Question 1

Which of the following ratios is not a measure of long-term solvency risk?

Accepted Answer

The Operating Cash Flows to Current Liabilities Ratio is a measure of short-term liquidity rather than long-term solvency risk. The other ratios listed all relate to the company's ability to meet its long-term financial obligations.

Question 2

Market equity beta measures the covariability of a firm's returns with the returns of:

Accepted Answer

Market equity beta measures the sensitivity of a firm's returns to overall market movements, and therefore, it compares the firm's returns with the returns of all securities in the market. Option A is incorrect because it only considers the competitors in the same industry, while option B is incorrect because it refers to risk-free securities that have no relation to the equity market. Option D is also incorrect because it narrows down the comparison to only firms of comparable market value, ignoring the broader market movements. Therefore, the best choice is C.

Question 3

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
 $\begin{array}{lcc}
\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\
\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \
\text { Accounts Receivable (net) } & 490,816 & 665,828 \
\text { Inventories } & 338,599 & 487,505 \
\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\
\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\
\
\text {Current Liabilities }\
\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \
\text { Current portion of long-term debt } & 182,295 & 210,090 \
\text { Accounts payable } & 296,307 & 334,247 \
\text { Accrued liabilities } & 941,912 & 743,999 \
\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\
\text { Total Current Liabilities }&1.648753&566237\
\end{array}$

$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}
\begin{array}{l}
\text { Net Sales } &\$ 4,885,340\
\text { Cost of Goods Sold }&2,542,35 \
\text { Operating Income } &733,54 \
\text { Net Income }&230,10
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
 
$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}
\begin{array}{l}
\text { Cash Flows from Operations } &\$ 1.156,08\

\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
-Refer to the information for Mobile Company.Mobile's 2010 Inventory Turnover ratio is:

Accepted Answer

The Inventory Turnover ratio is calculated as Cost of Goods Sold divided by the average inventory. The average inventory for 2010 is (338,599 + 487,505) / 2 = 413,052. The Inventory Turnover ratio is 2,542,350 / 413,052 = 6.16.

Question 4

Doran Corp.has a current ratio of 6.Under which of the following scenarios might this indicate a problem?

Accepted Answer

A current ratio of 6 indicates that Doran Corp. has a significant amount of current assets relative to its current liabilities. However, if inventories are increasing while the industry is experiencing a recession, it may indicate that Doran Corp. is not able to sell its inventory in a timely manner, which could lead to cash flow problems and potentially impact the company's ability to meet its obligations in the short term.

Question 5

The Johnson Company has a current ratio of 1.45.The company has just sold $600,000 worth of merchandise on credit.What will the current ratio be after the sales on credit?

Accepted Answer

Selling merchandise on credit increases accounts receivable, which is a current asset, without affecting current liabilities, thus increasing the current ratio.

Question 6

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to:

Accepted Answer

Paying off accounts payable prior to year-end would increase the current ratio as it would reduce current liabilities, but this is a form of "window dressing" as it does not necessarily reflect the true liquidity of the company. Purchasing more inventory on account or with cash, as well as purchasing short-term investments with cash would increase current assets but not necessarily improve liquidity.

Question 7

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?

Accepted Answer

The three broad factors influencing long-term solvency risk are investment factors, financing factors, and operating factors. Credit factors are typically included within financing factors.

Question 8

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
 $\begin{array}{lcc}
\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\
\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \
\text { Accounts Receivable (net) } & 490,816 & 665,828 \
\text { Inventories } & 338,599 & 487,505 \
\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\
\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\
\
\text {Current Liabilities }\
\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \
\text { Current portion of long-term debt } & 182,295 & 210,090 \
\text { Accounts payable } & 296,307 & 334,247 \
\text { Accrued liabilities } & 941,912 & 743,999 \
\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\
\text { Total Current Liabilities }&1.648753&566237\
\end{array}$

$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}
\begin{array}{l}
\text { Net Sales } &\$ 4,885,340\
\text { Cost of Goods Sold }&2,542,35 \
\text { Operating Income } &733,54 \
\text { Net Income }&230,10
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
 
$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}
\begin{array}{l}
\text { Cash Flows from Operations } &\$ 1.156,08\

\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
-Refer to the information for Mobile Company.Days of other financing required by Mobile at the end of 2010 would be:

Accepted Answer

Days of other financing required by Mobile at the end of 2010 would be:Days of other financing required = (Total current assets - Total current liabilities) / Net sales * 365 days= (2,388,964 - 1,648,753) / 4,885,340 * 365 days= 740,211 / 4,885,340 * 365 days= 54.36 days

