Financial Analysis Techniques Test ID: 7694069

Question #1 of 92 Question ID: 414437

A company must report separate financial information for any segment of their business which:

‫ غ‬A) is more than 20% of a firm's revenues.

‫ غ‬B) is located in a country other than the firm's home country.

‫ ض‬C) accounts for more than 10% of the firm's assets and has risk and return characteristics
distinguishable from the company's other lines of business.

Explanation

Financial statement items must be reported separately for any segment of a firm's business that is greater than 10% of revenue
or assets and has risk and return characteristics that are distinguishable from those of the company's other lines of business.
Requirements for reporting of geographic segments have the same size threshold and the segment must operate in a business
environment that is different from that of the firm's other segments.

Question #2 of 92 Question ID: 414388

Given the following income statement:

Net Sales 200

Cost of Goods Sold 55
Gross Profit 145
Operating Expenses 30
Operating Profit (EBIT) 115
Interest 15
Earnings Before Taxes
100
(EBT)
Taxes 40
Earnings After Taxes
60
(EAT)
What are the interest coverage ratio and the net profit margin?

Interest Coverage Ratio Net Profit Margin

‫ ض‬A) 7.67 0.30

‫ غ‬B) 0.57 0.56

‫ غ‬C) 2.63 0.30

Explanation

Interest coverage ratio = (EBIT / interest expense) = (115 / 15) = 7.67

Net profit margin = (net income / net sales) = (60 / 200) = 0.30

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Question #3 of 92 Question ID: 414355

Which of the following reasons is least likely a valid limitation of ratio analysis?

‫ غ‬A) Determining the target or comparison value for a ratio is difficult.

‫ غ‬B) It is difficult to find comparable industry ratios.

‫ ض‬C) Calculation of ratios involves a large degree of subjectivity.

Explanation

There is not a great deal of subjectivity involved in calculating ratios. The mechanical formulas for the calculations are fairly
standard and objective for the activity, liquidity, solvency, and profitability ratios, for instance. On the other hand, determining the
target or comparison value for a ratio is difficult as it requires some range of acceptable values and that introduces an element of
subjectivity. Conclusions cannot be made from viewing one set of ratios as all ratios must be viewed relative to one another in
order to make meaningful conclusions. It can be difficult to find comparable industry ratios, especially when analyzing companies
that operate in multiple industries.

Question #4 of 92 Question ID: 414402

The following footnote appeared in Crabtree Company's 20X7 annual report:

"On December 31, 20X7, Crabtree recognized a restructuring charge of $20 million, of which $5 million was for severance pay
for employees who will be terminated in 20X8 and $15 million was for land that became permanently impaired in 20X7."

Based only on these changes, Crabtree's net profit margin and fixed asset turnover ratio (using year-end financial statement
values) in 20X8 as compared to 20X7 will be:

Fixed asset
Net profit margin
turnover

‫ غ‬A) Higher Higher

‫ غ‬B) Lower Higher

‫ ض‬C) Higher Unchanged

Explanation

The restructuring charge and asset write-down are non-recurring transactions; thus, net income will be higher in 20X8, all else
equal. In 20X8, fixed asset turnover will be the same as 20X7, all else equal. The asset impairment charge is a one-time charge,
so fixed assets will not be reduced further in 20X8.

Question #5 of 92 Question ID: 414363

Are the following ratios best classified as profitability ratios?

Ratio #1 - Cash plus short-term marketable investments plus receivables divided by average daily cash expenditures.
Ratio #2 - Earnings before interest and taxes divided by average total assets.

‫ غ‬A) Neither of the ratios is a profitability ratio.

‫ غ‬B) Both of the ratios are profitability ratios.

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 ‫ ض‬C) Only one of the ratios is a profitability ratio.

Explanation

(Cash + short-term marketable investments + receivables) divided by average daily cash expenditures is known as the defensive
interval ratio. The defensive interval ratio is a liquidity ratio that measures the firm's ability to pay cash expenditures in the
absence of external cash flows, but does not directly measure profitability. EBIT / average total assets is one variation of the
return on assets ratio. Return on assets is a profitability ratio that measures the efficiency of managing assets and generating
profits.

Question #6 of 92 Question ID: 414392

The main difference between the current ratio and the quick ratio is that the quick ratio excludes:

‫ ض‬A) inventory.

‫ غ‬B) assets.
‫ غ‬C) cost of goods sold.

Explanation

Current ratio = (current assets / current liabilities) = [cash + marketable securities + receivables + inventory] / current liabilities

Quick ratio = [cash + marketable securities + receivables] / current liabilities

Question #7 of 92 Question ID: 414364

Given the following income statement and balance sheet for a company:

Balance Sheet
Assets Year 2003 Year 2004
Cash 500 450
Accounts Receivable 600 660
Inventory 500 550
Total CA 1300 1660
Plant, prop. equip 1000 1250
Total Assets 2600 2910

Liabilities
Accounts Payable 500 550
Long term debt 700 1102
Total liabilities 1200 1652

Equity
Common Stock 400 538
Retained Earnings 1000 720
Total Liabilities & Equity 2600 2,910

Income Statement

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 Sales 3000
Cost of Goods Sold (1000)
Gross Profit 2000
SG&A 500
Interest Expense 151
EBT 1349
Taxes (30%) 405
Net Income 944

What is the gross profit margin?

‫ غ‬A) 0.333.

‫ غ‬B) 0.472.
‫ ض‬C) 0.666.

Explanation

Gross profit margin = (gross profit / net sales) = (2,000 / 3,000) = 0.666

Question #8 of 92 Question ID: 414374

Use the following data from Delta's common size financial statement to answer the question:

Earnings after taxes = 18%

Equity = 40%
Current assets = 60%
Current liabilities = 30%
Sales = $300
Total assets = $1,400

What is Delta's after-tax return on equity?

‫ غ‬A) 5.0%.

‫ غ‬B) 18.0%.

‫ ض‬C) 9.6%.

Explanation

Net income after taxes = 300 × 0.18 = 54

Equity = 1400 × 0.40 = 560
ROE = Net Income / Equity = 54 / 560 = 0.0964 = 9.6%

Question #9 of 92 Question ID: 414382

If the inventory turnover ratio is 7, what is the average number of days the inventory is in stock?

‫ غ‬A) 25 days.

‫ غ‬B) 70 days.

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 ‫ ض‬C) 52 days.

Explanation

Average Inventory Processing Period = 365 / inventory turnover = 365 / 7 = 52 days.

Question #10 of 92 Question ID: 414357

Common size income statements express all income statement items as a percentage of:

‫ ض‬A) sales.

‫ غ‬B) assets.
‫ غ‬C) net income.

Explanation

Common size income statements express all income statement items as a percentage of sales. Note that common size balance
sheets express all balance sheet accounts as a percentage of total assets.

Question #11 of 92 Question ID: 414378

Given the following income statement and balance sheet for a company:

Balance Sheet
Assets Year 2003 Year 2004
Cash 500 450
Accounts Receivable 600 660
Inventory 500 550
Total CA 1300 1660
Plant, prop. equip 1000 1250
Total Assets 2600 2910

Liabilities
Accounts Payable 500 550
Long term debt 700 700
Total liabilities 1200 1652

Equity
Common Stock 400 400
Retained Earnings 1260 1260
Total Liabilities & Equity 2600 2910

Income Statement
Sales 3000
Cost of Goods Sold (1000)
Gross Profit 2000
SG&A 500
Interest Expense 151

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 EBT 1349
Taxes (30%) 405
Net Income 944

What is the operating profit margin?

‫ غ‬A) 0.45.

‫ غ‬B) 0.67.
‫ ض‬C) 0.50.

Explanation

Operating profit margin = (EBIT / sales) = (1,500 / 3,000) = 0.5

Question #12 of 92 Question ID: 414425

If a firm has a net profit margin of 0.05, an asset turnover of 1.465, and a leverage ratio of 1.66, what is the firm's ROE?

‫ ض‬A) 12.16%.
‫ غ‬B) 5.87%.
‫ غ‬C) 3.18%.

