Q&A Hero

Q: It is commonly accepted that the industry average for a ratio is the ideal goal for a financial manager to achieve.

Q: Financial ratios are used by personnel in marketing, human resources, and other groups within a firm, not just by the finance and accounting personnel.

Q: The balance sheet and income statement for Johnson and Breakwater is presented below.Balance Sheet (000)Cash$500Accounts receivable1,500Inventories500Current assets2,500Net fixed assets5,000Total Assets7,500Accounts payable1,200Bank note300Total current liabilities1,500long-term debt4,000Common stock300Retained earnings1,700Total liabilities and owners' equity$7,500Income Statement (000)Net sales$8,500Cost of goods sold(3,400)Gross profit5,100Operating expenses(2,900)Net operating income2,200Interest expense(580)Earnings before taxes1,620Income tax (34%)(551)Net income$1,069a. Compute the following ratios: Current ratio, Acid test ratio, Debt ratio, Total asset turnover, Operating profit margin, Return on total investments, Times interest earned, Inventory turnover.b. All other things equal, compute the dollar amount of sales needed to achieve an 18% return on total assets for the coming year.c. Given Johnson's inventory turnover ratio, find a way of computing the current level of inventory given this ratio and assuming the current level of inventories is unknown. Set up but do not solve.

Q: a. Using the financial statements for GMT Enterprises for 2010 (given below), calculate the return on equity, the debt ratio, and the times interest earned ratio.b. Suppose the industry average debt ratio is 50%. Give one reason why the debt ratio for GMT Enterprises may be considered favorable, and give one reason why the debt ratio for GMT Enterprises may be considered unfavorable.GMT Enterprises2010 Financial StatementsIncome Statement ($)Sales10,000Operating expenses8,200EBIT1,800Interest expense100EBT1,700Taxes (40%)680Net income1,020Balance Sheet ($)Current assets1,500Fixed assets4,000Total assets5,500Accounts payable900Accruals600Long-term debt400Common stock2,100Retained earnings1,500Total liabilities & equity5,500

Q: Complete the following balance sheet using the information given. Round account balances to the nearest dollar.Balance SheetIncome StatementCashSales (All Credit)$16,000Accounts receivableCost of goods sold11,000InventoryOperating expenses1,000Net fixed assetsInterest expense200Total assets$20,000Taxes1,000Net income$2,800Accounts payableShort-term notes payable$1,000Ratios:Long-term debtOperating Profit Margin =25%Common stock$1,500Return on Equity =20%Retained earningsQuick Ratio =31.9375Total Liabilities and equityFixed Asset Turnover =2Current Ratio =5Days Sales Outstanding =2

Q: Complete the following balance sheet using the information given. Round account balances to the nearest dollar.Balance SheetIncome StatementCashSales (All Credit)$20,000Accounts receivableCost of goods sold10,000InventoryOperating expenses6,000Net fixed assetsInterest expense100Total assetsTaxes1,365Net income$2,535Accounts payableShort-term notes payable$1,425Ratios:Long-term debtProfit Margin =12.675%Common stock$5,000Return on Equity =15%Retained earningsQuick Ratio =1.2Total Liabilities and equityReturn on Total Assets =10%Fixed Asset Turnover =1.6Current Ratio =2Days Sales Outstanding =45

Q: Beverly Corp. had total sales of $1,200,000 in 2010 (80 percent of its sales are credit). The company's gross profit margin is 25 percent, its ending inventory is $150,000, and its accounts receivable balance is $90,000. What additional amount of cash could the firm have generated if it had increased its inventory turnover ratio to 9.0 and reduced its average collection period to 28.21875 days?

Q: Please refer to Table 4-7 for the following question.Table 4-7Hokie Corporation Comparative Balance SheetFor the Years Ending December 31, 2009 and 2010(Millions of Dollars)Assets20092010Current Assets:Cash$2$10Accounts receivable1612Inventory2226Total current assets$40$48Gross fixed assets:$120$124Less accumulated depreciation(60)(64)Net fixed assets6060Total assets$100$108Liabilities and owners' equity:Current liabilities:Accounts payable$16$18Notes payable1010Total current liabilities$26$28Long-term debt2018Owners' equity:Common stock4040Retained earnings1422Total liabilities and owners' equity$100$108Hokie had net income of $28 million for 2010 and paid total cash dividends of $20 million to their common stockholders.Calculate the following 2010 financial ratios of Aggie Corporation using the information given in Table 4-7:i. current ratioii. acid test ratioiii. debt ratioiv. return on total assetsv. return on common equity

