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Exercises

The document provides financial data for Pulp, Paper, and Paperboard, Inc. for the years 2011-2013 including income statements, balance sheets, and historical and industry average ratios. An analysis of the company's liquidity, activity, debt, and profitability is provided based on the data. The analysis finds that while the company's liquidity and debt levels meet industry standards, inventory management and accounts receivable have deteriorated compared to previous years and industry averages. However, the company's profit margins exceed industry standards. Overall the company is in good financial condition but needs to improve inventory and receivables management and investigate the cause of a declining gross profit margin.

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433 views

Exercises

The document provides financial data for Pulp, Paper, and Paperboard, Inc. for the years 2011-2013 including income statements, balance sheets, and historical and industry average ratios. An analysis of the company's liquidity, activity, debt, and profitability is provided based on the data. The analysis finds that while the company's liquidity and debt levels meet industry standards, inventory management and accounts receivable have deteriorated compared to previous years and industry averages. However, the company's profit margins exceed industry standards. Overall the company is in good financial condition but needs to improve inventory and receivables management and investigate the cause of a declining gross profit margin.

Uploaded by

aly
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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18) Key Financial Data   Income Statement, Dreamscape,

Inc. For the Year Ended December 31, 2013


Prepare a common-size income statement for
Dreamscape, Inc. for the year ended December 31, 2013.
Evaluate the company’s performance against industry
average ratios and against last year’s results. 

Answer:

  Common-Size Income Statement Dreamscape, Inc. For


the Year Ended December 31, 2013
Dreamscape, Inc. performs significantly below industry
average. All profitability ratios (gross profit margin,
operating profit margin, and net profit margin) trail the
industry norms. In 2012 expenses as a percent of sales
were high.Dreamscape, Inc. improved the management of
operating expenses in 2013 meeting industry averages.
However, cost of goods sold as a percent of sales
increased and is a full 5 percent above the industry
average, further reducing the gross profit margin. Interest
expense is two times the average indicating high cost of
debt or a high debt level. The firm must concentrate on
reducing the cost of goods sold and interest expense to
improve performance.Diff: 2Topic:  Common Size Income
StatementsLearning Obj.:  LG 5Learning Outcome:  F-
02Question Status:  RevisedAACSB Tag:  Analytic Skills
Table 3.2

Dana Dairy Products Key Ratios


Income StatementDana Dairy ProductsFor the Year
Ended December 31, 2013
Balance SheetDana Dairy ProductsDecember 31, 2013

16) The current ratio for Dana Dairy Products in 2013 was
________. (See Table 3.2)

A) 1.58

B) 0.63

C) 1.10

D) 0.91

Answer:  D

Topic:  A Complete Ratio Analysis

17) Since 2012, the liquidity of Dana Dairy Products


________. (See Table 3.2)

A) has deteriorated

B) has remained the same

C) has improved
D) is not determinable

Answer:  A

Topic:  A Complete Ratio Analysis

18) The net working capital for Dana Dairy Products in


2013 was ________. (See Table 3.2)

A) $10,325

B) -$10,325

C) -$1,425

D) $14,250

Answer:  C

Topic:  A Complete Ratio Analysis

19) The inventory turnover for Dana Dairy Products in


2013 was ________. (See Table 3.2)

A) 43

B) 5

C) 20

D) 25
Answer:  C

Topic:  A Complete Ratio Analysis

20) The inventory management at Dana Dairy Products


________ since 2012. (See Table 3.2)

A) has deteriorated

B) has remained the same

C) has improved slightly

D) cannot be determined

Answer:  C

Topic:  A Complete Ratio Analysis

21) The average collection period for Dana Dairy Products


in 2013 was ________. (See Table 3.2)

A) 32.5 days.

B) 11.8 days.

C) 25.3 days.

D) 35.9 days.