Explanation

One of the many ways to express ROE = net profit margin × asset turnover × leverage ratio

ROE = (0.05)(1.465)(1.66) = 0.1216

Question #13 of 92 Question ID: 414415

Kellen Harris is a credit analyst with the First National Bank. Harris has been asked to evaluate Longhorn Supply Company's
cash needs. Harris began by calculating Longhorn's turnover ratios for 2007. After a discussion with Longhorn's management,
Harris decides to adjust the turnover ratios for 2008 as follows:

2007 Actual Expected

Turnover Increase / (Decrease)

Accounts receivable 5.0 10%

Fixed asset 3.0 7%

Accounts payable 6.0 (20%)

Inventory 4.0 (5%)

Equity 5.5 -

Total asset 2.3 8%

Longhorn's expected cash conversion cycle for 2008, based on the expected changes in turnover and assuming a 365 day year,
is closest to:

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 ‫ غ‬A) 46 days.

‫ غ‬B) 82 days.
‫ ض‬C) 86 days.

Explanation

2008 expected days of sales outstanding is 66 [365 / (5.0 × 1.1)], 2008 days of inventory on hand is 96 [365 / (4.0 × 0.95)], and
2008 days of payables is 76 [365 / (6.0 × 0.8)]. Expected cash conversion cycle is 86 days [66 days of sales outstanding + 96
days of inventory on hand - 76 days of payables].

Question #14 of 92 Question ID: 454995

If a company has a net profit margin of 5%, an asset turnover ratio of 2.5 and a ROE of 18%, what is the equity multiplier?

‫ غ‬A) 0.69.

‫ غ‬B) 2.25.
‫ ض‬C) 1.44.

Explanation

There are many different ways to illustrate ROE one of which is:

ROE = (net profit margin)(asset turnover)(equity multiplier)

0.18 = (0.05)(2.5)(equity multiplier)

0.18 ÷ [(0.05)(2.5)] = equity multiplier

0.18 ÷ 0.125 = equity multiplier

0.18 ÷ 0.125 = 1.44

Question #15 of 92 Question ID: 434285

In the year 20X4, a company had a net profit margin of 18%, total asset turnover of 1.75, and a financial leverage multiplier of
1.5. If the company's net profit margin declines to 10% in 20X5, what total asset turnover would be needed in order to maintain
the same return on equity as in 20X4, assuming there is no change in the financial leverage multiplier?

‫ غ‬A) 2.50.

‫ ض‬B) 3.15.
‫ غ‬C) 1.85.

Explanation

ROE in 20X4 was 0.18 × 1.75 × 1.5 = 0.4725.

If ROE for 20X5 is unchanged from 20X4, then:

0.10 × asset turnover × 1.5 = 0.4725
Asset turnover = 3.15.

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Question #16 of 92 Question ID: 414410

An analyst has gathered the following information about a firm:

Quick ratio of 0.25.

Cash ratio of 0.20.
$2 million in marketable securities.
$10 million in cash.

What is their receivables balance?

‫ غ‬A) 2 million.

‫ غ‬B) 5 million.
‫ ض‬C) 3 million.

Explanation

Cash ratio = (cash + marketable securities) / current liabilities

0.20 = ($10,000,000 + $2,000,000) / current liabilities

current liabilities = $12,000,000 / 0.2 = $60,000,000

Quick ratio = [cash + marketable securities + receivables] / $60,000,000

0.25 = [$10,000,000 + $2,000,000 + receivables] / $60,000,000

($60,000,000)(0.25) = $12,000,000 + receivables

$15,000,000 = $12,000,000 + receivables

$15,000,000 − $12,000,000 = receivables

$3,000,000 = receivables

Question #17 of 92 Question ID: 414353

Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis?

Statement #1 - Each line item is expressed as a percentage of its base-year amount.

Statement #2 - Each line item of the income statement is expressed as a percentage of revenue and each line item of the
balance sheet is expressed as a percentage of ending total assets.

Statement #3 - Each line item is expressed as a percentage of the prior year's amount.

Vertical
Horizontal analysis
analysis

‫ غ‬A) Statement #1 Statement #2

‫ ض‬B) Statement #2 Statement #1

‫ غ‬C) Statement #2 Statement #3

Explanation

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Horizontal common-size analysis involves expressing each line item as a percentage of the base-year figure. Vertical
common-size analysis involves expressing each line item of the income statement as a percentage of revenue and each line item
of the balance sheet as a percentage of ending total assets.

Question #18 of 92 Question ID: 414427

Summit Co. has provided the following information for its most recent reporting period:

Beginning Figures Ending Figures Average Figures

Sales $ 5,000,000

EBIT $ 800,000

Interest Expense $ 160,000

Taxes $ 256,000

Assets $ 3,500,000 $ 4,000,000 $ 3,750,000

Equity $ 1,700,000 $ 2,000,000 $ 1,850,000

What is Summit Co.'s total asset turnover and return on equity?

Total Asset Turnover Return on Equity

‫ غ‬A) 1.25 20.8%

‫ ض‬B) 1.33 20.8%

‫ غ‬C) 1.33 15.8%

Explanation

Total asset turnover = sales / average assets = 5,000,000 / 3,750,000 = 1.33

Return on equity = net income / average equity

Net income = EBIT − interest − taxes = 800,000 − 160,000 − 256,000 = 384,000
ROE = 384,000 / 1,850,000 = 20.8%

Question #19 of 92 Question ID: 414371

Earnings before interest and taxes (EBIT) is also known as:

‫ غ‬A) earnings before income taxes.

‫ غ‬B) gross profit.

‫ ض‬C) operating profit.

Explanation

Operating profit = earnings before interest and taxes (EBIT)

Gross profit = net sales - COGS

Net income = earnings after taxes = EAT

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Question #20 of 92 Question ID: 414419

An analyst has gathered the following information about a company:

Balance Sheet
Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750

Liabilities and Equity

Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Equity 1000
Retained Earnings 620
Total Liab. and Stockholder's equity 2750

Income Statement
Sales 1500
COGS 1100
Gross Profit 400
SG&A 150
Operating Profit 250
Interest Expense 25
Taxes 75
Net Income 150

What is the ROE?

‫ غ‬A) 9.9%.

‫ غ‬B) 10.7%.

‫ ض‬C) 9.3%.

Explanation

ROE = 150(NI) / [1000(common) + 620(RE)] = 150 / 1620 = 0.0926 or 9.3%

Question #21 of 92 Question ID: 414439

Lightfoot Shoe Company reported sales of $100 million for the year ended 20X7. Lightfoot expects sales to increase 10% in
20X8. Cost of goods sold is expected to remain constant at 40% of sales and Lightfoot would like to have an average of 73 days
of inventory on hand in 20X8. Forecast Lightfoot's average inventory for 20X8 assuming a 365 day year.

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 ‫ غ‬A) $8.0 million.

‫ ض‬B) $8.8 million.

‫ غ‬C) $22.0 million.

Explanation

20X8 sales are expected to be $110 million [$100 million × 1.1] and COGS is expected to be $44 million [$110 million sales ×
40%]. With 73 days of inventory on hand, average inventory is $8.8 million [($44 million COGS / 365) × 73 days].

Question #22 of 92 Question ID: 414412

How would the collection of accounts receivable most likely affect the current and cash ratios?

Current ratio Cash ratio

‫ غ‬A) Increase Increase

‫ غ‬B) No effect No effect

‫ ض‬C) No effect Increase

Explanation

Collecting receivables increases cash and decreases accounts receivable. Thus, current assets do not change and the current
ratio is unaffected. Because the numerator of the cash ratio only includes cash and marketable securities, collecting accounts
receivable increases the cash ratio.

Question #23 of 92 Question ID: 414359

Given the following income statement and balance sheet for a company:

Balance Sheet
Assets Year 2003 Year 2004
Cash 500 450
Accounts Receivable 600 660
Inventory 500 550
Total CA 1300 1660
Plant, prop. equip 1000 1250
Total Assets 2600 2910

Liabilities
Accounts Payable 500 550
Long term debt 700 1102
Total liabilities 1200 1652

Equity
Common Stock 400 538
Retained Earnings 1000 720
Total Liabilities & Equity 2600 2910

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 Income Statement
Sales 3000
Cost of Goods Sold (1000)
Gross Profit 2000
SG&A 500
Interest Expense 151
EBT 1349
Taxes (30%) 405
Net Income 944

What is the quick ratio for 2004?

