Question 1

Harper Corp.'s sales last year were $395,000, and its year-end receivables were $42,500. Harper sells on terms that call for customers to pay 30 days after the purchase, but many delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO − Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.
A) 7.95
B) 8.37
C) 8.81
D) 9.27
E) 9.74

Accepted Answer

The answer of Harper Corp.'s sales last year were $395,000,...

Question 2

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Accepted Answer

Both the inventory turnover ratio and days sales outstanding (DSO) are commonly used metrics for evaluating a company's asset management. The inventory turnover ratio measures the number of times a company sells and replaces its inventory in a given period, while DSO measures the number of days it takes for a company to collect payment for its sales. These ratios can provide insights into a company's efficiency and cash flow management.

Question 3

The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

Accepted Answer

The times-interest-earned ratio is just one of several financial ratios that can provide insight into a company's ability to pay off its debts. Other important measures may include the debt-to-equity ratio, current ratio, and cash flow coverage ratio, among others. Therefore, while the times-interest-earned ratio may be a useful tool for evaluating a company's financial health, it should not be relied on as the sole determinant of a company's ability to meet its debt obligations.

Question 4

Muscarella Inc. has the following balance sheet and income statement data: The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

A) 4.28%
B) 4.50%
C) 4.73%
D) 4.96%
E) 5.21%

Accepted Answer

The answer of Muscarella Inc. has the following balance sheet...

Question 5

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?
A) Increase the number of years over which fixed assets are depreciated for tax purposes.
B) Pay down the accounts payables.
C) Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.
D) Pay workers more frequently to decrease the accrued wages balance.
E) Reduce the inventory turnover ratio without affecting sales or operating costs.

Accepted Answer

By reducing the days' sales outstanding (DSO), the company can collect cash from its customers more quickly, thereby increasing its cash flow for the current year. This can be achieved by improving the company's credit policies, offering discounts for early payment, and improving its collection efforts. The other options either have no direct impact on cash flow or may even decrease it.

Question 6

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Accepted Answer

Debt management ratios, such as debt-to-equity ratio and interest coverage ratio, are used to evaluate a company's ability to manage its debts and the extent to which it is reliant on borrowing to finance its operations. By analyzing these ratios, investors and creditors can evaluate the risk associated with investing or lending to the company. High debt management ratios indicate that the company is using more leverage to finance its operations, which may lead to higher returns on equity if the investment generates sufficient profits. Therefore, debt management ratios can be used to evaluate a company's financial strategy and risk profile.

Question 7

Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO − Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.
A) 6.20
B) 6.53
C) 6.86
D) 7.20
E) 7.56

Accepted Answer

First, we need to calculate the company's DSO (Days Sales Outstanding) using the formula:

DSO = (Accounts Receivable / Annual Credit Sales) x 365

DSO = (60,000 / 425,000) x 365
DSO = 51.47

Next, we can calculate the days early or late using the formula:

DSO - Credit period = days early or late

51.47 - 45 = 6.47

Since the answer is positive, customers are paying late. Rounded to the nearest hundredth, the customers are paying 6.53 days late. Therefore, the best choice is B.

Question 8

Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?
A) 2.03
B) 2.13
C) 2.25
D) 2.36
E) 2.48

Accepted Answer

The total assets turnover ratio (TATO) is calculated by dividing sales by total assets. For Arshadi Corp., this is $52,000 / $22,000 = 2.36.

Question 9

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Accepted Answer

A high current ratio indicates that the firm has enough current assets to meet its short-term obligations, while a low inventory turnover ratio suggests that the firm is holding onto inventory for an extended period. This can be indicative of excess inventory or obsolete/damaged inventory. Therefore, the combination of a high current ratio and a low inventory turnover ratio may suggest that the firm has an above-average inventory level and/or part of the inventory is obsolete or damaged.

Question 10

Which of the following statements is CORRECT?
A) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.
B) If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
C) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase.
D) There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.
E) A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)...

