Exam 4: Financial Analysis-Sizing up Firm Performance

Lorna Dome, Inc. has an annual interest expense of $30,000. Lorna Dome's times-interest-earned ratio is 4.2. What is Lorna Dome's operating income?

The focus of DuPont Analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments.

If a company's average collection period is higher than the industry average, then the company might be:

Paper Clip Office Supply had $24,000,000 in sales last year. Its total asset turnover was 3.0. Interest expense was $100,000 (5% on its $2,000,000 of debt). The company is financed entirely with debt and common equity. What is Paper Clip's debt ratio?

Ratios are used to standardize financial information.

Snype, Inc. has an accounts receivable turnover ratio of 7.3. Stork Company has an accounts receivable turnover ratio of 5.0. Which of the following statements is correct?

Which of the following parties would perform an external financial analysis?

If Challenge Corporation has sales of $2 million per year (all credit) and an average collection period of 35 days, what is its average amount of accounts receivable?

Which of the following parties would perform an internal financial analysis?

GAAP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of $1,855,062, and a net profit margin of 2.9%. What is GAAP's return on equity? Round to the nearest 0.1%.

Which of the following statements is true?

The debt ratio is a measure of a firm's

On a common size balance sheet, total assets are equal to 100%.

Baker & Co. has applied for a loan from the Trust Us Bank in order to invest in several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. to the industry. The following are the financial statements given to Trust Us Bank: Balance Sheet 12/31/15 12/31/16 Cash $305 270 Accounts receivable 275 290 Inventory 600 580 Current assets 1,180 1,140 Plant and equipment 1,700 1,940 Less: acc depr (500) (600) Net plant and equipment 1,200 1,340 Total assets $2,380 $2,480 Liabilities and Owners' Equity Accounts payable $150 $200 Notes payable 125 0 Current liabilities 275 200 Bonds 500 500 Owners' equity Common stock 165 305 Paid-in-capital 775 775 Retained earnings 665 700 Total owners' equity 1,605 1,780 Total liabilities and owners' equity $2,380 $2,480 Income Statement Sales (100% credit) $1,100 $1,330 Cost of goods sold 600 760 Gross profit 500 570 Operating expenses 20 30 Depreciation 160 200 Net operating income 320 340 Interest expense 64 57 Net income before taxes 256 283 Taxes 87 96 Net income $169 $187 a. What are the firm's financial strengths and weaknesses? b. Should the bank make the loan? Why or why not?

Which of the following is NOT a component of return on assets (ROA)?

If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?

Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of $275,000, which consist strictly of notes payable. The firm's operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable. How much is the firm's times-interest-earned?

Which of the following is a limitation related to the usage of ratios when reviewing a firm's performance?

Baker & Co. has applied for a loan from the Trust Us Bank in order to invest in several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. to the industry. The following are the financial statements given to Trust Us Bank: Balance Sheet 12/31/15 12/31/16 Cash $305 270 Accounts receivable 275 290 Inventory 600 580 Current assets 1,180 1,140 Plant and equipment 1,700 1,940 Less: acc depr (500) (600) Net plant and equipment 1,200 1,340 Total assets $2,380 $2,480 Liabilities and Owners' Equity Accounts payable $150 $200 Notes payable 125 0 Current liabilities 275 200 Bonds 500 500 Owners' equity Common stock 165 305 Paid-in-capital 775 775 Retained earnings 665 700 Total owners' equity 1,605 1,780 Total liabilities and owners' equity $2,380 $2,480 Income Statement Sales (100% credit) $1,100 $1,330 Cost of goods sold 600 760 Gross profit 500 570 Operating expenses 20 30 Depreciation 160 200 Net operating income 320 340 Interest expense 64 57 Net income before taxes 256 283 Taxes 87 96 Net income $169 $187 Compute the following ratios: 2015 2016 Industry Norms Current ratio 5.0 Acid test ratio 3.0 Inventory turnover 2.2 Average collection period 90 days Debt ratio .33 Times interest earned 7.0 Total asset turnover .75 Fixed asset turnover 1.0 Operating profit margin 20% Net profit margin 12% Return on total assets 9.00% Return on equity 10.43%

Financial ratios can highlight a firm's financial performance with regard to liquidity, solvency, and profitability.