Question 1

The patent on a major drug produced by a pharmaceutical company will soon expire.Sales of the drug contribute 10% to the company's net income.Which of the following statements is most likely to be true in these circumstances?

Accepted Answer

The expiration of the patent and resulting drop in net income will likely cause investors to factor in this future decrease, leading to a lower P/E ratio. Option A, B, and D are incorrect because they do not accurately reflect how the expiration of the patent will affect the P/E ratio.

Question 2

A company has $72,500 of inventory at the beginning of the year and $65,500 at the end of the year.Sales revenue is $986,400,cost of goods sold is $572,700,and net income is $124,200 for the year.The inventory turnover ratio is:

Accepted Answer

Avg.inventory = (prior EB inventory + current EB inventory)/2
($72,500 + $65,500)/2 = $69,000
Inventory turnover ratio = COGS/Avg.Inventory
$572,700/$69,000 = 8.3.

Question 3

A decrease in accounts receivable turnover ratio is indicative of:

Accepted Answer

A decrease in accounts receivable turnover ratio means that the company is taking longer to collect payments from customers, which suggests an increase in accounts receivable. This could be due to various factors such as ineffective credit policies or a decrease in customer credit worthiness, but it is not indicative of an increase in sales revenue or a decline in cost of goods sold. It is also not necessarily related to slower selling inventory.

Question 4

Judging only from the ratios given,which of the following clothing wholesalers is least likely to have cash flow problems?

Accepted Answer

Company C has the highest receivables turnover and inventory turnover ratios, indicating that they are able to collect on their accounts receivable and sell their inventory quickly. This suggests that they are managing their cash flow effectively and are less likely to have cash flow problems. Company D, on the other hand, has the lowest ratios, indicating that they may have trouble collecting on their accounts receivable and selling their inventory quickly, which increases the likelihood of cash flow problems. Companies A and B have varying strengths and weaknesses in their ratios, but do not stand out as the best choice overall.

Question 5

An increase in gross profit percentage indicates that:

Accepted Answer

Gross profit percentage is calculated by dividing the gross profit by total revenue and multiplying by 100. An increase in gross profit percentage means that the gross profit has increased relative to total revenue. This can happen if cost of goods sold as a percentage of sales has decreased, indicating that the business is more efficient in producing goods and services or has negotiated better deals with suppliers.

Question 6

If net income is rising,but both sales and the gross profit percentage remain the same,then:

Accepted Answer

Since sales and gross profit percentage remain the same, it means that there is no change in the cost of goods sold. If net income is rising, it can only be due to a reduction in operating expenses.

Question 7

If a company's P/E ratio is 12.5 and the company's share price is $17.50 per share then the company's EPS is:

Accepted Answer

17.50/EPS = 12.5
17.5/12.5 = 1.40.

Question 8

An increase in the inventory turnover rate is indicative of:

Accepted Answer

The answer of An increase in the inventory turnover rate...

Question 9

A share sells for $20.The company has $64 million in earnings and 200 million outstanding shares.The P/E ratio for the company is:

Accepted Answer

EPS = Net Income/Avg.# of common shares outstanding
$64,000,000/200,000,000 = $0.32
P/E ratio = Stock Price (per share)/EPS
$20)00/$0.32 = 62.5.

Question 10

A company has $72,500 in inventory at the beginning of the accounting period and $65,500 at the end of the accounting period.Sales revenue is $986,400,cost of goods sold is $572,700,and net income is $124,200 for the accounting period.On average,this company has inventory on hand for approximately:

Accepted Answer

Avg.inventory = (prior EB inventory + current EB inventory)/2
($72,500 + $65,500)/2 = $69,000
Inventory turnover ratio = COGS/Avg.Inventory
$572,700/$69,000 = 8.3
Days to sell = 365/Inventory Turnover Ratio
365/8.3 = 44 days.

Question 11

A current ratio of 2.5 means that for every dollar of:

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. A current ratio of 2.5 means that for every dollar of current liabilities, there is $2.50 of current assets.

Question 12

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:

Accepted Answer

When inventory makes up a small percentage of assets and inventory costs are stable, the way competitors calculate inventory cost is least likely to affect comparisons between competitors. This is because the impact of the inventory cost calculation method on the overall financial statement is negligible.

Question 13

If a company's P/E ratio is 24 and the company's EPS is $1.50 then the company's share price is:

Accepted Answer

P/1.50 = 24
1.5 * 24 = $36.

Question 14

Company X has a P/E ratio of 16 in year 2017 and 16.5 in 2018.In 2018 its P/E ratio is 24.The best way to interpret these data is to conclude that:

Accepted Answer

P/E ratio alone is not enough to determine whether a stock should be bought or sold. Other financial results and news should be examined to determine the cause of the P/E ratio change. A sudden increase in P/E ratio could be due to an increase in earnings or anticipation of future growth, but it could also be due to a market anomaly or short-term trend. Therefore, it is important to analyze other financial information before making a decision to buy or sell the stock.

Question 15

A times interest earned ratio of 11 means that the company's:

Accepted Answer

The times interest earned ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. Therefore, a ratio of 11 indicates that the company's net income before taxes and interest is large enough to cover its interest expenses 11 times over.

Question 16

The debt-to-assets ratio is the:

Accepted Answer

The debt-to-assets ratio is calculated by dividing total liabilities by total assets. This ratio measures the proportion of a company's assets that are financed by debt, giving investors an idea of the company's financial risk.

Question 17

A current ratio of less than one is not so much of a concern when the company has a:

Accepted Answer

A high inventory turnover ratio indicates that a company is efficiently selling its inventory, which can offset a current ratio that is less than one. This is because there is confidence that the company will continue to generate cash through the sale of inventory, which can be used to pay off current liabilities. On the other hand, a low fixed asset turnover ratio or high days to collect number may indicate that a company is not utilizing its assets effectively or experiencing difficulty collecting receivables, respectively, which can exacerbate the impact of a low current ratio.

Question 18

A company that has a current ratio less than one cannot cover:

Accepted Answer

The current ratio measures a company's ability to cover its current liabilities with its current assets. If the ratio is less than one, it means that the company does not have enough current assets to cover its current liabilities, indicating that it may have difficulty paying off its short-term debt obligations.

Question 19

Company X has net sales revenue of $436,000,cost of goods sold of $343,000,and all other expenses of $157,000,if interest expense is $16,000 and income tax expense is zero,the times interest earned ratio is:

Accepted Answer

The answer of Company X has net sales revenue of...

Question 20

How competitors calculate depreciation is most likely to affect comparisons between competitors if property,plant,and equipment:

Accepted Answer

When property, plant, and equipment (PPE) makes up a large percentage of assets and has significantly different useful lives, the method of depreciation used by competitors can have a significant impact on the financial statements and comparisons between competitors. This is because the depreciation expense will vary depending on the method used, and as a consequence, the carrying value of PPE on the balance sheet will differ. This can lead to inconsistencies and distortions in financial ratios such as return on assets (ROA) and return on equity (ROE), making it difficult to compare the performance of different companies.

Quiz 13: Measuring and Evaluating Financial Performance