Financial Reporting - Financial Statement Ratios

Question 1

How do you calculate the asset turnover ratio when given the following?

Sales, assets, and operating income

Answer 1

Asset turnover = Sales / Average Total Assets

Question 2

What ratio uses the average number of days to convert sales into cash?

Answer 2

Day sales in accounts receivable ratio

Question 3

What is the Days Sales in Accounts Receivable ratio formula?

Answer 3

(Ending Accounts Receivable / Net Credit Sales) X 365

Question 4

How do you get net credit sales when given the following?

Ending Inventory
Ending Accounts Receivable
Gross Sales
Sales Returns

Answer 4

Gross sales - sales returns

Question 5

Residual income is calculated by multiplying the interest rate by the investment center’s invested capital.

This can be interpreted as what?

Answer 5

Opportunity costs

Question 6

What can help increase its working capital ratio?

Answer 6

Refinancing accounts payable to long-term payable.

This increases the working capital ratio, as it decreases current liabilities without affecting current assets.

Question 7

What is the current receivables calculation?

Answer 7

DSO / 365 (if not assumed) X Accounts Receivables

Question 8

How do you compare the current receivables to the projected receivables calculation amount to get the days’ sales outstanding percentage change?

Answer 8

1. Use the current receivables calculation
2. Adjust the Days Sales Outstanding to the projected number of days for the projected receivables within the current receivables calculation.
3. Subtract the project receivables - current receivables
4. Divide number 3 from the current receivables amount

Question 9

What has to happen for the accounts receivable turnover to change?

Answer 9

Net sales must be increased, or average net receivables must be decreased

Question 10

What happens when a company pledges its receivables?

Answer 10

The accounts receivable stay on the books, but they get used as collateral to be loaned out.

Question 11

What happens when a company factors its accounts receivable?

Answer 11

Similar to when a company sells receivables, which removes the accounts receivable from its balance sheet.

Question 12

What would improve the company’s accounts receivable turnover ratio?

Answer 12

Entering into a factoring agreement with a finance company

Question 13

How do you calculate a residual income target?

Answer 13

Operating income - cost of capital = residual income

Question 14

How did you calculate the cost of capital when given the following?

Revenue, liabilities, fixed assets, residual income target, cost of capital, and equity

Answer 14

Multiply the fixed assets by the cost of capital percentage

Question 15

How do you calculate operating income when given the following?

Residual income target, calculated cost of capital, revenue, liabilities, fixed assets, cost of capital, and equity.

Answer 15

Add the cost of capital with the residual income target.

Question 16

How do you determine the cost to reach a target when given the following information?

Residual income target, calculated cost of capital, revenue, liabilities, fixed assets, cost of capital, calculated operating income, and equity.

Answer 16

Revenue - calculated operating income

Question 17

What is the term that represents the residual income remaining after the cost of all capital and equity capital has been deducted?

Answer 17

Economic value-added

Question 18

What is the accounts receivable turnover formula?

Answer 18

Net credit sales / average accounts receivable

Question 19

When given the current ratio, quick ratio, and current liabilities.

How do you calculate the inventory and prepaid expenses?

Answer 19

Multiply the current liabilities by the current ratio assets portion (the first number) to get the current assets.

Then subtract the current assets - current liabilities to get the total inventory and prepaid expenses.

Question 20

When given the following:

Beginning inventory, purchases, and ending inventory.

How do you calculate inventory turnover?

Answer 20

1. Calculate the COGS = Beg inv + purchases - end inv
2. Calculate the average inventory amount = (beg inv + end inv) / 2
3. Divide the COGS by the average inventory amount

Question 21

How do you calculate residual income when given the following?

Operating income, total assets, required rate of return

Answer 21

1. Calculate the rate of return = Take the total assets and multiply it by the required rate of return.
2. Subtract the rate of return - operating income

Question 22

How do you calculate quick ratio?

Answer 22

(Cash + marketable securities + trade receivables) / current liabilities

Question 23

How do you calculate the quick ratio?

When given the following:
Inventories, trade receivables, cash and bank, prepaid expenses, AFS, and current liabilities.

Answer 23

(Cash and bank + trade receivables + AFS) / current liabilities

Question 24

What is the Current Ratio formula?

Answer 24

Current Assets / Current Liabilities

Question 25

If the current ratio is higher than prior periods is this more risk or less risk? Why?

Answer 25

Lower risk since there are more current assets to cover the current liabilities.

