Copy Part 2 Financial Statement Analysis and Liquidity Ratios Qs

Part 2 : Financial Statement Analysis and Liquidity Ratios
Question 1 - HOCK MP1 E21 - Activity Ratios
The annual sales revenue of an enterprise is $3,000,000. Half of the sales are on credit terms; half are cash sales.
Accounts receivable at the balance sheet date are $165,000. What is the average receivables collection period, to the
nearest day, using a 365 day year?
A. 20 days
B. 9 days
C. 18 days
D. 40 days
Question 2 - CMA 685 4.17 - Leverage and Coverage Ratios
If the ratio of total liabilities to equity increases, a ratio that must also increase is
A. The current ratio.

B. Total liabilities to total assets.
C. Return on equity.
D. Times interest earned.
Question 3 - ICMA 10.P2.054 - Activity Ratios
Zubin Corporation experiences a decrease in sales and the cost of good sold, an increase in accounts receivable, and
no change in inventory. If all else is held constant, what is the total effect of these changes on the receivables turnover
and inventory ratios?
A. Inventory turnover increased; receivables turnover decreased.

B. Inventory turnover decreased; receivables turnover decreased.
C. Inventory turnover decreased; receivables turnover increased.
D. Inventory turnover increased; receivables turnover increased.
Question 4 - ICMA 10.P2.022 - Financial Statement Analysis Basics, Liquidity Ratios
All of the following are affected when merchandise is purchased on credit except
A. total current assets.

B. net working capital.
C. current ratio.
D. total current liabilities.
Shown below are selected data from Fortune Company's most recent financial statements.
Marketable securities $10,000
Accounts receivable 60,000
Inventory 25,000
Supplies 5,000
Accounts payable 40,000
Short-term debt payable 10,000
Accruals 5,000
What is Fortune's net working capital?
A. $45,000
B. $80,000
C. $50,000
D. $35,000
Question 6 - CMA 695 2.1 - Financial Statement Analysis Basics, Liquidity Ratios
CPZ Enterprises had the following account information.

Accounts receivable $200,000
Bonds payable, due in ten years 10,000
Cash 100,000
Interest payable, due in three months 10,000
Inventory 400,000
Land 250,000
Notes payable, due in six months 50,000
Prepaid expenses 40,000
The company has an operating cycle of five months.
The current ratio for CPZ Enterprises is
A. 2.14
B. 5.29
C. 5.00
D. 1.68
A measure of its long-term debt-paying ability is a company's
A. Inventory turnover.
B. Length of the operating cycle.
C. Return on assets.
D. Times-interest-earned.
Markowitz Company increased its allowance for uncollectible accounts. This adjustment will
A. reduce debt-to-asset ratio.

B. reduce the current ratio.
C. increase the acid test ratio.
D. increase working capital.
A higher degree of operating leverage compared with the industry average implies that the firm
A. has higher variable costs.

B. has profits that are more sensitive to changes in sales volume.
C. is more profitable.
D. is less risky.
Question 10 - CMA 688 4.3 - Activity Ratios
The data presented below shows actual figures for selected accounts of McKeon Company for the fiscal year ended
May 31, 20X0, and selected budget figures for the 20X1 fiscal year. McKeon's controller is in the process of reviewing
the 20X1 budget and calculating some key ratios based on the budget. McKeon Company monitors yield or return
ratios using the average financial position of the company. (Round all calculations to three decimal places if
necessary.)
May 31, May 31,
20X1 20X0
Current assets $210,000$180,000
Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
20X1 Operations
Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in 20X1 60,000
Administrative expense 67,000
*All sales are credit sales.
Composition of Current Assets

May 31, May 31,
20X1 20X0
Cash $ 20,000$ 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000$180,000
The 20X1 accounts receivable turnover for McKeon Company is
A. 4.118
B. 3.500
C. 5.000
D. 1.882
Maydale Inc.'s financial statements show the following information.

Accounts receivable, end of Year 1$ 320,000
Credit sales for Year 2 3,600,000
Accounts receivable, end of Year 2 400,000
Maydale's accounts receivable turnover ratio is
A. 11.25.
B. 9.00.
C. 0.10.
D. 10.00.
In computing inventory turnover, the base to use is the
A. Cost of sales base because it eliminates any changes due solely to sales price changes.
B. Sales base because it is more likely to reflect a change in trend.
C. Sales base because it more clearly represents operational activity.
D. Sales base because it provides turnover rates that are considerably higher.
Question 13 - ICMA 13.P2.004 - Leverage and Coverage Ratios
Financial information for Arbat Inc. for two years of operation is shown below.
Year 1 Year 2
Sales $4,000,000$4,400,000
Total operating costs 3,200,000 3,440,000
Earnings before interest and taxes $ 800,000 $ 960,000
Interest payments 320,000 275,000
Income taxes 245,000 354,000
Net income $ 235,000 $ 331,000
Earnings per share $ 2.35 $ 3.31
The degree of operating leverage for Arbat Inc. is
A. 0.75.
B. 2.67.
C. 4.09.
D. 2.00.
Peggy Monahan, controller, has gathered the following information regarding Lampasso Company.
Beginning of the yearEnd of the year
Inventory $6,400 $7,600
Accounts receivable $2,140 $3,060
Accounts payable $3,320 $3,680
Total sales for the year were $85,900, of which $61,400 were credit sales. The cost of goods sold was $24,500.
Lampasso's inventory turnover ratio for the year was
A. 8.9 times.
B. 3.2 times.
C. 8.2 times.
D. 3.5 times.
Globetrade is a retailer that buys virtually all of its merchandise from manufacturers in a country experiencing
significant inflation. Globetrade is considering changing its method of inventory costing from first-in, first-out (FIFO) to
last-in, first-out (LIFO). What effect would the change from FIFO to LIFO have on Globetrade’s current ratio and
inventory turnover ratio?
A. The current ratio would decrease but the inventory turnover ratio would increase.
B. Both the current ratio and the inventory turnover ratio would decrease.
C. The current ratio would increase but the inventory turnover ratio would decrease.
D. Both the current ratio and the inventory turnover ratio would increase.
Spotech Co.'s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000,
respectively. Short-term interest rates are expected to average 5%. If Spotech could increase inventory turnover from
its current 8 times per year to 10 times per year, its expected cost savings in the current year would be
A. $250,000
B. $165,625
C. $82,812
D. $331,250
If a company has a current ratio of 2.1 and pays off a portion of its accounts payable with cash, the current ratio will
A. decrease.
B. remain unchanged.
C. move closer to the quick ratio.
D. increase.
The capital structure of four corporations is as follows.

