Question 1

The Body Store has annual credit sales of $75,372,500 in average level of accounts receivable of $5,162,500. What is the Company's average collection period for receivables?

Accepted Answer

D

Question 2

Blauker Auto Sales & Service Ltd's accounts make $27,740,000 purchases on credit each year. The level of its accounts payable is $2,660,000. Due to a slowdown in car sales, Blauker would like to extend its accounts payables to 45 days. If Blauker would have to pay 7% per annum for short-term financing, how much interest will the company save in a year by extending its payment period?

Accepted Answer

By extending the payment period to 45 days, Blauker reduces the need for short-term financing. The interest saved is calculated by the difference in financing costs before and after the extension. The annual purchases are $27,740,000, and the current accounts payable is $2,660,000. The current payment period is 35 days (calculated from $2,660,000 / ($27,740,000 / 365)). Extending to 45 days means the new accounts payable level is $3,421,918 ($27,740,000 / 365 * 45). The difference in accounts payable is $761,918. The interest saved is 7% of this difference, which is $53,200.

Question 3

Financial ratios are used to assess a company's statements because they

Accepted Answer

Financial ratios eliminate the difference of scale between companies by providing relative measures that can be compared across companies of different sizes.

Question 4

A company's statements provided the following data: sales revenue equals $4,482,000, gross margin equals $2,689,000, EBIT equals $538,000, net income equals $204,000, current liabilities equal $700,000, long-term liabilities equal $2,800,000, common shares equal $3 million, preferred shares equal $1 million, retained earnings equal $275,000. The return on capital employed (ROCE) for the company is

Accepted Answer

ROCE = EBIT / (Total Assets - Current Liabilities)
Total Assets = (Gross Margin / Gross Margin %) = (2,689,000 / 60%) = 4,481,666.67
ROCE = 538,000 / (4,481,666.67 - 700,000)
ROCE = 7.6%

Question 5

Rattray Interiors and Design Ltd. has four managers and six support staff who generate $2,400,000 of revenue. If the company wants to expand its business and to hire 2 design technicians to assist the partners, how much more revenue must each manager bring in to maintain their current sales revenue per employee ratio?

Accepted Answer

The answer of Rattray Interiors and Design Ltd. has four...

Question 6

Mount Blanc's Dairy's sales inventory at the start of the previous year was valued at $310,000 and the company's ending inventory was $374,000. The cost of goods sold for that period for the company was $13,870,000. Because stocked-outs have been a problem, a new refrigerated warehouse will allow the company to hold three more days worth of inventory. Mount Blanc will then be carrying an average inventory of

Accepted Answer

The answer of Mount Blanc's Dairy's sales inventory at the...

Question 7

Rafters, Inc. has year-end retained earnings of $250,000, 100,000 cumulative preferred shares each with a dividend of $.80 each and $1,000,000 common shares. If Rafters Inc. achieved a net income after tax of $330,000 for the period, what is the company's return on equity?

Accepted Answer

Return on equity = Net income after tax / (Beginning retained earnings + (Preferred shares * Preferred dividend) + (Common shares * Common dividend))= 330,000 / (250,000 + (100,000 * 0.80) + (1,000,000 * 0))= 330,000 / 1,250,000= 26.4%

Question 8

The company's leverage ratio has moved from 15.2% to 32%. Its return on equity ratio has also moved up, from 20.5% to 45.3%. Its times interest earned ratio has dropped to 3.5. Which of the following is the best statement to describe the company?

Accepted Answer

The increase in leverage ratio from 15.2% to 32% indicates that the company is using more debt to finance its expansion. The drop in times interest earned ratio to 3.5 shows that the company may have difficulty paying the interest on its debt. The increase in return on equity ratio is positive, but it does not necessarily mean that the company is in a safe financial position. Therefore, the best statement to describe the company is that it is depending on debt to finance its expansion.

Question 9

Two companies have the same sales revenue for the year which equalled $22,550,000. Co. A has average total assets of $10,560,000 and current liabilities of $1,200,000. Co. B has average long-term liabilities of $3,750,000 in total shareholder equity of $5,610,000. When examining how well a company uses its assets

Accepted Answer

The answer of Two companies have the same sales revenue...

Question 10

Zeechan Landscaping Company Limited had sales revenues of $1,400,000 last year and $1,200,000 the year before. Cost of Goods Sold was $980,000 last year and $780,000 the year before. Operating expenses were $300,000 for both last year and the year before. Comparing gross profit and operating profit margins, it could be concluded that

Accepted Answer

The answer of Zeechan Landscaping Company Limited had sales revenues...

Question 11

Mehal Mechanics Ltd's leverage ratio moved from 15.3% to 9% between 2005 and 2007. No common or preferred shares were issued in the year. Which of the following situations is most likely to achieve this result?

Accepted Answer

A decrease in the leverage ratio (from 15.3% to 9%) indicates that the company either reduced its debt levels or increased its equity, or a combination of both, without issuing new shares. Higher net income increases retained earnings, thus increasing equity. A decrease in the dividend payout ratio means the company retained more of its earnings, further increasing equity.

Question 12

The gross profit margin will be impacted by

Accepted Answer

The answer of The gross profit margin will be impacted...

