Fin 3320 Ch 4
Ortny Industries has an accounts receivable turnover ratio of 4.3. If Ortny has an accounts receivable balance of $90,000, what is Ortny's average daily credit sales? You may use a 360-day year.
$1,075
Kiosk Corp. has current assets of $4.5 million and current liabilities of $3.6 million. The current ratio is 1.25, and the quick ratio is 0.75. How much does Kiosk have invested in inventory (in millions)?
$1.8
Lorna Dome, Inc. has an annual interest expense of $30,000. Lorna Dome's times-interest-earned ratio is 4.2. What is Lorna Dome's operating income?
$126,000
If Challenge Corporation has sales of $2 million per year (all credit) and an average collection period of 35 days, what is its average amount of accounts receivable (assume a 360-day year)?
$194,444
A firm has a return on equity of 20% and a total asset turnover of 4. Assuming a debt ratio of 50% and sales of $1,000,000, calculate net income.
$25,000
Colton Corp. has current assets of $4.5 million. The current ratio is 1.25 and the quick ratio is 0.75. What is the amount of Colton's current liabilities (in millions)?
$3.6
Spinnit, Limited has a debt ratio of .57, current liabilities of $14,000, and total assets of $70,000. What is the level of Spinnit, Limited's total liabilities?
$39,900
Sputter Motors has sales of $3,450,000, total assets of $1,240,000, cost of goods sold of $2,550,000, and an inventory turnover of 6.38. What is the amount of Sputter's inventory?
$399,687
Sharky's Loan Co. has an annual interest expense of $30,000. If Sharky's times-interest-earned ratio is 2.9, what is Sharky's Earnings Before Taxes (EBT)?
$57000
Snort and Smiley Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000, and total assets of $70,000. What is Snort and Smiley's level of current liabilities?
$9400
Water Works, Inc. has a current ratio of 1.33, current liabilities of $540,000, and inventory of $400,000. What is Water Works, Inc.'s quick ratio?
0.59
List the four ways that improvement can be made in return on equity.
1) Increase in sales without a disproportionate increase in costs and expenses. 2) Reduce the firm's cost of goods sold or operating expenses. 3) Increase the sales relative to the asset base, either by increasing sales or by reducing the amounts invested in company assets. 4) Increase the use of debt relative to equity, but only to the extent that it does not unduly jeopardize the firm's financial position.
Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith's acid test ratio?
1.69
Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 1995. In addition, the firm's total assets were $2,500,000, and its capital structure is comprised of 40% debt and 60% equity. What was Corbin's return on equity in 1995?
10%
Billing's Pit Corporation has an accounts receivable turnover ratio of 3.4. What is Billing's Pit Corporation's average collection period? You may use a 360-day year.
106 days
Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.
17.5%
Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of $275,000, which consist strictly of notes payable. The firm's operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable. How much is the firm's times-interest-earned?
20.2
AP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of $1,855,062, and a net profit margin of 2.9%. What is GAAP's return on equity? Round to the nearest 0.1%.
24.0%
Skrit Corporation has a net profit margin of 15% and a total asset turnover of 1.7. What is Skrit's return on total assets?
25.5%
Storm King Associates has a total asset turnover ratio of 1.90 and a return on total assets of 7.20%. What is Storm King's net profit margin?
3.79
Wireless Communications has a total asset turnover of 2.66, total liabilities of $1,004,162, and sales revenues of $7,025,000. What is Wireless's debt ratio?
38.%
Smart and Smiley Incorporated has an average collection period of 74 days. What is the accounts receivable turnover ratio for Smart and Smiley? You may use a 360-day year.
4.86
Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is:
45 Days
Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall's debt ratio.
50%
A decrease in the operating income return on investments could be caused by an increase in:
A) tax rate. B) cost of goods sold. C) total assets.
Which of the following ratios indicates how rapidly the firm's credit accounts are being collected?
Accounts receivable turnover ratio
Which of the following will increase return on equity?
An increase in sales relative to the asset base
Which of the following statements is true?
As a general rule, management would want to reduce the firm's average collection period.
Which of the following would be most responsible for a company's average collection period being higher than the industry average?
Being more lenient in extending credit to its customers than its competitors.
A decrease in ________ will increase gross profit margin.
Cost of goods sold
If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?
Current ratio. Quick Ratio
A firm's average collection period has decreased significantly from the previous year. Which of the following could possibly explain the results?