Q: Please refer to Table 4-6 for the following question.Table 4-6Financial Data for Springfield Power Co. as of December 31, 2010:Inventory$300,000Long-term debt500,000Interest expense25,000Accumulated depreciation450,000Cash280,000Net sales (all credit)1,800,000Common stock900,000Accounts receivable325,000Operating expense (incl. depr. exp. and taxes)625,000Notes payable-current200,000Cost of goods sold1,100,000Plant and equipment1,400,000Accounts payable180,000Marketable securities80,000Accrued wages45,000Retained earnings190,000From the information presented in Table 4-6, calculate the following ratios for the Springfield Power Co.i. current ratioii. acid test ratioiii. average collection periodiv. inventory turnoverv. gross profit marginvi. operating profit marginvii. net profit marginviii. total asset turnover

Q: Blanton Corporation increased its financial leverage during 2010 by taking out a loan and using the proceeds to buy back common stock. At the end of 2010, the corporation reported higher earnings per share and higher return on equity. However, its stock price declined. Discuss why this may happen.

Q: A company borrows $10,000 and puts the money into its checking account. This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was A) equal to one. B) greater than one. C) less than one. D) greater than or less than one, but not equal to one.

Q: All of the following will improve a firm's liquidity position EXCEPT A) increase accounts receivable turnover. B) increase inventory turnover. C) increase the average collection period. D) increase long-term debt and invest the money in marketable securities.

Q: Bill's Bike Shop has a return on assets of 12%. Anton's assets = $100 while Anton's owner's equity = $40 and its debt equals $60. What is Bill's return on equity? A) 18% B) 20% C) 30% D) 12%

Q: Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers? A) The firm's average collection period is likely to fall. B) The firm's accounts receivable turnover might rise. C) The firm's sales might decrease. D) all of the above

Q: Assume that a firm issues a six-month note to purchase inventory. Which of the following is true if the current ratio before the purchase is 1.0? A) The firm's current ratio must decrease. B) The firm's quick ratio will stay the same. C) The firm's current ratio will increase. D) The firm's quick ratio might decrease.

Q: Denver Systems has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000. What is Denver Systems' return on equity? A) 7.5% B) 20.0% C) 21.5% D) 14.0%

Q: Which of the following has the most significant influence on return on equity? A) common dividends B) principal payments C) accruals D) operating income

Q: SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000. What is SNL's times-interest-earned ratio? A) 1.3 B) 11.4 C) 8.1 D) 45.8

Q: TransSystems Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is TransSystems Inc.'s debt ratio? A) 55.4% B) 43.7% C) 31.2% D) 66.7%

Q: Rural Hydroponics has total equity of $560,000; sales of $2,250,000; current assets of $700,000; and total liabilities of $435,000. What is Rural Hydroponics' total asset turnover? A) 4.02 B) 3.21 C) 2.26 D) 5.51

Q: Which of the following ratios would be the best way to determine how customers are paying for their purchases? A) inventory turnover B) total asset turnover C) current ratio D) average collection period

Q: RBW Corp. has cash of $48,000; short-term notes payable of $35,000, accounts receivable of $100,000; accounts payable of $120,000; inventories of $200,000; and accruals of $90,000. What is RBW's current ratio? A) 1.57 B) 2.71 C) 1.42 D) 0.64

Q: During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000. The result of this growth will be A) a higher operating profit margin and higher net income. B) a lower operating profit margin and lower net income. C) a lower operating profit margin and higher net income. D) a higher P/E ratio.

Q: Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit? A) return on equity B) the acid test ratio C) the operating profit margin D) the fixed asset turnover

Q: 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? A) liquidity B) leverage C) efficiency D) profitability

Q: An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that A) the firm has higher sales than the industry average. B) the firm is selling a product mix that includes more high margin items. C) the firm is managing its inventory inefficiently. D) the firm's products are in inventory for fewer days before they are sold than is average for the industry.

