honeycfa

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.

honeycfa

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 decrease current liabilities by 50.

C) increase current assets by 100 or increase 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).

honeycfa

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.

honeycfa

An analyst has collected the following data about a firm:

• Receivables turnover = 20 times. 
• Inventory turnover = 16 times. 
• Payables turnover = 24 times.

What is the cash conversion cycle?

A) Not enough information is given.

B) 26 days.

C) 56 days.

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

Receivables collection period = (365 / 20) = 18
Inventory processing period = (365 / 16) = 23
Payables payment period = (365 / 24) = 15
Cash conversion cycle = 18 + 23 – 15 = 26

honeycfa

Are the following ratios best classified as profitability ratios?

Ratio #1 – Cash plus short-term marketable investments plus receivables divided by average daily cash expenditures.

Ratio #2 – Earnings before interest and taxes divided by average total assets.

A) Only one of the ratios is a profitability ratio.

B) Both of the ratios are profitability ratios.

C) Neither of the ratios is a profitability ratio.

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(Cash + short-term marketable investments + receivables) divided by average daily cash expenditures is known as the defensive interval ratio. The defensive interval ratio is a liquidity ratio that measures the firm’s ability to pay cash expenditures in the absence of external cash flows, but does not directly measure profitability. EBIT / average total assets is one variation of the return on assets ratio. Return on assets is a profitability ratio that measures the efficiency of managing assets and generating profits.

honeycfa

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) 30 days 30 days 60 days

B) 36 days 45 days 30 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

honeycfa

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

honeycfa

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) Profitability ratio Solvency ratio

C) Activity 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.

honeycfa

Which of the following is least likely a routinely used operating profitability ratio?

A) Net income/net sales.

B) Sales/Total Assets

C) Gross profit/net sales.

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Sales/Total Assets, or Total Asset Turnover is a measure of operating efficiency, not operating profitability.

honeycfa

Given the following income statement and balance sheet for a company:

Balance Sheet
Assets	Year 2003	Year 2004
Cash	500	450
Accounts Receivable	600	660
Inventory	500	550
Total CA	1300	1660
Plant, prop. equip	1000	1250
Total Assets	2600	2910
Liabilities
Accounts Payable	500	550
Long term debt	700	700
Total liabilities	1200	1652
Equity
Common Stock	400	400
Retained Earnings	1260	1260
Total Liabilities & Equity	2600	2910
Income Statement
Sales		3000
Cost of Goods Sold		(1000)
Gross Profit		2000
SG&A		500
Interest Expense		151
EBT		1349
Taxes (30%)		405
Net Income		944

What is the operating profit margin?

A) 0.45.

B) 0.50.

C) 0.67.

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Operating profit margin = (EBIT / sales) = (1,500 / 3,000) = 0.5