CHAPTER 3: FINANCIAL STATEMENT ANALYSIS TOOLS

Instructor’s Manual Problem Set

Solutions can be found in the accompanying Excel files. Note that if you wish to see all of the formulas at once, you may
use the CTRL+` (Control plus grave accent) shortcut key to toggle them on or off.

1. Sweet Dreams Corp. has prepared the following financial statements:

Sweet Dreams Corp. Sweet Dreams Corp.
Income Statement Balance Sheet
For the Year Ended Dec. 31 2017 As of Dec. 31 2017
2017 2016 Assets 2017 2016
Sales 3,074,000 2,567,000 Cash 431,000 339,000
Cost of Goods Sold 2,088,000 1,711,000 Accounts Receivable 503,000 365,000
Gross Profit 986,000 856,000 Inventories 289,000 300,000
Selling and G&A Expenses 294,000 295,000 Total Current Assets 1,223,000 1,004,000
Fixed Expenses 35,000 35,000 Gross Fixed Assets 4,669,000 4,322,000
Depreciation Expense 239,000 223,000 Accumulated Depreciation 2,295,000 2,056,000
EBIT 418,000 303,000 Net Fixed Assets 2,374,000 2,266,000
Interest Expense 93,000 91,000 Total Assets 3,597,000 3,270,000
Earnings Before Taxes 325,000 212,000 Liabilities and Owners' Equity
Taxes 94,000 64,000 Accounts Payable 382,000 270,000
Net Income 231,000 148,000 Short-term Notes Payable 79,000 99,000
Accrued Expenses 159,000 114,000
Total Current Liabilities 620,000 483,000
Long-term Debt 1,023,000 967,000
Total Liabilities 1,643,000 1,450,000
Common Stock 819,000 808,000
Retained Earnings 1,135,000 1,012,000
Total Shareholder's Equity 1,954,000 1,820,000
Total Liabilities and Owners' Equity 3,597,000 3,270,000
a) Set up a worksheet similar to the one in Exhibit 4-4, page 124, and calculate all of the ratios for Sweet Dreams Corp.
b) Verify the change in 2017 Sweet Dreams Corp’s ROE using the Du Pont method.
c) Using the Altman’s model for privately held firms and public ones, calculate the Z-score for Sweet Dreams Corp.
Assume that the market value of Sweet Dreams Corp. is $1,200,000.
d) Calculate Sweet Dreams Corp.’s economic profit for these years and compare it to net income. Assume that the
weighted average cost of capital is 12%.
e) Using the following 2017 industry averages, evaluate Sweet Dreams Corp.’s financial situation. Set up a ratio analysis
system similar to the one in Exhibit 3-6, page 92.
Ratio Value Ratio Value
Current Ratio 2.50x Debt to Equity 0.90x
Quick Ratio 0.60x Long-Term Debt to Equity 40.00%
Inventory Turnover Ratio 6.50x Times Interest Earned 2.50x
Accounts Receivable Turnover Ratio 8.00x Cash Coverage Ratio 3.50x
Average Collection Period 40.00 days Gross Profit Margin 20.00%
Fixed Asset Turnover 2.00x Operating Profit Margin 7.00%
Total Asset Turnover 2.00x Net Profit Margin 5.00%
Total Debt Ratio 50.00% Return on Total Assets 5.00%
Long-Term Debt Ratio 20.00% Return on Equity 8.00%
LTD to Total Capitalization 30.00% Return on Common Equity 10.00%

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16 Chapter 3: Financial Statement Analysis Tools
Instructor’s Manual Problem Set

