ACCT370 Read & Interact: Chapter 6

Jefferson Beach Marina included the following information in its financial statements. Sales in the current year of $575,000 and $400,000 in the previous year. Operating income of $75,000 in the current year and $25,000 in the previous year. In comparison to the previous year, the effect of sales growth on operating income was

$10,938 Operating margin $25,000/$400,000 = 0.0625 Sales growth ($575,000 - $400,000) x 0.0625 = $10,938 (rounded)

Information about Peralta Enterprise's operations include: 65 days to sell inventory, 84 days to collect cash from customers, and 45 days to pay for inventory purchases. What is the company's operating cycle?

149 days.

Blackwell Corporation has the following items in its financial statements: Sales $850,000, Net income $157,500, Common Dividends $10,000, Preferred Dividends $7,500, Beginning Shareholders' Equity of $775,000, and Ending Shareholders' Equity of $875,000. Blackwell's ROCE is

18.2%. ($157,500 - $7,500)/($775,000 + $875,000)/2 = 18.2%

Rogers Inc. has the following items on its balance sheet: Accounts payable $37,220, Cash $60,032, Total Current Liabilities $103,390, Total Liabilities of $620,300, and Total Assets of $1,861,000. On its common-size balance sheet, the percentage for Accounts Payable is

2% $37,220/$1,861,000 = 2%

Riley Corporation has the following items in its financial statements: Sales $750,000, Net Income $25,500, Interest expense $8,500, Beginning assets of $1,250,000, Ending assets of $1,500,000. Assuming Riley's tax rate is 30%, its return on assets (ROA) is

2.3% [$25,500 + ($8,500 * 70%)] / $1,375,000 = 2.3%

Walker Company includes the following in its financial statements: Cash $7,500, Accounts Receivable $2,500, Inventory $5,000, Accounts payable $2,350, Accrued liabilities $3,750. Its current ratio is

2.46. ($7,500 + $2,500 + $5,000)/($2,350 + $3,750) = 2.46

Jolar Corporation has annual credit sales of $1,000,000, Cost of goods sold of $350,000, Beginning accounts receivable of $200,000, Ending accounts receivable of $300,000, and beginning and ending inventory of $80,000 and $100,000 respectively. Its inventory turnover is

3.9. $350,000/($80,000 + $100,000)/2 = 3.9

Jolar Corporation has annual credit sales of $1,000,000, Cost of goods sold of $350,000, Beginning accounts receivable of $200,000, Ending accounts receivable of $300,000, and beginning and ending inventory of $80,000 and $100,000 respectively. Its accounts receivable turnover is

4.0 $1,000,000/($200,000 + $300,000)/2 = 4

Rogers Inc. has the following items in its financial statements: Net cash provided by operating activities $37,500, Cash $93,750, Sales $750,000, and Total Assets of $1,250,000. On its common-size statement of cash flow, the percentage for net cash provided by operating activities is

5% $37,500/$750,000 = 5%

Jolar Corporation has annual credit sales of $1,000,000, Cost of goods sold of $350,000, Beginning accounts receivable of $200,000, Ending accounts receivable of $300,000, and beginning and ending inventory of $80,000 and $100,000 respectively. Its days accounts receivable outstanding is

91 days. $1,000,000/($200,000 + $300,000)/2 =4.0 365/4.0 = 91

Jolar Corporation has annual credit sales of $1,000,000, Cost of goods sold of $350,000, Beginning accounts receivable of $200,000, Ending accounts receivable of $300,000, and beginning and ending inventory of $80,000 and $100,000 respectively. Its days inventory held is closest to

94 days. $350,000/($80,000 + $100,000)/2 = 3.9 365/3.9 = 93.59 days

One way to determine credit risk using many variables simultaneously is called the

Altman Z-score.

Identify the true statement regarding dividends.

The payment of cash dividends indicates that management expects future operating cash flows to be favorable.

Cash flow from investing activities includes

capital expenditures.

The numerator in the quick ratio is

cash + short-term investments + accounts receivable.

During a period in which a company experiences rapid growth, which of the following is a preferable solvency measure?

cash flow coverage ratio.

The ability to generate cash from ongoing core business activities is called

cash flow from operating activities.

A way to quantify components of change is

cause-of-change analysis.

An income statement that shows each statement item as a percentage of sales is called a(n) ____-____ income statement.

common-size.

Companies are said to have a ____ ____ if they consistently earn rates of return above the competitive floor.

competitive advantage.

The ____ ____ is the rate of return that would be earned in the economist's "perfectly competitive" industry.

competitive floor.

The risk of nonpayment by a borrower is referred to as ____ ____.

credit risk.

Identifying similarities and differences across companies or business units at a single point in time is referred to as

cross-sectional analysis.

The current ratio is calculated as

current assets divided by current liabilities.

The ratio that tells us the company's ability to make interest and principal payments is known as the ____ ____ ratio.

interest coverage.

The calculation ____ ____ for the ratio is Cost of goods sold divided by average inventory.

inventory turnover.