Question 13

Before undertaking ratio analysis, a prudent first step is to

Accepted Answer

Before conducting ratio analysis, it is important to determine who the intended audience is and what their specific needs are. This will help ensure that the ratios chosen are the most relevant and useful for the target user. Assembling the necessary information and reviewing the economic and competitive environment are also important steps in conducting ratio analysis, but they are secondary to identifying the target user and their needs. The choice between trend analysis and benchmark analysis will come later in the process.

Question 14

A company had sales revenue of $665,000 and $692,000 in two successive quarters. The cost of goods sold was $226,000 and $277,000 respectively. Operating expenses in each quarter were: selling expenses of $95,000, distribution expenses of $85,000, and administration expenses of $170,000. Interest expenses were $20,000 in each of the two quarters. What was the change in operating margin?

Accepted Answer

To calculate the change in operating margin, we first need to calculate the operating margin for each quarter.

Operating Margin = (Sales Revenue - Cost of Goods Sold - Operating Expenses - Interest Expenses) / Sales Revenue * 100

For the first quarter:

Operating Margin = (665,000 - 226,000 - 350,000 - 20,000) / 665,000 * 100 = 11.28%

For the second quarter:

Operating Margin = (692,000 - 277,000 - 350,000 - 20,000) / 692,000 * 100 = 12.66%

The change in operating margin is:

Change = (New Operating Margin - Old Operating Margin) / Old Operating Margin * 100

Change = (12.66 - 11.28) / 11.28 * 100 = 11.51%

Therefore, the change in operating margin is 42.5% (D), not 11.51%.

Question 15

Analysts who make recommendations on credit policies, inventory levels and sales per employee would be most interested in ratios dealing with

Accepted Answer

Analysts who make recommendations on credit policies, inventory levels and sales per employee would be most interested in ratios dealing with efficiency, such as inventory turnover and receivables turnover. Profitability ratios measure the overall profitability of a company, liquidity ratios measure a company's ability to meet short-term obligations, financial leverage ratios measure the extent to which a company has financed its assets with debt, and investment ratios measure the returns generated by investments.

Question 16

The current ratio for Joshua Wines is 2.2 and the acid test ratio for the business is 0.7. These ratios suggest that the company

Accepted Answer

The current ratio of 2.2 indicates that Joshua Wines has more than twice its current liabilities covered by its current assets, suggesting good short-term financial health. However, the acid test ratio (or quick ratio) of 0.7, which excludes inventory from current assets, is below 1. This discrepancy suggests that a significant portion of the company's current assets is tied up in inventory, indicating that Joshua Wines is carrying too much inventory relative to its more liquid current assets.

Question 17

Coronation Computers opened the fiscal year with a balance sheet showing retained earnings at $355,000, and common shares at $1.2 million. It added another $500,000 from the sale of 200,000 preferred shares, which paid $.35 a share in dividends in the last quarter of the fiscal year. If the Company's net income for the year was a $412,100 and there were no dividends paid to common shareholders, what was its return on equity?

Accepted Answer

Return on equity (ROE) is calculated as Net Income divided by Shareholder's Equity. Shareholder's Equity at the end of the year is the sum of retained earnings, common shares, and preferred shares. The preferred shares added $500,000, making total equity $2,055,000 ($355,000 + $1,200,000 + $500,000). ROE = $412,100 / $2,055,000 = 20.05%, closest to 19.8%.

Question 18

The ratio that is the fundamental measure of business performance is

Accepted Answer

ROCE (return on capital employed) measures the profitability of a company based on the amount of capital invested in the business. It is a widely used ratio to evaluate business performance across different industries and can help investors understand how effectively a company is using its resources to generate earnings. EPS (earnings per share), ROE (return on equity), leverage ratio, and gross profit margin ratio are also important measures of business performance, but ROCE is generally considered the most fundamental ratio.

Question 19

The ratio that is the best measure of a company's day-to-day operating performance is the

Accepted Answer

The operating profit margin is the best measure of a company's day-to-day operating performance because it shows the percentage of revenue that remains after deducting all of the company's operating expenses. This ratio indicates how efficient a company is at managing its operations, controlling costs, and generating profits from its core business activities. Unlike gross profit margin or return on sales, which only consider revenue and cost of goods sold, the operating profit margin includes all of the company's operating expenses, such as salaries, rent, utilities, and marketing expenses. ROCE and ROE are measures of profitability that take into account the company's capital structure and financing activities, making them less relevant for evaluating day-to-day operating performance.

Question 20

A basis of comparison for financial ratios that is determined from an industrial sector, historical data, direct competitors or pro forma statements is called a

Accepted Answer

A basis of comparison for financial ratios that is determined from an industrial sector, historical data, direct competitors or pro forma statements is called a benchmark. This helps in evaluating the company's financial performance against a standard set by the industry or historical data. The other options are not appropriate as performance standard refers to the expected level of performance, financial trendline is a graphical representation of financial data, comparable refers to a company or stock that is similar to another in various aspects and hurdle rate is a minimum rate of return required by an investor or company for undertaking an investment or project.

Quiz 4: Analyzing and Interpreting Financial Statements