Baker & Co. has applied for a loan from the Trust Us Bank to invest in several potential opportunities. To evaluate the firm as a potential debtor

Baker & Co. has applied for a loan from the Trust Us Bank to invest in several potential opportunities. To evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. to the industry. The following are the financial statements given to Trust Us Bank:

Balance Sheet                                           12/31/13               12/31/14

Cash                                                             $305                         270

Accounts receivable                                  275                         290

Inventory                                                      600                         580

Current assets                                          1,180                      1,140

Plant and equipment                             1,700                      1,940

Less: acc depr                                           (500)                       (600)

Net plant and equipment                     1,200                      1,340

Total assets                                             $2,380                    $2,480

Liabilities and Owners' Equity

Accounts payable                                    $150                       $200

Notes payable                                             125                              0

Current liabilities                                       275                         200

Bonds                                                             500                         500

Owners' equity

Common stock                                            165                         305

Paid-in-capital                                            775                         775

Retained earnings                                      665                         700

Total owners' equity                              1,605                      1,780

Total liabilities and owners' equity $2,380                   $2,480

Income Statement

Sales (100% credit)                               $1,100                    $1,330

Cost of goods sold                                      600                         760

Gross profit                                                  500                         570

Operating expenses                                     20                            30

Depreciation                                                160                         200

Net operating income                               320                         340

Interest expense                                            64                            57

Net income before taxes                           256                         283

Taxes                                                                87                            96

Net income                                                $169                       $187

Compute the following ratios:

                                                                                2013       2014       Industry Norms

Current ratio                                                                                               5.0

Acid test ratio                                                                                             3.0

Inventory turnover                                                                                    2.2

Average collection period                                                                       90 days

Debt ratio                                                                                                     .33

Times interest earned                                                                              7.0

Total asset turnover                                                                                  .75

Fixed asset turnover                                                                                 1.0

Operating profit margin                                                                         20%

Net profit margin                                                                                      12%

Return on total assets                                                                              9.00%

Return on equity                                                                                        10.43%

Answer:                                                                                     Industry

                                                        2013               2014               Norm        Evaluation

Current ratio                               4.3x                5.7x                5.0x            Satisfactory

Acid test (quick) ratio               2.1x                2.8x                3.0x            Improving

Inventory turnover                    1.0x                1.31x              2.2x            Poor

Average collection period       90 days         78.5 days      90 days     Satisfactory

Debt ratio                                     33%                28%                33%            Satisfactory

Times interest earned              5.0x                6.0x                7.0x            Poor

Total asset turnover                  .46x                .54x                .75x            Poor

Fixed asset turnover                 .92x                .99x                1.00x          Satisfactory

Operating Profit Margin         29.1%            25.6%            20%            Satisfactory

Net profit margin                      15.36%          14.06%          12.00%      Poor

Return on total assets              7.1%               7.54%            9.00%        Poor

Operating income return

        on investments                   13.45%          13.71%          15.00%      Poor

Return on equity                        10.6%            10.47%          13.43%      Poor

S.M., Inc. had total sales of $400,000 in 2014 (70 percent of its sales are credit). The company's gross profit margin is 10%

McKinny Enterprises must raise $580,000 to pay off a bank loan at the end of the year. The firm expects sales of $5,200,000 for the year. Depreciation for the year is $315,000. The company's net profit margin is 5%. Can the company pay off its loan through the retention of earnings?

Answer:  Net profit = sales × net profit margin = $5,200,000 × .05 = $260,000

Internal funds generated by the firm = net profit + depreciation = $260,000 + $315,000 = $575,000

McKinny cannot pay off its loan by using only internally generated funds.

S.M., Inc. had total sales of $400,000 in 2014 (70 percent of its sales are credit). The company's gross profit margin is 10%, its ending inventory is $80,000, and its accounts receivable is $25,000. What amount of funds can be generated by the company if it increases its inventory turnover ratio to 10.0 and reduces its average collection period to 20 days?