Corporation
SterlingCooperWarwick Pane
Short-term debt 10% 10% 15% 10%
Long-term debt 40% 35% 30% 30%
Preferred stock 30% 30% 30% 30%
Common equity 20% 25% 25% 30%
Which corporation is the most highly leveraged?
A. Pane.
B. Cooper.
C. Warwick.
D. Sterling.
The following information has been derived from the financial statements of Boutwell Company.
Current assets $640,000
Total assets 990,000
Long-term liabilities 130,000
Current ratio 3.2
The company's debt-to-equity ratio is
A. 0.33 to 1.
B. 0.37 to 1.
C. 0.13 to 1.
D. 0.50 to 1.
Garstka Auto Parts must increase its acid test ratio above the current 0.9 level in order to comply with the terms of a
loan agreement. Which one of the following actions is most likely to produce the desired results?
A. Making a payment to trade accounts payable.

B. Selling auto parts on account.
C. Purchasing marketable securities for cash.
D. Expediting collection of accounts receivable.
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting
purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction
described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year
in its retained earnings account.
The issuance of serial bonds in exchange for an office building, with the first installment of the bonds due late this year,
A. Affects all of the answers as indicated.

B. Decreases the current ratio.
C. Decreases the quick ratio.
D. Decreases net working capital.
All of the following are included when calculating the acid test ratio except
A. prepaid insurance.
B. 60-day certificates of deposit.
C. six-month treasury bills.
D. accounts receivable.
necessary.)
May 31, May 31,
20X1 20X0
20X1 Operations
Sales* $350,000

May 31, May 31,
20X1 20X0
Cash $ 20,000$ 10,000

Inventory 70,000 80,000
Other 20,000 20,000
$210,000$180,000
McKeon Company's debt to total asset ratio for 20X1 is
A. 0.352
B. 0.237
C. 0.264
D. 0.315
A company has the following account balances.
Cash $160,000
Equipment 50,000
Inventory 35,000
Accrued wages 10,000
Long-term debt 30,000
What is the company's net working capital?
A. $205,000.
B. $220,000.
C. $225,000.
D. $180,000.
The early liquidation of a long-term note with cash affects the
A. Quick ratio to a greater degree than the current ratio.

B. Current ratio but not the quick ratio.
C. Current ratio to a greater degree than the quick ratio.
D. Current and quick ratio to the same degree.
The days' sales in receivables ratio will be understated if the company

A. Uses average receivables in the ratio calculation.

B. Uses a calendar year for its accounting period.
C. Does not use average receivables in the ratio calculation.
D. Uses a natural business year for its accounting period.
Marge Halifax, chief financial officer of Strickland Construction, has been tracking the activities of the company's
nearest competitor for several years. Among other trends, Halifax has noticed that this competitor is able to take
advantage of new technology and bring new products to market more quickly than Strickland. In order to determine
the reason for this, Halifax has been reviewing the following data regarding the two companies.
Strickland Competitor
Accounts receivable turnover 6.85 7.35
Return on assets 15.34 14.74
Times interest earned 15.65 12.45
Current ratio 2.11 1.23
Debt/equity ratio 42.16 55.83
Degree of financial leverage 1.06 1.81
Price/earnings ratio 26.56 26.15
On the basis of this information, which one of the following is the best initial strategy for Halifax to follow in attempting
to improve the flexibility of Strickland?
A. Investigate ways to improve asset efficiency and turnover times to improve liquidity.
B. Seek additional sources of outside financing for new product introductions.
C. Increase Strickland's investment in short-term securities to increase the current ratio.
D. Seek cost cutting measures that would increase Strickland's profitability.
Question 28 - CMA 688 4.17 - Comparative Financial Statement Analysis
In financial statement analysis, expressing all financial statement items as a percentage of base-year figures is called
A. ratio analysis.
B. vertical common size analysis.
C. horizontal common size analysis.
D. market growth analysis.
Question 29 - CMA 1289 P4 Q13 - Financial Statement Analysis Basics, Liquidity Ratios
Excerpts from the statement of financial position for Landau Corporation as of September 30 of the current year are
presented as follows.
Cash $ 950,000
Accounts receivable (net) 1,675,000
Inventories 2,806,000
Total current assets $5,431,000
Accounts payable $1,004,000
Accrued liabilities 785,000
Total current liabilities $1,789,000
The board of directors of Landau Corporation met on October 4 of the current year and declared the regular quarterly
cash dividend amounting to $750,000 ($0.60 per share). The dividend is payable on October 25 of the current year to
all shareholders of record as of October 12 of the current year.
Assume that the only transactions to affect Landau Corporation during October of the current year are the dividend
transactions and that the closing entries have been made.
Landau Corporation's working capital was
A. Decreased by the dividend declaration and unchanged by the dividend payment.

