MGMT 310 CH 3

On the statement of cash flows, which one of the following is considered an operating activity? Increase in net fixed assets Decrease in accounts payable Purchase of equipment Dividends paid Repayment of long-term debt

Decrease in accounts payable

On the statement of cash flows, which one of the following is considered a financing activity? Increase in inventory Decrease in accounts payable Increase in net working capital Dividends paid Decrease in fixed assets

Dividends paid

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

DuPont identity

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

Equity multiplier, profit margin, and total asset turnover

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?

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

Western Gear has net income of $12,400, a tax rate of 21 percent, and interest expense of $1,600. What is the times interest earned ratio for the year?

Times interest earned = [$12,400/(1 − .21) + $1,600]/$1,600 Times interest earned = 10.81

Market to Book Ratio

market value per share/book value per share Book value per share= total equity/shares outstanding Market to book = market price/ book value per share

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

profitability

The most acceptable method of evaluating the financial statements is to compare the company's current financial:

ratios to the company's historical ratios.

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

sales

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

total assets for the current year.

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

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

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?

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.

At the beginning of the year, Brick Makers had cash of $183, accounts receivable of $392, accounts payable of $463, and inventory of $714. At year end, cash was $167, accounts payables was $447, inventory was $682, and accounts receivable was $409. What is the amount of the net source or use of cash by working capital accounts for the year?

Change in NWC = ($167 + 409 + 682 − 447) − ($183 + 392 + 714 − 463) Change in NWC= −$15 A decrease in NWC is a source of cash.

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?

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

For the past year, Jenn's Floral Arrangements had taxable income of $198,600, beginning common stock of $68,000, beginning retained earnings of $318,750, ending common stock of $71,500, ending retained earnings of $316,940, interest expense of $11,300, and a tax rate of 21 percent. What is the amount of dividends paid during the year?

Net income = $198,600(1 − .21) Net income = $156,894 Dividends paid = $156,894 − ($316,940 − 318,750) Dividends paid = $158,704

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?

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

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?

ROE = [.0668 ($807,200)]/[$768,100 (1 − .54)] ROE = .1526, or 15.26%

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

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

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

short-term solvency

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

statement of cash flows

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

.5

Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 4.7, and a current ratio of 2.9. What is the cost of goods sold?

Current assets = 2.9($350,000) Current assets = $1,015,000 ($1,015,000 − Inventory)/$350,000 = 1.65 Inventory = $437,500 COGS = 4.7($437,500) COGS = $2,056,250

Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working capital of $223,700, and long-term debt of $450,000. What is the debt-equity ratio?

Current liabilities = $687,600 − 223,700 Current liabilities = $463,900 Total equity = $1,711,000 − 463,900 − 450,000 Total equity = $797,100 Debt-equity ratio = ($463,900 + 450,000)/$797,100 Debt-equity ratio= 1.15

Which one of the following is a source of cash?

decrease in an asset account increase in accounts payable acquisition of debt

Which one of the following is a use of cash?

decrease in common stock decrease in accounts payable increase in inventory

Relationships determined from a company's financial information and used for comparison purposes are known as:

financial ratios.

Investment activity

includes changes in fixed assets

Financing activity

includes changes in notes payable, long-term debt, and equity accounts as well as dividend payments

Operating activity

includes net income and changes in most current accounts

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?

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

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? 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? IV. Does the company have the ability to meet its debt obligations in a timely manner? I and III only II and IV only I, II, and III only II, III and IV only I, II, III, and IV

I, II, and III only

Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding and a book value per share of $2.09. What is the market-to-book ratio?

MV of assets = .96($225,000) MV of assets = $216,000 MV of equity = $216,000 − 101,000 MV of equity = $115,000 MV per share = $115,000/20,000 MV per share = $5.75 Market-to-book ratio = $5.75/$2.09 Market-to-book ratio = 2.75 times