FIN701 - Module 2-1

Sales

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

Explanation: ROE= .051( 1.24)( 1.62) ROE=.1024

A firm has a debt-equity ratio of .62, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?

Total asset turnover and debt-equity ratio

An increase in which of the following must increase the return on equity, all else constant?

Accounts receivable

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

Explanation: PE= $16.50/{.042 ($823,000)/7,500} PE= 3.58

Bernice's has $823,000 in sales. The profit margin is 4.2 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $16.50. What is the price-earnings ratio?

Explanation: ROE = .15 = (Net income/$2,800)($2,800/$1,900)( 1.50) Net income = $190

Canine Supply has sales of $2,800, total assets of $1 ,900, and a debt-equity ratio of .5. Its return on equity is 15 percent. What is the net income?

.36 Explanation: Given the debt-equity ratio of .57, if total debt is $.57 then total equity is $ 1.00 and total assets are $1 .57. Total debt ratio= $.57/$1.57 Total debt ratio= .36

Comer Books has a debt-equity ratio of .57. What is the total debt ratio?

.89 Explanation: Quick ratio = ($68 + 142)/$235 Quick ratio= .89

Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio?

.5

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

negative earnings.

The price-sales ratio is especially useful when analyzing firms that have:

Statement of Cash Flow

The sources and uses of cash over a stated period of time are reflected on the:

Equity multiplier, profit margin, and total asset turnover

Which one of the following accurately describes the three parts of the DuPont identity?

Explanation: ROE = [.0668 ($807,200)]/[$768,100 ( I - .54)] ROE= .1526, or 15.26%

Frank's Used Cars has sales of $807,200, total assets of $768,100, and a profit margin of 6.68 percent. The firm has a total debt ratio of 54 percent. What is the return on equity?

has an equity multiplier of 1.0.

If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm:

short-term solvency ratios

Ratios that measure a firm's liquidity are known as ____ ratios.

profitability ratios

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ___ ratios.

Price-earnings ratio

Which one of the following will decrease if a firm can decrease its operating costs, all else constant?

DuPont identity

Which one of these identifies the relationship between the return on assets and the return on equity?

having the same fiscal year

All of the following issues represent problems encountered when comparing the financial statements of two separate entities except the issue of the companies

12.22% Explanation: Common-size inventory= $430/($2,600 + 920) Common-size inventory = .1222, or 12.22%

Oil Creek Auto has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory?

Total assets for the current year

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:

Explanation: ROE= 12.5%(1.49) ROE= 18.63% (DuPont identity)

Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity?

Utilizing its total assets more efficiently than Sam's

RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?

14,352.31 Explanation: Total equity = $4,910/.52 Total equity= $9,442.31 Total assets = $4,910 + 9,442.31 Total assets = $ 14,352.31

SS Stores has total debt of $4,910 and a debt-equity ratio of 0.52. What is the value of the total assets?

Explanation: ROA = [.0578 ($813,200)]/($171,000 + 396,000) ROA = .0829, or 8.29%

TJ's has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and a profit margin of 5.78 percent. What is the return on assets?

I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales?

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations?

Explanation: Total asset turnover= $31,350/($2,715 + 22,407 + 3,908) Total asset turnover = 1.08 Every $1 in total assets generates $1 .08 in sales.

The Harrisburg Store has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars' worth of sales are generated from every $1 in total assets?

Explanation: Days' sales in inventory= 365/($579,300/$123,900) Days' sales in inventory = 78.07 days

The Up-Towner has sales of $913,400, costs of goods sold of $579,300, inventory of $123,900, and accounts receivable of $78,900. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?