Answer:  A
Topic:  A Complete Ratio Analysis

22) If Dana Dairy Products has credit terms which specify


that accounts receivable should be paid in 25 days, the
average collection period ________ since 2012. (See Table
3.2)

A) has deteriorated

B) has remained the same

C) has improved

D) cannot be determined

Answer:  A

Diff: 1

Topic:  A Complete Ratio Analysis

23) Dana Dairy Products had a ________ degree of


financial leverage than the industry standard, resulting in
________. (See Table 3.2)

A) lower; lower return on total assets

B) lower; lower return on equity


C) higher; higher return on equity

D) higher; higher return on total assets

Answer:  B

Topic:  A Complete Ratio Analysis

24) The debt ratio for Dana Dairy Products in 2013 was
________. (See Table 3.2)

A) 50 percent

B) 11 percent

C) 55 percent

D) 44 percent

Answer:  C

Topic:  A Complete Ratio Analysis

25) Dana Dairy Products’ gross profit margin was inferior


to the industry standard. This may have resulted from
________. (See Table 3.2)

A) a high sales price

B) the high cost of goods sold

C) excessive selling and administrative expenses


D) excessive interest expense

Answer:  B

Topic:  A Complete Ratio Analysis

26) The gross profit margin and net profit margin for Dana
Dairy Products in 2013 were ________. (See Table 3.2)

A) 13 percent and 0.9 percent, respectively

B) 13 percent and 1.5 percent, respectively

C) 2 percent and 0.9 percent, respectively

D) 2 percent and 1.5 percent, respectively

Answer:  A

Topic:  A Complete Ratio Analysis

27) The return on total assets for Dana Dairy Products for
2013 was ________. (See Table 3.2)

A) 0.9 percent

B) 5.5 percent

C) 25 percent

D) 2.5 percent
Answer:  D

Topic:  A Complete Ratio Analysis

28) The return on equity for Dana Dairy Products for 2013
was ________. (See Table 3.2)

A) 0.6 percent

B) 5.6 percent

C) 0.9 percent

D) 50 percent

Answer:  B

Topic:  A Complete Ratio Analysis

29) Using the modified DuPont formula allows the analyst


to break Dana Dairy Products return on equity into 3
components: the net profit margin, the total asset
turnover, and a measure of leverage (the financial
leverage multiplier). Which of the following mathematical
expressions represents the modified DuPont formula
relative to Dana Dairy Products’ 2013 performance? (See
Table 3.2)

A) 5.6(ROE) = 2.5(ROA) × 2.22(Financial leverage


multiplier)
B) 5.6(ROE) = 3.3(ROA) × 1.70(Financial leverage
multiplier)

C) 4.0(ROE) = 2.5(ROA) × 2.00(Financial leverage


multiplier)

D) 2.5(ROE) = 5.6(ROA) × 2.22(Financial leverage


multiplier)

Answer:  A

Topic:  Dupont System of Analysis

31) In an effort to analyze Clockwork Company finances,


Jim realized that he was missing the company’s net profits
after taxes for the current year. Find the company’s net
profits after taxes using the following information.

Return on total assets = 2%

Total asset turnover = 0.5

Cost of goods sold = $105,000

Gross profit margin = 0.30

Answer:  Sales = Cost of goods sold/(1 – Gross profit


margin) = 105,000/(1 – 0.30) = $150,000

Total assets = Sales/(Total asset turnover) = 150,000/0.50


= $300,000
Net profits after taxes = (ROA) × (Total assets) = (0.02) ×
(300,000) = $6,000

Topic:  A Complete Ratio Analysis

32) Given the following balance sheet, income statement,


historical ratios and industry averages, calculate the Pulp,
Paper, and Paperboard, Inc. financial ratios for the most
recent year. Analyze its overall financial situation for the
most recent year. Analyze its overall financial situation
from both a cross-sectional and time-series viewpoint.
Break your analysis into an evaluation of the firm’s
liquidity, activity, debt, and profitability.

