Question 1

-Using common-size analysis, what percentage would be attributable to the 2016 accumulated depreciation of Joshua Company?

Accepted Answer

($125) / $731 = (17.1) percent

Question 2

-Using common-size analysis, what percentage would be attributable to the 2017 wages payable of Joshua Company?

Accepted Answer

$20 / $719 = 2.8 percent

Question 3

-In the judgment of the credit analysts of Joshua Company, what issue would be of most concern or source of optimism?

Accepted Answer

The increase in cash and accounts receivable should be investigated. These increases may indicate that credit policies have become too liberal; that there is an economic downturn causing customers to be slow in paying their invoices; or that there has been a recent large increase in sales without a proportionate increase in profits.

Question 4

Which of the following is considered a solvency analysis measure?

Accepted Answer

The acid test ratio is a primary measure of short term solvency.

Question 5

Which of the following is an efficiency measure of solvency?

Accepted Answer

The inventory turnover ratio measures the efficiency of inventory management. The Days sales in receivables ratio is a measure of liquidity. The remaining responses are ratios reflecting near-term debt-paying ability.

Question 6

-Kamal Company's debt-to-equity ratio for 2017 is:

Accepted Answer

The debt to equity ratio is the relationship of total liabilities to total equity at a point in time. For Kamal the ratio is 0.52:1 [Total liabilities ($5,130 + $1,419) / total equity $12,632 = 0.518]. The ratio decreased from 2016 (0.584) to 2017 (0.518). The ratio does not address the ability to meet current interest payments.

Question 7

-Kamal Company's times interest earned ratio for 2017:

Accepted Answer

Times interest earned for 2017 is 22.77 times ($4,463 / $196). In 2016 the ratio was 23.12 times ($3,976 / $172). The times interest earned ratio is a measure of long term solvency and the capacity of earnings to pay interest on debt and total interest expense.

Question 8

-Kamal Company's debt-to-equity ratio was 0.52 to 1 in 2017 and 0.58 to 1 in 2016. Which of the following statements is true concerning Kamal ?

Accepted Answer

The decrease in the debt to equity ratio indicates that Kamal is improving its ratio and is relying less rather than more on creditors in 2017. The company actually has more stockholder equity as a percentage of total assets (common size analysis) in 2017 than in 2016 and appears to be in a stronger position at the end of 2017 even after acquiring close to $100,000 of additional long term debt. The debt-to-equity ratio does not address the ability to generate cash flows from operations.

Question 9

Which of the following is used to analyze a company's solvency?

Accepted Answer

The days sales in receivables ratio is a measure of solvency. Return on assets, asset turnover, and earnings per share are measures of performance.

Question 10

Below are selected data from the financial statements of Pepper Company for 2016 and 2017.
 The debt-to-equity ratio for 2017 is:

Accepted Answer

Debt to equity for 2017 is 1.337 [$240,000 / ($31,000 + 55,500 + 93,000)].
Debt to equity for 2016 is 0.964 [$190,000 / ($31,800 + 58,250 + 107,000)].
The ratio is increasing which should be a negative sign for credit analysts, and a major cause for concern for stockholders and Pepper Company managers.

Question 11

Which of the following generally indicates a positive change?

Accepted Answer

When the number of days sales in accounts receivable decrease, it is usually an indicator that credit sales are being collected and that the firm is managing well the credit extended to customers. This ratio is both a measure of solvency and performance.

Question 12

Oakridge Hobby Shop's inventory turned over six times during the year. Similar shops have an inventory turnover equal to twelve times per year.
What explains Oakridge's state of inventory management?

Accepted Answer

The inventory turnover ratio is calculated as cost of goods sold / average inventory. To increase this ratio to come closer to the industry average, Oakridge needs to increase cost of goods sold by increasing sales and/or decrease the amount invested in inventory.

Question 13

By-George Products is considered "very liquid" or highly solvent for the year ended December 31, 2017. This means that By-George

Accepted Answer

Higher degrees of solvency or liquidity indicate a greater ability to pay current debts from current assets.

Question 14

The current ratio and acid-test ratio differ in:

Accepted Answer

The acid test ratio is more specific than the current ratio as a test of short-term solvency.

Question 15

The primary difference between the debt to equity ratio and the times interest earned ratio is:

Accepted Answer

The primary measures of long-term solvency are the debt-to-equity ratio (computed from balance sheet elements as total liabilities divided by total stockholders' equity) and times-interest-earned (computed from income statement elements as the sum of net income, interest expense, and income taxes divided by interest expense for the period).

Question 16

Mamantor Company had a debt to equity ratio of 0.600. The company received a loan. The effect of the transaction is:

Accepted Answer

This transaction increases cash and total liabilities. Because only the numerator in the ratio (Total liabilities / Total stockholders' equity) is affected and it is increased, the ratio increases also.

Question 17

Consignment Shipments, Inc. had a times interest earned ratio of 11 to 1 in 2016. In 2017 the company incurred a substantial increase in interest expense with no overall effect on net income or taxes. The effect of the transaction is:

Accepted Answer

The interest payment transaction increases both the numerator and the denominator of the ratio by the same amount. The ratio decreases.
Example: $11,000 / $1,000 = 11. $11,000 + $1,000 / $1,000 + $1,000 = 6

Question 18

Which of the following is false regarding the current ratio compared to the acid test ratio?

Accepted Answer

The current ratio and the quick or acid test ratio have the same denominator-current liabilities. They differ in that the numerator of the acid test ratio excludes inventories, making the quick ratio more specific. Prepaid expenses are current assets, but they are excluded in the acid test ratio because of the difficulty of converting them to cash.

Question 19

Which of the following will increase working capital?

Accepted Answer

Working capital is current assets less current liabilities. Sales made for cash will increase current assets and increase sales, thus increasing working capital. Purchase of a office furniture with cash will decrease cash and increase furniture, thus decreasing working capital. The remaining two transactions have no net effect on working capital. Purchasing inventory on credit has a net effect of zero on current assets. Payment of accounts payable decreases current assets and current liabilities by the same amount.

Question 20

The basic activities conducted by a typical for-profit organization are:

Accepted Answer

Basic activities include generating capital from equity and debt, acquiring assets with capital, using assets to generate sales and profits, and using profits to pay the cost of capital.

Quiz 13: Appendix: Managerial Analysis of Financial Statements