B. Unchanged by the dividend declaration and decreased by the dividend payment.
C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and increased by the dividend payment.
The assets of Moreland Corporation are presented below.

January 1 December 31
Cash $ 48,000 $ 62,000
Marketable securities 42,000 35,000
Inventory 125,000 138,000
Plant & equipment
(net of accumulated depreciation) 325,000 424,000
For the year just ended, Moreland had net income of $96,000 on $900,000 of sales. Moreland's total asset turnover
ratio is
A. 1.27.
B. 1.37.
C. 1.48.
D. 1.50.
Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company's current
ratio would be increased by
A. The purchase of $100,000 of inventory on account.

B. Refinancing a $100,000 long-term loan with short-term debt.
C. The collection of $100,000 of accounts receivable.
D. The payment of $100,000 of accounts payable.
Stock options are frequently provided to officers of companies. Stock options that are exercised improve
A. The total asset turnover.

B. The ownership interest of existing stockholders.

C. The debt-to-equity ratio.
D. Basic earnings per share.
Birch Products Inc. has the following current assets.

Cash $ 250,000
Marketable securities 100,000
If Birch's current liabilities are $1,300,000, the firm's
A. current ratio will decrease if a payment of $100,000 cash is used to pay $100,000 of accounts payable.
B. quick ratio will not change if a payment of $100,000 cash is used to purchase inventory.
C. quick ratio will decrease if a payment of $100,000 cash is used to purchase inventory.
D. current ratio will not change if a payment of $100,000 cash is used to pay $100,000 of accounts payable.
Carlisle Company currently sells 400,000 bottles of perfume each year. Each bottle costs $0.84 to produce and sells
for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends
of $2,000 per year, and a 40% tax rate. Carlisle uses the following formulas to determine the company's leverage.
Operating leverage = [Q(S − VC)] ÷ [Q(S − VC) − FC]
Financial leverage = EBIT ÷ {EBIT − I − [P / (1 − T)]}
Total leverage = Q(S − VC) ÷ {Q(S − VC) − FC − I − [P / (1 − T)]}
Where:
Q=Quantity
FC=Fixed Cost
VC=Variable Cost
S=Selling Price
I=Interest Expense
P=Preferred Dividends
T=Tax Rate
EBIT=Earnings Before Interest and Taxes
The degree of financial leverage for Carlisle Company is
A. 2.4
B. 1.35
C. 2.3
D. 1.78
Question 35 - HOCK MP1 E2 - Leverage and Coverage Ratios
Ray Corporation has long-term debt of $1,200,000 and equity of $1,000,000. The board of directors has set a goal of
1:1 for the company's debt-equity ratio. Which of the following could the company employ to achieve this goal?
A. Issuing rights to purchase new common stock.

B. Paying a stock dividend to the existing shareholders.
C. Issuing new bonds.
D. Paying a dividend on its common stock.
Question 36 - CMA 1295 2.21 - Comparative Financial Statement Analysis
In assessing the financial prospects for a firm, financial analysts use various techniques. An example of vertical,
common-size analysis is
A. Advertising expense increased by 3% over the previous year.

B. Advertising expense is 4% of sales.
C. An assessment of the relative stability of a firm's level of vertical integration.
D. A comparison in financial ratio form between two or more firms in the same industry.
Accounts receivable turnover will normally decrease as a result of
A. A significant sales volume decrease near the end of the accounting period.
B. The write-off of an uncollectible account (assume the use of the allowance for doubtful accounts method).
C. An increase in cash sales in proportion to credit sales.
D. A change in credit policy to lengthen the period for cash discounts.
A company had $6 million in credit sales last fiscal year. The company’s beginning accounts receivable balance was
$1 million and its ending receivable balance was $1.25 million on its year-end financial statements. If the industry
average period for the collection of accounts receivables is 90 days, the company’s accounts receivable collection
period is less than the industry average by approximately
A. 68 days.
B. 52 days.
C. 60 days.
D. 22 days.
The following information was obtained from a company’s financial statements.

Beginning of the
End of the Year
Year
Inventory $6,400 $7,600
Accounts payable 3,320 3,680
Total sales for the year were $85,900, of which $62,400 were credit sales. The cost of goods sold was $24,500. The
company's payable turnover was
A. 17.8 times.
B. 6.7 times.
C. 16.9 times.
D. 7.0 times.

Cash 100,000
Inventory 400,000
Land 250,000
What is the company's acid test (quick) ratio?
A. 2.14
B. 2.31
C. 0.68
D. 1.68
Which one of the following is the best indicator of long-term debt paying ability?
A. Debt-to-total assets ratio.

B. Working capital turnover.
C. Current ratio.
D. Asset turnover.
All other things being equal, which one of the following factors would result in an increase in cash reported on the
balance sheet from one period to the next?
A. Decrease in the accrued vacation liability.

B. Reduction of days' sales outstanding of accounts receivable.
C. Increase in the level of inventory held.
D. Increase in the speed with which accounts payable invoices are paid.
If a company decided to change from the first-in, first-out (FIFO) inventory method to the last-in, first-out (LIFO)
method during a period of rising prices, its
A. Current ratio would be reduced.