‫ غ‬A) 3.018.

‫ ض‬B) 2.018.
‫ غ‬C) 0.331.

Explanation

Quick ratio = (cash + marketable securities + receivables) / CL = (450 + 0 + 660) / 550 = 2.018

Question #24 of 92 Question ID: 414379

A firm's financial statements reflect the following:

Current liabilities $4,000,000

Cash $400,000

Inventory $1,200,000

Accounts receivable $800,000

Short-term investments $2,000,000

Long-term investments $800,000

Accounts payable $2,500,000

What are the firm's current ratio, quick ratio, and cash ratio?

Current Ratio Quick Ratio Cash Ratio

‫ غ‬A) 1.1 0.6 0.8

‫ غ‬B) 0.8 0.6 1.1

‫ ض‬C) 1.1 0.8 0.6

Explanation

Current ratio = (0.4 + 2.0 + 0.8 + 1.2) / 4.0 = 1.1.

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Quick ratio = (0.4 + 2.0 + 0.8) / 4.0 = 0.8.
Cash ratio = (0.4 + 2.0) / 4.0 = 0.6.

Question #25 of 92 Question ID: 414404

An analyst has gathered the following information about a company:

Cost of goods sold = 65% of sales.

Inventory of $450,000.
Sales of $1 million.

What is the value of this firm's average inventory processing period using a 365-day year?

‫ ض‬A) 252.7 days.

‫ غ‬B) 1.4 days.

‫ غ‬C) 0.7 days.

Explanation

COGS = (0.65)($1,000,000) = $650,000

Inventory turnover = CGS / Inventory = $650,000 / $450,000 = 1.4444

Average Inventory Processing Period = 365 / 1.4444 = 252.7 days

Question #26 of 92 Question ID: 414430

When the return on equity equation (ROE) is decomposed using the original DuPont system, what three ratios comprise the
components of ROE?

‫ ض‬A) Net profit margin, asset turnover, equity multiplier.

‫ غ‬B) Gross profit margin, asset turnover, equity multiplier.
‫ غ‬C) Net profit margin, asset turnover, asset multiplier.

Explanation

The three ratios can be further decomposed as follows:

Net profit margin = net income/sales

Asset turnover = sales/assets

Equity multiplier = assets/equity

Question #27 of 92 Question ID: 414405

Given the following information about a company:

Receivables turnover = 10 times.

Payables turnover = 12 times.
Inventory turnover = 8 times.

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What are the average receivables collection period, the average payables payment period, and the average inventory processing
period respectively?

Average Receivables Average Payables Average Inventory

Collection Period Payment Period Processing Period

‫ غ‬A) 37 30 52

‫ غ‬B) 37 45 46

‫ ض‬C) 37 30 46

Explanation

Average receivables collection period = (365 / 10) = 36.5 or 37

Average payables payment period = (365 / 12) = 30.4 or 30

Average inventory processing period = (365 / 8) = 45.6 or 46

Question #28 of 92 Question ID: 414436

A firm's financial statements reflect the following:

EBIT $2,000,000

Sales $16,000,000

Interest expense $900,000

Total assets $12,300,000

Equity $7,000,000

Effective tax rate 35%

Dividend payout rate 28%

Based on this information, what is the firm's sustainable growth rate?

‫ ض‬A) 7.35%.

‫ غ‬B) 10.63%.

‫ غ‬C) 8.82%.

Explanation

ROE = tax burden × interest burden × EBIT margin × asset turnover × financial leverage

tax burden = net income/EBT

EBT = EBIT - I = 2,000,000 - 900,000 = 1,100,000
net income = (EBT)(1-t) = (1,100,000)(1 - 0.35) = 715,000
tax burden = 715,000/1,100,000 = 0.65
interest burden = EBT/EBIT = 1,100,000/2,000,000 = 0.55

EBIT margin = EBIT/revenue = 2,000,000/16,000,000 = 0.125

asset turnover = revenue/total assets = 16,000,000/12,300,000 = 1.301

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financial leverage = total assets/total equity = 12,300,000/7,000,000 = 1.757

ROE = 0.65 × 0.55 × 0.125 × 1.301 × 1.757 = 0.1021

Alternatively, ROE = [(EBIT - I)(1-t)]/equity = [(2,000,000 - 900,000)(1 - 0.35)]/7,000,000 = 0.1021

Sustainable growth = ROE (1 - dividend payout rate) = 0.1021 × 0.72 = 7.35%.

Question #29 of 92 Question ID: 414440

In preparing a forecast of future financial performance, which of the following best describes sensitivity analysis and scenario
analysis, respectively?

Description #1 - A computer generated analysis based on developing probability distributions of key variables that are used to
drive the potential outcomes.
Description #2 - The process of analyzing the impact of future events by considering multiple key variables.

Description #3 - A technique whereby key financial variables are changed one at a time and a range of possible outcomes are
observed. Also known as "what-if" analysis.

Sensitivity analysis Scenario analysis

‫ غ‬A) Description #2 Description #3

‫ ض‬B) Description #3 Description #2

‫ غ‬C) Description #3 Description #1

Explanation

Sensitivity analysis develops a range of possible outcomes as specific inputs are changed one at a time. Sensitivity analysis is
also known as "what-if" analysis. Scenario analysis is based on a specific set of outcomes for multiple variables. Computer
generated analysis, based on developing probability distributions of key variables, is known as simulation analysis.

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Question #30 of 92 Question ID: 414394

The following data applies to the XTC Company:

Sales = $1,000,000.
Receivables = $260,000.
Payables = $600,000.
Purchases = $800,000.
COGS = $800,000.
Inventory = $400,000.
Net Income = $50,000.
Total Assets = $800,000.
Debt/Equity = 200%.

What is the average collection period, the average inventory processing period, and the payables payment period for XTC
Company?

Average Average Inventory Payables

Collection Period Processing Period Payments Period

‫ غ‬A) 45 days 45 days 132 days

‫ غ‬B) 55 days 195 days 231 days

‫ ض‬C) 95 days 183 days 274 days

Explanation

Receivables turnover = $1,000,000 / $260,000 = 3.840

Average collection period = 365 / 3.840 = 95.05 or 95 days

Inventory turnover = $800,000 / $400,000 = 2

Average inventory processing period = 365 / 2 = 183 days

Payables turnover ratio = $800,000 / $600,000 = 1.333

Payables payment period = 365 / 1.333 = 273.82 or 274 days

Question #31 of 92 Question ID: 414435

A firm's financial statements reflect the following:

Net profit margin 15%

Sales $10,000,000

Interest payments $1,200,000

Avg. assets $15,000,000

Equity $11,000,000

Avg. working capital $800,000

Dividend payout rate 35%

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Which of the following is the closest estimate of the firm's sustainable growth rate?

‫ ض‬A) 9%.

‫ غ‬B) 10%.

‫ غ‬C) 8%.

Explanation

Return on equity (ROE) = net profit margin × asset turnover × leverage = (0.15)(0.67)(1.364) = 0.137.

The sustainable growth = (1 - dividend rate)(ROE) = (0.65)(0.137) = 8.9%.

Question #32 of 92 Question ID: 414362

Which of the following ratios would least likely measure liquidity?

‫ ض‬A) Return on assets (ROA).

‫ غ‬B) Current ratio.
‫ غ‬C) Quick ratio.

Explanation

ROA = (EBIT / average total assets) which measures management's ability and efficiency in using the firm's assets to generate
operating profits. Other ratios that measure liquidity (if a company can pay its current bills) besides the quick, cash, and current
ratios are the: receivables turnover, inventory turnover, and payables turnover ratios.

Question #33 of 92 Question ID: 414385

Given the following income statement:

Net Sales 200

Cost of Goods Sold 55
Gross Profit 145
Operating Expenses 30
Operating Profit (EBIT) 115
Interest 15
Earnings Before Taxes (EBT) 100
Taxes 40
Earnings After Taxes (EAT) 60

What are the gross profit margin and operating profit margin?

