Question 1

Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?

Accepted Answer

Asset turnover is a measure of how efficiently a company utilizes its assets to generate revenue, and is therefore more useful for evaluating a company's long-term solvency rather than its ability to pay short-term debts. Short-term creditors would be more interested in liquidity ratios like the current ratio and acid-test ratio, as well as the company's accounts receivable turnover.

Question 2

Ale Corporation had net income of $240000 and paid dividends to common stockholders of $40000 in 2017. The weighted average number of shares outstanding in 2017 was 60000 shares. Ale Corporation's common stock is selling for $76 per share on the New York Stock Exchange. Ale Corporation's price-earnings ratio is

Accepted Answer

The answer of Ale Corporation had net income of $240000...

Question 3

Ratios are used as tools in financial analysis

Accepted Answer

Ratios provide information that is not apparent from inspection of the individual components of the ratio. They allow for comparisons across different periods and among companies of different sizes and in different industries. Additionally, ratios can provide insight into a company's liquidity, profitability, debt level, and operating efficiency.

Question 4

Lake Company reported the following on its income statement: $\begin{array}{ll}
\text { Income before income taxes } & \$ 600,000 \
 \text { Income tax expense } & 150,000 \
\text { Net income }&\underline{\underline{\$450,000}}
\end{array}$ An analysis of the income statement revealed that interest expense was $60000. Lake Company's times interest earned was

Accepted Answer

The times interest earned ratio is calculated as (Income Before Income Taxes + Interest Expense) / Interest Expense. Plugging in the given numbers: ($600,000 + $60,000) / $60,000 = $660,000 / $60,000 = 11 times.

Question 5

The debt to assets ratio measures

Accepted Answer

The debt to assets ratio measures the percentage of the total assets provided by creditors, indicating the extent to which a company is financed by debt.

Question 6

Profit margin is calculated by dividing

Accepted Answer

Profit margin is calculated by dividing net income by net sales, which measures how much out of every dollar of sales a company actually keeps in earnings.

Question 7

If a company has an acid-test ratio of 1.2:1 what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? $\begin{array} { l c c } 
& \text { Short-term Borrowing } & \text { Collection of Receivable } \\end{array}$
A)$\begin{array} { l c c }  &&& \text { Increase } &&&&&&& \text { No effect } \\end{array}$
B)$\begin{array} { l c c } &&& \text { Increase } &&&&&&& \text { Increase } \\end{array}$
C)$\begin{array} { l c c }  &&& \text { Decrease } &&&&&&& \text { No effect } \\end{array}$
D)$\begin{array} { l c c } &&& \text { Decrease } &&&&&&& \text { Decrease }
\end{array}$

Accepted Answer

The answer of If a company has an acid-test ratio...

Question 8

A supplier to a company would be most interested in the company's

Accepted Answer

A supplier is primarily concerned with a company's ability to pay its short-term obligations, which is indicated by the current ratio. This ratio measures a company's assets relative to its liabilities, providing insight into financial health in the near term.

Question 9

Nord Company had $375000 of current assets and $150000 of current liabilities before borrowing $70000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of Nord Company's working capital?

Accepted Answer

Working capital is calculated as current assets minus current liabilities. Borrowing $70,000 increases both current assets and current liabilities by the same amount, leaving working capital unchanged.

Question 10

A measure of the percentage of each dollar of sales that results in net income is

Accepted Answer

Profit margin is calculated by dividing net income by total sales. It reflects how much profit a company is generating from each dollar of sales.

Question 11

If equal amounts are added to the numerator and the denominator of the current ratio the ratio will always

Accepted Answer

Adding equal amounts to both the numerator and the denominator of a fraction will decrease the value of the fraction if the original fraction is greater than 1.

Question 12

The current ratio may also be referred to as the

Accepted Answer

The current ratio is also known as the working capital ratio, which measures a company's ability to pay off its short-term liabilities with its current assets. The other options provided (short run ratio, acid-test ratio, contemporary ratio) are either incorrect or do not accurately describe the current ratio.

Question 13

The current assets of Myers Company are $250000. The current liabilities are $100000. The current ratio expressed as a proportion is

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. 
Current ratio = Current assets / Current liabilities
Current ratio = $250000 / $100000
Current ratio = 2.5 : 1

Question 14

The acid-test ratio

Accepted Answer

The acid-test ratio (also known as the quick ratio) is a measure of a company's ability to pay off its current liabilities using only its most liquid assets, such as cash, marketable securities, and accounts receivable. It does not include inventory in the numerator as inventory may not be easily converted into cash in the short-term. It also does not include prepaid expenses as part of the numerator. While the acid-test ratio is similar to the current ratio in that it both measures a company's ability to pay off its current liabilities, the acid-test ratio is considered a more conservative measure as it excludes inventory which may not be easily sold off in the short-term.

Question 15

Ale Corporation had net income of $240000 and paid dividends to common stockholders of $40000 in 2017. The weighted average number of shares outstanding in 2017 was 60000 shares. Ale Corporation's common stock is selling for $60 per share on the New York Stock Exchange. Ale Corporation's payout ratio for 2017 is

Accepted Answer

The payout ratio is the percentage of earnings paid out in dividends to common stockholders. To calculate the payout ratio, divide the dividends paid by the net income: $40000/$240000 = 0.167 or 16.7%. Therefore, the correct answer is C.

Question 16

Nord Company had $375000 of current assets and $150000 of current liabilities before borrowing $70000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Nord Company's current ratio?

Accepted Answer

Before the borrowing transaction, Nord Company's current ratio was calculated as follows:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $375000 / $150000
Current Ratio = 2.5

After borrowing $70000, the company's new current assets would be $445000 ($375000 + $70000) and its current liabilities would remain at $150000. The current ratio would then be calculated as follows:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $445000 / $150000
Current Ratio = 2.97

Therefore, the current ratio decreased from 2.5 to 2.97 after the borrowing transaction.

Question 17

A weakness of the current ratio is

Accepted Answer

The current ratio does not take into account the composition of current assets, which can vary significantly between companies. For example, if a company has a high proportion of inventory in their current assets, it may be difficult for them to turn that inventory into cash quickly, which could signal potential liquidity problems even if the current ratio appears strong.

Question 18

Trading on the equity (leverage) refers to the

Accepted Answer

Trading on the equity, also known as leverage, refers to the use of borrowed funds to increase the return to owners. This means that the company is using debt to finance its operations and investments, which can magnify returns for shareholders in good times but can also increase risk in bad times. It is not related to the amount of working capital or capital provided by owners, and it is also not a measure of how many times interest is earned.

Question 19

The ratios that are used to determine a company's short-term debt paying ability are

Accepted Answer

The ratios commonly used to measure a company's short-term debt paying ability include its current ratio (ability to pay off short-term liabilities with current assets), acid-test ratio (ability to pay off short-term liabilities with quick assets, which are current assets minus inventory), accounts receivable turnover (how quickly the company collects payments from customers), and inventory turnover (how quickly the company sells its inventory). Option D is the only answer that includes all of these ratios.

Question 20

Asset turnover measures

Accepted Answer

Asset turnover measures how efficiently a company uses its assets to generate sales. It is calculated by dividing net sales by average total assets. This ratio indicates how many dollars of sales are generated by each dollar of assets. It does not measure how often a company replaces its assets, the portion of assets that have been financed by creditors or the overall rate of return on assets.

Quiz 18: Financial Statement Analysis