University of Technology, Jamaica

FINANCIAL MANAGEMENT: FIN3001

UNIT 2: FINANCIAL STATEMENT ANALYSIS

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 FINANCIAL MANAGEMENT TUTORIAL
FIN 3001
UNIT 2: Financial Statement Analysis

1. Why would the inventory turnover ratio be more important when analyzing a grocery
chain than an insurance company?

2. If a firm’s ROE is low and management wants to improve it, explain how using more
debt might help

Use the supplied financial statements for Fontana Limited to answer questions 3 to 9

3. Calculate the firm’s accounts receivable ratio in 2019 and 2020 (assume all sales were on
credit). Are they different? What might have caused the difference?

4. Find the firm’s days sales outstanding (DSO) in 2019 and 2020? (1 year = 365 days)
What accounts for the difference between them?

5. Calculate and interpret Fontana’s return on assets (ROA) for 2019 and 2020. Comment
on the difference.

6. Calculate and interpret the firm’s return on equity (ROE) for 2019 & 2020. Comment on
the difference.

7. What is Fontana’s basic earning power ratio (BEP) for each year? Give an interpretation
of your answers.

8. What is Fontana’s times interest earned (TIE) ratio for 2019 & 2020? Give an
interpretation of your answers.

9. For 2019 & 2020, find Fontana’s (i) current ratio (ii) quick ratio? Interpret your results.

10. Blue Ice Limited has $10B in assets and its tax rate is 25%. The firm’s Basic Earning
Power ratio is 18% and its return on assets (ROA) 12%. What is Blue Ice Limited TIE
ratio?

11. TOS Company has an EPS of $5.00, a book value per share of $30, and a market/book
value ratio of 1.5x. What is TOS’s P/E ratio?

12. Logan Manufacturing currently has $1,000,000 in accounts receivable. Its days sales
outstanding (DSO) is 40 days. It wants to reduce its DSO to the industry average of 25
days by pressuring customers to pay on time. The Chief Financial Officer (CFO)
estimates that average sales will fall by 12% if the policy is adopted. Assuming the firms
achieves the DSO of 25 days and suffers the 12% sales decline, what will be the new
level of accounts receivable? Assume 1 year =365 days

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 13. Petland Limited has $8M in sales. Its ROE is 10% and total assets turnover is 2.0 times.
Petland is 70% equity financed. What is its net income?

14. Complete the following balance sheet using the given information: Debt ratio = 40%.
Total assets turnover = 1.8, current ratio = 2.1, DSO = 20 days, gross profit margin
[(sales – cost of goods sold)/sales] = 40%, Inventory turnover ratio = 6. (Assume 360
days)

ASSETS ($) LIABILITIES & EQUITY ($)

Cash Accounts Payable
Accounts Receivable Long-Term Debt 90,000
Inventories Common Stock
Fixed Assets ________ Retained Earnings 102,500
Total Assets 400,000 Total Liabilities & Equity _______
Sales Cost of Goods Sold

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