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Given the following information about a company:
  • Receivables turnover = 10 times.
  • Payables turnover = 12 times.
  • Inventory turnover = 8 times.

What are the average receivables collection period, the average payables payment period, and the average inventory processing period respectively?
Average Receivables
Collection Period
Average Payables
Payment Period
Average Inventory
Processing Period
A)
373052
B)
374546
C)
373046



Average receivables collection period = (365 / 10) = 36.5 or 37
Average payables payment period = (365 / 12) = 30.4 or 30
Average inventory processing period = (365 / 8) = 45.6 or 46

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

Balance Sheet

AssetsYear 2003Year 2004
Cash500450
Accounts Receivable600660
Inventory500550
Total CA13001660
Plant, prop. equip10001250
Total Assets26002,910
Liabilities
Accounts Payable500550
Long term debt7001102
Total liabilities12001652
Equity
Common Stock400538
Retained Earnings1000720
Total Liabilities & Equity26002,910

Income Statement

Sales3000
Cost of Goods Sold(1000)
Gross Profit2000
SG&A500
Interest Expense151
EBT1349
Taxes (30%)405
Net Income944

What is the average receivables collection period?
A)
76.7 days.
B)
80.3 days.
C)
60.6 days.



Average collection period = 365 / receivables turnover
Receivables turnover = sales / average receivables = 3,000 / 630 = 4.76
Average receivables collection period = 365 / 4.76 = 76.65

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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 turnover ratio?
A)
2.0.
B)
0.5.
C)
1.0.



Receivables turnover = 1,500(sales) / 750(receivables) = 2.0

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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

Determine the current ratio and the cash ratio.
Current RatioCash Ratio
A)
1.981.86
B)
4.650.93
C)
2.671.07



Current ratio = [100(cash) + 750(accounts receivable)+ 300(marketable securities) + 850(inventory)] / [300(AP) + 130(short term debt)] = (2000 / 430) = 4.65
Cash ratio = [100(cash) + 300(marketable securities)] / [300(AP) + 130(short term debt)] = (400 / 430) = 0.93

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Eagle Manufacturing Company reported the following selected financial information for 2007:

Accounts payable turnover

5.0


Cost of goods sold

$30 million


Average inventory

$3 million


Average receivables

$8 million


Total liabilities

$35 million


Interest expense

$2 million


Cash conversion cycle

13.5 days


Assuming 365 days in the calendar year, calculate Eagle's sales for the year.
A)
$52.3 million.
B)
$58.4 million.
C)
$57.8 million.



Set up the cash conversion cycle formula and solve for the missing variable, sales. Days in payables is equal to 73 [365 / 5 accounts payable turnover]. Days in inventory is equal to 36.5 [365 / ($30 million COGS / $3 million average inventory)]. Given the cash conversion cycle, days in inventory, and days in payables, calculate days in receivables of 50 [13.5 days cash conversion cycle + 73 days in payables – 36.5 days in inventory]. Given days in receivables of 50 and average receivables of $8 million, sales are $58.4 million [($8 million average receivables / 50 days) × 365].

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An analyst has gathered the following information about a firm:
  • Quick ratio of 0.25.
  • Cash ratio of 0.20.
  • $2 million in marketable securities.
  • $10 million in cash.

What is their receivables balance?
A)
5 million.
B)
2 million.
C)
3 million.



Cash ratio = (cash + marketable securities) / current liabilities
0.20 = ($10,000,000 + $2,000,000) / current liabilities
current liabilities = $12,000,000 / 0.2 = $60,000,000
Quick ratio = [cash + marketable securities + receivables] / $60,000,000
0.25 = [$10,000,000 + $2,000,000 + receivables] / $60,000,000
($60,000,000)(0.25) = $12,000,000 + receivables
$15,000,000 = $12,000,000 + receivables
$15,000,000 − $12,000,000 = receivables
$3,000,000 = receivables

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How would the collection of accounts receivable most likely affect the current and cash ratios?
Current ratio Cash ratio
A)
IncreaseIncrease
B)
No effectNo effect
C)
No effectIncrease



Collecting receivables increases cash and decreases accounts receivable. Thus, current assets do not change and the current ratio is unaffected. Because the numerator of the cash ratio only includes cash and marketable securities, collecting accounts receivable increases the cash ratio.