Q: WPM, Inc. has current assets of $8,000,000, current liabilities of $4,000,000, inventory of $1,320,000, and sales of $12,000,000. What is the acid test ratio? A) 2.0 B) 1.67 C) 0.22 D) 0.1

Q: Which of the following does NOT provide an indication of liquidity? A) quick ratio B) debt ratio C) inventory turnover D) average collection period

Q: Based on the information contained in Tables 4-5, what was Yen's operating profit margin for 2010? A) 26.50% B) 21.34% C) 14.29% D) 11.67%

Q: Based on the information contained in Tables 4-5, what was Yen's return on common equity for 2010? A) 50.0% B) 85.0% C) 121.4% D) 24.3%

Q: Based on the information contained in Tables 4-5, what was Yen's quick ratio at the end of 2010? A) 2.10 B) 1.43 C) 2.93 D) 1.79

Q: Please refer to Table 4-5 for the following questions.Table 4-5Yen Inc.Balance Sheet20092010Cash$8,000$12,200Accounts receivable12,00013,000Inventories9,00010,000Land20,00020,000Other fixed assets16,00019,800Accumulated depreciation(4,000)(5,000)Total assets$61,000$70,000Accounts payable$11,000$12,000Long-term Bonds24,00024,000Common stock14,00014,000Retained earnings12,00020,000Liabilities & Equity$61,000$70,000Yen Inc.Income StatementFor the year ended December 31, 2010Sales$196,000Cost of goods sold(140,000)Gross profit$56,000Operating expenses(26,000)Depreciation(2,000)EBIT28,000Interest expense(2,000)EBT26,000Taxes(9,000)Net Income$17,000Based on the information contained in Tables 4-5, what was the total amount of Yen's common stock dividend for 2010?A) $17,000B) $12,800C) $9,000D) $8,000

Q: Standard Inc. has an annual interest expense of $40,000. If Standard's times-interest-earned ratio is 3.0, what is Standard's Earnings Before Taxes (EBT)?A) $47,000B) $80,000C) $120,000D) $160,000

Q: John Box Inc. has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT). John Box's times-interest-earned ratio is 4.2. What is John Box's net income? A) $96,000 B) $57,000 C) $126,000 D) $57,600

Q: WRJ has a debt ratio of .4, current liabilities of $18,000, and total assets of $120,000. What is the level of WRJ's total liabilities? A) $22,000 B) $48,000 C) $58,000 D) $63,934

Q: Acme Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000 and total assets of $70,000. What is Acme's level of current liabilities? A) $8,400 B) $9,400 C) $12,348 D) $10,600

Q: Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accounts receivable balance of $100,000, what is Jeter's average daily credit sales? A) $745.23 B) $1,232.88 C) $22,222.22 D) $1,893.45

Q: High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an accounts receivable turnover ratio of 5. Assuming that High and Low have the same sales level, which of the following statements is correct? A) High's average collection period is less than Low's. B) Low's average collection period is less than High's. C) High has a higher accounts receivable balance on average than does Low Company. D) Low Company has (on average) a lower accounts receivable balance than does High.

Q: Septon Inc. has an average collection period of 74 days. What is the accounts receivable turnover ratio for Septon Inc.? A) 4.93 B) 2.47 C) 2.66 D) 1.74

Q: Which of the following ratios would be the poorest indicator of how rapidly the firm's credit accounts are being collected? A) times interest earned B) average collection period C) accounts receivable turnover ratio D) cash conversion cycle

Q: Apollo Corp. reported the following balance sheet: Cash $28,000 Accounts payable $5,000 Accounts receivable 15,000 Notes Payable 12,000 Inventory 45,000 Accruals 17,000 Net Fixed Assets 122,000 Long-Terms Debt 45,000 Common Stock 10,000 Retained Earnings 121,000 Total assets $210,000 Total Liab. & Equity $210,000 Apollo has sales of $600,000 and net income of $50,000. Apollo's return on equity is A) 5.00%. B) 50.00%. C) 38.17%. D) 41.13%.

Q: Apollo Corp. reported the following balance sheet: Cash $28,000 Accounts payable $5,000 Accounts receivable 15,000 Notes Payable 12,000 Inventory 45,000 Accruals 17,000 Net Fixed Assets 122,000 Long-Terms Debt 45,000 Common Stock 10,000 Retained Earnings 121,000 Total assets $210,000 Total Liab. & Equity $210,000 Apollo Corp.'s debt ratio is A) 32.17%. B) 37.62%. C) 39.45%. D) 42.95%.