B. Cash flow would be decreased.
C. Inventory turnover ratio would be reduced.
D. Debt-to-equity ratio would be decreased.
Question 44 - CIA 593 IV.40 - Financial Statement Analysis Basics, Liquidity Ratios
A condensed comparative balance sheet for a company appears below:

12-31-Year 112-31-Year 2
Cash $ 40,000 $ 30,000
Inventory 200,000 300,000
Property, plant & equipment 500,000 550,000
Accumulated depreciation (280,000) (340,000)
Total assets $580,000 $640,000
Current liabilities $60,000 $100,000
Long-term liabilities 390,000 420,000
Stockholders' equity 130,000 120,000
Total liabilities and equity $580,000 $640,000
In looking at liquidity ratios at both balance sheet dates, what happened to the (1) current ratio and (2) acid-test
(quick) ratio?
A. (1) Increased (2) Increased

B. (1) Decreased (2) Increased
C. (1) Decreased (2) Decreased
D. (1) Increased (2) Decreased
A company has a current ratio of 1.4, a quick, or acid test, ratio of 1.2, and the following partial summary balance
sheet:
Cash $ 10 Current liabilities $
Accounts receivable ___ Long-term liabilities 40
Inventory ___ Shareholders' equity 30
Fixed Assets ___
Total assets $100 Total liabilities and equity$100
The company has an accounts receivable balance of:
A. $36
B. $26
C. $12
D. $66
necessary.)
May 31, May 31,
20X1 20X0
Current assets $210,000 $180,000
20X1 Operations
Sales* $350,000

May 31, May 31,
20X1 20X0
Cash $ 20,000 $ 10,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000 $180,000
Using a 365-day year, McKeon's days' sales in inventory is
A. 171 days.
B. 78 days.
C. 160 days.
D. 183 days.

To determine the operating cycle for a wholesaler, which one of the following pairs of items is needed?
A. Days' sales in accounts receivable and average merchandise inventory.

B. Asset turnover and return on sales.
C. Accounts receivable turnover and inventory turnover.
D. Cash turnover and net sales.
When reviewing a credit application, the credit manager should be most concerned with the applicant's
A. price-earnings ratio and current ratio.

B. working capital and return on equity.
C. profit margin and return on assets.
D. working capital and current ratio.
All of the following financial indicators are measures of either liquidity or activity except the
A. Accounts receivable turnover.

B. Merchandise inventory turnover.
C. Times-interest-earned ratio.
D. Average collection period in days.
Lisa, Inc.
Statement of Financial Position
December 31, 20X4
(in thousands)
20X420X3
Assets
Current assets:
Cash $ 30 $ 25
Trading securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost of market) 60 50
Prepaid items 15 20
Total Current Assets $170 $140
Long-term assets:
Long-term investments:
Available-for-sale investments $ 25 $ 20
Property, plant & equipment:
Land (at cost) 75 75
Building (net) 80 90
Equipment (net) 95 100

Intangible assets:
Patents (net) 35 17
Goodwill (net) 20 13
Total Long-Term Assets $330 $315
Total Assets $500 $455
Liabilities and Equity

Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest $ 15 $ 15
Total current liabilities $ 85 $ 55
Long-term liabilities:
Long-term Notes payable 10% due 12/31/20X6 $ 10 $ 10
Bonds payable 12% due 12/31/20X9 15 15
Total long-term debt $ 25 $ 25
Total liabilities $110 $ 80
Shareholders' Equity
Preferred stock - 5% cumulative, $100 par, nonparticipating
authorized, issued and outstanding, 1,000 shares $100 $100
Common stock - $10 par 20,000 shares authorized, 15,000
shares issued and outstanding 150 150
Additional paid-in capital - common 75 75
Retained earnings 65 50
Total Equity $390 $375
Total Liabilities & Equity $500 $455
Lisa Inc.'s acid test (quick) ratio at December 31, 20X4 was
A. 2.0
B. 1.8
C. 0.6
D. 1.1
Cornwall Corporation's net accounts receivable were $68,000 and $47,000 at the beginning and end of the year,
respectively. Cornwall's condensed Income Statement is shown below.
Sales $900,000
Operating expenses 175,000
Operating income 198,000
Income tax 79,000
Net income $119,000
Cornwall's average number of days' sales in accounts receivable (using a 360-day year) is
A. 8 days.
B. 13 days.
C. 23 days.
D. 19 days.
Borglum Corporation is considering the acquisition of one of its parts suppliers and has been reviewing the pertinent
financial statements. Specific data, shown below, has been selected from these statements for review and comparison
with industry averages.
Bond Rockland Western Industry
Total sales (millions) $4.27 $3.91 $4.86 $4.30
Net profit margin 9.55% 9.85% 10.05% 9.65%
Current ratio 1.32 2.02 1.96 1.95
Return on assets 11.0% 12.6% 11.4% 12.4%
Debt/equity ratio 62.5% 44.6% 49.6% 48.3%
Financial leverage 1.40 1.02 1.86 1.33
Borglum's objective for this acquisition is assuring a steady source of supply from a stable company. Based on the
information above, select the strategy that would fulfill Borglum's objective.
A. Borglum should not acquire any of these firms as none of them represents a good risk.
B. Acquire Rockland as both the debt/equity ratio and degree of financial leverage are below the industry average.
C. Acquire Bond as both the debt/equity ratio and degree of financial leverage exceed the industry average.
D. Acquire Western as the company has the highest net profit margin and degree of financial leverage.
Question 53 - ICMA 1603.P2.048 - Comparative Financial Statement Analysis
Select information from a company’s year-end balance sheet is shown below.

Balance Sheet
As of December 31, Year 1
Cash $ 50,000
Inventory 75,000
Property, plant and equipment, net 250,000
Total assets $495,000
Accounts payable $ 35,000

Long-term debt 100,000
Total liabilities $135,000
Common stock $300,000

Retained earnings 60,000
Total equity $360,000
Total liabilities and equity $495,000
Based on the above information, a common-size balance sheet for the company will show
A. property, plant and equipment, net at 69%.

