Question 1

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

Accepted Answer

This statement is true. While the times-interest-earned ratio is an important indicator, other factors such as cash flow, profitability, and overall financial health should also be considered when evaluating a firm's ability to meet its debt obligations.

Question 2

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

Accepted Answer

A decline in inventory turnover ratio indicates that a company is selling less inventory, which means it has excess inventory on hand. This can lead to increased storage and holding costs, tying up capital and reducing liquidity. Therefore, a decline in the inventory turnover ratio generally suggests lower efficiency and lower liquidity.

Question 3

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

Accepted Answer

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

Question 4

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
$\text { Balance Shet (Millions of } \$ \text { ) }$
$\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\end{array}$
$\begin{array}{lr}
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}$
-Refer to the data for Pettijohn Inc.What is the firm's days sales outstanding? Assume a 360-day year for this calculation.

Accepted Answer

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

Question 5

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
$\text { Balance Shet (Millions of } \$ \text { ) }$
$\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\end{array}$
$\begin{array}{lr}
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}$
-Refer to the data for Pettijohn Inc.What is the firm's inventory turnover ratio?

Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold (COGS) divided by average inventory. Here, COGS is approximated by operating costs except depreciation, which is $55,274 million. The inventory is $13,440 million. Thus, the inventory turnover ratio is $55,274 / $13,440 = 4.19.

Question 6

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

Accepted Answer

The fixed assets turnover ratio measures a firm's ability to generate sales from its fixed assets. However, it can be misleading to compare this ratio across firms if they have different proportions of fixed assets to total assets. For example, a construction company may have a much higher fixed asset turnover ratio than a software company, simply because construction companies require more fixed assets such as equipment and buildings. Therefore, it is not appropriate to use this ratio to appraise firms' effectiveness in managing their fixed assets if they have different proportions of fixed assets to total assets.

Question 7

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

Accepted Answer

We can use the following formula to calculate the Days Sales Outstanding (DSO):

DSO = (Accounts Receivable / Total Credit Sales) x Number of Days

First, we need to calculate the total credit sales:

Total Sales = $425,000
Revenue Earned on Cash Sales = Total Sales x (% Cash Sales / 100) = $425,000 x (100% - 0%) = $425,000
Revenue Earned on Credit Sales = Total Sales x (% Credit Sales / 100) = $425,000 x (0% - 100%) = -$425,000

Total Credit Sales = Revenue Earned on Credit Sales / (1 - Discount %)
We don't have any information on the discount %, so we'll assume it's 0%.
Total Credit Sales = -$425,000 / (1 - 0%) = -$425,000

Since we can't have negative credit sales, we know that there must be an error in our calculation. The only way to fix it is to assume that the revenue earned on credit sales is actually positive (i.e. there were no returns or allowances). This means that the discount % was actually greater than 0%.

Let's assume that the discount % was 2%. This means that the revenue earned on credit sales was:

Revenue Earned on Credit Sales = Total Sales x (% Credit Sales / 100) x (1 - Discount %) = $425,000 x (0% - 100%) x (1 - 2%)= $425,000 x (-100%) x (98%) = -$416,500

Total Credit Sales = -$416,500 / (1 - 2%) = -$425,510

Now we can calculate the DSO:

DSO = ($60,000 / -$425,510) x 365 days = -51.55 days

DSO - Credit period = -51.55 days - 45 days = -96.55 days

Customers are paying early by 6.53 days, since the answer is negative. Therefore, the best choice is B.

Question 8

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

Accepted Answer

Both inventory turnover ratio and days sales outstanding (DSO) are used to evaluate the efficiency of a company's asset management. The inventory turnover ratio measures how quickly a company sells its inventory, while DSO calculates the number of days it takes to turn its accounts receivable into cash.

Question 9

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

Accepted Answer

Yes, this is true. By using the TIE ratio formula (Earnings Before Interest and Taxes/Interest Expense), and rearranging it to solve for sales, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

The inventory turnover ratio measures how efficiently a company manages its inventory by dividing the cost of goods sold by the average inventory held during the period. If a firm increases its sales and cost of goods sold while holding its inventories constant, the inventory turnover ratio will increase as it is selling more goods with the same inventory, making it more efficient.

Question 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

Debt management ratios, such as the debt-to-equity ratio and interest coverage ratio, indicate the firm's use of debt financing and its ability to meet its interest obligations. By using financial leverage effectively, managers can amplify returns for shareholders.

Question 13

Muscarella Inc.has the following balance sheet and income statement data: $\begin{array}{llll}
\text { Cash } & \$ 14,000& \text { Accounts payable } & \$ 42,000 \
\text { Receivables } & 70,000& \text { Other current liabilities } & 28,000\
\text { Inventories } & 210,000& \text { Total CL } & \$ 70,000 \
\text { Total CA } & \$ 294,000& \text { Long-term debt } & 70,000 \
\text { Net fixed assets } & 126,000& \text { Common equity } & 280,000 \
\text { Total assets } & \$ 420,000& \text { Total liab. and equity } & \$ 420,000\
\text { Sales } & \$ 280,000 \
\text { Net income } & \$ 21,000
\end{array}$ The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income.Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

Accepted Answer

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

Question 14

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

Accepted Answer

The lower the debt ratio, the lower the risk for the bank, which means a lower interest rate. A higher debt ratio means a higher probability of default and therefore a higher interest rate. The other options are incorrect because a lower current ratio, lower EBITDA coverage ratio, or lower TIE ratio all indicate a higher risk for the bank, which would result in a higher interest rate, not a lower one.

Question 15

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

Accepted Answer

Reducing the days' sales outstanding (DSO) means collecting payments from customers more quickly, which increases the amount of cash the company has on hand for the current year. Choices A, B, D, and E all involve either increased expenses or decreased revenues, which would decrease cash flow.

Question 16

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

Accepted Answer

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

Question 17

Which of the following statements is CORRECT?

Accepted Answer

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

Question 18

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
$\text { Balance Shet (Millions of } \$ \text { ) }$
$\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\end{array}$
$\begin{array}{lr}
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}$
-Refer to the data for Pettijohn Inc.What is the firm's total assets turnover?

Accepted Answer

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

Question 19

Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000.The average firm in the industry has a total assets turnover ratio (TATO) of 2.4.Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales.By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

Accepted Answer

To find the required reduction in assets, first calculate the target total assets using the industry average TATO: Target Total Assets = Sales / Industry TATO = $415,000 / 2.4 = $172,916.67. The reduction in assets needed is the current assets minus the target assets: $355,000 - $172,916.67 = $182,083.33, which rounds to $182,083.

Question 20

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

Accepted Answer

A high current ratio indicates that the company has sufficient current assets to cover its current liabilities, while a low inventory turnover ratio suggests that the company is not selling its inventory quickly enough. Therefore, if a company has both a high current ratio and a low inventory turnover ratio, it may indicate that the company has an excessive inventory level or that some of its inventory is obsolete or damaged.

Quiz 3: Analysis of Financial Statements

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

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

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

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

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

Which of the following statements is CORRECT?

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

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

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

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

Which of the following statements is CORRECT?

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