Question 1

A firm has total debt of $4,850 and a debt-equity ratio of 0.57.What is the value of the total assets?

Accepted Answer

Total equity = $4,850/0.57 = $8,508.77Total assets = $4,850 + $8,508.77 = $13,358.77

Question 2

Which of the following represent problems encountered when comparing the financial statements of two separate entities?
I.Either one,or both,of the firms may be conglomerates and thus have unrelated lines of business.
II.The operations of the two firms may vary geographically.
III.The firms may use differing accounting methods.
IV.The two firms may be seasonal in nature and have different fiscal year ends.

Accepted Answer

All the options listed represent challenges in comparing financial statements of two different entities. Conglomerates have diverse business operations making comparisons difficult (I), geographic variations can affect operations and financial results (II), differing accounting methods can lead to discrepancies in financial reporting (III), and seasonal variations along with different fiscal year ends can distort direct comparisons (IV).

Question 3

Russell's Deli has cash of $136,accounts receivable of $95,accounts payable of $210,and inventory of $409.What is the value of the quick ratio?

Accepted Answer

Quick ratio = ($136 + $95)/$210 = 1.10

Question 4

The Bike Shop paid $1,990 in interest and $1,850 in dividends last year.The times interest earned ratio is 2.2 and the depreciation expense is $520.What is the value of the cash coverage ratio?

Accepted Answer

EBIT = 2.2 × $1,990 = $4,378; Cash coverage ratio = ($4,378 + $520)/$1,990 = 2.46

Question 5

A firm currently has $600 in debt for every $1,000 in equity.Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income.Which one of the following will decrease as a result of this action?

Accepted Answer

The equity multiplier is calculated as total assets divided by equity. If the firm decreases its debt while maintaining its equity, the total assets will decrease, causing the equity multiplier to decrease.

Question 6

A firm has sales of $3,200,net income of $390,total assets of $4,500,and total equity of $2,750.Interest expense is $50.What is the common-size statement value of the interest expense?

Accepted Answer

Common-size interest = $50/$3,200 = 1.56 percent

Question 7

Uptown Men's Wear has accounts payable of $2,214,inventory of $7,950,cash of $1,263,fixed assets of $8,400,accounts receivable of $3,907,and long-term debt of $4,200.What is the value of the net working capital to total assets ratio?

Accepted Answer

Net working capital to total assets = ($1,263 + $3,907 + $7,950 - $2,214)/($1,263 + $3,907 + $7,950 + $8,400) = 0.51

Question 8

A firm has total assets of $310,100 and net fixed assets of $168,500.The average daily operating costs are $2,980.What is the value of the interval measure?

Accepted Answer

Interval measure = ($310,100 - $168,500)/$2,980 = 47.52 days

Question 9

It is easier to evaluate a firm using financial statements when the firm:

Accepted Answer

When a firm uses the same accounting procedures as other firms in the industry, it allows for a more accurate and meaningful comparison of financial statements. It ensures that the financial statements are consistent and comparable to those of other firms. This is important when evaluating a firm as it allows for a more informed decision-making process.

Question 10

A firm has sales of $2,190,net income of $174,net fixed assets of $1,600,and current assets of $720.The firm has $310 in inventory.What is the common-size statement value of inventory?

Accepted Answer

Common-size inventory = $310/($1,600 + $720) = 13.36 percent

Question 11

During the year,Kitchen Supply increased its accounts receivable by $130,decreased its inventory by $75,and decreased its accounts payable by $40.How did these three accounts affect the firm's cash flows for the year?

Accepted Answer

Increasing accounts receivable by $130 means the company has $130 more in sales that it hasn't yet received cash for, which is a use of cash. Decreasing inventory by $75 means the company has sold or otherwise reduced inventory without needing to spend cash to replace it, which is a source of cash. Decreasing accounts payable by $40 means the company has paid off some of its debts, which is a use of cash. The net effect is $130 (use) - $75 (source) + $40 (use) = $95 use of cash.

Question 12

The Du Pont identity can be used to help managers answer which of the following questions related to a firm's operations?
I.How many sales dollars has the firm generated per each dollar of assets?
II.How many dollars of assets has a firm acquired per each dollar in shareholders' equity?
III.How much net profit is a firm generating per dollar of sales?
IV.Does the firm have the ability to meet its debt obligations in a timely manner?

Accepted Answer

The Du Pont identity, also known as the Du Pont analysis, helps managers to understand how effectively the firm is using its assets, equity, and debt to generate profits. Specifically, it breaks down the Return on Equity (ROE) into three components: Net profit margin (measures how much profit the firm generates for each dollar of sales), Asset turnover (measures how efficiently the firm uses its assets to generate sales), and Financial leverage (measures how much debt the firm uses to finance its operations). Therefore, it can be used to answer questions related to sales generation per dollar of assets, asset acquisition per dollar of equity, net profit per dollar of sales, and debt obligations.

Question 13

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current:

Accepted Answer

Comparing a firm's current financial ratios to its own historical ratios is the most acceptable method of evaluating the financial statements of a firm as it provides insight into the firm's financial performance and trends over time. Other options, such as comparing to firms in other countries or unrelated industries, may not provide relevant or comparable information. Comparing to the average ratios of all firms in the same geographic area may be useful, but can still be impacted by industry and other factors. Using projections based on Tobin's Q may provide valuable information but is not a standard method of financial statement evaluation.

Question 14

A firm has a debt-equity ratio of 0.42.What is the total debt ratio?

Accepted Answer

The debt-equity ratio is 0.42. If total debt is $42 and total equity is $100, then total assets are $142. Total debt ratio = $42/$142 = 0.30.

Question 15

Wise's Corner Grocer had the following current account values.What effect did the change in net working capital have on the firm's cash flows for 2012?

Accepted Answer

The answer of Wise's Corner Grocer had the following current...

Question 16

Last year,which is used as the base year,a firm had cash of $52,accounts receivable of $218,inventory of $509,and net fixed assets of $1,107.This year,the firm has cash of $61,accounts receivable of $198,inventory of $527,and net fixed assets of $1,216.What is the common-base year value of accounts receivable?

Accepted Answer

Common-base year accounts receivable = $198/$218 = 0.91

Question 17

Which one of the following statements is correct?

Accepted Answer

Financial statements are a commonly used tool to evaluate the performance of a company. They provide valuable information on financial health, profitability, and efficiency, among others. Therefore, financial statements are often used as a basis for making decisions and conducting various types of analysis. Choices A, C, D, and E are incorrect because they either contradict common practice or are not accurate statements.

Question 18

A firm has sales of $68,400,costs of $42,900,interest paid of $2,100,and depreciation of $6,500.The tax rate is 34 percent.What is the value of the cash coverage ratio?

Accepted Answer

Cash coverage ratio = ($68,400 - $42,900)/$2,100 = 12.14

Question 19

A firm generated net income of $862.The depreciation expense was $47 and dividends were paid in the amount of $25.Accounts payables decreased by $13,accounts receivables increased by $28,inventory decreased by $14,and net fixed assets decreased by $8.There was no interest expense.What was the net cash flow from operating activity?

Accepted Answer

Net cash from operating activities = $862 + $47 - $13 - $28 + $14 = $882

Question 20

Al's Sport Store has sales of $897,400,costs of goods sold of $628,300,inventory of $208,400,and accounts receivable of $74,100.How many days,on average,does it take the firm to sell its inventory assuming that all sales are on credit?

Accepted Answer

Inventory turnover = $628,300/$208,400 = 3.014875Days in inventory = 365/3.014875 = 121.07 days

Quiz 3: Working With Financial Statements