Gross Profit
Operating Profit Margin
Margin

‫ غ‬A) 0.379 0.725

‫ ض‬B) 0.725 0.575

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 ‫ غ‬C) 2.630 1.226

Explanation

Gross profit margin = gross profit / net sales = 145 / 200 = 0.725

Operating profit margin = EBIT / net sales = 115 / 200 = 0.575

Question #34 of 92 Question ID: 414369

To calculate the cash ratio, the total of cash and marketable securities is divided by:

‫ غ‬A) total assets.

‫ ض‬B) current liabilities.

‫ غ‬C) total liabilities.

Explanation

Current liabilities are used in the denominator for the: current, quick, and cash ratios.

Question #35 of 92 Question ID: 414389

An analyst has gathered the following information about a company:

Balance Sheet

Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750

Liabilities and Equity

Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Stock 1000
Retained Earnings 620
Total Liab. and Stockholder's equity 2750

Income Statement

Sales 1500
COGS 1100
Gross Profit 400
SG&A 150
Operating Profit 250

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 Interest Expense 25
Taxes 75
Net Income 150

What is the receivables collection period?

‫ ض‬A) 183.

‫ غ‬B) 365.

‫ غ‬C) 243.

Explanation

Receivables turnover = 1,500(sales) / 750(receivables) = 2.0

Average receivables collection period = 365 / 2 = 182.5 or 183

Question #36 of 92 Question ID: 414409

Eagle Manufacturing Company reported the following selected financial information for 2007:

Accounts payable 5.0

turnover

Cost of goods sold $30 million

Average inventory $3 million

Average receivables $8 million

Total liabilities $35 million

Interest expense $2 million

Cash conversion cycle 13.5 days

Assuming 365 days in the calendar year, calculate Eagle's sales for the year.

‫ غ‬A) $52.3 million.

‫ غ‬B) $57.8 million.

‫ ض‬C) $58.4 million.

Explanation

Set up the cash conversion cycle formula and solve for the missing variable, sales. Days in payables is equal to 73 [365 / 5
accounts payable turnover]. Days in inventory is equal to 36.5 [365 / ($30 million COGS / $3 million average inventory)]. Given
the cash conversion cycle, days in inventory, and days in payables, calculate days in receivables of 50 [13.5 days cash
conversion cycle + 73 days in payables - 36.5 days in inventory]. Given days in receivables of 50 and average receivables of $8
million, sales are $58.4 million [($8 million average receivables / 50 days) × 365].

Question #37 of 92 Question ID: 414426

Given the following information about a firm what is its return on equity (ROE)?

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 An asset turnover of 1.2.
An after tax profit margin of 10%.
A financial leverage multiplier of 1.5.

‫ غ‬A) 0.12.

‫ غ‬B) 0.09.

‫ ض‬C) 0.18.

Explanation

ROE = (EAT / S)(S / A)(A / EQ)

ROE = (0.1)(1.2)(1.5) = 0.18

Question #38 of 92 Question ID: 414424

An analyst has gathered the following information about a company.

The total asset turnover is 1.2.

The after-tax profit margin is 10%.

The financial leverage multiplier is 1.5.

Given this information, the company's return on equity is:

‫ غ‬A) 9%.

‫ غ‬B) 12%.

‫ ض‬C) 18%.

Explanation

ROE = profit margin × total asset turnover × financial leverage

ROE = (0.1)(1.2)(1.5) = 0.18 or 18.0%

Question #39 of 92 Question ID: 414380

An analyst has collected the following data about a firm:

Receivables turnover = 20 times.

Inventory turnover = 16 times.
Payables turnover = 24 times.

What is the cash conversion cycle?

‫ ض‬A) 26 days.

‫ غ‬B) Not enough information is given.

‫ غ‬C) 56 days.

Explanation

Cash conversion cycle = receivables collection period + inventory processing period - payables payment period.

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Receivables collection period = (365 / 20) = 18
Inventory processing period = (365 / 16) = 23
Payables payment period = (365 / 24) = 15
Cash conversion cycle = 18 + 23 - 15 = 26

Question #40 of 92 Question ID: 414397

Which of the following ratios would NOT be used to evaluate how efficiently management is utilizing the firm's assets?

‫ غ‬A) Fixed asset turnover.

‫ غ‬B) Payables turnover.

‫ ض‬C) Gross profit margin.

Explanation

The gross profit margin is used to measure a firm's operating profitability, not operating efficiency.

Question #41 of 92 Question ID: 414407

An analyst has gathered the following information about a company:

Balance Sheet
Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750

Liabilities and Equity

Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Stock 1000
Retained Earnings 620
Total Liab. and Stockholder's equity 2750

Income Statement
Sales 1500
COGS 1100
Gross Profit 400
SG&A 150
Operating Profit 250
Interest Expense 25
Taxes 75
Net Income 150

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What is the receivables turnover ratio?

‫ غ‬A) 1.0.

‫ غ‬B) 0.5.
‫ ض‬C) 2.0.

Explanation

Receivables turnover = 1,500(sales) / 750(receivables) = 2.0

Question #42 of 92 Question ID: 414431

Which of the following ratios is NOT part of the original DuPont system?

‫ غ‬A) Equity multiplier.

‫ غ‬B) Asset turnover.

‫ ض‬C) Debt to total capital.

Explanation

The debt to total capital ratio is not part of the original DuPont system. The firm's leverage is accounted for through the equity
multiplier.

Question #43 of 92 Question ID: 414408

An analyst has gathered the following information about a company:

Balance Sheet

Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750

Liabilities and Equity

Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Stock 1000
Retained Earnings 620
Total Liab. and Stockholder's equity 2750

Income Statement

Sales 1500
COGS 1100

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 Gross Profit 400
SG&A 150
Operating Profit 250
Interest Expense 25
Taxes 75
Net Income 150

Determine the current ratio and the cash ratio.

Current Ratio Cash Ratio

‫ ض‬A) 4.65 0.93

‫ غ‬B) 1.98 1.86

‫ غ‬C) 2.67 1.07

Explanation

Current ratio = [100(cash) + 750(accounts receivable)+ 300(marketable securities) + 850(inventory)] / [300(AP) + 130(short term debt)] =
(2000 / 430) = 4.65

Cash ratio = [100(cash) + 300(marketable securities)] / [300(AP) + 130(short term debt)] = (400 / 430) = 0.93

Question #44 of 92 Question ID: 414360

Which of the following is least likely a routinely used operating profitability ratio?

‫ ض‬A) Sales/Total Assets

‫ غ‬B) Gross profit/net sales.
‫ غ‬C) Net income/net sales.

Explanation

Sales/Total Assets, or Total Asset Turnover is a measure of operating efficiency, not operating profitability.

Question #45 of 92 Question ID: 414391

Which ratio is used to measure a company's internal liquidity?

‫ ض‬A) Current ratio.

‫ غ‬B) Total asset turnover.

‫ غ‬C) Interest coverage.

Explanation

Total asset turnover measures operating efficiency and interest coverage measures a company's financial risk.

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Question #46 of 92 Question ID: 414384

Goldstar Manufacturing has an accounts receivable turnover of 10.5 times, an inventory turnover of 4 times, and payables
turnover of 8 times. What is Goldstar's cash conversion cycle?

‫ ض‬A) 80.38 days.

‫ غ‬B) 171.64 days.

‫ غ‬C) 6.50 days.

Explanation

The cash conversion cycle = average receivables collection period + average inventory processing period - payables payment
period. The average receivables collection period = 365 / average receivables turnover or 365 / 10.5 = 34.76. The average
inventory processing period = 365 / inventory turnover or 365 / 4 = 91.25. The payables payment period = 365 / payables
turnover ratio = 365 / 8 = 45.63. Putting it all together: cash conversion cycle = 34.76 + 91.25 - 45.63 = 80.38.

Question #47 of 92 Question ID: 414421

What is a company's equity if their return on equity (ROE) is 12%, and their net income is $10 million?

‫ غ‬A) $1,200,000.
‫ غ‬B) $120,000,000.
‫ ض‬C) $83,333,333.

Explanation

One of the many ways ROE can be expressed is: ROE = net income / equity

0.12 = $10,000,000 / equity

Equity = $10,000,000 / 0.12 = $83,333,333

Question #48 of 92 Question ID: 414401

An analyst has collected the following data about a firm:

Receivables turnover = 10 times.

Inventory turnover = 8 times.
Payables turnover = 12 times.