Question 11

Pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
 
-Refer to the data for Pettijohn Inc. What is the firm's days sales outstanding? Assume a 360-day year for this calculation.
A) 48.17
B) 50.71
C) 53.38
D) 56.19
E) 59.14

Accepted Answer

The answer of Pettijohn Inc.
The balance sheet and income statement...

Question 12

Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?
A) $267.34
B) $281.41
C) $296.22
D) $311.81
E) $328.22

Accepted Answer

The answer of Aziz Industries has sales of $100,000 and...

Question 13

A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.

Accepted Answer

A decline in inventory turnover ratio suggests that the firm is holding onto inventory for a longer period of time, which can lead to increased costs and reduced liquidity. Therefore, a decline in inventory turnover ratio indicates that the firm is managing its inventory less efficiently and its liquidity position may be deteriorating.

Question 14

Pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
 
-Refer to the data for Pettijohn Inc. What is the firm's total assets turnover?
A) 0.90
B) 1.12
C) 1.40
D) 1.68
E) 2.02

Accepted Answer

Total assets turnover is calculated by dividing revenue by total assets. Using the data from the balance sheet and income statement, we get a total assets turnover of $2,800 / $2,000 = 1.40. Therefore, the answer is C.

Question 15

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Accepted Answer

This statement is true. By using the formula TIE = EBIT/Interest Expense, a firm can solve for the necessary EBIT (or sales) to achieve its desired TIE ratio, given its interest expense and other relevant information.

Question 16

Which of the following statements is CORRECT?
A) If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.
B) A reduction in inventories held would have no effect on the current ratio.
C) An increase in inventories would have no effect on the current ratio.
D) If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
E) A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

Accepted Answer

The inventory turnover ratio is calculated as the cost of goods sold divided by average inventory. If a firm increases its sales and cost of goods sold while holding its inventories constant, then its cost of goods sold will increase without any change in the average inventory. Therefore, the inventory turnover ratio will increase. Choice A is incorrect since an increase in sales and cost of goods sold would result in a decrease in the inventory turnover ratio only if the firm also increases its inventories. Choice B and C are both incorrect since changes in inventories will affect the current ratio, which is calculated as current assets divided by current liabilities. Finally, choice E is incorrect since a reduction in the inventory turnover ratio would generally lead to a decrease in the ROE, as it indicates that the firm is less efficient in managing its inventory and generating sales.

Question 17

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Accepted Answer

It is not necessary for the firms being compared to have the same proportion of fixed assets to total assets for the fixed assets turnover ratio to be a useful measure. However, it is important to note that the ratio may be more meaningful when comparing firms within the same industry or with similar business models.

Question 18

Pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
 
-Refer to the data for Pettijohn Inc. What is the firm's inventory turnover ratio?
A) 4.17
B) 4.38
C) 4.59
D) 5.82
E) 5.07

Accepted Answer

Inventory turnover ratio = (Cost of goods sold except depreciation + Depreciation)/Inventory = 4.17

Question 19

If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?
A) Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
B) The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
C) Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
D) Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
E) The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Accepted Answer

Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm. This is because a lower debt ratio indicates lower financial risk for the company, making it less likely that they will default on the loan. Therefore, the bank is more willing to lend at a lower interest rate.

Question 20

Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?
A) $164,330
B) $172,979
C) $182,083
D) $191,188
E) $200,747

Accepted Answer

Total assets turnover ratio (TATO) = Sales / Total assets

Industry TATO = 2.4

Bonner Corp's TATO = 415,000 / 355,000 = 1.17

To find the amount by which assets must be reduced, we can set up an equation:

2.4 = 415,000 / (355,000 - x)

where x is the amount by which assets must be reduced

Solving for x, we get:

x = $182,083

Therefore, the answer is (C) $182,083.

Quiz 3: Analysis of Financial Statements

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO) ?

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Which of the following statements is CORRECT?

A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Which of the following statements is CORRECT?

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?