Question 1

Wise's Corner Grocer had the following current account values. What effect did the change in net working capital have on the firm's cash flows for 2012?

A)net use of cash of $37
B)net use of cash of $83
C)net source of cash of $83
D)net source of cash of $111
E)net source of cash of $135

Accepted Answer

The answer of Wise's Corner Grocer had the following current...

Question 2

A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?
A)equity multiplier
B)total asset turnover
C)profit margin
D)return on assets
E)return on equity

Accepted Answer

The equity multiplier is calculated by dividing total assets by equity. If the firm decreases its debt while maintaining its current equity, total assets will decrease (since assets = debt + equity) and therefore the equity multiplier will decrease as well. None of the other choices are directly affected by changes in the firm's debt-to-equity ratio.

Question 3

Which one of the following statements is correct?
A)Book values should always be given precedence over market values.
B)Financial statements are frequently used as the basis for performance evaluations.
C)Historical information provides no value to someone who is predicting future performance.
D)Potential lenders place little value on financial statement information.
E)Reviewing financial information over time has very limited value.

Accepted Answer

Financial statements are a crucial tool for evaluating the performance of a company. They provide historical information that can be used to make predictions about future performance. Financial statements also help potential investors and creditors make decisions about whether to invest in or lend money to a company. Therefore, financial statements are frequently used as the basis for performance evaluations. Choices A, C, D, and E are all incorrect statements.

Question 4

The Bike Shop paid $2,310 in interest and $1,850 in dividends last year. The times interest earned ratio is 2.2 and the depreciation expense is $460. What is the value of the cash coverage ratio?
A)1.67
B)1.80
C)2.21
D)2.40
E)2.52

Accepted Answer

EBIT = 2.2 F1F1F1S1F1F1F10 $2,310 = $5,082; Cash coverage ratio = ($5,082 + $460)/$2,310 = 2.40

Question 5

A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of $6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio?
A)12.14
B)15.24
C)17.27
D)23.41
E)24.56

Accepted Answer

Cash coverage ratio = ($68,400 - $42,900)/$2,100 = 12.14

Question 6

Russell's Deli has cash of $136, accounts receivable of $87, accounts payable of $215, and inventory of $409. What is the value of the quick ratio?
A)0.31
B)0.53
C)0.71
D)1.04
E)1.07

Accepted Answer

Quick ratio = ($136 + $87)/$215 = 1.04

Question 7

During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the year?
A)$245 use of cash
B)$165 use of cash
C)$95 use of cash
D)$95 source of cash
E)$165 source of cash

Accepted Answer

Increasing accounts receivable by $130 means the company has $130 more in sales that it hasn't yet received cash for, which is a use of cash. Decreasing inventory by $75 means the company has sold or otherwise reduced inventory without needing to spend cash to replace it, which is a source of cash. Decreasing accounts payable by $40 means the company has paid off some of its debts, which is a use of cash. The net effect is $130 (use) - $75 (source) + $40 (use) = $95 use of cash.

Question 8

A firm has a debt-equity ratio of 0.42. What is the total debt ratio?
A)0.30
B)0.36
C)0.44
D)1.58
E)2.38

Accepted Answer

The debt-equity ratio is 0.42. If total debt is $42 and total equity is $100, then total assets are $142. Total debt ratio = $42/$142 = 0.30.

Question 9

A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the total assets?
A)$6,128.05
B)$7,253.40
C)$9,571.95
D)$11,034.00
E)$12,725.26

Accepted Answer

Total equity = $4,620/0.57 = $8,105.26Total assets = $4,620 + $8,105.26 = $12,725.26

Question 10

It is easier to evaluate a firm using financial statements when the firm:
A)is a conglomerate.
B)has recently merged with its largest competitor.
C)uses the same accounting procedures as other firms in the industry.
D)has a different fiscal year than other firms in the industry.
E)tends to have many one-time events such as asset sales and property acquisitions.

Accepted Answer

If a firm uses the same accounting procedures as other firms in its industry, it makes it easier to compare financial statements and evaluate the firm's performance. Differences in accounting methods can create confusion and make it difficult to compare financial data to other firms in the industry.

Question 11

A firm generated net income of $878. The depreciation expense was $47 and dividends were paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $22, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity?
A)$876
B)$902
C)$904
D)$922
E)$930

Accepted Answer

Net cash from operating activities = $878 + $47 - $13 - $22 + $14 = $904

Question 12

Which of the following can be used to compute the return on equity?
I. Profit margin * Return on assets
II. Return on assets * Equity multiplier
III. Net income/Total equity
IV. Return on assets*Total asset turnover
A)I and III only
B)II and III only
C)II and IV only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

Return on equity can be computed using the formula: Return on assets * Equity multiplier (II) and Net income/Total equity (III).