What is the average receivables collection period, the average inventory processing period, and the average payables payment
period? (assume 360 days in a year)

Receivables Inventory Payables

Collection Period Processing Period Payment Period

‫ غ‬A) 30 days 30 days 60 days

‫ غ‬B) 45 days 36 days 30 days

‫ ض‬C) 36 days 45 days 30 days

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Explanation

Receivables collection period = 360 / 10 = 36 days

Inventory processing period = 360 / 8 = 45 days

Payables payment period = 360 / 12 = 30 days

Question #49 of 92 Question ID: 414395

Are the quick ratio and the debt-to-capital ratio used primarily to assess a company's ability to meet short-term obligations?

Debt-to-capital
Quick ratio
ratio

‫ ض‬A) Yes No

‫ غ‬B) Yes Yes

‫ غ‬C) No Yes

Explanation

The quick ratio is a liquidity ratio. Liquidity ratios are used to measure a firm's ability to meet its short-term obligations. The
debt-to-capital ratio is a solvency ratio. Solvency ratios are used to measure a firm's ability to meet its longer-term obligations.

Question #50 of 92 Question ID: 414406

Given the following income statement and balance sheet for a company:

Balance Sheet

Assets Year 2003 Year 2004

Cash 500 450
Accounts Receivable 600 660
Inventory 500 550
Total CA 1300 1660
Plant, prop. equip 1000 1250
Total Assets 2600 2,910

Liabilities
Accounts Payable 500 550
Long term debt 700 1102
Total liabilities 1200 1652

Equity
Common Stock 400 538
Retained Earnings 1000 720
Total Liabilities & Equity 2600 2,910

Income Statement

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 Sales 3000
Cost of Goods Sold (1000)
Gross Profit 2000
SG&A 500
Interest Expense 151
EBT 1349
Taxes (30%) 405
Net Income 944

What is the average receivables collection period?

‫ ض‬A) 76.7 days.

‫ غ‬B) 60.6 days.

‫ غ‬C) 80.3 days.

Explanation

Average collection period = 365 / receivables turnover

Receivables turnover = sales / average receivables = 3,000 / 630 = 4.76
Average receivables collection period = 365 / 4.76 = 76.65

Question #51 of 92 Question ID: 414393

An analyst has gathered the following data about a company:

Average receivables collection period of 37 days.

Average payables payment period of 30 days.
Average inventory processing period of 46 days.

What is their cash conversion cycle?

‫ غ‬A) 45 days.
‫ غ‬B) 113 days.
‫ ض‬C) 53 days.

Explanation

Cash conversion cycle = average receivables collection period + average inventory processing period - payables payment period
= 37 + 46 - 30 = 53 days.

Question #52 of 92 Question ID: 414434

An analysis of the industry reveals that firms have been paying out 45% of their earnings in dividends, asset turnover = 1.2;
asset-to-equity (A/E) = 1.1 and profit margins are 8%. What is the industry's projected growth rate?

‫ غ‬A) 4.55%.

‫ غ‬B) 4.95%.
‫ ض‬C) 5.81%.

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Explanation

ROE = profit margin × asset turnover × A/E = 0.08 × 1.2 × 1.1 = 0.1056
RR = (1 - 0.45) = 0.55
g = ROE × RR = 0.1056 × 0.55 = 0.0581

Question #53 of 92 Question ID: 414414

Income Statements for Royal, Inc. for the years ended December 31, 20X0 and December 31, 20X1 were as follows (in $ millions):

20X0 20X1

Sales 78 82

Cost of Goods Sold (47) (48)

Gross Profit 31 34

Sales and Administration (13) (14)

Operating Profit (EBIT) 18 20

Interest Expense (6) (10)

Earnings Before Taxes 12 10

Income Taxes (5) (4)

Earnings after Taxes 7 6

Analysis of these statements for trends in operating profitability reveals that, with respect to Royal's gross profit margin and net profit
margin:

‫ غ‬A) gross profit margin decreased but net profit margin increased in 20X1.

‫ ض‬B) gross profit margin increased in 20X1 but net profit margin decreased.

‫ غ‬C) both gross profit margin and net profit margin increased in 20X1.

Explanation

Royal's gross profit margin (gross profit / sales) was higher in 20X1 (34 / 82 = 41.5%) than in 20X0 (31 / 78 = 39.7%), but net profit margin
(earnings after taxes / sales) declined from 7 / 78 = 9.0% in 20X0 to 6 / 82 = 7.3% in 20X1.

Question #54 of 92 Question ID: 414390

Which of the following is a measure of a firm's liquidity?

‫ غ‬A) Equity Turnover.

‫ غ‬B) Net Profit Margin.

‫ ض‬C) Cash Ratio.

Explanation

Equity turnover and net profit margin are each measures of a company's operating performance.

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Question #55 of 92 Question ID: 414372

A company has a receivables turnover of 10, an inventory turnover of 5, and a payables turnover of 12. The company's cash conversion
cycle is closest to:

‫ ض‬A) 79 days.

‫ غ‬B) 30 days.

‫ غ‬C) 37 days.

Explanation

Cash conversion cycle = receivables days + inventory processing days - payables payment period.
Receivables days = 365 / receivables turnover = 365 / 10 = 36.5 days.
Inventory processing days = 365 / inventory turnover = 365 / 5 = 73.0 days.
Payables payment period = 365 / payables turnover = 365 / 12 = 30.4 days.
Cash collection cycle = 36.5 + 73.0 - 30.4 = 79.1 days.

Question #56 of 92 Question ID: 414413

Given the following income statement and balance sheet for a company:

Balance Sheet
Assets Year 2006 Year 2007
Cash 200 450
Accounts Receivable 600 660
Inventory 500 550
Total CA 1300 1660
Plant, prop. equip 1000 1580
Total Assets 2600 3240
Liabilities
Accounts Payable 500 550
Long term debt 700 1052
Total liabilities 1200 1602
Equity
Common Stock 400 538
Retained Earnings 1000 1100
Total Liabilities & Equity 2600 3240

Income Statement
Sales 3000
Cost of Goods Sold (1000)
Gross Profit 2000
SG&A 500
Interest Expense 151
EBT 1349
Taxes (30%) 405
Net Income 944

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Which of the following is closest to the company's return on equity (ROE)?

‫ ض‬A) 0.62.

‫ غ‬B) 0.29.
‫ غ‬C) 1.83.

Explanation

There are several ways to approach this question but the easiest way is to recognize that ROE = NI / average equity thus ROE =
944 / 1,519 = 0.622.

If using the traditional DuPont, ROE = (NI / Sales) × (Sales / Assets) × (Assets / Equity):

ROE = (944 / 3,000) × (3,000 / 2,920) × (2,920 / 1,519) = 0.622

The 5-part Dupont formula gives the same result:

ROE = (net income / EBT)(EBT / EBIT)(EBIT / revenue)(revenue / total assets)(total assets / total equity)

Where EBIT = EBT + interest = 1,349 + 151 = 1,500

ROE 2007 = (944 / 1,349)(1,349 / 1,500)(1,500 / 3,000)(3,000 / 2,920)(2,920 / 1,519) = 0.622

Question #57 of 92 Question ID: 414370

Johnson Corp. had the following financial results for the fiscal 2004 year:

Current ratio 2.00

Quick ratio 1.25

Current liabilities $100,000

Inventory turnover 12

Gross profit % 25

The only current assets are cash, accounts receivable, and inventory. The balance in these accounts has remained constant
throughout the year. Johnson's net sales for 2004 were:

‫ ض‬A) $1,200,000.

‫ غ‬B) $900,000.

‫ غ‬C) $300,000.

Explanation

The 25% GP indicates that the cost of goods sold is 75% of sales. The inventory is derived from the difference between current
ratio and the quick ratio. The current ratio indicates that the current assets are $200,000 and the quick assets are $125,000. The
difference represents the inventory of $75,000. The inventory turnover is used to obtain cost of goods sold of $900,000. The cost
of goods sold is 75% of sales, indicating that sales are $1,200,000.

Question #58 of 92 Question ID: 414428

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With other variables remaining constant, if profit margin rises, ROE will:

‫ غ‬A) fall.

‫ غ‬B) remain the same.

‫ ض‬C) increase.

