Question 1

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's cash flow adequacy ratio is:
A)1.43
B)2.15
C)1.90
D)0.54

Accepted Answer

The cash flow adequacy ratio is calculated as cash from operating activities divided by capital expenditures. For Wilcox, this is $150 / $60 = 2.5. However, none of the options match this exactly, so the closest option is 1.43, which might be due to a different interpretation or calculation method.

Question 2

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's return on equity is:
A)20.62%
B)25.50%
C)29.59%
D)28.49%

Accepted Answer

Return on Equity (ROE) is calculated as Net Profit / Shareholder's Equity. From the given data, Net Profit = $145 and Total Shareholder's Equity = $490. Thus, ROE = ($145 / $490) * 100 = 29.59%.

Question 3

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's times interest earned ratio is:
A)1.50
B)4.50
C)6.63
D)8.60

Accepted Answer

The times interest earned ratio is calculated as Earnings Before Interest and Taxes (EBIT) divided by Interest Expense. From the income statement, EBIT (Operating profit) is $265 and Interest Expense is $40. Thus, the ratio is $265 / $40 = 6.625, which rounds to 6.63.

Question 4

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's total asset turnover ratio is:
A)3.98
B)4.22
C)5.91
D)3.34

Accepted Answer

Total asset turnover ratio is calculated as Net Sales / Total Assets. For Wilcox Corporation, this is $2,870 / $860 = 3.34.

Question 5

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's average collection period is:
A)5 days
B)9 days
C)13 days
D)15 days

Accepted Answer

The average collection period is calculated as $ \text{Days in Period} \times \frac{\text{Average Accounts Receivable}}{\text{Net Credit Sales}} $. Assuming 365 days in a year, and given that net sales are $2,870 and accounts receivable is $70, the calculation is $ 365 \times \frac{70}{2870} \approx 8.87 $ days, which rounds to 9 days.

Question 6

What is important to understand about the label "pro forma"?
A)Pro forma refers to GAAP-based financial statements.
B)Pro forma requires firms to present two distinct net profit amounts in their Form 10-Ks.
C)Pro forma relates to the amount of debt in a firm's capital structure.
D)Pro forma earnings or financial statements are sometimes based on a firm's own definition which is not technically a correct definition.

Accepted Answer

Pro forma earnings or financial statements may include adjustments or exclusions that are not in accordance with GAAP standards, making them potentially misleading. It is important to carefully scrutinize the assumptions and methodology used in pro forma statements before relying on them for investment decisions.

Question 7

Which group of people would be the most concerned about the ability of a firm to make interest and principal payments?
A)Auditors.
B)Customers.
C)Creditors.
D)Investors.

Accepted Answer

Creditors are the group of people who lend money to the firm and therefore have a vested interest in the firm's ability to make interest and principal payments. If the firm defaults on its payments, creditors could suffer losses or have to take legal action to recover their money. Auditors are concerned with verifying the accuracy of a firm's financial statements, while customers and investors may be more concerned with other aspects of the firm's operations such as product quality, customer service, or long-term growth potential.

Question 8

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's effective tax rate is:
A)24.67%
B)27.36%
C)35.00%
D)35.56%

Accepted Answer

The answer of Use the following selected financial information for...

Question 9

Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?
A)Debt ratio and price-to-earnings ratio.
B)Cash flow adequacy and fixed charge coverage.
C)Days payable outstanding and gross profit margin.
D)Cash interest coverage and average collection period.

Accepted Answer

The ratios that best measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges are the cash flow adequacy ratio and fixed charge coverage ratio. The debt ratio and price-to-earnings ratio only measure the level of debt and the firm's earnings potential. Days payable outstanding and gross profit margin don't specifically measure a firm's ability to cover interest and fixed charges. Cash interest coverage and average collection period only measure a firm's ability to cover interest and collect outstanding debts.

