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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 1102
Total liabilities 1200 1652
Equity
Common Stock 400 538
Retained Earnings 1000 720
Total Liabilities & Equity 2600 2,910

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 gross profit margin?

A)
0.666.
B)
0.333.
C)
0.472.



Gross profit margin = (gross profit / net sales) = (2,000 / 3,000) = 0.666

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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.



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

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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



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.

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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.




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

= 95 + 183 – 274 = 4 days

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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



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

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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


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.

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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.



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

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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.

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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



Receivables collection period = 360 / 10 = 36 days

Inventory processing period = 360 / 8 = 45 days

Payables payment period = 360 / 12 = 30 days

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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.




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

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