Income Statement Pulp, Paper, and Paperboard, Inc. For


the Year Ended December 31, 2013
Balance Sheet Pulp, Paper, and Paperboard, Inc. December
31, 2013
Historical and Industry Average Ratios Pulp, Paper and
Paperboard, Inc.

Answer:   Historical and Industry Average Ratios Pulp,


Paper and Paperboard, Inc.
LIQUIDITY: The liquidity of the firm is on target with the
industry standard in 2013 and shows no trend since 2011.
The firm’s liquidity is stable.ACTIVITY: Inventory and
accounts receivable management has deteriorated since
2012 and is inferior when compared to the industry
standard. The low inventory turnover may be caused by
overstocking and/or obsolete inventories. The high
average collection period may have resulted from poor
collections procedures or from relaxed credit terms.
Further investigation is necessary to determine the cause
of the variances.DEBT: The firm has less debt than the
industry average. The trend since 2011 has been toward
reducing the debt ratio. The firm, therefore, is subject to
less financial risk than any other firm in the
industry.PROFITABILITY: Although the gross profit margin
is inferior to the industry average, the operating and net
profit margin far exceed the standards, boosting return on
total assets and return on equity. The trend in the gross
profit margin is unfavorable and may either be caused by a
slide in product prices or an escalation in cost of sales. The
cause of the poor gross profit margin should be
investigated.Overall, the firm needs to focus attention on
inventory and accounts receivable management and the
cause of the poor gross profit margin. In general, the firm
is in good financial condition.Diff: 3Topic:  Complete Ratio
AnalysisLearning Obj.:  LG 6Learning Outcome:  F-
02Question Status:  RevisedAACSB Tag:  Analytic Skills

 33) Complete the balance sheet for General Aviation, Inc.


based on the following financial data. Balance Sheet
General Aviation, Inc. December 31, 2013
Key Financial Data (2005)1. Sales totaled $720,000.2. The
gross profit margin was 38.7 percent.3. Inventory turned 6
times.4. There are 360 days in a year.5. The average
collection period was 31 days.6. The current ratio was
2.35.7. The total asset turnover was 2.81.8. The debt ratio
was 49.4 percent.9. Total current assets equal
$159,565. Answer:   Balance Sheet General Aviation, Inc.
December 31, 2013 Diff: 3Topic:  A Complete Ratio
AnalysisLearning Obj.:  LG 6Learning Outcome:  F-
02Question Status:  RevisedAACSB Tag:  Analytic Skills 

34) Construct the DuPont system of analysis using the


following financial data for Key Wahl Industries and
determine which areas of the firm need further analysis.
Key Financial Data
Answer:  Ratios for Key Wahl Industries Total asset
turnover =   = 0.67 Debt ratio =   = 50% Financial leverage
multiplier =   = 2 ROA =   = 5%ROE = ROA × Financial
leverage multiplier = 10% Net profit margin =   =
7.5%DuPont System of Analysis: Key Wahl Industries
performs equally to industry averages according to the
return on equity. However, when dissecting the financial
data further into the three key components of the DuPont
system (a profit-on-sale, efficiency-of-asset use, and a use-
of-leverage component), some areas of improvement may
be highlighted. Key Wahl Industries has a lower net profit
margin and return on total assets than industry averages.
Nevertheless, the firm makes up for the low profit margin
through excessive use of leverage (a 50 percent debt ratio
versus 33 percent for the industry). Financial risk could be
reduced resulting in the same return on equity by
increasing the net profit margin and reducing debt.Diff:
3Topic:  Dupont System of AnalysisLearning Obj.:  LG
6Learning Outcome:  F-02Question Status:  Previous
EditionAACSB Tag:  Analytic Skills

https://www.coursehero.com/file/p5bkng2/Income-
Statement-Pulp-Paper-and-Paperboard-Inc-For-the-Year-
/Ended-December-31

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