Explanation

The DuPont equation shows clearly that ROE will increase as profit margin increases, as long as asset turn and leverage do not fall.

Question #59 of 92 Question ID: 414398

>An analyst has gathered the following data about a company:

Average receivables collection period of 95 days.

Average inventory processing period of 183 days.
A payables payment period of 274 days.

What is their cash conversion cycle?

‫ ض‬A) 4 days.
‫ غ‬B) 186 days.
‫ غ‬C) -4 days.

Explanation

Cash conversion cycle = average receivables collection period + average inventory processing period - payables payment period

= 95 + 183 - 274 = 4 days

Question #60 of 92 Question ID: 414354

Are the following statements about common-size financial statements correct or incorrect?

Statement #1 - Expressing financial information in a common-size format enables the analyst to make better comparisons
between two firms of similar size that operate in different industries.

Statement #2 - Common-size financial statements can be used to highlight the structural changes in the firm's operating results
and financial condition that have occurred over time.

With respect to these statements:

‫ ض‬A) only one is correct:

‫ غ‬B) both are correct.

‫ غ‬C) both are incorrect.

Explanation

Vertical common-size statements enable the analyst to make better comparisons of two firms of different sizes that operate in the
same industry. Horizontal common-size financial statements express each line as a percentage of the base year figure; thus,
horizontal common-size statements can be used to identify structural changes in a firm's operating results and financial condition

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over time.

Question #61 of 92 Question ID: 414358

Comparing a company's ratios with those of its competitors is best described as:

‫ غ‬A) common-size analysis.

‫ غ‬B) longitudinal analysis.

‫ ض‬C) cross-sectional analysis.

Explanation

Comparing a company's ratios with those of its competitors is known as cross-sectional analysis.

Question #62 of 92 Question ID: 414387

The cash conversion cycle is the:

‫ غ‬A) length of time it takes to sell inventory.

‫ ض‬B) sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for
credit purchases.

‫ غ‬C) sum of the time it takes to sell inventory and the time it takes to collect accounts receivable.

Explanation

Cash conversion cycle = (average receivables collection period) + (average inventory processing period) − (payables payment
period)

Question #63 of 92 Question ID: 414403

During 2007, Brownfield Incorporated purchased $140 million of inventory. For the year just ended, Brownfield reported cost of
goods sold of $130 million. Inventory at year-end was $45 million. Calculate inventory turnover for the year.

‫ ض‬A) 3.25.
‫ غ‬B) 3.71.

‫ غ‬C) 2.89.

Explanation

First, calculate beginning inventory given COGS, purchases, and ending inventory. Beginning inventory was $35 million [$130
million COGS + $45 million ending inventory - $140 million purchases]. Next, calculate average inventory of $40 million [($35
million beginning inventory + $45 million ending inventory) / 2]. Finally, calculate inventory turnover of 3.25 [$130 million COGS /
$40 million average inventory].

Question #64 of 92 Question ID: 414381

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Which of the following items is NOT in the numerator of the quick ratio?

‫ غ‬A) Receivables.

‫ ض‬B) Inventory.

‫ غ‬C) Cash.

Explanation

Quick ratio = (cash + marketable securities + receivables) / current liabilities

Current ratio = (cash + marketable securities + receivables + inventory) / current liabilities

Question #65 of 92 Question ID: 414422

Using the following data, find the return on equity (ROE).

Net Income Total Assets Sales Equity

$2 $10 $10 $8

‫ غ‬A) 100%.
‫ غ‬B) 20%.
‫ ض‬C) 25%.

Explanation

Net Income / Equity = ROE

2 / 8 = 25%

Question #66 of 92 Question ID: 414383

Using a 365-day year, if a firm has net annual sales of $250,000 and average receivables of $150,000, what is its average
collection period?

‫ غ‬A) 1.7 days.

‫ غ‬B) 46.5 days.

‫ ض‬C) 219.0 days.

Explanation

Receivables turnover = $250,000 / $150,000 = 1.66667

Collection period = 365 / 1.66667 = 219 days

Question #67 of 92 Question ID: 414411

What would be the impact on a firm's return on assets ratio (ROA) of the following independent transactions, assuming ROA is

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less than one?

Transaction #1 - A firm owned investment securities that were classified as available-for-sale and there was a recent decrease in
the fair value of these securities.

Transaction #2 - A firm owned investment securities that were classified as trading securities and there was recent increase in
the fair value of the securities.

Transaction #1 Transaction #2

‫ غ‬A) Higher Lower

‫ غ‬B) Lower Higher

‫ ض‬C) Higher Higher

Explanation

Available-for-sale securities are reported on the balance sheet at fair value and any unrealized gains and losses bypass the
income statement and are reported as an adjustment to equity. Thus, a decrease in fair value will result in a higher ROA ratio
(lower assets). Trading securities are also reported on the balance sheet at fair value; however, the unrealized gains and losses
are recognized in the income statement. Therefore, an increase in fair value will result in higher ROA. In this case, both the
numerator and denominator are higher; however, since the ratio is less than one, the percentage change of the numerator is
greater than the percentage change of the denominator, so the ratio will increase.

Question #68 of 92 Question ID: 414396

An analyst has gathered the following information about a company:

Balance Sheet
Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750

Liabilities and Equity

Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Stock 1000
Retained Earnings 620
Total Liab. and Stockholder's equity 2750

Income Statement
Sales 1500
COGS 1100
Gross Profit 400
SG&A 150

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 Operating Profit 250
Interest Expense 25
Taxes 75
Net Income 150

What is the inventory turnover ratio?

‫ غ‬A) 0.77.

‫ ض‬B) 1.29.
‫ غ‬C) 1.59.

Explanation

Inventory turnover = 1,100(COGS) / 850(inventory) = 1.29

Question #69 of 92 Question ID: 414438

McQueen Corporation prepared the following common-size income statement for the year ended December 31, 20X7:

Sales 100%

Cost of goods sold 60%

Gross profit 40%

For 20X7, McQueen sold 250 million units at a sales price of $1 each. For 20X8, McQueen has decided to reduce its sales price
by 10%. McQueen believes the price cut will double unit sales. The cost of each unit sold is expected to remain the same.
Calculate the change in McQueen's expected gross profit for 20X8 assuming the price cut doubles sales.

‫ غ‬A) $80 million increase.

‫ غ‬B) $150 million increase.
‫ ض‬C) $50 million increase.

Explanation

20X7 gross profit is equal to $100 million ($1 × 250 million units sold × 40% gross profit margin). The 10% price cut to $0.90 will
increase cost of goods sold to 67% of sales [COGS=0.6($1) = $0.60; $0.60 / $0.90 = 67%.]. As a result, gross profit will decrease
to 33% of sales. If unit sales double in 20X8, gross profit will equal $150 million ($0.90 × 500 million units × 33% gross profit
margin). Therefore, gross profit will increase $50 million ($150 million 20X8 gross profit - $100 million 20X7 gross profit).

Question #70 of 92 Question ID: 414423

The traditional DuPont equation shows ROE equal to:

‫ غ‬A) net income/assets × sales/equity × assets/sales.

‫ ض‬B) net income/sales × sales/assets × assets/equity.

‫ غ‬C) EBIT/sales × sales/assets × assets/equity × (1 - tax rate).

Explanation

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Profit margin × asset turnover × financial leverage. Although net income/assets × sales/equity × assets/sales also yields ROE, it is not the
DuPont equation.

Question #71 of 92 Question ID: 460645

Regarding the use of financial ratios in the analysis of a firm's financial statements, it is most accurate to say that:

‫ غ‬A) variations in accounting treatments have little effect on financial ratios.

‫ غ‬B) many financial ratios are useful in isolation.

‫ ض‬C) a range of target values for a ratio may be more appropriate than a single target value.

Explanation

Determining a target value for a ratio is difficult, so a range of values may be more appropriate. Financial ratios are not useful
when viewed in isolation and are only valid when compared to historical figures or peers. Comparing ratios between firms can be
complicated by variations in accounting treatments used at each firm.

Question #72 of 92 Question ID: 414417

Assume that Q-Tell Incorporated is in the communications industry, which has an average receivables turnover ratio of 16 times.
If the Q-Tell's receivables turnover is less than that of the industry, Q-Tell's average receivables collection period is most likely:

‫ غ‬A) 20 days.
‫ غ‬B) 12 days.
‫ ض‬C) 25 days.

