Mechanic

The following data applies to the XTC Company:

• Sales = $1,000,000.
• Receivables = $260,000.
• Payables = $600,000.
• Purchases = $800,000.
• COGS = $800,000.
• Inventory = $400,000.
• Net Income = $50,000.
• Total Assets = $800,000.
• Debt/Equity = 200%.

What is the average collection period, the average inventory processing period, and the payables payment period for XTC Company?

Average Collection Period

Average Inventory Processing Period

Payables Payments Period

A) 95 days 183 days 274 days

B) 55 days 195 days 231 days

C) 45 days 45 days 132 days

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Receivables turnover = $1,000,000 / $260,000 = 3.840
Average collection period = 365 / 3.840 = 95.05 or 95 days
Inventory turnover = $800,000 / $400,000 = 2
Average inventory processing period = 365 / 2 = 183 days
Payables turnover ratio = $800,000 / $600,000 = 1.333
Payables payment period = 365 / 1.333 = 273.82 or 274 days

Mechanic

Are the quick ratio and the debt-to-capital ratio used primarily to assess a company’s ability to meet short-term obligations?

Quick ratio

Debt-to-capital ratio

A) Yes Yes

B) Yes No

C) No Yes

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The quick ratio is a liquidity ratio. Liquidity ratios are used to measure a firm’s ability to meet its short-term obligations. The debt-to-capital ratio is a solvency ratio. Solvency ratios are used to measure a firm’s ability to meet its longer-term obligations.

Mechanic

An analyst has gathered the following information about a company:

Balance Sheet
Assets
	Cash	100
	Accounts Receivable	750
	Marketable Securities	300
	Inventory	850
	Property, Plant & Equip	900
	Accumulated Depreciation	(150)
Total Assets		2750
Liabilities and Equity
	Accounts Payable	300
	Short-Term Debt	130
	Long-Term Debt	700
	Common Stock	1000
	Retained Earnings	620
Total Liab. and Stockholder's equity		2750
Income Statement
Sales		1500
COGS		1100
Gross Profit		400
SG&A		150
Operating Profit		250
Interest Expense		25
Taxes		75
Net Income		150

What is the inventory turnover ratio?

A) 1.59.

B) 0.77.

C) 1.29.

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Inventory turnover = 1,100(COGS) / 850(inventory) = 1.29

Mechanic

Which of the following ratios would NOT be used to evaluate how efficiently management is utilizing the firm’s assets?

A) Fixed asset turnover.

B) Payables turnover.

C) Gross profit margin.

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The gross profit margin is used to measure a firm's operating profitability, not operating efficiency.

Mechanic

>An analyst has gathered the following data about a company:

• Average receivables collection period of 95 days.
• Average inventory processing period of 183 days.
• A payables payment period of 274 days.

What is their cash conversion cycle?

A) -4 days.

B) 186 days.

C) 4 days.

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Cash conversion cycle = average receivables collection period + average inventory processing period – payables payment period

= 95 + 183 – 274 = 4 days

Mechanic

What type of ratio is revenue divided by average working capital and what type of ratio is average total assets divided by average total equity?

Revenue / Average working capital

Average total assets / Average total equity

A) Activity ratio Liquidity ratio

B) Activity ratio Solvency ratio

C) Profitability ratio Solvency ratio

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Revenue divided by average working capital, also known as the working capital turnover ratio, is an activity ratio. Average total assets divided by average total equity, also known as the financial leverage ratio, is a solvency ratio.

spartan1

An analyst has collected the following data about a firm:

• Receivables turnover = 10 times.
• Inventory turnover = 8 times.
• Payables turnover = 12 times.

What is the average receivables collection period, the average inventory processing period, and the average payables payment period? (assume 360 days in a year)

Receivables Collection Period

Inventory Processing Period

Payables Payment Period

A) 36 days 45 days 30 days

B) 30 days 30 days 60 days

C) 45 days 36 days 30 days

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Receivables collection period = 360 / 10 = 36 days
Inventory processing period = 360 / 8 = 45 days
Payables payment period = 360 / 12 = 30 days

spartan1

The following footnote appeared in Crabtree Company’s 20X7 annual report:

“On December 31, 20X7, Crabtree recognized a restructuring charge of $20 million, of which $5 million was for severance pay for employees who will be terminated in 20X8 and $15 million was for land that became permanently impaired in 20X7.”

Based only on these changes, Crabtree’s net profit margin and fixed asset turnover ratio in 20X8 as compared to 20X7 will be?

Net profit margin

Fixed asset turnover

A) Higher Unchanged

B) Higher Higher

C) Lower Higher

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The restructuring charge and asset write-down are non-recurring transactions; thus, net income will be higher in 20X8, all else equal. In 20X8, fixed asset turnover will be the same as 20X7, all else equal. The asset impairment charge is a one-time charge, so fixed assets will not be reduced further in 20X8.

spartan1

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].

spartan1

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