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What would be the impact on a firm’s return on assets ratio (ROA) of the following independent transactions, assuming ROA is less than one?
Transaction #1 – A firm owned investment securities that were classified as available-for-sale and there was a recent decrease in the fair value of these securities.
Transaction #2 – A firm owned investment securities that were classified as trading securities and there was recent increase in the fair value of the securities.
Transaction #1 Transaction #2
A)
Higher Lower
B)
Higher Higher
C)
Lower Higher



Available-for-sale securities are reported on the balance sheet at fair value and any unrealized gains and losses bypass the income statement and are reported as an adjustment to equity. Thus, a decrease in fair value will result in a higher ROA ratio (lower assets). Trading securities are also reported on the balance sheet at fair value; however, the unrealized gains and losses are recognized in the income statement. Therefore, an increase in fair value will result in higher ROA. In this case, both the numerator and denominator are higher; however, since the ratio is less than one, the percentage change of the numerator is greater than the percentage change of the denominator, so the ratio will increase.

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

Balance Sheet

AssetsYear 2006Year 2007
Cash200450
Accounts Receivable600660
Inventory500550
Total CA13001660
Plant, prop. equip10001580
Total Assets26003240
Liabilities
Accounts Payable500550
Long term debt7001052
Total liabilities12001602
Equity
Common Stock400538
Retained Earnings10001100
Total Liabilities & Equity26003240

Income Statement

Sales3000
Cost of Goods Sold(1000)
Gross Profit2000
SG&A500
Interest Expense151
EBT1349
Taxes (30%)405
Net Income944

Which of the following is closest to the company's return on equity (ROE)?
A)
0.62.
B)
0.29.
C)
1.83.



There are several ways to approach this question but the easiest way is to recognize that ROE = NI / average equity thus ROE = 944 / 1,519 = 0.622.
If using the traditional DuPont, ROE = (NI / Sales) × (Sales / Assets) × (Assets / Equity):
ROE = (944 / 3,000) × (3,000 / 2,920) × (2,920 / 1,519) = 0.622
The 5-part Dupont formula gives the same result:
ROE = (net income / EBT)(EBT / EBIT)(EBIT / revenue)(revenue / total assets)(total assets / total equity)
Where EBIT = EBT + interest = 1,349 + 151 = 1,500
ROE 2007 = (944 / 1,349)(1,349 / 1,500)(1,500 / 3,000)(3,000 / 2,920)(2,920 / 1,519) = 0.622

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Income Statements for Royal, Inc. for the years ended December 31, 20X0 and December 31, 20X1 were as follows (in $ millions):

20X0

20X1

Sales

78

82

Cost of Goods Sold

(47)

(48)

  Gross Profit

31

34

Sales and Administration     

(13)

(14)

  Operating Profit (EBIT)

18

20

Interest Expense

(6)

(10)

  Earnings Before Taxes

12

10

Income Taxes

(5)

(4)

  Earnings after Taxes

  7

  6

Analysis of these statements for trends in operating profitability reveals that, with respect to Royal’s gross profit margin and net profit margin:
A)
gross profit margin decreased but net profit margin increased in 20X1.
B)
gross profit margin increased in 20X1 but net profit margin decreased.
C)
both gross profit margin and net profit margin increased in 20X1.



Royal’s gross profit margin (gross profit / sales) was higher in 20X1 (34 / 82 = 41.5%) than in 20X0 (31 / 78 = 39.7%), but net profit margin (earnings after taxes / sales) declined from 7 / 78 = 9.0% in 20X0 to 6 / 82 = 7.3% in 20X1.

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