Question 1

A quality of earnings ratio higher than one is an indicator of which of the following?

Accepted Answer

A quality of earnings ratio higher than one indicates that a company's cash generated by operations is higher than its reported profits. It suggests that a company's earnings are of high quality, as cash is a more reliable indicator of a company's financial health than reported profits, which can be inflated by accounting practices. Therefore, choice D is the best answer.

Question 2

In 2012, C Co's total liabilities were $10,742 million and shareholders' equity was $8,403 million. In 2012, P Co's total liabilities were $16,259 million and their shareholders' equity was $6,401 million. Which of the following statements is false?

Accepted Answer

It is not possible to determine which company is more profitable based solely on the information given regarding their liabilities and equity. The given information only provides insight into their debt-to-equity ratios and financing methods.

Question 3

Calculate C Co's receivables turnover ratio and the days' sales in receivables for 2012.

Accepted Answer

Receivables turnover ratio = Net sales / Average accounts receivable
For 2012, net sales = $218,400 and average accounts receivable = ($11,700 + $19,300) / 2 = $15,500
Receivables turnover ratio = $218,400 / $15,500 = 14.09 times
Days' sales in receivables = 365 days / Receivables turnover ratio
Days' sales in receivables = 365 days / 14.09 times = 25.9 days
Therefore, the correct answer is B, which is the closest option to 14.09 times for the receivables turnover ratio and 25.9 days for the days' sales in receivables.

Question 4

Which of the following accounting ratios considers the importance of cash flows relating to required interest payments?

Accepted Answer

The cash coverage ratio measures a company's ability to meet its interest payments from operating cash flows. It takes into account the importance of cash flows relating to required interest payments. Option A (receivables turnover) measures the efficiency of a company's collection of accounts receivable. Option C (debt/equity ratio) compares the amount of debt a company has to its shareholder's equity. Option D (times interest earned ratio) measures a company's ability to meet its interest payments by evaluating its earnings before interest and taxes relative to its interest expenses.

Question 5

The Able Company had profit of $47,500 and earnings per share of $3.17 during 20B. On December 31, 20B, the shares had a market price of $18.50 per share. What is Able's price/earnings ratio?

Accepted Answer

Price/earnings ratio (P/E ratio) calculates the market price per share divided by earnings per share. 
P/E ratio = Market price per share / Earnings per share

Market price per share = $18.50
Earnings per share = $3.17
P/E ratio = $18.50 / $3.17 = 5.84

Therefore, the answer is B.

Question 6

Teel Company's working capital was $40,000 and total current liabilities were 1/4 of that amount. What was the current (working capital) ratio?

Accepted Answer

Current Ratio = Current Assets / Current Liabilities
Given, Working Capital = Current Assets - Current Liabilities
We know, Current Liabilities = (1/4) Working Capital
Therefore, Current Assets = Working Capital + Current Liabilities = Working Capital + (1/4) Working Capital = (5/4) Working Capital
Putting the values in the formula of current ratio, we get:
Current Ratio = (5/4) Working Capital / (1/4) Working Capital
Current Ratio = 5
Hence, the current ratio is 5 to 1. Option C is correct.

Question 7

A supplier to a company would be most interested in the

Accepted Answer

Suppliers are most interested in the current ratio as it indicates the company's ability to pay its short-term obligations, which includes payments to suppliers.

Question 8

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will

Accepted Answer

The answer of A company with $60,000 in current assets...

Question 9

Consider the following information:

Accepted Answer

The answer of Consider the following information: 
...

Question 10

Perot Company had profit before interest and taxes of $120,000. Interest expense for the period was $17,000 and income taxes amounted to $28,500. The average shareholders' equity was $680,000. What is Perot's return on equity?

Accepted Answer

The answer of Perot Company had profit before interest and...

Question 11

Calculate C Co's gross profit ratio for 2012 and 2011 respectively.

Accepted Answer

The answer of Calculate C Co's gross profit ratio for...

Question 12

Calculate P Co's dividend yield for 2012 and 2011 respectively.

Accepted Answer

The answer of Calculate P Co's dividend yield for 2012...

Question 13

Which of the following ratios usually is not considered to be a test of profitability?

Accepted Answer

Current ratio measures the ability of a company to pay its short-term liabilities with its short-term assets. It is a liquidity ratio and not a profitability ratio. The other options listed are all commonly used ratios to measure profitability.

Question 14

Beta Limited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Beta's current ratio?

Accepted Answer

To calculate the effect on the current ratio, we need to calculate both the current assets and current liabilities before and after the borrowing transaction. Assuming there were no changes to current assets, the current liabilities would increase by $50,000, resulting in a new current ratio of:

Current assets / (Current liabilities + Note payable)
= Current assets / (Current liabilities + $50,000)

Since the denominator has increased, the current ratio would increase. Therefore, choice B is correct.

Question 15

Calculate P Co's dividend payout for 2012 and 2011 respectively.

Accepted Answer

P Co's dividend payout for 2012 is 39.3% and for 2011 is 33.8%.

Question 16

Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?

Accepted Answer

Dividend yield is not a ratio that is indicative of a company's ability to pay its debts in the short-term. Asset turnover, receivables turnover, and current ratio are all ratios that are commonly used by short-term creditors to evaluate a company's creditworthiness.

Question 17

If trade receivables are collected quickly, it may indicate which of the following?

Accepted Answer

If trade receivables are collected quickly, it may indicate that the company's credit policies are overly stringent, as they may be granting credit only to customers with very high creditworthiness, leading to faster collections.

Question 18

Bailey Corporation reported the following information for 20A:  Bailey's debt/equity ratio was

Accepted Answer

The answer of Bailey Corporation reported the following information for...

Question 19

Short-term creditors are usually most interested in assessing

Accepted Answer

Short-term creditors are primarily concerned with a company's liquidity, as they want to ensure that the company has enough assets that can easily be converted into cash to repay the debt on time. Solvency pertains to a company's ability to meet its long-term obligations, while marketability and profitability are focused on the company's ability to sell products or services and generate income, respectively.

Question 20

Calculate C Co's profit margin ratio for 2012 and 2011 respectively. 47)

Accepted Answer

Profit margin ratio = Net income / Net sales2012: 12.3% = 1,230 / 10,0002011: 18.8% = 1,880 / 10,000

Quiz 13: Analyzing Financial Statements