Answer:  Average collection period = (accounts receivable)/(annual credit sales/360 days)

20 days = (accounts receivable)/[(400,000)(.70)/360 days]

Accounts receivable = (20 × $280,000)/(360) = $15,556

Funds generated by reducing accounts receivable = $25,000 - $15,556 = $9,444

Inventory turnover = (cost of goods sold)/(ending inventory)

10.0 = [($400,000)(1 - .10)]/(ending inventory)

Ending inventory = ($360,000)/(10.0) = $36,000

Funds generated by reducing inventory = $80,000 - $36,000 = $44,000

Total funds generated = $9,444 + $44,000 = $53,444

Financial Data for Dooley Sportswear December 31, 2013

                                          Table 3

Financial Data for Dooley Sportswear December 31, 2013

Inventory                                                    $206,250

Long-term debt                                           300,000

Interest expense                                               5,000

Accumulated depreciation                     442,500

Cash                                                               180,000

Net sales (all credit)                               1,500,000

Common stock                                            800,000

Accounts receivable                                  225,000

Operating expenses                                   525,000

Notes payable-current                              187,500

Cost of goods sold                                      937,500

Plant and equipment                             1,312,500

Accounts payable                                      168,750

Marketable securities                                  95,000

Prepaid insurance                                        80,000

Accrued wages                                              65,000

Retained earnings-current-year                          ?

Federal income taxes                                     5,750

95) From the information presented in Table 3, calculate the following financial ratios for the Dooley Sportswear Company.

                current ratio                                        operating profit margin

                acid test ratio                                      net profit margin

                average collection period               total tangible asset turnover

                inventory turnover                           times interest earned

                gross profit margin

Answer: 

Current ratio = ($180,000 + $95,000 + $225,000 + $206,250 + $80,000)/($168,750 + $187,500 + $65,000) = ($786,250/$421,250) = 1.87

Acid test ratio = ($180,000 + $95,000 + $225,000 + $80,000)/($168,750 + $187,500 + $65,000) = ($580,000/$421,250) = 1.38

Average collection period = ($225,000)/($1,500,000/360 days) = 54 days

Inventory turnover = ($937,500/$206,250) = 4.55

Gross profit margin = ($562,500/$1,500,000) = 0.375

Operating profit margin = ($37,500/$1,500,000) = 0.025

Net profit margin = ($26,750/$1,500,000) = 0.0178

Total asset turnover = ($1,500,000/$1,656,250) = 0.906

Times interest earned = ($37,500/$5,000) = 7.5 times

                                                  Table 4

           Hokie Corporation Comparative Balance Sheet

           For the Years Ending March 31, 2013 and 2014

                                      (Millions of Dollars)

Assets                                                          2013                       2014

Current assets:

Cash                                                                 $2                         $10

Accounts receivable                                     16                           10

Inventory                                                         22                           26

Total current assets                                   $40                         $46

Gross fixed assets:                                   $120                       $124

Less accumulated depreciation               60                           64

Net fixed assets                                             60                           60

Total assets                                                $100                       $106

Liabilities and Owners' Equity

Current liabilities:

Accounts payable                                      $16                         $18

Notes payable                                                10                           10

Total current liabilities                             $26                         $28

Long-term debt                                              20                           18

Owners' equity:

Common stock                                              40                           40

Retained earnings                                        14                           20

Total liabilities and owners' equity    $100                       $106

Hokie had net income of $26 million for 1996 and paid total cash dividends of $20 million to their common stockholders.

Calculate the following financial ratios for the Hokie Corporation using the information given in Table 4 and 2014 information.

                current ratio

                acid test ratio

                debt ratio

                long-term debt to total capitalization

                return on total assets

                return on common equity

Answer: 

Current ratio = ($46/$28) = 1.64

Acid test ratio = ($20/$28) = 0.71

Debt ratio = ($46/$106) = 0.43

Long-term debt to total capitalization = ($18/$78) = 0.23

Return on total assets = ($26/$106) = 0.25

Return on common equity = ($26/$60) = 0.43

Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an after-tax profit margin of 11.04%

Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an after-tax profit margin of 11.04% and sales of $2.5 million. What is Hi Sky's return on equity?

