1215

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 current ratio?

A) 2.67.

B) 0.22.

C) 4.65.

---

Current ratio = [100(cash) + 750(AR) + 300(marketable securities) + 850(inventory)] / [300(AP) + 130(short-term debt)] = (2,000 / 430) = 4.65

1215

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

A) Sales/Total Assets

B) Net income/net sales.

C) Gross profit/net sales.

---

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

1215

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) $4.5 million.

B) $12.0 million.

C) $7.5 million.

---

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).

1215

Which of the following ratios would least likely measure liquidity?

A) Return on assets (ROA).

B) Quick ratio.

C) Current ratio.

---

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.

---

1215

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.

---

(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.

1215

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	1600	1660
Plant, prop. equip	1000	1250
Total Assets	2600	2910
Liabilities
Accounts Payable	500	550
Long term debt	700	1002
Total liabilities	1200	1552
Equity
Common Stock	400	538
Retained Earnings	1000	820
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 current ratio for 2004?

A) 0.331.

B) 2.018.

C) 3.018.

---

Current ratio = (CA / CL) = (1,660 / 550) = 3.018