13.
Using the Du Pont method, evaluate the effects of the following relationships for the Butters
Corporation.
a. Butters Corporation has a profit margin of 7 percent and its return on assets
(investment) is 25.2 percent. What is its assets turnover?
b. If the Butters Corporation has a debt-to-total-assets ratio of 50 percent, what would the
firm’s return on equity be?
c. What would happen to return on equity if the debt-to-total-assets ratio decreased to
35 percent?
3-13. Solution:
Butters Corporation
a.
Profit margin  Total asset turnover  Return on asset (investment)
7%

?
 25.2%
Total asset turnover 
25.2%
7%
 3.6x
b.
Return on equity 
Return on assets (investment)
(1  Debt/Assets)

25.2%
(1  0.50)

25.2%
0.50
 50.40%
c.
Return on equity 
Return on assets (investment)
(1  Debt/Assets)

25.2%
(1  .35)

25.2%
0.65
 38.77%
29.
Bard Corporation shows the following income statement. The firm uses FIFO inventory accounting.
BARD CORPORATION
Income Statement for 2008
Sales .....................................................................
Cost of goods sold ................................................
Gross profit ..........................................................
Selling and administrative expense ......................
Depreciation .........................................................
Operating profit ....................................................
Taxes (30%) .........................................................
Aftertax income ...................................................
a.
b.
c.
$200,000 (10,000 units at $20)
100,000 (10,000 units at $10)
100,000
10,000
20,000
70,000
21,000
$ 49,000
Assume in 2009 the same 10,000-unit volume is maintained, but that the sales price increases by
10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $10 per
unit. Also assume that selling and administrative expense will be 5 percent of sales and
depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 2009.
In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the
sales price? Explain why this impact occurred.
Now assume that in 2010 the volume remains constant at 10,000 units, but the sales price
decreases by 15 percent from its year 2009 level. Also, because of FIFO inventory policy, cost of
goods sold reflects the inflationary conditions of the prior year and is $11 per unit. Further,
assume selling and administrative expense will be 5 percent of sales and depreciation will be
unchanged. The tax rate is 30 percent. Compute the aftertax income.
3-29. Solution:
Bard Corporation
a.
2009
Sales ................................
Cost of goods sold ..........
Gross profit ..................
Selling and adm. expense
Depreciation ...................
Operating profit ............
Taxes (30%) ...................
After tax income ..........
3-29. (Continued)
b. Gain in aftertax income
2009
2008
Increase
$220,000 (10,000 units at $22)
100,000 (10,000 units at $10)
$120,000
11,000 (5% of sales)
20,000
$ 89,000
$ 26,700
$ 62,300
$62,300
49,000
$13,300
Increase
$13,300

 27.14%
Base value (2008) $49,000
Aftertax income increased much more than sales because of
FIFO inventory policy (in this case, the cost of old inventory
did not go up at all), and because of historical cost
depreciation (which did not change).
c.
2010
Sales ................................
Cost of goods sold ..........
Gross profit ..................
Selling and adm. expense
Depreciation ...................
Operating profit ............
Taxes (30%) ...................
After tax income...........
*$22 × 0.85 = $18.70
$187,000 (10,000 units at $18.70*)
110,000 (10,000 units at $11.00)
$ 77,000
9,350 (5% of sales)
20,000
$ 47,650
$ 14,295
$ 33,355
The low profits indicate the effect of inflation followed by
disinflation.
31.
The Griggs Corporation has credit sales of $1,200,000. Given the following ratios, fill in the balance
sheet below.
Total assets turnover ...................................
Cash to total assets ......................................
Accounts receivable turnover .....................
Inventory turnover ......................................
Current ratio ................................................
Debt to total assets ......................................
2.4 times
2.0%
8.0 times
10.0 times
2.0 times
61.0%
GRIGGS CORPORATION
Balance Sheet 2008
Assets
Liabilities and Stockholders’ Equity
Cash .............................
_____
Accounts receivable ......
_____
Inventory .......................
_____
Total current assets
.......................................Equity
Fixed assets .................
_____
Total assets ............ _____
Current debt ............................................. _____
Long-term debt......................................... _____
Total debt ..................................... _____
.................................................................._____
.................................................................._____
Total debt and stockholders’ equity
3-31. Solution:
Griggs Corporation
Sales/total assets
Total assets
Total assets
= 2.4 times
= $1,200,000/2.4
= $500,000
Cash
Cash
Cash
= 2% of total assets
= 2% × $500,000
= $10,000
Sales/accounts receivable
Accounts receivable
Accounts receivable
= 8 times
= $1,200,000/8
= $150,000
Sales/inventory
Inventory
Inventory
= 10 times
= $1,200,000/10
= $120,000
_____
3-31. (Continued)
Fixed assets
Current asset
= Total assets – current assets
= $10,000 + $150,000 +
$120,000 = $280,000
= $500,000 – $280,000
= $220,000
Fixed assets
Current assets/current debt
Current debt
Current debt
Current debt
=2
= Current assets/2
= $280,000/2
= $140,000
Total debt/total assets
Total debt
Total debt
= 61%
= .61 × $500,000
= $305,000
Long-term debt
Long-term debt
Long-term debt
= Total debt – current debt
= $305,000 – 140,000
= $165,000
Equity
Equity
Equity
= Total assets – total debt
= $500,000 – $305,000
= $195,000
Griggs Corporation
Balance Sheet 2008
Cash .....................
A/R ......................
Inventory .............
Total current
assets
Fixed assets .........
$ 10,000 Current debt ..........
Long-term debt .....
150,000
$120,000
Total debt ..........
$140,000
165,000
$305,000
280,000
220,000
Equity ...................
195,000
Total assets ..........
$500,000 Total debt and
stockholders’
equity
$500,000