B. accounts receivable at 24%.
C. long-term debt at 74%.
D. retained earnings at 17%.
Dedham Corporation has decided to include certain financial ratios in its year-end annual report to shareholders.
Selected information relating to its most recent fiscal year is provided below.
Cash $ 10,000
Inventory 30,000
Available-for-sale securities classified as current assets
At cost 9,000
Fair value at year end 12,000
Notes payable (due in 90 days) 25,000
Bonds payable (due in 10 years) 35,000
Dedham's quick (acid-test) ratio at year end is
A. 2.00 to 1.
B. 1.925 to 1.
C. 1.80 to 1.
D. 1.05 to 1.
A retail company has experienced rapid growth in sales during the current year. An analyst has calculated the
following ratios for this company.
Prior YearCurrent Year
Inventory Turnover 5.4 9.3
Receivables turnover 4.2 3.5
Fixed asset turnover 2.4 3.6
Quick ratio 1.5 1.2
Based on the above, the analyst may conclude that sales increased due to more
A. competitive pricing.
B. favorable credit policies.
C. stores open in current year.
D. control over inventory levels.
A company's cash ratio will decrease if the company
A. receives cash by issuing a short-term note payable.

B. purchases commercial paper.
C. sells goods for cash at a selling price lower than cost.
D. purchases materials on account.
When compared to a debt-to-assets ratio, a debt to equity ratio would
A. Be higher than the debt to assets ratio.

B. Be lower than the debt to assets ratio.
C. Be about the same as the debt to assets ratio.
D. Have no relationship at all to the debt to assets ratio.
Lancaster Inc. had net accounts receivable of $168,000 and $147,000 at the beginning and end of the year,
respectively. The company’s net income for the year was $204,000 on $1,700,000 in total sales. Cash sales were 6%
of total sales. Lancaster's average accounts receivable turnover ratio for the year is
A. 10.79.
B. 9.51.
C. 10.15.
D. 10.87.
A financial analyst with Mineral Inc. calculated the company's degree of financial leverage as 1.5. If net income before
interest increases by 5%, earnings to shareholders will increase by
A. 5.00%.
B. 1.50%.
C. 3.33%.
D. 7.50%.
Question 60 - CIA 595 IV.51 - Leverage and Coverage Ratios
Everything else being equal, a > highly leveraged firm will have > earnings per share.
A. More; Lower
B. Less; Less volatile
C. Less; Higher
D. More; Less volatile
When a balance sheet amount is related to an income statement amount in computing a ratio,
A. The income statement amount should be converted to an average for the year.
B. Comparisons with industry ratios are not meaningful.

C. The balance sheet amount should be converted to an average for the year.
D. Both amounts should be converted to market value.
Makay Corporation has decided to include certain financial ratios in its year-end annual report to shareholders.
Cash $ 10,000
Accounts receivable (end of year) 20,000
Accounts receivable (beginning of year) 24,000
Inventory (end of year) 30,000
Inventory (beginning of year) 26,000
Net credit sales for year 220,000
Makay's average inventory turnover for the year was
A. 5.0 times.
B. 4.7 times.
C. 5.4 times.
D. 7.9 times.
Payment of a trade account payable of $64,500 would
A. Increase the current ratio but the quick ratio would not be affected.
B. Increase both the current and quick ratios.
C. Increase the quick ratio but the current ratio would not be affected.
D. Decrease both the current and quick ratios.
Which one of the following statements concerning the effects of leverage on earnings before interest and taxes (EBIT)
and earnings per share (EPS) is correct?
A. For a firm using debt financing, a decrease in EBIT will result in a proportionally larger decrease in EPS.
B. A decrease in the financial leverage of a firm will increase the beta value of the firm.
C. If Firm A has a higher degree of operating leverage than Firm B, and Firm A offsets this by using less financial
leverage, then both firms will have the same variability in EBIT.
D. Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT.
The dollar value of a company’s ending inventory on its balance sheet was $500,000, $600,000, and $400,000 for
Years 1, 2, and 3, respectively. In preparing a horizontal analysis with Year 1 as the base year, the percentage
change shown for Year 3 would be
A. 20%.
B. (25%).
C. (20%).
D. 80%.
The Liabilities and Shareholders' Equity section of Mica Corporation's Statement of Financial Position is shown below.
January 1December 31
Accounts payable $ 32,000 $ 84,000
Accrued liabilities 14,000 11,000
7% bonds payable 95,000 77,000
Reserve for bond retirement 12,000 28,000
Total liabilities and shareholders' equity $608,000 $706,000
Mica's debt/equity ratio is
A. 25.1%.
B. 32.2%.
C. 33.9%.
D. 25.6%.
The owner of a chain of grocery stores has bought a large supply of mangoes and paid for the fruit with cash. This
purchase will adversely impact which one of the following?
A. Quick or acid test ratio.

B. Current ratio.
C. Working capital.
D. Price earnings ratio.
Which of the following financial ratios is used to assess the liquidity of a company?
A. Profit Margin on Sales.

B. Current Ratio.
C. Days' Sales Outstanding.
D. Total Debt to Total Assets Ratio.
Question 69 - CIA 596 IV.53 - Activity Ratios
A growing company is assessing current working capital requirements. An average of 58 days is required to convert
raw materials into finished goods and to sell them. Then an average of 32 days is required to collect on receivables. If
the average time the company takes to pay for its raw materials is 15 days after they are received, then the total cash
conversion cycle for this company is:
A. 11 days.
B. 90 days.
C. 41 days.
D. 75 days.
A financial analyst has gathered the following select financial data on three companies.
Company A Company B Company C

Total current assets €500,000 €1,250,000 €870,000
Total current liabilities €445,000 € 970,000 €620,000
On the basis of the information provided above, the financial analyst is able to conclude that
A. Company A has the highest liquidity.

