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ACC 205 Week 5 Individual Study Guide Financial Ratios PaperScholar Study Aids
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ACC 205 Week 5 Individual Study Guide Financial Ratios

ACC 205 Week 5 Individual Study Guide Financial Ratios

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  1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

Edison   Stagg     Thornton

Cash      $4,000   $2,500   $1,000

Short-term investments       3,000      2,500      2,000

Accounts receivable           2,000      2,500      3,000

Inventory                1,000      2,500      4,000

Prepaid expenses              800         800         800

Accounts payable                200         200         200

Notes payable: short-term 3,100      3,100      3,100

Accrued payables               300         300         300

Long-term liabilities          3,800      3,800      3,800

  1. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
  2. Suppose Thornton is using FIFO for inventory valuation and Edison is using LIFO. Comment on the comparability of information between these two companies.
  3. If all short-term notes payable are due on July 11 at 8 a.m., comment on each company’s ability to settle its obligation in a timely manner.

 

  1. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

19X5      19X4

Net credit sales    $832,000               $760,000

Cost of goods sold              440,000 350,000

Cash, Dec. 31      125,000 110,000

Accounts receivable, Dec. 31           180,000 140,000

Inventory, Dec. 31               70,000   50,000

Accounts payable, Dec. 31                115,000 108,000

The company is planning to borrow $300,000 via a 90-day bank loan to cover short-term operating needs.

  1. Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places.
  2. Study the ratios from part (a) and comment on the company’s ability to repay a bank loan in 90 days.
  3. Suppose that Alaska’s major line of business involves the processing and distribution of fresh and frozen fish throughout the United States. Do you have any concerns about the company’s inventory turnover ratio? Briefly discuss.

 

  1. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 19X7:

Net sales               $1,500,000

Interest expense  120,000

Income tax expense           80,000

Preferred dividends            25,000

Net income           130,000

Average assets    1,100,000

Average common stockholders’ equity           400,000

 

  1. Compute the profit margin on sales and the rates of return on assets and common stockholders’ equity, rounding calculations to two decimal places.
  2. Does the firm have positive or negative financial leverage? Briefly explain.