honeycfa

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 Higher

B) Higher Unchanged

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.

honeycfa

A firm has a cash conversion cycle of 80 days. The firm's payables turnover goes from 11 to 12, what happens to the firm's cash conversion cycle? It:

A) shortens.

B) lengthens.

C) may shorten or lengthen.

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CCC = collection period + Inv Period – Payment period.

Payment period = (365 / payables turnover) = (365 / 11) = 33; (365 / 12) = 30. This means the CCC actually increased to 83.

honeycfa

Adams Co.'s common sized balance sheet shows that:

• Current Liabilities = 20%
• Equity = 45%
• Current Assets = 45%
• Total Assets = $2,000

What are Adams' long-term debt to equity ratio and working capital?

        Debt to Equity    Working Capital

A) 0.78   $250

B) 1.22  $500

C) 0.78   $500

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If equity equals 45% of assets, and current liabilities equals 20%,  then long-term debt must be 35%.
Long-Term Debt / Equity = 0.35 / 0.45 = 0.78

Working capital = CA ? CL = 45% - 20% = 25% of assets
WC = 2,000(0.25) = $500