Question 26

What can you compare the current ratio to see if it is more risky or less risky?

Answer 26

Prior periods, trend analysis, or industry standards

Question 27

What is the debt to equity ratio formula?

Answer 27

Total Liabilities / Total Equity

Question 28

What does the debt to equity ratio tell you?

Answer 28

How a company is raising a capital either through more debt or equity.

Question 29

A higher debt to equity ratio means?

Answer 29

A company is more risky since you have more debt than equity financing but have a higher return on equity (since less sharing with shareholders). With the hope of getting bigger returns and not having to split it amongst more shareholders.

Question 30

A lower debt to equity ratio means?

Answer 30

Less risky but have to share profit with more shareholders leading to a lower return on equity.

Question 31

What does the debt to equity ratio measure?

Answer 31

Solvency by looking at the capital structure of a company. Does it have more debt or equity financing? Leading to a higher or lower return on equity and the risk maybe more (higher debt/numerator) or less risk (higher equity/denominator) within the LT.

Question 32

What is the times interest earned ratio formula?

Answer 32

EBIT / Interest Expense

Question 33

What does the times interest earned ratio measure?

Answer 33

The long term risk of paying interest coverage.

Question 34

If the time interest earned ratio is higher is this more or less risky?

Answer 34

Less risky since the company has more earnings to cover more interest expense

Question 35

What is the Inventory Turnover/days inventory Ratio Formula?

Answer 35

Inventory Turnover = COGS / Average Inventory Days in inventory = Ending Inventory / (COGS / 365)

Question 36

What does the inventory turnover/days inventory measure?

Answer 36

How many times inventory gets turned over (sold) within a period and turn into cash.

Question 37

A higher inventory turnover ratio less risky or more risky?

Answer 37

Need to compare this to the industry standard and most times you want to turn it over quickly but it should be greater than or equal to the industry standard to determine risk

Question 38

A higher days in inventory ratio less risky or more risky?

Answer 38

Need to compare this to the industry standard and most times you want to turn it over quickly but it should be less than or equal to the industry standard to determine risk

Question 39

What is the accounts receivable turnover/days in sales in accounts receivable formula?

Answer 39

Accounts receivable turnover = Net Sales / Net Average Accounts Receivables Days Sales in Accounts Receivables = Net Ending Accounts Receivables / (Net Sales / 365)

Question 40

What does the accounts receivable turnover/days in sales in accounts receivable measure?

Answer 40

Amount of days it takes to calculate the collection of cash from accounts receivables.

Question 41

A higher accounts receivable turnover is considered less risky or more risky?

Answer 41

Need to compare this to the industry standard and most times you want to turn it over quickly but it should be greater than or equal to the industry standard to determine risk

Question 42

A lower days in sales in accounts receivable is considered less risky or more risky?

Answer 42

Need to compare this to the industry standard and most times you want to turn it over quickly but it should be less than or equal to the industry standard to determine risk

Question 43

What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?

Answer 43

ROI may lead to rejecting projects that yield positive cash flows.

Question 44

What is a question asking for when stating to solve how many time inventory turnsover within a year and gives the inventory conversion period and the amount of days per year?

Answer 44

Inventory turnover amount = days in a year / conversion period

Question 45

If a company uses gross profit method to determine COGS and inventory levels on an interim basis and miscalculated its cost in one of the product lines and is using an overstated gross profit rate for the year, What impact would this have on the company?

Answer 45

Could be misleading creditors/lenders into believing they have more collateral for a loan than it actually does.

Question 46

When given revenue of 25M, liabilities of 3M, fixed assets of 7M, equity of 5.5M, cost of capital percentage of 12%, and a residual income target of 1.5M, how do you find the cost needed to reach the target?

Answer 46

1. Take the cost of capital percentage and multiply it by the fixed assets. 840K = 7,000,000 X 12% 2. Add together the residual income and the fixed asset cost of capital percentage amount. 2.340M = 840K + 1.5M 3. Subtract number #2 from the revenue amount. 25M - 2.340M = 22.660M

Question 47

When given the cash, AR, Inventory, AP, ST Payables, LT Payables, how do you calculate the quick (acid) ratio?

Answer 47

(Cash + AR) / (AP + ST Payables)

Question 48

When given the following: asset turnover, profit margin on sales, how do you calculate percentage return on assets?

Answer 48

Return on assets = Asset Turnover X Profit margin on Sales.