A) 15%

B) 35%

C) 27%

D) 13%

Paper Clip Office Supply had $24,000,000 in sales last year. Its total asset turnover was 3.0. Interest expense was $100,000 (5% on its $2,000,000 of debt). The company is financed entirely with debt and common equity. What is Paper Clip's debt ratio?

A) 20%

B) 30%

C) 25%

D) 60%

E) 16%

Kiosk Corp. has current assets of $4.5 million and current liabilities of $3.6 million. The current ratio is 1.25, and the quick ratio is 0.75. How much does Kiosk have invested in inventory (in millions)?

A) $0.8

B) $1.8

C) $2.4

D) $2.9

E) $3.6

Champion Company has sales of $20 million, total debt of $1.5 million, and a debt ratio of 40%. What is Champion's total asset turnover?

A) 13.33

B) 9.11

C) 6.55

D) 5.33

The focus of DuPont Analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments.

Answer:  TRUE

The current ratio and the acid test ratio are both measures of financial leverage.

Answer:  FALSE

Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the firm's management.

Answer:  TRUE

Financial ratios that are higher than industry averages may indicate problems which are as detrimental to the firm as ratios that are too low.

Answer:  TRUE

According to the DuPont Analysis, an increase in net profit margin will decrease return on assets.

Answer:  FALSE

Financial ratios comprise the principal tool of financial analysis since they can be used to answer a variety of questions regarding a firm's financial condition.

Answer:  TRUE

Financial ratios can highlight a firm's financial performance with regard to liquidity, solvency, and profitability.

Answer:  TRUE

Ratios are used to standardize financial information.

Answer:  TRUE

There is no such thing as a liquidity ratio being too high.

Answer:  FALSE

A retailer that accepts credit cards will have a higher accounts receivable turnover ratio than a retailer with its own credit department.

Answer:  TRUE

One weakness of the times-interest-earned ratio is that it includes only the annual interest expense as a finance expense that must be paid.

Answer:  TRUE

Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 1995. In addition, the firm's total assets were $2,500,000,

Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 1995. In addition, the firm's total assets were $2,500,000, and its capital structure is comprised of 40% debt and 60% equity. What was Corbin's return on equity in 1995?

A) 15%

B) 2.5%

C) 10%

D) Return on equity cannot be determined with the information provided.

Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations?

A) The quick ratio (acid test)

B) Return on equity

C) Total asset turnover

D) Operating profit margin

If Challenge Corporation has sales of $2 million per year (all credit) and an average collection period of 35 days, what is its average amount of accounts receivable?

A) $191,781

B) $57,143

C) $5,556

D) $97,222

Which of the following financial ratios is the best measure of how effectively a firm's management is serving its stockholders?

A) Current ratio

B) Debt ratio

C) ACP

D) Return on equity

Colton Corp. has current assets of $4.5 million. The current ratio is 1.25 and the quick ratio is 0.75. What is the amount of Colton's current liabilities (in millions)?

A) $4.5

B) $1.8

C) $2.4

D) $2.9

E) $3.6

Consolidated Industries has total interest charges of $20,000 per year. Sales of $2 million generated an operating income of $220,000 and an after-tax profit of 6% of sales. The firm has a marginal tax rate of 40%. What is the firm's times-interest-earned ratio?

A) 10

B) 11

C) 12

D) 13

A firm has a return on equity of 20% and a total asset turnover of 4. Assuming a debt ratio of 50% and sales of $1,000,000

A firm has a return on equity of 20% and a total asset turnover of 4. Assuming a debt ratio of 50% and sales of $1,000,000, calculate net income.

A) $25,000

B) $50,000

C) $75,000

D) $100,000  

An increase in the current ratio would indicate an increase in

A) leverage.