Customers are paying off their accounts quicker. The firm has a strict collection policy. v
If the total asset turnover decreases, then the return on equity will:
Decrease
Which of the following transactions does NOT affect the quick ratio?
Equipment is purchased and is financed by a long-term debt issue.
TF According to the DuPont Analysis, an increase in net profit margin will decrease return on assets.
False
TF On a common size income statement, EBIT is equal to 100%.
False
TF There is no such thing as a liquidity ratio being too high.
False
TF When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry, it is called trend analysis.
False
TF The current ratio and the acid test ratio are both measures of financial leverage.
False
Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In addition, this firm's current ratio and acid test ratio also meet industry standards. Based on this information, we can conclude that this firm must have excessive:
Fixed Assets
Which of the following is included in the denominator of the times-interest-earned ratio?
Interest expense
Why is the quick ratio a more refined measure of liquidity than the current ratio
Inventories are omitted from the numerator of the ratio because they are generally the least liquid of the firm's current assets.
Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In addition, this firm's current ratio and fixed asset turnover ratio also meet industry standards. Based on this information, we can conclude that this firm must have excessive:
Inventory
A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?
Liquidity
Which of the following is the best indicator of management's effectiveness at generating profits relative to the firm's assets?
Operating income return on investment
The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of:
Profitability ratios.
Another name for the acid test ratio is the:
Quick
An example of a liquidity ratio is the:
Quick Ratio
Which of the following is NOT a reason why financial analysts use ratio analysis?
Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.
Which of the following is NOT a limitation related to the usage of ratios when reviewing a firm's performance?
Ratios cannot be used to compare firms that are in the same industry if one firm's sales are higher than another firm's.
Which of the following financial ratios is the best measure of how effectively a firm's management is serving its stockholders?
Return on equity
Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
Return on investment
Snype, Inc. has an accounts receivable turnover ratio of 7.3. Stork Company has an accounts receivable turnover ratio of 5.0. Which of the following statements is correct?
Snype's average collection period is less than Stork's.
Which of the following industries has the highest average inventory turnover ratio?
Supermarkets
Which of the following is NOT a component of operating income return on investment?
Taxes
Which of the following is NOT a driving force of the operating profit margin?
The ability to control all of the firm's expenses
Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations?
The quick ratio (acid test)
Which of the following statements is true?
The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
Which of the following will help an analyst determine how well a firm is able to meet its debt obligations?
Timed interest earned
Which of the following is the best indicator of management's effectiveness at managing the firm's balance sheet?
Total asset turnover
TF A serious pitfall in the interpretation of financial ratios arises when a company, whose business is seasonal, ends its accounting year on March 31, while most companies in the same industry end their accounting period on December
True
TF By using common size income statements, firms can determine how various expenses as a percentage of total sales changed from period to period.
True
TF Differences in accounting practices limit the use of ratio analysis.
True
TF Financial ratios can highlight a firm's financial performance with regard to liquidity, solvency, and profitability.
True
TF Financial ratios that are higher than industry averages may indicate problems which are as detrimental to the firm as ratios that are too low.
True
TF Firms that engage in multiple lines of business make it difficult to assign them to an industry category for ratio analysis.
True
TF On a common size balance sheet, total assets are equal to 100%.
True
TF One weakness of the times-interest-earned ratio is that it includes only the annual interest expense as a finance expense that must be paid.
True
TF Ratios are used to standardize financial information.
True
TF Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the firm's management.
True
TF The focus of DuPont Analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments.
True
TF The lower the average collection period ratio, the more efficient is the firm in managing its investment in accounts receivable.
True
TF Financial ratios comprise the principal tool of financial analysis since they can be used to answer a variety of questions regarding a firm's financial condition.
True
Holding all other variables constant, which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in:
accounts payable
Other things held constant, an increase in ________ will decrease the current ratio. Assume an initial current ratio greater than 1.0.
accruals
If a company's average collection period is higher than the industry average, then the company might be
allowing its customers too much time to pay their bills
A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined. This may be due to:
an increase in inventory purchases.
An increase in ________ will decrease the times-interest-earned ratio.
interest expense
The debt ratio is a measure of a firm's:
leverage
An increase in the current ratio would indicate an increase in:
liquidity.
In the times-interest-earned ratio, lease expense is included in:
neither the numerator nor the denominator.
________ indicates management's effectiveness in managing the firm's income statement.
operating profit margin
An increase in ________ will increase common equity.
paid in capital and dividends paid
The accounting rate of return on stockholders' investments is measured by:
return on equity.
The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of:
work in process inventory.
