Question 1

Trading on the equity (leverage) refers to the

Accepted Answer

Trading on the equity, also known as financial leverage, involves using borrowed money (debt) to finance investments, with the aim of magnifying the returns to the owners' equity. This leverages the investment and may increase potential profits, but also increases potential losses. Therefore, option C - the use of borrowed money to increase the return to owners - is the best choice.

Question 2

If the average collection period is 52 days, what is the accounts receivable turnover?

Accepted Answer

The answer of If the average collection period is 52...

Question 3

A company has an accounts receivable turnover ratio of 10. The average net accounts receivable during the period are $700,000. What is the amount of net credit sales for the period?

Accepted Answer

The accounts receivable turnover ratio is calculated as net credit sales divided by average net accounts receivable. Therefore, net credit sales = turnover ratio * average net accounts receivable = 10 * $700,000 = $7,000,000.

Question 4

A successful grocery store would probably have

Accepted Answer

A high inventory turnover is ideal for a successful grocery store as it indicates that products are selling quickly, reducing the likelihood of spoilage or waste and increasing profits. A low inventory turnover can indicate slow sales, excess inventory, and lower profitability. A zero profit margin means that the store is not making any profit, which is not sustainable for a business. A low volume can also indicate slow sales, which can negatively impact the store's profitability.

Question 5

The current assets of Orangette Company are $227,500. The current liabilities are $130,000. The current ratio expressed as a proportion is

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. In this case, the current ratio is $227,500 ÷ $130,000 = 1.75.

Question 6

A general rule to use in assessing the average collection period is that it

Accepted Answer

The average collection period should not greatly exceed the credit term period, which is the time period agreed upon between the seller and buyer for payment of the invoice. If the average collection period exceeds this time, it may indicate that the company is having difficulty collecting payments from customers, which can lead to cash flow problems. A general rule of thumb is that the average collection period should be less than or equal to the credit term period.

Question 7

Ed's Drive-In $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Ed's Drive-In's current ratio?

Accepted Answer

The answer of Ed's Drive-In $175,000 of current assets and...

Question 8

A company that is leveraged is one that

Accepted Answer

A company that is leveraged has debt financing, meaning that it has borrowed money to finance its operations, which places the company at risk if it is unable to make its debt payments. A high earnings per share or current ratio do not necessarily indicate leverage, while equity financing means that the company has raised money through selling shares of ownership.

Question 9

A supplier to a company would be most interested in the

Accepted Answer

A supplier is primarily concerned with a company's ability to pay its short-term obligations, which is indicated by the current ratio. This ratio measures a company's assets relative to its liabilities, providing insight into financial health in the near term.

Question 10

A company has an average inventory on hand of $75,000 and its average days in inventory is 36.5 days. What is the cost of goods sold?

Accepted Answer

The answer of A company has an average inventory on...

Question 11

Rama Company reported the following on its income statement: $\begin{array}{lr}
\text { Income before income taxes } & \$ 500,000 \
\text { Income tax expense } & 150,000 \
\text { Net income } & \$ 350,000
\end{array}$ An analysis of the income statement revealed that interest expense was $60,000. Rama Company's times interest earned was

Accepted Answer

The answer of Rama Company reported the following on its...

Question 12

The ratios that are used to determine a company's short-term debt paying ability are

Accepted Answer

The current ratio, current debt coverage, receivable turnover, and inventory turnover are all measures that assess a company's ability to pay off its short-term liabilities.

Question 13

Aps Company reported the following on its income statement: $\begin{array}{lr}
\text { Income before income taxes } & \$ 420,000 \
\text { Income tax expense } & 120,000 \
\text { Net income } & \$ 300,000
\end{array}$ An analysis of the income statement revealed that interest expense was $70,000. Aps Company's times interest earned was

Accepted Answer

The answer of Aps Company reported the following on its...

Question 14

Ratios are used as tools in financial analysis

Accepted Answer

Ratios can provide insights into the performance and financial health of a company that may not be immediately apparent from simply looking at the individual components of the financial statements. While ratios should not be viewed in isolation, they can be a useful tool in financial analysis.

Question 15

If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? Short-term Borrowing $\quad$ Collection of Receivable
a. $\quad$ Increase $\quad$ $\quad$ $\quad$ No effect
b. $\quad$ Increase$\quad$ $\quad$  $\quad$ Increase
c. $\quad$ Decrease$\quad$ $\quad$  $\quad$ No effect
d. $\quad$ Decrease$\quad$  $\quad$ $\quad$ Decrease

Accepted Answer

The answer of If a company has a current ratio...

Question 16

If equal amounts are added to the numerator and the denominator of the current ratio and the ratio is over one, the ratio will always

Accepted Answer

The answer of If equal amounts are added to the...

Question 17

A liquidity ratio measures the

Accepted Answer

A liquidity ratio measures the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. It does not measure income or operating success over a period of time (choice A), ability to survive over a long period of time (choice B), or the number of times interest is earned (choice D).

Question 18

A weakness of the current ratio is

Accepted Answer

The current ratio only uses year-end balances of current asset and current liability accounts, which may not accurately reflect the company's liquidity throughout the year.

Question 19

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

Asset turnover is more relevant for assessing long-term operational efficiency rather than short-term creditworthiness.

Question 20

The inventory turnover is calculated by dividing

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. This ratio measures the number of times inventory is sold and replaced during a particular period. The average inventory is used because it provides a better representation of the inventory levels throughout a period of time, rather than using only the beginning or ending inventory. Therefore, the correct option is C.

Quiz 13: Financial Analysis: The Big Picture