B. Company B has the highest liquidity.
C. Company A and Company B both have a higher liquidity than Company C.
D. Company B and Company C both have a higher liquidity than Company A.
Using the data presented below, calculate the cost of sales for the Beta Corporation for the past year.
Current ratio 3.5
Acid test ratio 3.0
Current liabilities at year end$600,000
Beginning inventory $500,000
Inventory turnover 8.0
A. $6,400,000
B. $1,600,000
C. $3,200,000
D. $2,400,000

Cash 100,000
Inventory 400,000
Land 250,000
What will happen to the current and quick ratios if CPZ Enterprises uses cash to pay 50 percent of the accounts
payable?
A. Both ratios will increase.

B. Both ratios will decrease.
C. The current ratio will increase and the quick ratio will decrease.
D. The current ratio will decrease and the quick ratio will increase.
Garland Corporation's Income Statement for the year just ended is shown below.
Net sales $900,000
Cost of goods sold:
Inventory - beginning $125,000
Purchases 540,000
Goods available for sale 665,000
Inventory - ending 138,000
Gross profit 373,000
Operating expenses 175,000
Income from operations $198,000
Garland's average inventory turnover ratio is
A. 4.01.
B. 6.84.
C. 3.82.
D. 6.52.
Firms with high degrees of financial leverage would be best characterized as having
A. high fixed-charge coverage.

B. zero coupon bonds in their capital structures.
C. high debt-to-equity ratios.

D. low current ratios.
The ratio that measures a firm's ability to generate earnings from its resources is
A. Sales to working capital.

B. Days' sales in receivables.
C. Days' sales in inventory.
D. Asset turnover.
The following financial information is given for Anjuli Corporation (in millions of dollars).
Prior Year Current Year
Sales $10 $11
Cost of goods sold 6 7
Current Assets:
Cash 2 3
Accounts receivable 3 4
Inventory 4 5
Between the prior year and the current year, did the days' sales in inventory and days' sales in receivables for Anjuli
increase or decrease? Assume a 365-day year.
A. Days' sales in inventory decreased; days' sales in receivables increased.

B. Days' sales in inventory increased; days' sales in receivables decreased.
C. Days' sales in inventory decreased; days' sales in receivables decreased.
D. Days' sales in inventory increased; days' sales in receivables increased.
The following account balances represent the end-of-year balance sheet of a company.
Accounts payable $ 67,000
Accounts receivable (net) 115,000
Accumulated depreciation - building 298,500
Accumulated depreciation - equipment 50,500
Cash 27,500
Common stock ($10 par value) 100,000
Deferred tax liabilities - noncurrent 37,500
Equipment 136,000
Income taxes payable 70,000
Inventory 257,000
Land and building 752,000
Long-term notes payable 123,000
Trading securities 64,000
Notes payable within 1 year 54,000
Other current liabilities 22,500

Paid-in capital in excess of par 150,000
Retained earnings 403,500
The company's quick ratio is:
A. 1.44
B. 0.82
C. 0.97
D. 1.09
Given an acid test ratio of 2.0, current assets of $5,000, and inventory of $2,000, the value of current liabilities is
A. $2,500
B. $6,000
C. $3,500
D. $1,500
Since incorporating three years ago, Lawrence Inc. has estimated bad debts at a rate of 3% using the income
statement approach. During its fourth year in business, after recording the uncollectible accounts expense based on
its previous estimate, Lawrence determined that its estimate of bad debts should be increased to 4.5%. During this
fourth year, Lawrence recorded sales of $25,000,000 and had an ending accounts receivable balance of $2,000,000.
This change would decrease
A. the current year's income by $30,000 and decrease the firm's financial leverage.
B. the current year's income by $375,000 and increase the firm's degree of operating leverage.
C. both degree of operating leverage and times interest earned.
D. the current year's income by $1,125,000 and decrease the firm's degree of operating leverage.
Sylvan Corporation has the following capital structure.

Debenture bonds: $10,000,000
Preferred equity: $1,000,000
Common equity: $39,000,000
The financial leverage of Sylvan Corporation would increase as a result of:
A. Financing its future investments with a higher percentage of bonds.

B. Financing its future investments with a higher percentage of equity funds.
C. Issuing common stock and using the proceeds to retire preferred stock.
D. Maintaining the same dollar level of cash dividends as the prior year, even though earnings have increased by 7%.
Lisa, Inc.
December 31, 20X4
(in thousands)
20X420X3
Assets
Current assets:
Cash $ 30 $ 25
Prepaid items 15 20
Long-term assets:
Intangible assets:
Patents (net) 35 17

Assume net credit sales were $300,000 for 20X4. Lisa Inc.'s average collection period for 20X4, using a 360-day
year, was
A. 36 days.
B. 61 days.
C. 45 days.
D. 54 days.
The purchase of treasury stock with a firm's surplus cash
A. Increases a firm's equity.

B. Increases a firm's interest-coverage ratio.
C. Increases a firm's financial leverage.
D. Increases a firm's assets.
Norton, Inc. has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if
A. the company purchased inventory on open account.

B. a previously declared stock dividend was distributed.
C. the company wrote off an uncollectible receivable.
D. the company sold merchandise on open account that earned a normal gross margin.
Broomall Corporation has decided to include certain financial ratios in its year-end annual report to shareholders.
Cash $ 10,000
Inventory 30,000
Available-for-sale securities classified as current assets
At cost 9,000
Fair value at year end 12,000
Broomall's working capital at year end is
A. $28,000.
B. $37,000.
C. $10,000.
D. $40,000.
Assume the information below for Ramer Company, for Matson Company, and for their common industry represents a
recent year.
Industry
RamerMatson Average
Current ratio 3.50 2.80 3.00
Accounts receivable turnover 5.00 8.10 6.00
Inventory turnover 6.20 8.00 6.10
Times interest earned 9.00 12.30 10.40
Debt-to-equity ratio 0.70 0.40 0.55
Return on investment 0.15 0.12 0.15
Dividend payout ratio 0.80 0.60 0.55
Earnings per share $3.00 $2.00 --
The attitudes of both Ramer and Matson concerning risk are best explained by the
A. Current ratio and earnings per share.