Question 49

Using the information below, calculate Interest Coverage Ratio for a company for 2018. Debt of the company: $800,000 Interest rate: 7% p.a. Total Equity: $5,000,000 Earnings before interest and taxes: $144,500 Total fixed assets: $3,550,400

Answer 49

1. Interest Expense = Debt of the company X Interest Rate. 56,000 = 800,000 X 7% 2. EBIT / Interest Expense 2.58 = 144,500 / 56,000

Question 50

What is the inventory turnover when given the following: Beginning inventory 17,000 Purchases 56,000 Ending inventory 13,000

Answer 50

1. COGS = Beginning Inventory + Purchases - Ending Inventory 60,000 = 17,000 + 56,000 - 13,000 2. Average Inventory = (Beginning inventory + Ending Inventory) / 2 15,000 = (17,000 +13,000) / 2 3. Inventory turnover = COGS / Average Inventory 4 = 60,000 / 15,000

Question 51

How do you calculate ROI when given the following: Operating profit of 40k and investment amount 250k?

Answer 51

ROI = Operating profit / investment amount 16% = 40,000 / 250,000

Question 52

How do you calculate sales for the year? When given the following: Operating income of 5M Net Assets book beginning value of 22M Net Assets ending book value of 18M 25% ROI for the year Investment turnover of 2.5

Answer 52

1. Average net assets = (Net book beginning value + net ending book value) / 2 20,000,000 = (22,000,000 + 18,000,000) / 2 2. Sales for the year = Average net assets X Investment turnover 50,000,000 = 20,000,000 X 2.5

Question 53

What does a higher PE indicate opposed to a low PE?

Answer 53

Investors are willing to pay more for each dollar of current earnings in hope of earnings growing (growth) significantly in the future.

Question 54

What ratio is used to measure a company's profitability?

Answer 54

Gross margin ratio

Question 55

How do you calculate the number of days to sell when given the following? Beginning Inventory 400K Ending Inventory 260K Cost of Goods Sold 2.450M Trade Receivables (AVG) 200K

Answer 55

1. Number of days to sell = (Ending Inventory / COGS) X 365 38.73 = (260,000 / 2,450,000) X 365

Question 56

What would cause the current ratio to increase?

Answer 56

Increase in current assets or decrease in current liability

Question 57

When given the following: Sales total of 300k, beginning accounts receivable of 20k, and ending accounts receivable of 30k. How do you calculate accounts receivable turnover?

Answer 57

1. Average accounts receivable = (Beg AR + End AR) / 2 25,000 = (20,000 + 30,000) / 2 2. Sales Total / Average AR 12 = 300,000 / 25,000

Question 58

When given the following: Sales for the last year of 6,500,750 Common stock outstanding of 500k Current share price of $70 EPS Expected $2.2 Calculate the price to sales?

Answer 58

1. Sales per share = Sales for the last year / Common stock outstanding 13.0015 = 6,500,750 / 500,000 2. Price to sales = Current share price / Sales per share 5.38 = 70 / 13.0015

Question 59

Calculate the average number of days required to convert sales into cash, when given the following? Ending Inventory 250k Ending AR 360K Gross Sales 2.750M Sales Returns 340K

Answer 59

1. Calculate Net Sales = Gross Sales - Sales Returns 2,410,000 = 2,750,000 - 340,000 2. Average number of days to convert sales to cash = (Ending AR / Net Sales) X 365 54.52 = (360,000 / 2,410,000) X 365

Question 60

When given the following: 10% Return on assets Asset Turnover 4:1 Calculate profit margin on sales?

Answer 60

Profit margin on sales = Return on assets / asset turnover portion 2.5 = 10% / 4

Question 61

If a fixed asset is purchased on the last day of the year how does this affect Return of Investment (ROI)/Residual Income (RI)?

Answer 61

Decreases both since a return or residual income could not be produced that fast.