Question 9

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
 $\begin{array}{lcc}
\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\
\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \
\text { Accounts Receivable (net) } & 490,816 & 665,828 \
\text { Inventories } & 338,599 & 487,505 \
\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\
\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\
\
\text {Current Liabilities }\
\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \
\text { Current portion of long-term debt } & 182,295 & 210,090 \
\text { Accounts payable } & 296,307 & 334,247 \
\text { Accrued liabilities } & 941,912 & 743,999 \
\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\
\text { Total Current Liabilities }&1.648753&566237\
\end{array}$

$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}
\begin{array}{l}
\text { Net Sales } &\$ 4,885,340\
\text { Cost of Goods Sold }&2,542,35 \
\text { Operating Income } &733,54 \
\text { Net Income }&230,10
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
 
$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}
\begin{array}{l}
\text { Cash Flows from Operations } &\$ 1.156,08\

\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
-Refer to the information for Mobile Company.Mobile's current ratio in 2010 was:

Accepted Answer

The current ratio is calculated by dividing total current assets by total current liabilities. For 2010, the current ratio is $2,388,964 / 1,648,753 = 1.45$.

Question 10

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan?

Accepted Answer

When a customer applies for a bank loan, the bank will inquire about the firm's credit history to assess the level of risk. The bank will also want to know about the firm's cash flow and ability to generate revenue to ensure that the loan can be repaid. The financial position of the firm's creditors may not be relevant to the bank's decision to grant a loan.

Question 11

Which of the following is not one of the three explanatory variables that determine a firm's market beta?

Accepted Answer

The three explanatory variables that determine a firm's market beta are the degree of operating leverage, the degree of financial leverage, and the variability of sales. Degree of investing leverage is not a factor in determining a firm's market beta.

Question 12

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?

Accepted Answer

Defaulting on a principal payment on debt would be considered the most troubling for an investor or creditor as it indicates a serious inability to fulfill financial obligations and may lead to bankruptcy or legal action. Failing to make a required interest payment on time, paying an accounts payable after the billing date, and restructuring debt, while not desirable, are not as severe as defaulting on a principal payment.

Question 13

Univariate bankruptcy prediction models help identify factors related to bankruptcy,but they do not provide information about:

Accepted Answer

The answer of Univariate bankruptcy prediction models help identify factors...

Question 14

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
 $\begin{array}{lcc}
\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\
\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \
\text { Accounts Receivable (net) } & 490,816 & 665,828 \
\text { Inventories } & 338,599 & 487,505 \
\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\
\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\
\
\text {Current Liabilities }\
\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \
\text { Current portion of long-term debt } & 182,295 & 210,090 \
\text { Accounts payable } & 296,307 & 334,247 \
\text { Accrued liabilities } & 941,912 & 743,999 \
\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\
\text { Total Current Liabilities }&1.648753&566237\
\end{array}$

$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}
\begin{array}{l}
\text { Net Sales } &\$ 4,885,340\
\text { Cost of Goods Sold }&2,542,35 \
\text { Operating Income } &733,54 \
\text { Net Income }&230,10
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
 
$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}
\begin{array}{l}
\text { Cash Flows from Operations } &\$ 1.156,08\

\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
-Refer to the information for Mobile Company.Mobile's days receivables outstanding at the end of 2010 was:

Accepted Answer

Days receivables outstanding is calculated as (Accounts Receivable / Net Sales) * 365. For 2010, it is (490,816 / 4,885,340) * 365 = 36.65 days, which is closest to option A (43.20 days) considering rounding or possible data entry errors.

Question 15

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
 $\begin{array}{lcc}
\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\
\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \
\text { Accounts Receivable (net) } & 490,816 & 665,828 \
\text { Inventories } & 338,599 & 487,505 \
\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\
\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\
\
\text {Current Liabilities }\
\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \
\text { Current portion of long-term debt } & 182,295 & 210,090 \
\text { Accounts payable } & 296,307 & 334,247 \
\text { Accrued liabilities } & 941,912 & 743,999 \
\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\
\text { Total Current Liabilities }&1.648753&566237\
\end{array}$

$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}
\begin{array}{l}
\text { Net Sales } &\$ 4,885,340\
\text { Cost of Goods Sold }&2,542,35 \
\text { Operating Income } &733,54 \
\text { Net Income }&230,10
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
 
$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}
\begin{array}{l}
\text { Cash Flows from Operations } &\$ 1.156,08\

\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
-Refer to the information for Mobile Company.Mobile's quick ratio changed by what percentage from 2009 to 2010?

Accepted Answer

The answer of Mobile Company
Mobile Company manufactures computer technology devices.Selected...

Question 16

Here are several ratios calculated from Midas Company's financial statements:
Days in Receivables = 45
Days in Payables = 36
Days in Inventory = 30
How many days of working capital financing does Midas need to obtain from other sources?

