CH 3 Working with Financial Statements

Solid Rock Construction has current assets totaling $7 million, including $4 million in inventory. The company's current liabilities total $5 million. The quick ratio is _____.

0.60 (Current Assets - Inventory) / Current Liabliities (7 -4) /5 = 0.60

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

1.15 $11,300/($54,800 - $45,000) = 1.15

What is the debt-equity ratio for a company with $3.5 million in total assets ans $1.4 million in equity?

1.5 Total Debt = (Total Assets - Total Equity) / Total Assets (3.5 - 1.4) / 3.5

Wilberton's has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio?

1.94 Current ratio = ($537,800 - 412,400) / ($388,700 - 323,900) = 1.94

BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share.

12 Times $18/($2,700/1,800) = 12 Times

BC Corporation had sales of $1,000,000 and cost of goods sold $450.000 for the year. Inventory at year end was $180,000. The firms days sales in inventory is:

146 Inventory turnover (ITO)=COGS/INV: 365/ITO ITO = $450,000/$180,000 = 2.5 DSI = 365/2.5 =146

It takes K's Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.

21.73 Accounts receivable turnover = 365 / 16.8 = 21.73

A firm with a 26 percent return on equity earned ___ cents in profit for every one dollar in shareholders equity

26

City Plumbing has inventory of $287,800, equity of $538,800, total assets of $998,700, and sales of $1,027,400. What is the common-size percentage for the inventory account?

28.82 Percent Inventory common-size percentage = $287,800/$998,700 = .2882, or 28.82 percent

Days' sales in receivables is given by the following ratio:

365 / Receivables turnover

High Road Transport has a current stock price of $5.60. For the past year, the company had net income of $287,400, total equity of $992,300, sales of $1,511,000, and 750,000 shares outstanding. What is the market-to-book ratio?

4.23 Market-to-book = $5.60 /($992,300 / 750,000) = 4.23

Better life Corporation has sales of $500,000 on assets of $2,000,000. At year end accounts receivable were still 5% of assets. The firm's receivable turnover is _____ times.

5

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

A firm with a market-to-book vale that is greater than 1 is said to have ____ value for shareholders.

Created

The current ratio computes the relationship between ___

Current assets and current liabilities

A cash ratio is found by dividing cash by:

Current liabilities Cash /Current Liabilities

The cash coverage ratio adds ____ to operating earning (EBIT) for a better of measure of how much cash is available to meet interest obligations.

Depreciation

Financial Statement analysis is primarily "Management by ________"

Exception

Long-term solvancy ratio are also known as:

Financial Leverage Ratios

Long-term debt on the common-size balance sheet of solid rock contruction over the past three years is 30%, 34% and 40% respectively. This indicates that the firm has increased its

Leverage

The Price-Earnings (PE) ratio is a ___ ratio.

Market Value

How is price-earnings (PE) ratio computed?

Market price per share / Earnings price per share

How is the market-to-book ratio measured?

Market value per share/Book value per share

Which one of the following is the correct equation for computing return on assets (ROA)?

Net Income/ Total Assets

If a company has had negative earnings for several periods they might choose to use a ____.

Price - Sale Ratio

The profit margin is equal to net income divided by

Sales

These financial statements provide for comparison of firms that differ in size

Standardized

What does a Time interest Earned (TIE) Ratio of 3.5 times mean?

The Company's interest obligation are covered 3.5 times by it's EBIT

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets.

The cash ratio is used to evaluate the:

length of time that a firm can pay its bills if no additional cash becomes available.

What is the main difference between the cash coverage ratio and the times inters earned ratio?

non-cash expenses

The equity multiplier is equal to:

one plus the debt-equity ratio.

AD corporation has net income of $425,000 and total sales of $2.5 million. The firms profit margin is __ %

17

A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid?

2.24 Percent Dividends paid common-size percentage = [$811,000 ×.051 × (1 - .56)] / $811,000 = .0224, or 2.24 percent

BK Trucking has total equity of $25,380 and 1,500 shares outstanding. its stock is currently selling $38 per share. What is the market-to-book ratio?

2.25 $38 / (25,380 / 1,500) = 2.25

A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio.

2.40 $600/$250 = 2.40

AD corporation had sales of $750,000 and cost of goods sold of $350,000. Inventory at year end was $87,500. the firm's inventory turnover is ______.

4.00 COGS/Inventory $350,000/$87,500 = 4.00

Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets?

5.56 percent Return on assets = .1128 /(1 + 1.03) = .0556, or 5.56 percent

AD Corporation had net income of $300,000 and paid out $125,000 in cash dividends to stockholders. The firm's retention ratio is ___%. (Round the percent to the nearest whole number).

58% Retention ratio = (EPS - DPS) / EPS OR addition to retained earnings/net income = (net income - dividends)/net income = (300000-125000)/300000=0.58 or 58%

Adell Furniture has a profit margin of 8.2 percent on sales of $211,000. The common size ratio of dividends is .03 and total assets are $196,000. What is the plowback ratio?

63.41 Percent Plowback ratio = [(.082 × $211,000) - (.03× $211,000)] / (.082 × $211,000) = .6341, or 63.41 percent

Alpha manufacturing has cost of good sold of $90 million and a net income of $9.6 million on total sales of $120 million. Total assets are $150 million. A common size income statement will show cost of goods sold of 75% and a net profit of __%

8 Net profit(%) - 9.6/120 = 8 NI/TS = NP

if sales increase while there is no change in accounts receivable, the receivables turnover ratio will?

Increase

Which of the following is the correct equation for return on equity?

Net income/total equity

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23 million, and total assets of $1.48 million. what is the return on assets?

- 27.23% - 403,000 / 1.48m = 27.23%

Which of the following is (are) true of financial ratios? (2 answers)

- Are used for comparison purposes - Are developed from a firm's financial information

Which of the following would help a company take action to improve its ratios?

- Comparing to its own historical ratios - Comparing to peer companies - Comparing to aspirant companies - Comparing to major competitors

Based on the sustainable growth rate, which of the following factors affect a firms ability to sustain growth?

- Dividend Policy - Profit Margin - Financial Policy

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.0, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:

- Further investigation - Examination of whether the increase is due to declining inventory or increasing sales

Which of the following create problems with financial statement analysis?

- The firm or its competitors are global companies - The firm and its competitors operate under different regulatory environments - the firm or its competitors are conglomerates

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase.

which one of the following best explains why financial managers use a common-size balance sheet

To track changes in a firms capital structure

A common-size balance sheet expresses accounts as a percentage of _____.

Total Assets

True or False: A way to establish a benchmark for ratio analysis is to identify a peer group.

True

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes __ to sell

a long time