Question 62

Calculate the net profit earned when given the following? Profit margin 6.75% Asset turnover ratio of 3 Beginning Balance of Assets 40K Ending balance of Equity of 35K Ending balance of liabilities of 25K

Answer 62

1. Total Ending Assets = End Bal Equity + End Bal Liabilities 60,000 = 35,000 + 25,000 2. Average Assets = (Beginning Assets + Ending Assets) / 2 50,000 = (40,000 + 60,000) / 2 3. Sales = Average Assets X Asset Turnover Ratio 150,000 = 50,000 X 3 4. Net Profit Earned = Sales X Profit Margin 10,125 = 150,000 X 6.75

Question 63

Calculate the return of investment and residual income , when given the following? Revenues of 80K COGS of 45K G&A Expenses 15K Required rate of return of 18% Equipment Value of 100K

Answer 63

ROI: 1. Net Income = Revenue - COGS - G&A Expenses 20,000 = 80,000 - 45,000 - 15,000 2. ROI = Net Income / Equipment Value 20% = 20,000 / 100,000 RI: 1. Required equipment rate of return = Equipment Value X Required Rate of Return 18,000 = 100,000 X 18% 2. Residual Income = Net income - required equipment rate of return 2,000 = 20,000 - 18,000

Question 64

Calculate the percentage change receivables when given the following? Annual Sales of 4M Current Days Sales Outstanding 40 days Project Days Sales Outstanding 30 days with increase of 20% in annual sales 365 days in the year

Answer 64

1. Current receivable amount = (Current Days Sales Outstanding / 365) X Annual Sales 438,356.16 = (40 / 365) X 4,000,000 2. Project Annual Sales = Annual Sales X Projected Increase in Annual Sales 4,800,000 = 4,000,000 + (4,000,000 X 20%) 3. Projected Receivable amount = (Projected Days Sales Outstanding / 365) X Projected Annual Sales 394,520.55 = (30 / 365) X 4,800,000 4. Change of Receivables = Current Receivable Amount -Projected Receivable amount 43,835.61 = 438,356.16 - 394,520.55 5. Percent change receivables = Change of Receivables / Current receivable amount 0.1000009 = 43,835.61 / 438356.16 Increase of 10%

Question 65

Calculate total inventory when given the following? Current Assets 5.5M Current Ratio 2.0 Quick Ratio 1.5

Answer 65

1. Total Current Assets = Current Assets X Quick Ratio (Asset Portion) 8,250,000 = 5,500,000 X 1.5 2. Total Current Assets / Current Ratio (Asset Portion) 4,125,000 = 8,250,00 / 2 3. Total Inventory = Current Assets - Number 2 1,325,000 = 5,500,000 - 4,125,000

Question 66

Calculate the return on investment when given the following? Sales of 311,000 Variable cost 250,000 Traceable Fixed Costs 50,000 Average Invested Capital 40,000 Imputed Interest Rate 10%

Answer 66

1. Net Income = Sales - variable costs - traceable fixed costs 11,000 = 311,000 - 250,000 - 50,000 2. Return on Investment = Net Income / Average Invested Capital 27.50% = 11,000 / 40,000

Question 67

Wexford Co. has a subunit that reported the following data for year 1: Asset (Investment) Turnover 1.5 times Sales $750,000 Return on Sales 8% The imputed interest rate is 12%. What is the division residual income for year 1?

Answer 67

ROS = 60,000 = 750,000 X .08 Interest Charge = 500,000 = 750,000 / 1.5 Interest Charge = 60,000 = 500,000 * 12% 0 = 60,000 - 60,000

Question 68

Vested, Inc. made some changes in operations and provided the following information: Year 2 Year 3 Operating revenues 900,000 1,100,000 Operating expenses 650,000 700,000 Operating assets 1,200,000 2,000,000 What percentage represents the return on investment for year 3?

Answer 68

400,000 = 1,100,000 - 700,000 1,600,000 = (1,200,000 + 2,000,000) / 2 25% = 400,000 / 1,600,000

Question 69

A company uses its fixed assets of $1,000,000 at 95% capacity to generate sales of $2,000,000. The company wishes to generate sales of $3,000,000. What amount of additional fixed assets must be acquired, assuming that all fixed assets will operate at maximum capacity?

Answer 69

950,000 X ________ ____ 2,000,000 3,000,000 2,850,000,000,000 / 2,000,000 = 1,425,0001 425,000 = 1,425,000 - 1,000,000

Question 70

The quick (acid-test) ratio formula 0is

Answer 70

cash + marketable securities + net receivables / by (including AP) current liabilities

Question 71

Wexford Co. has a subunit that reported the following data for year 1: Asset (Investment) Turnover 1.5 times Sales $750,000 Return on Sales 8% The imputed interest rate is 12%. What is the division residual income for year 1?

Answer 71

Net operating income = Return on Sales = 750,000 X 0.08 = 60,000 750,000 / 1.5 = 500,000 Required Income = 500,000 X .12 = 60,000 60,000 - 60,000 = 0