Q: Apollo Corp. reported the following balance sheet:Cash$28,000Accounts payable$5,000Accounts receivable15,000Notes Payable12,000Inventory45,000Accruals17,000Net Fixed Assets122,000Long-Terms Debt45,000Common Stock10,000Retained Earnings121,000Total assets$210,000Total Liab. & Equity$210,000Apollo Corp.'s current ratio isA) 2.59.B) 2.74.C) 2.98.D) 3.88.

Q: In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell's cash balance for 2010? A) $2,500 B) $13,600 C) $4,000 D) $6,500

Q: In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell's total asset balance for 2010? A) $42,500 B) $36,500 C) $38,500 D) $26,900

Q: In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell's inventory turnover for 2010? A) 0.13 B) 11.1 C) 9.3 D) 7.78

Q: Please refer to Table 4-4 for the following questions.Table 4-4Wes Donnell, Inc.Balance Sheet20092010Cash$2,500$?????Accounts receivable6,0007,000Inventories8,5009,000Land7,0007,000Other fixed assets15,00015,500Accumulated depreciation(5,000)(6,000)Total assets$34,000$?????Accounts payable$4,000$5,000Bonds6,0006,500Common stock15,00015,000Retained earnings9,000?????Liabilities & Equity$34,000$?????Wes Donnell, Inc.Income StatementFor the year ended December 31, 2010Sales$100,000Cost of goods sold(70,000)Gross profit30,000Operating expenses(16,000)Depreciation(1,000)EBIT13,000Interest expense(500)EBT12,500Taxes(1,900)Net Income$10,600In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell's retained earnings balance for 2010?A) $10,000B) $8,000C) $19,600D) $2,600

Q: Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?A) times interest earnedB) net profit marginC) operating return on assetsD) operating efficiency quotient

Q: Based on the information in Table 4-3, assuming that the firm has no preferred stock, and paid $300,000 in common dividends, the firm's return on equity was A) 79.43%. B) 61.89%. C) 43.34%. D) 33.53%.

Q: Based on the information in Table 4-3, the current and acid-test ratios are, respectively, A) 2.37 and 1.39. B) 2.37 and 1.27. C) 2.18 and 1.39. D) 2.18 and 1.27.

Q: Based on the information in Table 4-3, the debt ratio is A) 18.38%. B) 40.24%. C) 48.48%. D) 53.43%.

Q: Based on the information in Table 4-3, the total asset turnover is A) 2.10 times. B) 2.42 times. C) 2.87 times. D) 3.25 times.

Q: Based on the information in Table 4-3, the operating profit margin is A) 13.75%. B) 18.59%. C) 25.80%. D) 33.33%.

Q: Based on the information in Table 4-3, the operating return on total assets is A) 55.62%. B) 10.06%. C) 44.74%. D) 33.33%.

Q: Please refer to Table 4-3 for the following questions.Table 4-3Emery CorporationBalance Sheet Income StatementAssets:Cash$250,000Sales (all credit)$8,000,000Accounts receivable450,000Cost of goods sold(4,000,000)Inventory500,000Operating expense(2,900,000)Net fixed assets2,100,000Interest expense(150,000)Total assets$3,300,000Income taxes(380,000)Net income$570,000Liabilities and owners' equity:Accounts payable$100,000Notes payable450,000Long-term debt1,050,000Owners' Equity1,700,000Total liabilities and owner's equity$3,300,000Based on the information in Table 4-3, the average collection period isA) 38.01 days.B) 27.36 days.C) 20.53 days.D) 17.49 days.

Q: Based on the information in Table 4-2, the inventory turnover ratio isA) 1.29 times.B) 2.37 times.C) 4.43 times.D) 2.99 times.

Q: Based on the information in Table 4-2, the times interest earned ratio is A) 11.48. B) 5.25. C) 4.88. D) 8.65.

Q: Based on the information in Table 4-2, and assuming the company's stock price is $50 per share, the P/E ratio is A) 10.89. B) 14.33. C) 24.44. D) 27.50.

Q: Based on the information in Table 4-2, the return on equity is A) 19.33%. B) 18.47%. C) 16.66%. D) 15.65%.

Q: Based on the information in Table 4-2, the debt ratio is A) 28.12%. B) 34.74%. C) 45.69%. D) 42.03%.