Question 10

What does a low asset turnover compared to the industry imply?
A)The investment in assets may be too high.
B)Sales are higher than average.
C)The investment in assets is too low.
D)Net income is low relative to the investment in assets.

Accepted Answer

A low asset turnover compared to the industry implies that the investment in assets may be too high. This means that the company is not efficiently utilizing its assets to generate sales, resulting in a lower asset turnover ratio compared to the industry average.

Question 11

How is the cash conversion cycle calculated?
A)Average collection period + days inventory held + Days payable outstanding.
B)Average collection period - days inventory held + Days payable outstanding.
C)Average collection period - days inventory held - Days payable outstanding.
D)Average collection period + days inventory held - Days payable outstanding.

Accepted Answer

The cash conversion cycle is calculated as the sum of the average collection period and days inventory held, minus the days payable outstanding. This measures the time between when a company pays for its inventory and when it receives cash from its sales, effectively showing how efficiently a company manages its working capital.

Question 12

What does a financial leverage index greater than one indicate about a firm?
A)Return on assets exceeds the return on equity.
B)Return on equity exceeds the return on assets.
C)The firm is not employing debt successfully.
D)The firm does not generate enough funds to cover interest payments.

Accepted Answer

A financial leverage index greater than one indicates that the firm is employing debt successfully as the return on equity exceeds the return on assets. It means that the firm is generating a higher return for its shareholders by using debt to finance its operations. However, it also means that the firm has higher financial risk as it has more debt obligations to fulfill.

Question 13

The Du Pont System shows which of the following series of relationships?
A)Net profit margin x total asset turnover = Return on investment.
B)Net profit margin x financial leverage = Return on equity.
C)Net profit margin x total asset turnover = Return on investment and Return on investment x financial leverage = Return on equity.
D)Net profit margin x total asset turnover = Return on equity and Return on equity x financial leverage = Return on investment.

Accepted Answer

The Du Pont System shows the relationship between the net profit margin and total asset turnover in calculating the return on investment, and the relationship between return on investment and financial leverage in calculating the return on equity. Therefore, both of these equations are part of the Du Pont System and are represented by choice C.

Question 14

All of the following are steps of a financial statement analysis except:
A)Establish objectives of the analysis.
B)Prepare pro forma statements.
C)Study the industry in which the firm operates.
D)Develop knowledge of the firm and the quality of management.

Accepted Answer

Preparing pro forma statements is not a step of financial statement analysis. The other three steps are crucial in understanding a firm's financial health and making investment decisions. Establishing objectives helps focus the analysis, studying the industry enables comparison to peers, and developing knowledge of the firm and management is important in evaluating its ability to generate profits and sustain growth.

Question 15

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's days payable outstanding is:
A)7 days
B)11 days
C)16 days
D)22 days

Accepted Answer

Days payable outstanding (DPO) is calculated as (Accounts Payable / Cost of Goods Sold) * 365. For Wilcox, it is (85 / 1985) * 365 ≈ 16 days.

Question 16

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's quick ratio is:
A)0.85
B)2.00
C)1.00
D)0.75

Accepted Answer

The quick ratio is calculated as (Cash + Short-term investments + Accounts receivable) / Current liabilities = (25 + 15 + 70) / 130 = 110 / 130 = 0.85.

Question 17

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's cash flow margin is:
A)5.23%
B)5.85%
C)6.24%
D)6.67%

Accepted Answer

The cash flow margin is calculated by dividing the cash from operating activities by the net sales. For Wilcox Corporation, the cash from operating activities is $150 million and the net sales are $2,870 million. Therefore, the cash flow margin is $150 million / $2,870 million = 5.23%.