Question 13

The Du Pont identity can be used to help managers answer which of the following questions related to a firm's operations?
I. How many sales dollars has the firm generated per each dollar of assets?
II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity?
III. How much net profit is a firm generating per dollar of sales?
IV. Does the firm have the ability to meet its debt obligations in a timely manner?
A)I and III only
B)II and IV only
C)I, II, and III only
D)II, III and IV only
E)I, II, III, and IV

Accepted Answer

The Du Pont identity consists of three components: net profit margin, total asset turnover, and financial leverage. These components can be used to answer questions about a firm's profitability, efficiency in using its assets, and ability to generate returns for shareholders. Therefore, options I, II, and III are all questions that can be answered using the Du Pont identity. Option IV is not directly related to the identity, but it could be indirectly assessed by looking at the financial leverage component of the identity.

Question 14

Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?
A)74.19 days
B)84.76 days
C)121.07 days
D)138.46 days
E)151.21 days

Accepted Answer

Inventory turnover = $628,300/$208,400 = 3.014875Days in inventory = 365/3.014875 = 121.07 days

Question 15

A firm has sales of $3,400, net income of $390, total assets of $4,500, and total equity of $2,750. Interest expense is $40. What is the common-size statement value of the interest expense?
A)0.89 percent
B)1.18 percent
C)3.69 percent
D)10.26 percent
E)14.55 percent

Accepted Answer

Common-size interest = $40/$3,400 = 1.18 percent

Question 16

Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $218, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts receivable of $198, inventory of $527, and net fixed assets of $1,216. What is the common-base year value of accounts receivable?
A)0.08
B)0.10
C)0.88
D)0.91
E)1.18

Accepted Answer

Common-base year accounts receivable = $198/$218 = 0.91

Question 17

A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of $720. The firm has $310 in inventory. What is the common-size statement value of inventory?
A)13.36 percent
B)14.16 percent
C)19.38 percent
D)30.42 percent
E)43.06 percent

Accepted Answer

Common-size inventory = $310/($1,600 + $720) = 13.36 percent

Question 18

Which of the following represent problems encountered when comparing the financial statements of two separate entities?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods.
IV. The two firms may be seasonal in nature and have different fiscal year ends.
A)I and II only
B)II and III only
C)I, III, and IV only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

All the options listed represent challenges in comparing financial statements of two different entities. Conglomerates have diverse business operations making comparisons difficult (I), geographic variations can affect operations and financial results (II), differing accounting methods can lead to discrepancies in financial reporting (III), and seasonal variations along with different fiscal year ends can distort direct comparisons (IV).

Question 19

A firm has total assets of $311,770 and net fixed assets of $167,532. The average daily operating costs are $2,980. What is the value of the interval measure?
A)31.47 days
B)48.40 days
C)56.22 days
D)68.05 days
E)104.62 days

Accepted Answer

Interval measure = ($311,770 - $167,532)/$2,980 = 48.40 days

Question 20

Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?
A)0.31
B)0.42
C)0.47
D)0.51
E)0.56

Accepted Answer

Net working capital to total assets = ($1,263 + $3,907 + $7,950 - $2,214)/($1,263 + $3,907 + $7,950 + $8,400) = 0.51

Quiz 3: Working With Financial Statements

Wise's Corner Grocer had the following current account values. What effect did the change in net working capital have on the firm's cash flows for 2012?

A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?

Which one of the following statements is correct?

The Bike Shop paid $2,310 in interest and $1,850 in dividends last year. The times interest earned ratio is 2.2 and the depreciation expense is $460. What is the value of the cash coverage ratio?

A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of $6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio?

Russell's Deli has cash of $136, accounts receivable of $87, accounts payable of $215, and inventory of $409. What is the value of the quick ratio?

During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the year?

A firm has a debt-equity ratio of 0.42. What is the total debt ratio?

A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the total assets?

It is easier to evaluate a firm using financial statements when the firm:

Which of the following can be used to compute the return on equity? I. Profit margin * Return on assets II. Return on assets * Equity multiplier III. Net income/Total equity IV. Return on assets*Total asset turnover

Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?

A firm has sales of $3,400, net income of $390, total assets of $4,500, and total equity of $2,750. Interest expense is $40. What is the common-size statement value of the interest expense?

A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of $720. The firm has $310 in inventory. What is the common-size statement value of inventory?

A firm has total assets of $311,770 and net fixed assets of $167,532. The average daily operating costs are $2,980. What is the value of the interval measure?

Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?