The calculation for the ____ ____ ratio is Cost of goods sold divided by average inventory.

inventory turnover.

The quick ratio is similar to the current ratio, except it excludes

inventory.

Companies present cash flows related to expansion of fixed assets and cash flows related to nonoperating investments in the cash flow from ____ activities section of the statement of cash flows.

investing.

The accounts payable turnover ratio

is calculated using inventory purchases and average accounts payable.

The days accounts receivable outstanding

is calculated using net credit sales and accounts receivable.

The company's short-term ability to generate cash for working capital needs and immediate debt repayment needs is its

liquidity.

Financial ratios useful in analyzing a company's credit risk involve ____ and ____ ratios.

liquidity; solvency.

The ratio that tells us if a company can pay its long term debt is the

long-term debt to assets ratio.

These types of companies have capital expenditures limited to the amount needed to sustain current levels of operations, usually at a time when operating cash flows are significantly positive.

mature companies.

If a borrower has a serious cash flow problem, lenders may

modify payment schedules.

The calculation for the accounts receivable turnover ratio is

net credit sales divided by average accounts receivable.

The interest coverage ratio is calculated as

operating income before taxes and interest divided by interest expense.

Cash flow from ____ refers to the amount of cash a company is able to generate from ongoing core business activities.

operations

Return on assets (ROA) can be broken down into asset turnover and

profit margin.

Common-size cash flow statements show each statement item as a percentage of

sales.

Common-size income statements show each statement item as a percentage of

sales.

A company's ability to generate a stream of cash inflows sufficient to maintain its productive capacity and be able to pay its debt is known as its ____.

solvency.

Days inventory held

tells us how many days it takes for inventory to move from the company to its customers.

Current assets divided by current liabilities is the calculation for

the current ratio.

Stockers Market shows sales of $25,000 and gross profit of $15,000 for the current year on its trend income statement. For the previous year, it had sales of $22,000 and gross profit of $12,100. This means that

the current year percentage for gross profit is 124% $15,000/$12,100 = 124%

Stockers Market shows sales of $25,000 and gross profit of $15,000 for the current year on its common-size income statement. For the previous year, it had sales of $22,000 and gross profit of $12,100. This means that,

the current year percentage for gross profit is 60%.

Cash plus marketable securities plus receivables divided by current liabilities is the calculation for

the quick ratio.

Identifying trends for a single company or business unit refers to ____-____ analysis.

time-series.

Statements that recast each item as a percentage of a base year number are called ____ statements.

trend.

Debt financing may be preferred over equity financing because

unlike dividends, interest on debt is tax deductible.

Which of the following are true regarding the payment of dividends?

- A cash dividend decrease implies that the company's management expects future operation cash flow to decrease and stay at a decreased level. - A cash dividend increase implies that the company's management expects future operating cash flow to be favorable.

Activity ratios include

- accounts receivable turnover. - inventory turnover.

Financial reports don't always include the data needed for a complete and faithful picture of a company's activities and operations because that data is filtered by

- management's accounting discretion. - generally accepted accounting principles.

Short-term liquidity ratios include

- the quick ratio. - accounts receivable turnover. - the current ratio.

The cash flow coverage ratio

- uses operating cash flows before interest payments. - is better to use than the interest coverage ratio when the company experiences rapid growth.

_______ is (are) intended to help lenders assess a borrower's default risk.

Credit analysis.

A company's operating cycle is determined by

how long it takes to sell inventory plus collect cash from customers.

Which of the following ratios is not part of the Z-score model?

Common stock/total assets.

______ continually works to drive down the rate of return on assets toward the competitive floor.

Competition.

Which of the following will cause a company's ROA to decrease?

Decrease in the intensity of asset utilization.

Which of the following will cause a company's ROA to increase?

Increase in the profit margin.

Trend income statements show each statement item as a percentage of

a base year amount.

______ measures a company's performance in using capital provided by common shareholders to generate earnings.

ROCE.

More timely payment of accounts payable would lead to

a higher accounts payable turnover ratio.

Which of the following is best used to analyze a company's credit risk?

Statement of Cash Flows.

Identify the statement that is false regarding the calculation of ROCE.

The denominator used is ending shareholders' equity.

True or false: The use of GAAP and management's accounting discretion can distort the reported financial information of a company and an analyst's view of the company.

True.

Ratios that tell us how efficiently a company uses its assets are ____ ratios.

activity.

Common-size balance sheets show each statement item as a percentage of

assets.

Financial leverage is measured by

debt-to-capital ratio.

The most significant source of external financing for most companies is ____.

debt.

A company is in ____ when it fails to make a required loan payment on time.

default.

Return on assets is calculated as

earnings before interest divided by average assets.

These types of companies may require large investments in property plant and equipment when their operating cash flows are often negative.

emerging companies.

An increase in inventory can signal unfavorable business conditions such as

escalating merchandise costs.

An increase in accounts receivable can signal unfavorable business conditions such as

expanded consumer credit use.

The degree to which a firm finances its operations with debt rather than equity is called

financial leverage.