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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)
6.50 days.
B)
80.38 days.
C)
171.64 days.



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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Given the following income statement:
Net Sales200
Cost of Goods Sold55
Gross Profit145
Operating Expenses30
Operating Profit (EBIT)115
Interest15
Earnings Before Taxes (EBT)100
Taxes40
Earnings After Taxes (EAT)60

What are the gross profit margin and operating profit margin?
Gross Profit MarginOperating Profit Margin
A)
0.7250.575
B)
2.6301.226
C)
0.3790.725



Gross profit margin = gross profit / net sales = 145 / 200 = 0.725Operating profit margin = EBIT / net sales = 115 / 200 = 0.575

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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 EquityWorking Capital
A)
0.78$250
B)
1.22$500
C)
0.78$500



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

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The cash conversion cycle is the:
A)
length of time it takes to sell inventory.
B)
sum of the time it takes to sell inventory and the time it takes to collect accounts receivable.
C)
sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases.



Cash conversion cycle = (average receivables collection period) + (average inventory processing period) − (payables payment period)

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Given the following income statement:
Net Sales200
Cost of Goods Sold55
Gross Profit145
Operating Expenses30
Operating Profit (EBIT)115
Interest15
Earnings Before Taxes (EBT)100
Taxes40
Earnings After Taxes (EAT)60

What are the interest coverage ratio and the net profit margin?
Interest Coverage RatioNet Profit Margin
A)
2.630.30
B)
7.670.30
C)
0.570.56



Interest coverage ratio = (EBIT / interest expense) = (115 / 15) = 7.67
Net profit margin = (net income / net sales) = (60 / 200) = 0.30

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An analyst has gathered the following information about a company:

Balance Sheet

Assets
Cash100
Accounts Receivable750
Marketable Securities300
Inventory850
Property, Plant & Equip900
Accumulated Depreciation(150)
Total Assets2750
Liabilities and Equity
Accounts Payable300
Short-Term Debt130
Long-Term Debt700
Common Stock1000
Retained Earnings620
Total Liab. and Stockholder's equity2750

Income Statement

Sales1500
COGS1100
Gross Profit400
SG&A150
Operating Profit250
Interest Expense25
Taxes75
Net Income150

What is the receivables collection period?
A)
243.
B)
365.
C)
183.



Receivables turnover = 1,500(sales) / 750(receivables) = 2.0
Average receivables collection period = 365 / 2 = 182.5 or 183

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Which of the following is a measure of a firm's liquidity?
A)
Equity Turnover.
B)
Cash Ratio.
C)
Net Profit Margin.



Equity turnover and net profit margin are each measures of a company's operating performance.

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Which ratio is used to measure a company's internal liquidity?
A)
Current ratio.
B)
Interest coverage.
C)
Total asset turnover.



Total asset turnover measures operating efficiency and interest coverage measures a company’s financial risk.

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The main difference between the current ratio and the quick ratio is that the quick ratio excludes:
A)
cost of goods sold.
B)
assets.
C)
inventory.



Current ratio = (current assets / current liabilities) = [cash + marketable securities + receivables + inventory] / current liabilities
Quick ratio = [cash + marketable securities + receivables] / current liabilities

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An analyst has gathered the following data about a company:
  • Average receivables collection period of 37 days.
  • Average payables payment period of 30 days.
  • Average inventory processing period of 46 days.

What is their cash conversion cycle?
A)
113 days.
B)
45 days.
C)
53 days.



Cash conversion cycle = average receivables collection period + average inventory processing period – payables payment period = 37 + 46 – 30 = 53 days.

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