Q: Based on the information in Table 4-2, the average collection period is A) 70 days. B) 81 days. C) 89 days. D) 127 days.

Q: Based on the information in Table 4-2, the acid-test ratio is A) 1.17. B) 1.33. C) 1.39. D) 2.15.

Q: Please refer to Table 4-2 for the following questions.Table 4-2Drummond CompanyBalance SheetAssets:Cash and marketable securities$400,000Accounts receivable1,415,000Inventories1,847,500Prepaid expenses24,000Total current assets3,686,500Fixed assets2,800,000Less: accum. depr.(1,087,500)Net fixed assets1,712,500Total assets$5,399,000Liabilities:Accounts payable$600,000Notes payable875,000Accrued taxes92,000Total current liabilities$1,567,000Long-term debt900,000Common Stock (100,000 shares)700,000Retained Earnings2,232,000Total liabilities and owner's equity$5,399,000Net sales (all credit)$6,375,000Less: Cost of goods sold(4,375,000)Selling and administrative expense(1,000,000)Depreciation expense(135,000)Interest expense(100,000)Earnings before taxes$765,000Income taxes(306,000)Net income$459,000Based on the information in Table 4-2, the current ratio isA) 2.97.B) 2.46.C) 2.35.D) 2.23.

Q: XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10. It is likely thatA) XYZ's earnings per share are twice the earnings per share of EFG.B) investors expect XYZ's earnings to grow faster than EFG's earnings.C) investors believe that for the same level of earnings growth, XYZ is a higher risk company.D) investors believe XYZ stock is overvalued.

Q: Based on the information in Table 4-1, the inventory turnover ratio is A) 1.3 times. B) 2.0 times. C) 2.5 times. D) 2.9 times.

Q: Cash flows between investors and the firm, what we call financing cash flows, occur in one of four ways EXCEPT: A) Pay stock dividend. B) Pay interest to lenders. C) Pay dividends to stockholders. D) Increase or decrease interest-bearing debt.

Q: Computing the change in long-term assets or net capital spending, it involves computing the change in net fixed assets and other long-term assets.

Q: What are the limitations of financial statements?

Q: In the United States, financial statements are prepared following the Financial Accounting Standards Board's generally accepted accounting principles (GAAP).

Q: It is possible for two companies to have the same financial performance, but their financial statements can be different, depending on how and when the managers choose to report certain transactions.

Q: Why should we be more concerned with the marginal tax rate rather than the average tax rate?

Q: How is taxable income computed?

Q: The income statement for Simpson, Inc. indicates that tax expense was $30,000. The balance sheet indicates that taxes payable for the same year increased by $5,000. What amount did Simpson, Inc. actually pay in taxes during this year? A) $15,000 B) $20,000 C) $25,000 D) Cannot be determined without the cash balance

Q: Rogue Corp. has sales of $4,250,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is Rogue's tax liability? A) $258,000 B) $260,000 C) $360,000 D) $600,000

Q: When a company sells a piece of equipment or land, any gain (sales price less the book value of the asset or residual value) is thought to be a capital gain.

Q: What are the differences between GAAP and IFRS?

Q: Which of the following statements about Generally Accepted Accounting Principles (GAAP) is NOT true? A) GAAP is a set of rule-based accounting standards established by the Financial Accounting Standards Board (FASB). B) GAAP sets out the standards, conventions, and rules that accountants must follow when preparing audited financial statements. C) GAAP is complex, providing more than 150 "pronouncements" as to how to account for different types of transactions. D) All of the statements above are true.

Q: Which of the following statements about International Financial Reporting Standards (IFRS) is NOT true? A) IFRS sets out broad and general principles that accountants should follow when preparing financial statements. B) IFRS leaves LESS room for discretion than GAAP does. C) IFRS offers simplicity but also possibly more leeway for accounting malpractice than does GAAP. D) In 2008, the Securities and Exchange Commission (SEC) announced its plan to convert U.S. companies from GAAP to IFRS.

Q: International Financial Reporting Standards (IFRS) is a set of principle-based accounting standards that were established by the International Accounting Standards Board (IASB).

Q: Generally Accepted Accounting Principles (GAAP) is a set of principle-based accounting standards established by the Financial Accounting Standards Board (FASB).