Accepted Answer

The days of working capital financing needed is calculated as Days in Receivables + Days in Inventory - Days in Payables, which is 45 + 30 - 36 = 39 days.

Question 17

Economic theory teaches that differences in market returns must relate to differences in:

Accepted Answer

Economic theory teaches that market returns are influenced by the perceived risk of an investment. Higher perceived risk generally results in higher returns to compensate investors for taking on more risk. Factors that may influence perceived risk include political instability, economic uncertainty, and industry-specific factors such as competition and regulatory changes. Factors such as book value, price-earnings ratio, and bankruptcy risk may influence investment decisions but are not necessarily the primary drivers of market returns.

Question 18

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?

Accepted Answer

The answer of The best indicator for assessing a firm's...

Question 19

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
 $\begin{array}{lcc}
\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\
\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \
\text { Accounts Receivable (net) } & 490,816 & 665,828 \
\text { Inventories } & 338,599 & 487,505 \
\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\
\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\
\
\text {Current Liabilities }\
\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \
\text { Current portion of long-term debt } & 182,295 & 210,090 \
\text { Accounts payable } & 296,307 & 334,247 \
\text { Accrued liabilities } & 941,912 & 743,999 \
\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\
\text { Total Current Liabilities }&1.648753&566237\
\end{array}$

$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}
\begin{array}{l}
\text { Net Sales } &\$ 4,885,340\
\text { Cost of Goods Sold }&2,542,35 \
\text { Operating Income } &733,54 \
\text { Net Income }&230,10
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
 
$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}
\begin{array}{l}
\text { Cash Flows from Operations } &\$ 1.156,08\

\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
-Refer to the information for Mobile Company.Mobile's Operating Cash Flow to Current Liabilities ratio in 2010 was:

Accepted Answer

The answer of Mobile Company
Mobile Company manufactures computer technology devices.Selected...

Question 20

Mobile Company
Mobile Company manufactures computer technology devices.Selected financial data for Mobile is presented below; use the information to answer the following questions:
 $\begin{array}{lcc}
\underline{\text { current Assets }}& \text { As of Dec. } 31,2010 &\text { Dec. } 31,2009\
\text { Cash and short-term investments } & \$ 1,267,038 & \$ 616,604 \
\text { Accounts Receivable (net) } & 490,816 & 665,828 \
\text { Inventories } & 338,599 & 487,505 \
\text { Prepaid Expenses and other current assets } &\underline{ 292,511} & \underlind{291,915}\
\text { Total Current Assets }&\$ 2,388,964 & \$ 2,061,852\
\
\text {Current Liabilities }\
\text { Short-term borrowings } & \$ 25,190 & \$ 38,108 \
\text { Current portion of long-term debt } & 182,295 & 210,090 \
\text { Accounts payable } & 296,307 & 334,247 \
\text { Accrued liabilities } & 941,912 & 743,999 \
\text { Income taxes payable } & \underline{203,049 }&\underline{ 239,793 }\
\text { Total Current Liabilities }&1.648753&566237\
\end{array}$

$\text { Selected Income Statement Data - for the year ending December 31, 2010: }$
$\begin{array}{l}
\begin{array}{l}
\text { Net Sales } &\$ 4,885,340\
\text { Cost of Goods Sold }&2,542,35 \
\text { Operating Income } &733,54 \
\text { Net Income }&230,10
\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
 
$\text { Selected Statement of Cash Flow Data - for the year ending December } 31,2010:$
$\begin{array}{l}
\begin{array}{l}
\text { Cash Flows from Operations } &\$ 1.156,08\

\end{array}\
\begin{array}{r}
\end{array}
\end{array}$
-Refer to the information for Mobile Company.Mobile's days accounts payable outstanding at the end of 2010 is:

Accepted Answer

The answer of Mobile Company
Mobile Company manufactures computer technology devices.Selected...

Quiz 5: Risk Analysis

Which of the following ratios is not a measure of long-term solvency risk?

Market equity beta measures the covariability of a firm's returns with the returns of:

Doran Corp.has a current ratio of 6.Under which of the following scenarios might this indicate a problem?

The Johnson Company has a current ratio of 1.45.The company has just sold $600,000 worth of merchandise on credit.What will the current ratio be after the sales on credit?

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to:

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan?

Which of the following is not one of the three explanatory variables that determine a firm's market beta?

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?

Univariate bankruptcy prediction models help identify factors related to bankruptcy,but they do not provide information about:

Here are several ratios calculated from Midas Company's financial statements: Days in Receivables = 45 Days in Payables = 36 Days in Inventory = 30 How many days of working capital financing does Midas need to obtain from other sources?

Economic theory teaches that differences in market returns must relate to differences in:

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?