Fin 120 ch4 – Flashcards
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The TBI Company has a number of days of inventory of 50. Therefore, the TBI Company's inventory turnover is closest to
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Cost of goods sold/Inventory = Inventory/(CoGS/365) = 365 Inventory turnover X Number of days of inventory = 365 Inventory turnover × 50 = 365, and solving for Inventory turnover provides a turnover of 7.3 times.
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DuPont analysis involves breaking return-on-assets ratios into their
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profit margin and turnover components.
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If a company's net profit margin is -5 percent, its total asset turnover is 1.5 times, and its equity multiplier ratio is 1.2 times, its return on equity is closest to
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ROE = Net income/Average total equity = Net income/Revenues X Revenues/Average total assets X Average total assets/Average total equity Return on equity = -5% × 1.5 × 1.2 = -9.0%
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Which of the following issues are stockholders primarily concerned about? (listed correct answers)
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-The value of their stock. -How much cash they can receive via dividends and/or capital appreciation. -How profitable the firm is.
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Which of the following is not a primary concern of a firm's creditors? (Whether the firm is generating enough cash to pay dividends?)
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-Whether and when they will be repaid the money that they have loaned the firm? -Whether and when they will receive their entitled interest payment? -Whether the firm is generating enough cash to pay its day-to-day bills?
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To create a common size balance sheet, we divide each of the asset, liability, and equity account items by
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total assets.
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The most useful way to prepare a common size income statement is to express each account item as a percentage of
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net sales.
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Which of the following aspects about a company's health does the current ratio measure?
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Short-term solvency
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Anyone analyzing a firm's financial statements should
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-use audited financial statements only. -do a trend analysis. -perform a benchmark analysis.
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All but one of the following is true of common-size balance sheets.
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Each asset and liability item on the balance sheet is standardized by dividing it by sales.
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All but one of the following is true of common-size income statements. (Each income statement item is standardized by dividing it by total assets.)
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-Common-size financial statement analysis is a specialized application of ratio analysis. -Income statement accounts are represented as percentages of sales. -Each income statement item is standardized by dividing it by sales.
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Which of the following is NOT true of liquidity ratios? (For manufacturing firms, quick ratios will tend to be much larger than current ratios.)
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-They measure the ability of the firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. -The higher the number, the more liquid the firm and the better its ability to pay its short-term bills. -There are two commonly used ratios to measure liquidity—current ratio and quick ratio.
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All but one of the following is true about quick ratios. (Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios.)
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-Quick ratios will tend to be much smaller than current ratio for manufacturing firms or other industries that have a lot of inventory. -The quick ratio is calculated by dividing the most liquid of current assets by current liabilities. -Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets.
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Which one of the following does NOT change a firm's current ratio? (The firm collects on its accounts receivables.)
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-The firm purchases inventory by taking a short-term loan. -The firm pays down its accounts payables. -None of the above.
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All else being equal, which one of the following will decrease a firm's current ratio?
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An increase in accounts payable.
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Which one of the following statements is NOT true?
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The more days that it takes the firm to collect on its receivables, the more efficient the firm is.
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Which one of the following statements is NOT correct? (A leveraged firm is less risky than a firm that is not leveraged.)
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-A leveraged firm is more risky than a firm that is not leveraged. -A firm that uses debt magnifies the return to its shareholders. -All of the above statements are correct.
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For a firm that has no debt in its capital structure,
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ROE = ROA.
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Which one of the following statements is NOT correct? (All of the above are correct.)
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The DuPont system is based on two equations that relate a firm's ROA and ROE. -The DuPont system is a set of related ratios that links the balance sheet and the income statement. -Both management and shareholders can use this tool to understand the factors that drive a firm's ROE.
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The DuPont equation shows that a firm's ROE is determined by three factors:
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net profit margin, total asset turnover, and the equity multiplier.
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Liquidity ratio: Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of 378,454. What is the quick ratio?
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Current assets = $623,122 Current liabilities = $378,454 Inventory = $241,990 Quick ratio = Current assets - Inventory / Current liabilities = ($623,122 - $241,990) / $378,454 = 1.01
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Liquidity ratio: Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm's current ratio?
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Current assets = $73,913 + $451,000 +$334,227 = $859,140 Current liabilities = $469,553 Current ratio = Current assets / Current liabilities $859,140/$469,553 = 1.83
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Liquidity ratio: Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of 197,333. What is the firm's quick ratio?
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Current ratio = 1.92 Current liabilities = $272,934 Inventory = $197,333 Current ratio = Current assets / Current liabilities 1.92 = Current assets / Current liabilities Current assets = 1.92 X $272,934 = %524,033 Quick ratio = (Current assets - Inventory) / Current liabilities = ($524,033 - $197,333) / $272,934 = 1.20
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Efficiency ratio: If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its accounts receivable turnover?
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Accounts receivables = $654,803 Net sales = $1,932,349 A/R turnover = Net sales / Accounts receivables =$1,932,349/$654,803=2.95
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Efficiency ratio: If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables?
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Accounts receivables turnover = 3.9x Net sales = $3,436,812 A/R turnover = Net sales / Account receivables 3.9x= $3,436,812 / Accounts receivables Accounts receivables= $3,436,812 / 3.9 = $881,234
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Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm's days's sales in inventory?
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Day's sales in inventory = 356/5.6 = 65.2 days
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Efficiency ratio: Jet, Inc., has net sales of $712,478 and accounts receivables of $167,435. What are the firm's accounts receivables turnover and days's sales outstanding?
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Net sales = $712,478 Accounts receivables = $167,435 A/R turnover = Net sales / Accounts receivables =$712,478/$137,435 = 4.26 times DSO= 365 / (Net sales / Accounts receivable turnoever) =365/4.26 = $85.7 days
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Efficiency ratio: Ellicott City Manufacturers, Inc., has sales of $6,344,210, and a gross profit margin of 67.3 percent. What is the firm's cost of goods sold?
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Gross profit margin = (Sales - CofGS) / Sales 0.673= ($6,344,210 - CoGS) / $6,344,210 CofGS = $6,344,210 - (0.673*$6,344,210) =$2,074,557
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Leverage ratio: Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio?
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Debt ratio = $1,233,837 / $2,178,990 = 0.57 Equity multiplier = total assets/equity = 1/(equity/total assets) = 1/(1-debt/total asets) = 1/(1-0.57) = 2.33 Equity multiplier = 1 + (debt to equity) debt to equity ratio = equity multiplier -1 = 2.33-1=1.33
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Market-value ratio: RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio.
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Net income = $812,425 Share price = $13.45 EPS = $812,425 / 312, 490 = $2.60 Price - earnings ratio = $13.45/$2.60 = 5.17 time
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Market Market-value ratios: Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a P-E ratio of 11.2 times. What is the firm's share price?
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Net income = $1,276,351 Share outstanding= 420,000 EPS = $1,276,351 / 420,000 = $3.04 P-E ratio = 11.2 times Price - earnings ratio = Price per share/EPS 11.2 = Price per share/$3.04 Price per share = 11.2 x $3.04 = #34.05
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The quick ratio is a better indicator of a company's liquidity compared to the current ratio due to the impact of:
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inventory.
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Which of the following indicates how quickly a firm's credit accounts are being collected?
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accounts receivable turnover
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Which of the following is a coverage ratio?
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times interest earned ratio
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Which of the following is an indicator of how efficient management is in using assets to generate sales?
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total asset turnover
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A debt ratio of 0.9 means:
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the firm has $0.90 of total debt for every $1.00 of total assets.
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A common-size balance sheet illustrates the relationship between:
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asset accounts and total assets.