Question 18

Use the following selected financial information for Wilcox Corporation to answer questions . Wilcox Corporation
Income Statement
For the Year Ended December 31,2015
$\begin{array}{lr}
\text { Net sales } & \$ 2,870 \
\text { Cost of goods sold } & 1,985\\text { Gross profit } & \$ \overline{885} \
\text { Operating expenses } & 620\\text { Operating profit } & \$ 265 \
\text { Interest expense } & 40\\text { Earnings before taxes }&\$225\
\text { Income tax expense }&80\\text { Net profit }&\$145
\end{array}$ Wilcox Corporation
Balance Sheet
December 31, 2015
$\begin{array}{lclr}\text { Assets }&&\text { Liabilities and stockholders' equity }\\hline
\text { Current assets }&&\text { Current liabilities }\
\text { Cash } & \$ 25 & \text { Accounts payable } & \$ 85 \
\text { Short-term investments } & 15 & \text { Accrued liabilities } & 45 \
\text { Accounts receivable } & 70 & \text { Total current liabilities } & 130 \
\text { Inventory } & 150 & \text { Long-term debt } & 240\\text { Total current assets }&260&\text { Total liabilities }&370\\
\text { Long-term assets }&&\text { Stockholders' equity }\
\text { Net PPE } & 390 & \text { Common stock and PIC } & 80 \
\text { Goodwill } & 210 & \text { Retained earnings } & 410\&&\text { Total stockholders' equity }&490\
\text { Total assets }&\$860&\text { Total liabilities and equity }&\$860
\end{array}$ WilcoxCorporation
Statement of Cash Flow Information
For the Year Ended December 31, 2015

$\begin{array}{ll}\text { Cash from operating activities }&\$150\
\text { Investing activities: }\
\text { Capital expenditures } & \$ 60 \
\text { Acquisitions } & \$ 10\
\text { Financing activities: }\
\text { Proceeds from long-term borrowing } & \$ 50 \
\text { Payments on long-term borrowing } & \$ 25 \
\text { Payments of cash dividends } & \$ 20\
\text { Cash paid for interest } & \$ 10 \
\text { Cash paid for income taxes } & \$ 75
\end{array}$
-Wilcox's debt ratio is:
A)40.11%
B)43.02%
C)55.80%
D)56.32%

Accepted Answer

The debt ratio is calculated as total liabilities divided by total assets. For Wilcox Corporation, total liabilities are $370 and total assets are $860. Thus, the debt ratio is $ \frac{370}{860} = 0.4302 $ or 43.02%.

Question 19

Which group of people would be the most concerned about the operating areas that have contributed to the success of the firm and which have not?
A)Customers.
B)Management.
C)Auditors.
D)Creditors.

Accepted Answer

Management is responsible for the success of the firm and would be the most concerned about the operating areas that have contributed to its success and those that have not. Customers, auditors, and creditors may be interested in the firm's success, but their primary concerns would be different than those of management.

Question 20

Which ratios help assess the firm's ability to meet cash needs as they arise?
A)Current ratio and cash flow liquidity ratio.
B)Average collection period and net profit margin.
C)Debt ratio and dividend payout.
D)Operating profit margin and return on equity.

Accepted Answer

The current ratio and cash flow liquidity ratio are both liquidity ratios that assess a firm's ability to meet its short-term cash needs. The current ratio measures the company's ability to pay its short-term obligations with its current assets and is calculated by dividing current assets by current liabilities. The cash flow liquidity ratio measures the company's ability to generate cash to meet its obligations by comparing its operating cash flow to its current liabilities. Therefore, these ratios are the most relevant for assessing a firm's ability to meet cash needs as they arise.

Quiz 5: The Analysis of Financial Statements

What is important to understand about the label "pro forma"?

Which group of people would be the most concerned about the ability of a firm to make interest and principal payments?

Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?

What does a low asset turnover compared to the industry imply?

How is the cash conversion cycle calculated?

What does a financial leverage index greater than one indicate about a firm?

The Du Pont System shows which of the following series of relationships?

All of the following are steps of a financial statement analysis except:

Which group of people would be the most concerned about the operating areas that have contributed to the success of the firm and which have not?

Which ratios help assess the firm's ability to meet cash needs as they arise?