asset management rahos. Seasonal sales patterns would not substantially affect your analysis.

IV. Hensonal sales patterns would most likely affect the liquidity ration, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.

V. If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted.

you correct for such potential problems?

is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period.

here is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group.

is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques.

IV. It is possible to correct for such problems by using average rather than end-of-period financial statement information.

V. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business.

-Select-

IV

V. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return

on Equity.

-Select-

CENGAGE MINDTAP

Ch 04-End-of-Chapter Problems - Analysis of Financial Statements

Q Search this course

Grade it Now

Save & Continue

Continua without exuána.

1. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity.

II. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit

Margin.

III. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on

Equity.

-Select-

How might you correct for such potential problems?

IV. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on

Equity.

-Select-

e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis?

I. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations.

Search this cou

V. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return

on Equity.

-Select-

-Select-

II. Seasonal sales pallers would most likely allect the profitability ratios, with little ellect on asset management ratios. Rapid growth would not substantially affect your analysis.

III. Repid growth would most likely affect the coverage ratios, with little effect on asset management ratios. Seasonal sales pellers would not substantially affect your analysis.

IV. Seasonal sales pallers would most likely allect the liquidity ratios, with little ellect on asset management ratios. Rapid growth would not substantially affect your analysis.

V. If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted.

I. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period.

II. There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group.

III. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques.

IV. It is possible to correct for such problems by using average rather than end-of-period financial statement information.

V. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business.