2. Powerful Tools Inc., a construction equipment manufacturer, has lost some information on its financial
statements. Help the firm’s financial staff to fill in the missing data using your knowledge of financial ratios.
Powerful Tools Inc. Powerful Tools Inc.
Income Statement Balance Sheet
For the Year Ended December 31, 2017 As of December 31, 2017
2017 2017
Sales Ratio Assets
Cost of Goods Sold Formula Cash 70,000
Gross Profit Ratio Accounts Receivable 50,000
Operating Expenses Formula Inventories Ratio
EBIT Ratio Total Current Assets Formula
Interest Expense Formula Gross Fixed Assets 1,000,000
Earnings Before Taxes Formula Accumulated Depreciation Formula
Taxes Formula Net Fixed Assets Formula
Net Income 50,000 Total Assets Ratio
Liabilities and Owner's Equity
Notes: Tax Rate 40% Accounts Payable 20,000
Short-term Bank Notes Formula
Ratio Value Total Current Liabilities Formula
Inventory Turnover 5.00x Long-term Debt Ratio
Net Profit Margin 7% Total Liabilities Ratio
Total Debt Ratio 60.00% Common Equity Formula
Gross Profit Margin 30.00% Total Liab. and OE Formula
Operating Profit Margin 15.00%
Return on Total Assets 5.00%
Long-Term Debt Ratio 50.00%
a) Using the ratios provided, recreate the financial statements as shown using formulas.
b) Complete the financial statements by using formulas that refer to existing data to fill in the remaining cells.
3. Cristal Clear, Inc., a manufacturer of water purification systems, has accidentally erased parts of its 2017 and
2016 financial statements. Help the company fill in the missing data using your knowledge of financial ratios.
Cristal Clear, Inc.
Ratios 2017 2016
Liquidity Ratios
Current Ratio 2.35x Ratio
Quick Ratio Ratio 0.80x
Efficiency Ratios
Inventory Turnover Ratio Ratio 3.50x
A/R Turnover Ratio 14.00x Ratio
Average Collection Period Ratio 40.00 days
Fixed Asset Turnover 15.00x Ratio
Total Asset Turnover Ratio Ratio
Leverage Ratios
Total Debt Ratio 60.00% Ratio
Long-Term Debt Ratio Ratio 35.00%
LTD to Total Capitalization Ratio Ratio
Debt to Equity Ratio Ratio
Long-Term Debt to Equity Ratio Ratio
Coverage Ratios
Times Interest Earned Ratio 4.00x
Cash Coverage Ratio 3.00x Ratio
Profitability Ratios
Gross Profit Margin Ratio Ratio
Operating Profit Margin Ratio Ratio
Net Profit Margin Ratio 3.00%
Return on Total Assets 4.20% Ratio
Return on Equity Ratio 12.00%
Return on Common Equity Ratio Ratio

Cristal Clear, Inc. Cristal Clear, Inc.

Income Statement Balance Sheet
For the Year Ended Dec. 31, 2017 As of Dec. 31, 2017
2017 2016 Assets 2017 2016
Sales Ratio Ratio Cash and Equivalents 46,000 50,000
Cost of Goods Ratio 2,466,000 Accounts Receivable Ratio Ratio
Gross Profit Formula Formula Inventory Formula Ratio
G&A Expenses Formula 207,000 Total Current Assets Ratio Formula
Other Expenses 115,000 Formula Plant & Equipment Formula 435,000
Depreciation Ratio Ratio Accumulated Depreciation 146,000 Formula
EBIT 173,000 Ratio Net Fixed Assets Formula Formula
Interest Expense Formula 54,000 Total Assets Ratio 1,490,000
EBT Formula Formula Liabilities and Owners' Equity
Taxes Formula Formula Accounts Payable Formula 131,000
Net Income 59,500 Formula Short-term Notes Payable 201,000 Formula
Notes Other Current Liabilities 121,000 117,000
Tax Rate 40% Total Current Liabilities 480,000 Ratio
Long-term Debt Formula Formula
Total Liabilities Ratio Formula
Common Stock Formula 408,000
Retained Earnings 199,000 Formula
Total Shareholder's Equity Formula Ratio
Total Liab. and OE Formula Formula
a) Using the ratios provided, recreate the financial statements as shown using formulas.
b) Complete the financial statements using formulas that refer to existing data to fill in the remaining cells.