04 REO HO-MAS FS Analysis Consultation HO
04 REO HO-MAS FS Analysis Consultation HO
04 REO HO-MAS FS Analysis Consultation HO
04
ILLUSTRATION
A company had $500,000 of sales for the year just ended and is projecting sales of $600,000 for the coming
year. For every $1 increase in sales, 38 cents of additional financing is required for the purchase of additional assets. The
projected profit margin is 20%, and 25% of profits will be retained for reinvestment in the company. What is the amount of
additional external financing needed by the company in the coming year?
DRILLS
1. 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.
2. 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.
3. Markowitz Company increased its allowance for uncollectible accounts. This adjustment will
A. reduce debt-to-asset ratio. C. increase the acid test ratio
B. reduce the current ratio. D. increase working capital.
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5. 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.
6. 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.
7. 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. C. Decreases the quick ratio.
B. Decreases the current ratio. D. Decreases net working capital.
9. Stock options are frequently provided to officers of companies. Stock options that are exercised improve
A. The total asset turnover. C. The ownership interest of existing stockholders.
B. The debt-to-equity ratio. D. Basic earnings per share.
10. Ray Corporation has long-term debt of P1,200,000 and equity of P1,000,000. 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 new bonds. C. Issuing rights to purchase new common stock.
B. Paying a dividend on its common stock. D. Paying a stock dividend to the existing shareholders.
11. 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.
12. 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. C. Reduction of days' sales outstanding of accounts receivable.
B. Increase in the level of inventory held. D. Faster settlement of accounts payable
13. When reviewing a credit application, the credit manager should be most concerned with the applicant's
A. price-earnings ratio and current ratio. C. working capital and return on equity.
B. profit margin and return on assets. D. working capital and current ratio.
14. All of the following financial indicators are measures of either liquidity or activity except the
A. Accounts receivable turnover. C. Merchandise inventory turnover.
B. Times-interest-earned ratio. D. Average collection period in days.
17. 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.
18. Firms with high degrees of financial leverage would be best characterized as having
A. high fixed-charge coverage. C. zero coupon bonds in their capital structures.
B. high debt-to-equity ratios. D. low current ratios.
21. 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.