Finance A

October 14, 2021 (Week 3)

Prof. Tatsuo KUROGI
 Assets:
Which is correct ? Cash $600,000
Accounts receivable 900,000
Inventories 1,500,000
The current ratio is Prepaid expenses 75,000
A) 1.92 B) 1.98 Total current assets $3,075,000
Net fixed assets $5,925,000
C) 2.86 D) 2.88 Total assets $9,000,000

Liabilities:
The acid-test (quick) Accounts payable $800,000
Notes payable 700,000
ratio is Accrued taxes 50,000
A) 1.71 B) 1.67 Total current liabilities $1,550,000
Long-term debt 2,500,000
C) 1.02 D) 0.97 Owner's equity 4,950,000
Total liabilities and owner's equity $9,000,000

Question 1 2
<Question 1>
The current ratio: B
Total current assets / Total current liabilities
= 3,075,000 / 1,550,000 = 1.9838

The acid-test (quick) ratio: D

(Cash + Acct. receivable) / Total current liabilities
= (600,000 + 900,000) / 1,550,000 = 0.9677

Answer 3
The current ratio of a firm would be increased by
which of the following?

A) Land held for investment is sold for cash.

B) Equipment is purchased, financed by a long-
term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a credit basis.

Question 2 4
<Question 2> A

A) Cash increase by selling land.

B) Fixed assts and long-term debt increase.
C) No change for total current assets (offset)
D) No change for total current assets (offset)

Answer 5
Alyward, Inc. currently has $2,145,000 in current
assets and $858,000 in current liabilities.
The company’s managers want to increase the
firm’s inventory, which will be financed by a short-
term loan with the bank.
What level of additional inventory can the firm
carry without its current ratio falling below 2.0?

Group Discussion 1 6
Aylward’s target current ratio is 2.0.
Let x represent the cost of the additional
inventory financed with the short-term note.
We solve for x as follows:
2 = ($2,145,000 + x) / ($858,000 + x)
x = $429,000

Answer
High Inc. has an accounts receivable turnover ratio of 7.3.
Low Company has an accounts receivable turnover ratio of 5.
Assuming that High and Low have the same sales level, which
of the following statements is correct?

A) High's average collection period is less than Low’s.

B) Low's average collection period is less than High’s.
C) High has a higher accounts receivable balance on
average than does Low Company.
D) Low Company has (on average) a lower accounts
receivable balance than does High.

Question 3 8
<Question 3>
A) High's average collection period is less than Low’s.

annual credit sales

Accounts receivable turnover =
accounts receivable

accounts receivable accounts receivable

Days in receivables = =
daily credit sales  annual credit sales 
 
 365 

Answer 9
Septon Inc. has an average collection period of 74
days. What is the accounts receivable turnover
ratio for Septon Inc.?

A) 4.93
B) 2.47
C) 2.66
D) 1.74

Question 4 10
<Question 4> A

74 = Acct. receivable / Daily credit sales

74 / 365 = Acct. receivable / Annual credit sales
365 / 74 = Annual credit sales / Acct. receivable
4.93 = Acct. receivable turnover

Answer 11
The South African Diamond Corporation had a
gross profit margin (gross profit / sales) of 30%
and sales of $10 million last year. 78% of the sales
are on credit and the remainder are cash sales.

a. If the company’s accounts receivable are

$545,700, what is its average collection period?

b. The company’s inventory turnover is 10 times.

What is the level of its inventories?

Group Discussion 2 12
<a> 25.5 days

Average collection period

= Accounts receivable / Daily credit sales
= 545,700 / (0.78 x 10 million/365)
= 25.5

Answer 13
<b> $700, 000

Inventory turnover
= Cost of goods sold / Inventory
= 0.70 x Sales / Inventory
= 0.70 x 10 million / Inventory = 10
Inventory = 0.70 x 10 million / 10 = 700,000

Answer 14
 Balance Sheet Income Statement
Assets:
Cash $250,000 Sales (all credit) $8,000,000
Accounts receivable 450,000 Cost of goods sold (4,000,000)
Inventory 500,000 Operating expense (2,900,000)
Net fixed assets 2,100,000 Interest expense (150,000)
Total assets $3,300,000 Income taxes (380,000)
Net income $570,000
Liabilities and owners' equity:
Accounts payable $100,000
Notes payable 450,000 The operating return on total
Long-term debt 1,050,000 assets is

Owners' Equity 1,700,000

A) 55.62% B) 10.06%
Total liabilities and owner's equity $3,300,000 C) 44.74% D) 33.33%

Question 5 15
<Question 5> D

Operating profits
= 8,000,000 – 4,000,000 – 2,900,000
= 1,100,000
Operating return on total assets
= 1,100,000 / 3,300,000
= 0.3333

Answer 16
Rural Hydroponics has total equity of $560,000;
sales of $2,250,000; current assets of $700,000;
and total liabilities of $435,000. What is Rural
Hydroponics' total asset turnover?

A) 4.02
B) 3.21
C) 2.26
D) 5.51

Question 6 17
<Question 6> C

Total assets = Total liabilities + Total equity

= 435,000 + 560,000 = 995,000
Total asset turnover
= Sales / Total assets
= 2,250,000 / 995,000
= 2.2613

Answer 18