Explanation

Average receivables collection period = 365 / receivables turnover, which is 22.81 days for the industry (= 365 / 16). If Q-Tell's
receivables turnover is less than 16, its average days collection period must be greater that 22.81 days.

Question #73 of 92 Question ID: 414432

Would an increase in net profit margin or in the firm's dividend payout ratio increase a firm's sustainable growth rate?

Dividend payout
Net profit margin
ratio

‫ ض‬A) Yes No

‫ غ‬B) Yes Yes

‫ غ‬C) No No

Explanation

The sustainable growth rate is equal to ROE multiplied by the retention rate. According to the Dupont formula, an increase in net
profit margin will result in higher ROE. Thus, an increase in net profit margin will result in a higher growth rate. The retention rate
is equal to 1 minus the dividend payout ratio. Thus, an increase in the dividend payout ratio will lower the retention rate and lower

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the growth rate.

Question #74 of 92 Question ID: 414367

An analyst has gathered the following information about a company:

Balance Sheet
Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750

Liabilities and Equity

Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Stock 1000
Retained Earnings 620
Total Liab. and Stockholder's equity 2750

Income Statement
Sales 1500
COGS 1100
Gross Profit 400
SG&A 150
Operating Profit 250
Interest Expense 25
Taxes 75
Net Income 150

What is the current ratio?

‫ غ‬A) 0.22.

‫ ض‬B) 4.65.
‫ غ‬C) 2.67.

Explanation

Current ratio = [100(cash) + 750(AR) + 300(marketable securities) + 850(inventory)] / [300(AP) + 130(short-term debt)] = (2,000 /
430) = 4.65

Question #75 of 92 Question ID: 485774

An analyst is examining the operating performance ratios for a company. A summary of the company's data for the three most

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recent fiscal years along with the industry averages are shown below:

Industry 20X5 20X4 20X3

Return on total capital (ROTC) 24.0% 26.6% 27.3% 28.4%
Return on common equity 10.0% 12.6% 15.5% 20.2%
Return on equity (ROE) 8.0% 12.1% 14.7% 18.9%

Based on the above data, the analyst's most appropriate conclusion is that the trend in ROE:

‫ غ‬A) relative to return on common equity implies declining leverage and financial risk.

‫ غ‬B) relative to the industry average reflects underperformance due to weak management.
‫ ض‬C) relative to ROTC implies increasing leverage and financial risk.

Explanation

Return on equity (net income / average total equity) includes both common equity and preferred equity in the denominator, but
not debt. Return on total capital (EBIT / average total debt + average total equity) includes both equity and debt. An increasing
spread between ROE and ROTC implies increasing debt in the capital structure, which reflects increasing leverage and financial
risk.

Question #76 of 92 Question ID: 414420

What is the net income of a firm that has a return on equity of 12%, a leverage ratio of 1.5, an asset turnover of 2, and revenue of
$1 million?

‫ غ‬A) $36,000.
‫ غ‬B) $360,000.
‫ ض‬C) $40,000.

Explanation

The traditional DuPont system is given as:

ROE = (net profit margin)(asset turnover)(leverage ratio)

Solving for the net profit margin yields:

0.12 = (net profit margin) × (2) × (1.5)

0.04 = (net profit margin)

Recognizing that the net profit margin is equal to net income / revenue we can substitute that relationship into the above equation
and solve for net income:

0.04 = net income / revenue = net income / $1,000,000

$40,000 = net income.

Question #77 of 92 Question ID: 414418

Comparative income statements for E Company and G Company for the year ended December 31 show the following (in $
millions):

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 E Company G Company

Sales 70 90

Cost of Goods Sold (30) (40)

Gross Profit 40 50

Sales and Administration (5) (15)

Depreciation (5) (10)

Operating Profit 30 25

Interest Expense (20) (5)

Earnings Before Taxes 10 20

Income Taxes (4) (8)

Earnings after Taxes 6 12

The financial risk of E Company, as measured by the interest coverage ratio, is:

‫ ض‬A) higher than G Company's because its interest coverage ratio is less than one-third of G
Company's.
‫ غ‬B) higher than G Company's because its interest coverage ratio is less than G Company's, but at least
one-third of G Company's.
‫ غ‬C) lower than G Company's because its interest coverage ratio is at least three times G Company's.

Explanation

E Company's interest coverage ratio (EBIT / interest expense) is (30 / 20) = 1.5.

G Company's interest coverage ratio is (25 / 5) = 5.0. Higher interest coverage means greater ability to cover required interest
and lease payments. Note that 1.5 / 5.0 = 0.30, which means the interest coverage for E Company is less than 1/3 that of G
Company.

Question #78 of 92 Question ID: 434284

The latest balance sheet for XYZ, Inc. appears below:

12/31/20X412/31/20X3
Assets
Cash 2,098 410
Accounts receivable 4,570 4,900
Inventory 4,752 4,500
Prepaid SGA 877 908
Total current assets 12,297 10,718

Land 0 4,000
Property, Plant &
11,000 11,000
Equipment
Accumulated
(5,862) (5,200)
Depreciation

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Total Assets 17,435 20,518

Liabilities and Equity

Accounts Payable 4,651 5,140

Wages Payable 2,984 2,890
Dividends Payable 100 100
Total current liabilities 7,735 8,130

Long term Debt 1,346 7,388

Common Stock 4,000 4,000

Retained Earnings 4,354 1,000
Total Liabilities and
17,435 20,518
Equity
At the end of 20X4, what were XYZ's current and quick ratios?

Current ratio Quick ratio

‫ غ‬A) 1.59 1.59

‫ غ‬B) 1.48 0.86

‫ ض‬C) 1.59 0.86

Explanation

Current ratio = current assets / current liabilities = 12,297 / 7,735 = 1.59

Quick ratio = (cash + receivables) / current liabilities = 2,098 + 4,570 / 7,735 = 0.86

Question #79 of 92 Question ID: 414368

Wells Incorporated reported the following common size data for the year ended December 31, 20X7:

Income Statement %
Sales 100.0

Cost of goods sold 58.2

Operating expenses 30.2

Interest expense 0.7

Income tax 5.7

Net income 5.2

Balance sheet % %

Cash 4.8 Accounts payable 15.0

Accounts receivable 14.9 Accrued liabilities 13.8

Inventory 49.4 Long-term debt 23.2
Net fixed assets 30.9 Common equity 48.0
Total assets 100.00 Total liabilities & equity 100.0
For 20X6, Wells reported sales of $183,100,000 and for 20X7, sales of $215,600,000. At the end of 20X6, Wells' total assets
were $75,900,000 and common equity was $37,800,000. At the end of 20X7, total assets were $95,300,000. Calculate Wells'

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current ratio and return on equity ratio for 20X7.

Current ratio Return on equity

‫ غ‬A) 2.4 26.4%

‫ غ‬B) 4.6 25.2%

‫ ض‬C) 2.4 26.8%

Explanation

The current ratio is equal to 2.4 [(4.8% cash + 14.9% accounts receivable + 49.4% inventory) / (15.0% accounts payable +
13.8% accrued liabilities)]. This ratio can be calculated from the common size balance sheet because the percentages are all on
the same base amount (total).

Return on equity is equal to net income divided by average total equity. Since this ratio mixes an income statement item and a
balance sheet item, it is necessary to convert the common-size inputs to dollars. Net income is $11,211,200 ($215,600,000 ×
5.2%) and average equity is $41,772,000 [($95,300,000 × 48.0%) + $37,800,000] / 2. Thus, 2007 ROE is 26.8% ($11,211,200
net income / $41,772,000 average equity).

Question #80 of 92 Question ID: 414400

What type of ratio is revenue divided by average working capital and what type of ratio is average total assets divided by average
total equity?

Revenue / Average Average total assets /

working capital Average total equity

‫ ض‬A) Activity ratio Solvency ratio

‫ غ‬B) Activity ratio Liquidity ratio

‫ غ‬C) Profitability ratio Solvency ratio

Explanation

Revenue divided by average working capital, also known as the working capital turnover ratio, is an activity ratio. Average total
assets divided by average total equity, also known as the financial leverage ratio, is a solvency ratio.