B) liquidity.

C) return on investment.

D) operating income.

Which of the following is NOT a component of return on assets (ROA)?

A) Total assets

B) Cost of goods sold

C) Sales

D) Leverage

________ indicates management's effectiveness in managing the firm's income statement.

A) Gross profit margin

B) Operating profit margin

C) Net profit margin

D) Return on assets

Holding all other variables constant, which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in

A) inventory.

B) long-term debt.

C) accounts receivable.

D) accounts payable.

Which of the following will increase return on equity?

A) An increase in sales with a proportionate increase in costs and expenses

B) An increase in sales relative to the asset base

C) A decrease in leverage

D) Both A and C

Which of the following is NOT a driving force of the operating profit margin?

A) The average selling price for each product

B) The ability to control all of the firm's expenses

C) The ability to control general and administrative expenses

D) The number of units of product sold

Use the following information to answer the following question(s).Key Ratios for ABC, Inc. and Its Industry

 Use the following information to answer the following question(s).

                                                              Key Ratios for ABC, Inc. and Its Industry

                                                ABC, Inc. 2013 Ratios        Industry Average Ratios in 2013

Current ratio                                          1.2                                              1.4

Acid test ratio                                     0.89                                            0.94

Average collection period        30 days                                     25 days

Inventory turnover                            18.1                                            20.3

Fixed assets turnover                          4.1                                              4.8

Total asset turnover                          2.78                                              2.8

Debt ratio                                             50%                                           60%

Times-interest-earned                     5.5%                                          4.5%

Net profit margin                           1.15%                                          1.5%

Return on equity                            5.21%                                        7.32%

                  ABC, Inc. Income Statement (in thousands)

                                        December 31, 2014

Sales (all credit)                                                                $200,000

Cost of goods sold                                                             140,000

Gross profit on sales                                                            60,000

Operating expenses                                                             56,000

Operating income                                                                   4,000

Interest expense                                                                       1,000

Earnings before tax                                                                 3,000

Income tax                                                                                 1,050

Net income available to common stockholders          $1,950

                     ABC, Inc. Balance Sheet (in thousands)

                                        December 31, 2014

Assets

Cash                                                                                         $2,000

Accounts receivable                                                             17,800

Inventories                                                                                8,700

Total current assets                                                              28,500

Gross fixed assets                                                                 70,000

Accumulated depreciation                                                26,500

Net fixed assets                                                                     43,500

Total assets                                                                          $72,000

Liabilities and Equity

Accounts payable                                                              $18,000

Accruals                                                                                  13,350

Total current liabilities                                                       31,350

Long-term debt                                                                        8,250

Total liabilities                                                                      39,600

Common stock (par value and paid in capital)            2,000

Retained earnings                                                                30,400

Total stockholders' equity                                                  32,400

Total liabilities and equity                                              $72,000

In 1995, ABC's average collection period is

A) 30 days.

B) 32.5 days.

C) 25 days.

D) 35 days.

In 2014, ABC's inventory turnover is

A) 23.9.

B) 20.3.

C) 15.5.

D) 16.1.

In 2014, ABC's fixed asset turnover is

A) 2.78.

B) 5.0.

C) 4.6.

D) 4.8.

Since 2013, ABC's efficiency at using its assets has

A) improved.

B) deteriorated.

C) remained the same.

D) been variable across components of the efficiency measures.

In 2014, the improvement in ABC's return on equity occurred because

A) ABC used more debt than in 1994.

B) ABC lowered its expenses in 1995 and was, therefore, more profitable.

C) ABC utilized its total assets more efficiently in 1995.

D) None of the above explain the improvement in ABC's return on equity.

Since 2013, ABC's liquidity has

A) improved.

B) deteriorated.

C) remained the same.

D) been variable across components of the liquidity measures.

Since 2013, ABC's inventory management has

A) improved.

B) deteriorated.

C) remained the same.

D) changed but in an indeterminate manner.