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A company has a receivables turnover of 10, an inventory turnover of 5, and a payables turnover of 12. The company’s cash conversion cycle is closest to:

A) 30 days.

B) 37 days.

C) 79 days.

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Cash conversion cycle = receivables days + inventory processing days – payables payment period.
Receivables days = 365 / receivables turnover = 365 / 10 = 36.5 days.
Inventory processing days = 365 / inventory turnover = 365 / 5 = 73.0 days.
Payables payment period = 365 / payables turnover = 365 / 12 = 30.4 days.
Cash collection cycle = 36.5 + 73.0 – 30.4 = 79.1 days.

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An analyst gathered the following data about a company:

• Current liabilities are $300.
• Total debt is $900.
• Working capital is $200.
• Capital expenditures are $250.
• Total assets are $2,000.
• Cash flow from operations is $400.

If the company would like a current ratio of 2, they could:

A) decrease current assets by 100 or increase current liabilities by 50.

B) increase current assets by 100 or increase current liabilities by 50.

C) increase current assets by 100 or decrease current liabilities by 50.

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For the current ratio to equal 2.0, current assets would need to move to $600 (or up by $100) or current liabilities would need to decrease to $250 (or down by $50). Remember that CA ? CL = working capital (500 ? 300 = 200).

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Goldstar Manufacturing has an accounts receivable turnover of 10.5 times, an inventory turnover of 4 times, and payables turnover of 8 times. What is Goldstar’s cash conversion cycle?

A) 80.38 days.

B) 6.50 days.

C) 171.64 days.

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The cash conversion cycle = average receivables collection period + average inventory processing period – payables payment period. The average receivables collection period = 365 / average receivables turnover or 365 / 10.5 = 34.76. The average inventory processing period = 365 / inventory turnover or 365 / 4 = 91.25. The payables payment period = 365 / payables turnover ratio = 365 / 8 = 45.63. Putting it all together: cash conversion cycle = 34.76 + 91.25 – 45.63 = 80.38.

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Wells Incorporated reported the following common size data for the year ended December 31, 20X7:

Income Statement	%
Sales	100.0
Cost of goods sold	58.2
Operating expenses	30.2
Interest expense	0.7
Income tax	5.7
Net income	5.2

Balance sheet	%			%
Cash	4.8		Accounts payable	15.0
Accounts receivable	14.9		Accrued liabilities	13.8
Inventory	49.4		Long-term debt	23.2
Net fixed assets	30.9		Common equity	48.0
Total assets	100.00		Total liabilities & equity	100.0

For 20X6, Wells reported sales of $183,100,000 and for 20X7, sales of $215,600,000. At the end of 20X6, Wells’ total assets were $75,900,000 and common equity was $37,800,000. At the end of 20X7, total assets were $95,300,000. Calculate Wells’ current ratio and return on equity ratio for 20X7.

 

Current ratio

Return on equity

A) 2.4 26.8%

B) 2.4 26.4%

C) 4.6 25.2%

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The current ratio is equal to 2.4 [(4.8% cash + 14.9% accounts receivable + 49.4% inventory) / (15.0% accounts payable + 13.8% accrued liabilities)]. This ratio can be calculated from the common size balance sheet because the percentages are all on the same base amount (total).

Return on equity is equal to net income divided by average total equity. Since this ratio mixes an income statement item and a balance sheet item, it is necessary to convert the common-size inputs to dollars. Net income is $11,211,200 ($215,600,000 × 5.2%) and average equity is $41,772,000 [($95,300,000 × 48.0%) + $37,800,000] / 2. Thus, 2007 ROE is 26.8% ($11,211,200 net income / $41,772,000 average equity).

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Which of the following ratios would least likely measure liquidity?

A) Quick ratio.

B) Current ratio.

C) Return on assets (ROA).

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ROA = (EBIT / average total assets) which measures management's ability and efficiency in using the firm's assets to generate operating profits. Other ratios that measure liquidity (if a company can pay its current bills) besides the quick, cash, and current ratios are the: receivables turnover, inventory turnover, and payables turnover ratios.

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Eagle Manufacturing Company reported the following selected financial information for 2007:

Accounts payable turnover	5.0
Cost of goods sold	$30 million
Average inventory	$3 million
Average receivables	$8 million
Total liabilities	$35 million
Interest expense	$2 million
Cash conversion cycle	13.5 days

Assuming 365 days in the calendar year, calculate Eagle's sales for the year.

A) $52.3 million.

B) $58.4 million.

C) $57.8 million.

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Set up the cash conversion cycle formula and solve for the missing variable, sales. Days in payables is equal to 73 [365 / 5 accounts payable turnover]. Days in inventory is equal to 36.5 [365 / ($30 million COGS / $3 million average inventory)]. Given the cash conversion cycle, days in inventory, and days in payables, calculate days in receivables of 50 [13.5 days cash conversion cycle + 73 days in payables – 36.5 days in inventory]. Given days in receivables of 50 and average receivables of $8 million, sales are $58.4 million [($8 million average receivables / 50 days) × 365].

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Given the following information about a firm:

• Net Sales = $1,000.
• Cost of Goods Sold = $600. 
• Operating Expenses = $200.
• Interest Expenses = $50.
• Tax Rate = 34%.

What are the gross and operating profit margins?

Gross Operating Margin

Operating Profit Margin

A) 40% 10%

B) 40% 20%

C) 20% 15%

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Gross profit margin = ($1,000 net sales ? $600 COGS) / $1,000 net sales = 400 / 1,000 = 0.4

Operating profit margin = ($1,000 net sales ? $600 COGS ? $200 operating expenses) / $1,000 net sales = $200 / $1000 = 0.2

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As of December 31, 2007, Manhattan Corporation had a quick ratio of 2.0, current assets of $15 million, trade payables of $2.5 million, and receivables of $3 million, and inventory of $6 million. How much were Manhattan’s current liabilities?

A) $12.0 million.

B) $7.5 million.

C) $4.5 million.

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Manhattan’s quick assets were equal to $9 million ($15 million current assets – $6 million inventory). Given a quick ratio of 2.0, quick assets were twice the current liabilities. Thus, the current liabilities must have been $4.5 million ($9 million quick assets / 2.0 quick ratio).

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During 2007, Brownfield Incorporated purchased $140 million of inventory. For the year just ended, Brownfield reported cost of goods sold of $130 million. Inventory at year-end was $45 million. Calculate inventory turnover for the year.

A) 3.71.

B) 3.25.

C) 2.89.

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First, calculate beginning inventory given COGS, purchases, and ending inventory. Beginning inventory was $35 million [$130 million COGS + $45 million ending inventory – $140 million purchases]. Next, calculate average inventory of $40 million [($35 million beginning inventory + $45 million ending inventory) / 2]. Finally, calculate inventory turnover of 3.25 [$130 million COGS / $40 million average inventory].

honeycfa

An analyst has gathered the following information about a company:

• Cost of goods sold = 65% of sales. 
• Inventory of $450,000. 
• Sales of $1 million.

What is the value of this firm’s average inventory processing period using a 365-day year?

A) 0.7 days.

B) 252.7 days.

C) 1.4 days.

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COGS = (0.65)($1,000,000) = $650,000

Inventory turnover = CGS / Inventory = $650,000 / $450,000 = 1.4444

Average Inventory Processing Period = 365 / 1.4444 = 252.7 days