B. Current ratio, accounts receivable turnover, and inventory turnover.
C. Debt/equity ratio and times interest earned.
D. Dividend payout ratio and earnings per share.
Lowell Corporation has decided to include certain financial ratios in its year-end annual report to shareholders.
Cash $ 10,000
Accounts receivable (end of year) 20,000
Accounts receivable (beginning of year) 24,000
Inventory (end of year) 30,000
Inventory (beginning of year) 26,000
Using a 365-day year, compute Lowell's accounts receivable turnover in days.
A. 36.5 days.
B. 33.2 days.
C. 39.8 days.
D. 26.1 days.
A company has a current ratio of 2.0. Cash is 20%, accounts receivable is 40%, and inventory is 40% of total current
assets. What is the acid-test ratio for the company?
A. 0.8.
B. 2.0.
C. 1.2.
D. 1.6.
Question 88 - CMA 1289 P4 Q14 - Financial Statement Analysis Basics, Liquidity Ratios
Excerpts from the statement of financial position for Landau Corporation as of September 30 of the current year are
presented as follows.
Cash $ 950,000
Accounts receivable (net) 1,675,000
Accounts payable $1,004,000
Accrued liabilities 785,000
Total current liabilities $1,789,000
The board of directors of Landau Corporation met on October 4 of the current year and declared the regular quarterly
cash dividend amounting to $750,000 ($0.60 per share). The dividend is payable on October 25 of the current year to
all shareholders of record as of October 12 of the current year.
Assume that the only transactions to affect Landau Corporation during October of the current year are the dividend
transactions and that the closing entries have been made.
Landau Corporation's current ratio was
A. Decreased by the dividend declaration and unchanged by the dividend payment.

B. Decreased by the dividend declaration and increased by the dividend payment.
C. Increased by the dividend declaration and unchanged by the dividend payment.
D. Unchanged by either the dividend declaration or the dividend payment.
Lisa, Inc.
December 31, 20X4
(in thousands)
20X420X3
Assets
Current assets:
Cash $ 30 $ 25
Prepaid items 15 20
Long-term assets:
Intangible assets:
Patents (net) 35 17

Assume net credit sales and cost of goods sold for 20X4 were $300,000 and $220,000 respectively. Lisa Inc.'s
accounts receivable turnover for 20X4 was
A. 6.7 times.
B. 5.9 times.
C. 4.9 times.
D. 8.0 times.
The use of debt in the capital structure of a firm
A. decreases its operating leverage.

B. increases its financial leverage.
C. increases its operating leverage.
D. decreases its financial leverage.
Carlisle Company currently sells 400,000 bottles of perfume each year. Each bottle costs $0.84 to produce and sells
for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends
of $2,000 per year, and a 40% tax rate. Carlisle uses the following formulas to determine the company's leverage.
Operating leverage = [Q(S − VC)] ÷ [Q(S − VC) − FC]
Financial leverage = EBIT ÷ {EBIT − I − [P / (1 − T)]}
Total leverage = Q(S − VC) ÷ {Q(S − VC) − FC − I − [P / (1 − T)]}
Where:
Q=Quantity
FC=Fixed Cost
VC=Variable Cost
S=Selling Price
I=Interest Expense
P=Preferred Dividends
T=Tax Rate
EBIT=Earnings Before Interest and Taxes
The degree of operating leverage for Carlisle Company is
A. 1.35
B. 1.78
C. 1.2
D. 2.4
Locar Corporation had net sales last year of $18,600,000 (of which 20% were installment sales). It also had an
average accounts receivable balance (including the installment receivables) of $1,380,000. Credit terms are 2/10, net
30. Based on a 360-day year, Locar’s average collection period last year was
A. 26.7 days.
B. 27.3 days.
C. 26.2 days.
D. 33.4 days.
Lisa, Inc.
December 31, 20X4
(in thousands)
20X420X3
Assets
Current assets:
Cash $ 30 $ 25

Prepaid items 15 20
Long-term assets:
Intangible assets:
Patents (net) 35 17

Assume sales and cost of goods sold for 20X4 were $300,000 and $220,000, respectively. Lisa Inc.'s inventory
turnover, using a 360-day year, was
A. 4.0 times.
B. 3.7 times.
C. 5.0 times.
D. 4.4 times.
Bisbee Corporation's abbreviated common-size income statements for Year 1's actual results and Year 2's anticipated
results are shown below.
Year 1 Year 2
Sales 100% 100%
Cost of Goods Sold 50% 50%
Selling and administrative expense 40% ?
Operating income 10% ?
Bisbee estimates that units sold will increase by 5% in Year 2 with no price increase to its customers and no
anticipated cost increases from its vendors. Assume selling and administrative expenses are 5% variable and 95%
fixed. If all predictions materialize, Bisbee should expect selling and administrative expenses in Year 2 to be
A. less than 40% of sales.

B. greater than 40%, but no more than 42% of sales.
C. greater than 42% of sales.
D. 40% of sales.
necessary.)
May 31, May 31,
20X1 20X0
20X1 Operations
Sales* $350,000

May 31, May 31,
20X1 20X0
Cash $ 20,000$ 10,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000$180,000
McKeon Company's total asset turnover for 20X1 is
A. 0.722
B. 0.805
C. 0.761
D. 0.348
Baldwin Corporation's inventory expressed as a percentage of current assets increased from 25% last July to 35%
this July. The factor that is least likely to cause this increase is that Baldwin
A. is beginning to experience high growth.

