Mechanic

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

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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.

Mechanic

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

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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

Mechanic

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.

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

Mechanic

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.

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

Mechanic

Which ratio is used to measure a company's internal liquidity?

A) Current ratio.

B) Interest coverage.

C) Total asset turnover.

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

Mechanic

Which of the following is a measure of a firm's liquidity?

A) Equity Turnover.

B) Cash Ratio.

C) Net Profit Margin.

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

Mechanic

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 receivables collection period?

A) 243.

B) 365.

C) 183.

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

Mechanic

Given the following income statement:

Net Sales	200
Cost of Goods Sold	55
Gross Profit	145
Operating Expenses	30
Operating Profit (EBIT)	115
Interest	15
Earnings Before Taxes (EBT)	100
Taxes	40
Earnings After Taxes (EAT)	60

What are the interest coverage ratio and the net profit margin?

Interest Coverage Ratio

Net Profit Margin

A) 2.63 0.30

B) 7.67 0.30

C) 0.57 0.56

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

Mechanic

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.

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

Mechanic

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