112 Part 2 Fundamental Concepts in Financial Management
Total
Current
AssetsCurrent
RatioEffect
on Net
Income
a. Cash is acquired through issuance of additional
common stock. _____ _____ _____
b. Merchandise is sold for cash. _____ _____ _____
c. Federal income tax due for the previous year is paid. _____ _____ _____
d. A fixed asset is sold for less than book value. _____ _____ _____
e. A fixed asset is sold for more than book value. _____ _____ _____
f. Merchandise is sold on credit. _____ _____ _____
g. Payment is made to trade creditors for previous
purchases. _____ _____ _____Kaiser has no preferred stock—only common equity, current liabilities, and long-term debt.
a. Find Kaiser’s (1) accounts receivable, (2) current assets, (3) total assets, (4) ROA,
(5) common equity, (6) quick ratio, and (7) long-term debt.
b. In Part a, you should have found that Kaiser’s accounts receivable (A/R)! $111.1
million. If Kaiser could reduce its DSO from 40.55 days to 30.4 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 common equity, how would
this affect (1) the ROE, (2) the ROA, and (3) the total debt/total assets ratio?Financial ratio analysis is conducted by three main groups of analysts: credit analysts,
stock analysts, and managers. What is the primary emphasis of each group, and how
would that emphasis affect the ratios they focus on?
Why would the inventory turnover ratio be more important for someone analyzing a gro-
cery store chain than an insurance company?
Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline
in its total assets turnover ratio. However, the company’s sales, cash and equivalents,
DSO, and fixed assets turnover ratio remained constant. What balance sheet accounts
must have changed to produce the indicated changes?
Profit margins and turnover ratios vary from one industry to another. What differences
would you expect to find between the turnover ratios, profit margins, and DuPont equa-
tions for a grocery chain and a steel company?
How does inflation distort ratio analysis comparisons for one company over time (trend
analysis) and for different companies that are being compared? Are only balance sheet
items or both balance sheet and income statement items affected?
If a firm’s ROE is low and management wants to improve it, explain how using more debt
might help.
Give some examples that illustrate how (a) seasonal factors and (b) different growth rates
might distort a comparative ratio analysis. How might these problems be alleviated?
Why is it sometimes misleading to compare a company’s financial ratios with those of
other firms that operate in the same industry?
Suppose you were comparing a discount merchandiser with a high-end merchandiser.
Suppose further that both companies had identical ROEs. If you applied the DuPont equa-
tion to both firms, would you expect the three components to be the same for each com-
pany? If not, explain what balance sheet and income statement items might lead to the
component differences.
Indicate the effects of the transactions listed in the following table on total current assets,
current ratio, and net income. Use (+) to indicate an increase, (") to indicate a decrease,
and (0) to indicate either no effect or an indeterminate effect. Be prepared to state any nec-
essary assumptions and assume an initial current ratio of more than 1.0. (Note: A good ac-
counting background is necessary to answer some of these questions; if yours is not
strong, answer just the questions you can.)