B. used a material amount of cash from selling its short-term investments to purchase land.
C. is a seasonal company with traditionally higher activity in the summer months.
D. has inventory that is becoming obsolete.
Davis Retail Inc. has total assets of $7,500,000 and a current ratio of 2.3 times before purchasing $750,000 of
merchandise on credit for resale. After this purchase, the current ratio will
A. be exactly 2.53 times.

B. remain at 2.3 times.
C. be lower than 2.3 times.
D. be higher than 2.3 times.
The following inventory and sales data are available for the current year for Volpone Company. Volpone uses a
365-day year when computing ratios.
November 30, 20X2November 30, 20X1
Net credit sales $6,205,000
Gross receivables 350,000 320,000
Inventory 960,000 780,000
Cost of goods sold 4,380,000
Volpone Company's average number of days to sell inventory for the current year is
A. 65.00 days.
B. 72.50 days.
C. 80.00 days.
D. 51.18 days.
Selected financial data for Boyd Corporation are shown below.

January 1December 31
Cash $ 48,000 $ 62,000
Accounts receivable (net) 68,000 47,000
Trading securities 42,000 35,000

Inventory 125,000 138,000
Plant & equipment (net) 325,000 424,000
Accounts payable 32,000 84,000
Accrued liabilities 14,000 11,000
Deferred taxes 15,000 9,000
Long-term bonds payable 95,000 77,000
Boyd's net income for the year was $96,000. Boyd's current ratio at the end of the year is
A. 2.71.
B. 2.97.
C. 1.56.
D. 1.71.
Question 100 - CIA 1190 IV.55 - Leverage and Coverage Ratios
Assume that a company's total debt to total assets ratio is currently 50%. It plans to purchase fixed assets either by
using borrowed funds for the purchase or by entering into an operating lease. The company's debt to asset ratio as
measured by the balance sheet will
A. Increase if the assets are purchased, and remain unchanged if the assets are leased.
B. Increase whether the assets are purchased or leased.
C. Increase if the assets are purchased, and decrease if the assets are leased.
D. Remain unchanged whether the assets are purchased or leased.

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Part 2 : Financial Statement Analysis and Liquidity Ratios

Question 1 - HOCK MP1 E21 - Activity Ratios

Question 2 - CMA 685 4.17 - Leverage and Coverage Ratios

A. The current ratio.

Question 3 - ICMA 10.P2.054 - Activity Ratios

A. Inventory turnover increased; receivables turnover decreased.

Question 4 - ICMA 10.P2.022 - Financial Statement Analysis Basics, Liquidity Ratios

A. total current assets.

Question 5 - ICMA 10.P2.027 - Financial Statement Analysis Basics, Liquidity Ratios

What is Fortune's net working capital?

CPZ Enterprises had the following account information.

The company has an operating cycle of five months.

The current ratio for CPZ Enterprises is

Question 7 - CMA 688 4.11 - Leverage and Coverage Ratios

A measure of its long-term debt-paying ability is a company's

Question 8 - ICMA 10.P2.026 - Financial Statement Analysis Basics, Liquidity Ratios

A. reduce debt-to-asset ratio.

Question 9 - CMA 695 1.1 - Leverage and Coverage Ratios

A. has higher variable costs.

Question 10 - CMA 688 4.3 - Activity Ratios

Composition of Current Assets

The 20X1 accounts receivable turnover for McKeon Company is

Question 11 - ICMA 10.P2.053 - Activity Ratios

Maydale Inc.'s financial statements show the following information.

Maydale's accounts receivable turnover ratio is

Question 12 - CMA 1293 2.13 - Activity Ratios

In computing inventory turnover, the base to use is the

Question 13 - ICMA 13.P2.004 - Leverage and Coverage Ratios

Earnings per share $ 2.35 $ 3.31

The degree of operating leverage for Arbat Inc. is

Question 14 - ICMA 10.P2.055 - Activity Ratios

Lampasso's inventory turnover ratio for the year was

Question 15 - ICMA 10.P2.058 - Activity Ratios

Question 16 - CMA 696 1.15 - Activity Ratios

Question 17 - ICMA 10.P2.036 - Financial Statement Analysis Basics, Liquidity Ratios

Question 18 - ICMA 10.P2.037 - Leverage and Coverage Ratios

The capital structure of four corporations is as follows.

Which corporation is the most highly leveraged?

Question 19 - ICMA 10.P2.048 - Leverage and Coverage Ratios

The company's debt-to-equity ratio is

Question 20 - ICMA 10.P2.028 - Financial Statement Analysis Basics, Liquidity Ratios

A. Making a payment to trade accounts payable.

A. Affects all of the answers as indicated.

Question 22 - ICMA 10.P2.034 - Financial Statement Analysis Basics, Liquidity Ratios

Question 23 - CMA 688 4.2 - Leverage and Coverage Ratios

Composition of Current Assets

Accounts receivable 100,000 70,000

McKeon Company's debt to total asset ratio for 20X1 is

Question 24 - ICMA 1603.P2.062 - Financial Statement Analysis Basics, Liquidity Ratios

A company has the following account balances.

What is the company's net working capital?

The early liquidation of a long-term note with cash affects the

A. Quick ratio to a greater degree than the current ratio.

Question 26 - CMA 688 4.15 - Activity Ratios

The days' sales in receivables ratio will be understated if the company

A. Uses average receivables in the ratio calculation.

Question 27 - ICMA 10.P2.051 - Leverage and Coverage Ratios

Question 28 - CMA 688 4.17 - Comparative Financial Statement Analysis

Landau Corporation's working capital was

A. Decreased by the dividend declaration and unchanged by the dividend payment.

Question 30 - ICMA 10.P2.066 - Activity Ratios

The assets of Moreland Corporation are presented below.