Question #81 of 92 Question ID: 414375

A firm has a cash conversion cycle of 80 days. The firm's payables turnover goes from 11 to 12, what happens to the firm's cash
conversion cycle? It:

‫ غ‬A) may shorten or lengthen.

‫ غ‬B) shortens.

‫ ض‬C) lengthens.

Explanation

CCC = collection period + Inv Period - Payment period.

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Payment period = (365 / payables turnover) = (365 / 11) = 33; (365 / 12) = 30. This means the CCC actually increased to 83.

Question #82 of 92 Question ID: 434283

A firm's financial statements reflect the following:

EBIT $2,000,000

Sales $16,000,000

Interest expense $900,000

Total assets $18,400,000

Equity $7,000,000

Effective tax rate 35%

Dividend rate 28%

Current liabilities $1,400,000

Based on this information and assuming that the firm's debt has a cost of 9% and has been outstanding for a full year, what is the
firm's debt-to-assets ratio and interest coverage ratio?

Debt-to-Assets
Interest Coverage Ratio
Ratio

‫ ض‬A) 0.62 2.22

‫ غ‬B) 0.90 1.80

‫ غ‬C) 0.70 0.96

Explanation

The debt-to-assets ratio = ($18.4m - 7.0m) / ($18.4m) or 0.62. The interest coverage ratio = $2,000,000 / $900,000 = 2.22.

Question #83 of 92 Question ID: 414433

Statement #1 - As compared to the price-to-earnings ratio, the price-to-cash flow ratio is easier to manipulate because
management can easily control the timing of the cash flows.

Statement #2 - One of the benefits of earnings per share as a valuation metric is that it facilitates the comparison of firms of
different sizes.
With respect to these statements:

‫ غ‬A) both are correct.

‫ ض‬B) both are incorrect.

‫ غ‬C) only one is correct.

Explanation

Although manipulation of cash flow can occur, the P/E ratio is easier to manipulate because earnings are based on the numerous

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estimates and judgments of accrual accounting. EPS does not facilitate comparisons among firms. Two firms may have the same
amount of earnings but the number of shares outstanding may differ significantly.

Question #84 of 92 Question ID: 457613

Given the following information about a firm:

Net Sales = $1,000.

Cost of Goods Sold = $600.
Operating Expenses = $200.
Interest Expenses = $50.
Tax Rate = 34%.

What are the gross and operating profit margins?

Gross Profit Margin Operating Profit Margin

‫ غ‬A) 40% 10%

‫ غ‬B) 20% 15%

‫ ض‬C) 40% 20%

Explanation

Gross profit margin = ($1,000 net sales − $600 COGS) / $1,000 net sales = 400 / 1,000 = 0.4

Operating profit margin = ($1,000 net sales − $600 COGS − $200 operating expenses) / $1,000 net sales = $200 / $1000 = 0.2

Question #85 of 92 Question ID: 414386

Adams Co.'s common sized balance sheet shows that:

Current Liabilities = 20%

Equity = 45%
Current Assets = 45%
Total Assets = $2,000

What are Adams' long-term debt to equity ratio and working capital?

Debt to Equity Working Capital

‫ ض‬A) 0.78 $500

‫ غ‬B) 1.22 $500

‫ غ‬C) 0.78 $250

Explanation

If equity equals 45% of assets, and current liabilities equals 20%, then long-term debt must be 35%.

Long-Term Debt / Equity = 0.35 / 0.45 = 0.78

Working capital = CA − CL = 45% - 20% = 25% of assets

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WC = 2,000(0.25) = $500

Question #86 of 92 Question ID: 414361

As of December 31, 2007, Manhattan Corporation had a quick ratio of 2.0, current assets of $15 million, trade payables of $2.5
million, and receivables of $3 million, and inventory of $6 million. How much were Manhattan's current liabilities?

‫ ض‬A) $4.5 million.

‫ غ‬B) $12.0 million.

‫ غ‬C) $7.5 million.

Explanation

Manhattan's quick assets were equal to $9 million ($15 million current assets - $6 million inventory). Given a quick ratio of 2.0,
quick assets were twice the current liabilities. Thus, the current liabilities must have been $4.5 million ($9 million quick assets /
2.0 quick ratio).

Question #87 of 92 Question ID: 414356

Ratio analysis is most useful for comparing companies:

‫ غ‬A) in different industries that use the same accounting standards.

‫ ض‬B) of different size in the same industry.
‫ غ‬C) that operate in multiple lines of business.

Explanation

Ratio analysis is a useful way of comparing companies that are similar in operations but different in size. Ratios of companies
that operate in different industries are often not directly comparable. For companies that operate in several industries, ratio
analysis is limited by the difficulty of determining appropriate industry benchmarks.

Question #88 of 92 Question ID: 414376

Paragon Company's operating profits are $100,000, interest expense is $25,000, and earnings before taxes are $75,000. What is
Paragon's interest coverage ratio?

‫ غ‬A) 1 time.

‫ ض‬B) 4 times.

‫ غ‬C) 3 times.

Explanation

ICR = operating profit ÷ I = EBIT ÷ I

= 100,000 ÷ 25000 = 4

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Question #89 of 92 Question ID: 414366

An analyst gathered the following data about a company:

Current liabilities are $300.

Total debt is $900.
Working capital is $200.
Capital expenditures are $250.
Total assets are $2,000.
Cash flow from operations is $400.

If the company would like a current ratio of 2, they could:

‫ غ‬A) decrease current assets by 100 or increase current liabilities by 50.

‫ غ‬B) increase current assets by 100 or increase current liabilities by 50.

‫ ض‬C) increase current assets by 100 or decrease current liabilities by 50.

Explanation

For the current ratio to equal 2.0, current assets would need to move to $600 (or up by $100) or current liabilities would need to
decrease to $250 (or down by $50). Remember that CA − CL = working capital (500 − 300 = 200).

Question #90 of 92 Question ID: 414373

An analyst has gathered the following information about a firm:

Net sales of $500,000.

Cost of goods sold = $250,000.
EBIT of $150,000.
EAT of $90,000.

What is this firm's operating profit margin?

‫ غ‬A) 50%.

‫ ض‬B) 30%.
‫ غ‬C) 18%.

Explanation

Operating profit margin = (EBIT / net sales) = ($150,000 / $500,000) = 30%

Question #91 of 92 Question ID: 414377

Assume a firm with a debt to equity ratio of 0.50 and debt equal to $35 million makes a commitment to acquire raw materials with
a present value of $12 million over the next 3 years. For purposes of analysis the best estimate of the debt to equity ratio should
be:

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 ‫ غ‬A) 0.500.

‫ ض‬B) 0.671.
‫ غ‬C) 0.573.

Explanation

The original debt / equity ratio = 35 / 70 = 0.5. Now adjust the numerator but not the denominator. Why? You have commitments
(liabilities) but no new equity because (non-current) liabilities and assets are increased by the same amount. D/E = (35 + 12) / 70
= 0.671.

Question #92 of 92 Question ID: 414416

Selected financial information gathered from the Matador Corporation follows:

2007 2006 2005

Average debt $792,000 $800,000 $820,000

Average equity $215,000 $294,000 $364,000

Return on assets 5.9% 6.6% 7.2%

Quick ratio 0.3 0.5 0.6

Sales $1,650,000 $1,452,000 $1,304,000

Cost of goods sold $1,345,000 $1,176,000 $1,043,000

Using only the data presented, which of the following statements is most correct?

‫ غ‬A) Leverage has declined.

‫ ض‬B) Return on equity has improved.
‫ غ‬C) Gross profit margin has improved.

Explanation

Leverage increased as measured by the debt-to-equity ratio from 2.25 in 2005 to 3.68 in 2007. Gross profit margin declined from
20.0% in 2005 to 18.5% in 2007. Return on equity has improved since 2005. One measure of ROE is ROA × financial leverage.
Financial leverage (assets / equity) can be derived by adding 1 to the debt-to-equity ratio. In 2005, ROE was 23.4% [7.2% ROA ×
(1 + 2.25 debt-to-equity)]. In 2007, ROE was 27.6% [5.9% ROA × (1 + 3.68 debt-to-equity)].

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