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CH 3 Questions; 2. a. Accounts receivable are paid in cash Current ratio does not change b.

. Notes payable are paid off with cash Current ratio increases c. Inventory is sold on account Current ratio does not change d. Inventory is purchased on account Current ratio decreases e. Accrued wages and taxes increase Current ratio decrease f. Long-term debt is paid with cash Current ratio decreases g. Cash from a short-term bank loan is received Current ratio decreases

4. If the ACP is extremely low, the firms accounts receivable policy may be so strict that customers prefer to do business with competing firms. Firms offer accounts receivable terms as an incentive to get customers to buy products from their firm rather than a competing firm. By offering firm customers the accounts receivable privilege, management allows customers to buy potentially more now and pay later. Without that incentive in place, managers would require customers to pay for their purchases very quickly, customers may choose to buy the goods from the competitors who offer better credit terms. 7. A change in one ratio may well affect the value of several ratios. Often these interrelations can help evaluate firm performance. Managers and investors often perform a detailed analysis of ROA and ROE using the DuPont analysis system. Popularized by the DuPont Corporation, the DuPont analysis system uses the balance sheet and income statement to break the ROA and ROE ratios into component pieces.

Problems; 30.
a. Current ratio b. Quick ratio c. Cash ratio d. Inventory turnover ratio e. Days sales in inventory f. Average collection period g. Average payment period Lake of Egypt Marina, Inc. 390/210=1.86 times (390-200)/210=0.90 times 75/210=.36 times 515/200=2.58 times (200x365)/515=141.75 days (115x365)/515=81.50 days (90x365)/260=126.35 days Industry 2.0 times 1.2 times 0.25 times 3.60 times 101.39 days 32.50 days 45 days

h. Fixed asset turnover ratio i. Sales to working capital j. Total asset turnover ratio k. Capital intensity ratio l. Debt ratio m. Debt-to-equity ratio n. Equity multiplier o. Times interest earned p. Cash coverage ratio q. Profit margin r. Basic earnings power ratio s. ROA t. ROE u. Dividend payout ratio v. Market-to-book ratio w. PE ratio

515/520=0.99 times 515/(390-210)=2.86 times 515/910=0.57 times 901/515=1.77 times (210+300)/910=56.04% (210+300)/400=1.28 times 910/400=2.28 times 233/33=7.06 times (233+22)/33=7.73 times 138/515=26.80% 233/910=25.60% 138/910=15.16% 138/400=34.50% 65/138=47.10% 14.750/6.077=2.43 times 14.750/2.123=6.95 times

1.25 times 4.25 times 0.85 times 1.18 times 62.50% 1.67 times 2.67 times 8.50 times 8.75 times 28.75% 32.50% 19.75% 36.88% 35% 2.55 times 15.60 times

31. ROA = Profit Margin x Total asset turnover = 26.80% x 0.57 times = 15.16% ROE = Profit Margin x Total asset turnover x Equity multiplier = 26.80% x 0.57 times x 2.28 times = 34.50%

33. Lake of Egypt Marina is performing below the industry in all areas. Liquidity is lower, asset management is poorer, and profit ratios are lower.