Ratios

1. Based on the following financial information, which best describes the company's liquidity and quality of its current assets over the past three years?

Liquidity is trending downward as shown by the declining current and quick ratios. The ratios would be even lower were it not for the 10-day slowdown of the collection period.

While the company’s quick ratio and working capital indicate its liquidity is improving, a substantial part of the improvement is the direct result of the 10-day slowdown in the collection period. Until we know what caused the slowdown, the company’s liquidity is unclear and its asset quality may actually be deteriorating.

Liquidity has doubled as shown by the doubling of working capital. In fact, it may have more than doubled because inventory is reported at a lower value due to a 15-day shortening of the holding period.

Liquidity is declining as shown by the steady increase in the company’s reliance on inventory to cover current liabilities. This, coupled with the decreasing amount of inventory due to a 15-day shortening of the holding period, indicates even less liquidity.

Question 2: What is the trend in the EBITDA-to-total-debt-service and Funded debt-to-EBITDA ratios for the years 20Y2 and 20Y3?

Company Revolutionary Designs, Inc.

EBITDA-to-Total-debt-service increased from 0.3 to 0.4 and Funded-debt-to-EBITDA decreased from 3.6 to 4.1.

EBITDA-to-Total-debt-service increased slightly from 0.2 to 0.3, but Funded-debt-to-EBITDA weakened from 4.4 to 3.7.

EBITDA-to-Total-debt-service increased from 2.8 to 3.1 and Funded-debt-to-EBITDA decreased from 4.4 to 3.7.

EBITDA-to-Total-debt-service strengthened, increasing from 2.8 to 3.1, but Funded-debt-to-EBITDA weakened, decreasing from 3.6 to 3.1.

The current portion of a company's balance sheets for the past three years are as follows:

question 3:Which of the following best describes the company's liquidity over the past three years?

Liquidity indicators showed improvement as evidenced by lower current and quick ratios in 20Y3.

Liquidity indicators deteriorated in each of the three years as evidenced by the consecutive increases in both the current and quick ratios.

Liquidity indicators were relatively stable from 20Y1 to 20Y2 but then deteriorated in 20Y3 when both the current and quick ratios declined.

Liquidity indicators were mixed with the quick ratio improving and the current ratio declining over the three year period.

Three years of balance sheets for a very profitable furniture manufacturer at its seasonal low point of accounts receivable and inventory are as follows:

question 4:Which of the following most accurately describes the company's capital structure?

Leverage is deteriorating, and long-term debt would be more appropriate than short-term notes payable since the company is at its seasonal low point.

Leverage is improving, and long-term debt would be more appropriate than short-term notes payable since the company is at its seasonal low point.

Leverage is improving, and the breakdown of short- and long-term debt is about right.

Leverage is deteriorating, and the breakdown of short- and long-term debt is about right.

Question 5:What was the company’s pretax return on equity in 20Y3?

Company Muebles Mexicanos

61.80%

48.70%

108.90%

41.00%

Question 6: Which of the following had a favorable impact on Muebles Mexicanos’ gross profit margin in the most recent year?

Higher selling prices

Cheaper raw materials

Better efficiencies

Higher regional unemployment

Question 7: A company's income statements for the past three years are as follows:

: Which of the following best describes the company's profit margin performance?

The company’s gross profit margin, operating profit margin and net profit margin all trended downward over the three year period.

All profit margins declined in 20Y2. Gross profit margin improved substantially in 20Y3, but the net profit margin only partially recovered.

Gross profit margin and operating profit margin both increased in 20Y2 and 20Y3.

Gross profit margin, operating profit margin and net profit margin all declined in 20Y2 and then fully recovered in 20Y3.

Question 8: The company’s leverage is steadily decreasing. Which of the following is the best explanation?

The company is paying down its long term debt by $400,000 per year while a portion of net income is being retained.

The company’s gross profit margin is steadily increasing and so is the net profit margin.

The company’s total liabilities are steadily decreasing, and net income is steadily increasing.

Most of the liabilities that are increasing are current, and they don’t affect the leverage calculation.

Question 9--In 20Y2, most of Light Touch’s profit margins declined; in 20Y3, they leveled off. Company management expects those same margins to return to 20Y1 levels in 20Y4. How realistic is that expectation?

Company

Light Touch

The company’s high income tax rate makes it quite unlikely that the expectation will be realized.

Light Touch’s steadily improving gross profit margin makes it quite likely that the expectation will be realized.

The company’s operating profit margin has leveled off, indicating the company should be able to fulfill its expectations.

Light Touch’s operating expenses are growing faster than sales. The company will need to control those costs better in order to meet its expectations.

Question 10 Review the following year end financial statement excerpts to answer the question below.

Which of the following best describes the company's inventory over the past three years?

Inventory days on hand was stable in 20Y2 and slower in 20Y3.

Inventory days on hand improved in 20Y2 and lengthened slightly in 20Y3.

Inventory days on hand was stable in all three years.

Inventory days on had improved in all three years.