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Topic: Information from cash flow to assess credit risk
[QUESTION]
87. Which of the following factors does not negatively impact operating cash
flows?
a. Accounts receivable are increasing.
b. Inventories are increasing.
c. Operating costs are increasing faster than sales.
d. Sales are increasing faster than operating costs.
88. Debt financing
a. is always a better choice than equity financing because of the tax deductibility of interest
expense.
b. is only used by emerging growth companies with no access to equity capital.
c. is one option available to both established and emerging companies.
d. is only used by established growth companies because they are able to secure a low interest
rate .
89. Financial ratio, percentage, and trend comparisons can be distorted by all of the following
except
a. the presence of nonrecurring items among the firms being analyzed.
b. aggressive revenue recognition practices.
c. the timing of asset purchases.
d. accounting for similar economic fundamentals in similar fashion.
90. With respect to financial ratios:
a. There may be accounting distortions which require the analyst to get "behind the
numbers".
b. There is only one correct way to compute many financial ratios.
c. Analysts make adjustments in computing financial ratios only for industry
practice.
d. Financial ratios give analysts the answers they are searching for.
91. Which of the following does not properly describe the Altman Z-score?
a. The Z-score is a multiple discriminant analysis using five financial ratios to
estimate default risk.
b. The Z-score was originally designed only for publicly traded manufacturing firms.
c. Each ratio has its own unique weight in calculating the final score.
d. A high score is an indication of default risk.
92. Which of the following actions is not an option for the lender when the borrower
is in default?
a. Petition a court to judge the borrower insolvent.
b. Adjust the loan payment schedule to better suit the company’s anticipated
operating cash flows.
c. Modify the payment schedule in exchange for an increased interest rate or
additional collateral, such as receivables, inventory, or equipment.
d. Contact the borrower’s customers and collect their receivables..
Essay and Computational Questions
[QUESTION]
93. Panera Bread Company is a national bakery-cafe concept with 1,380 Company-owned and
franchise-operated bakery-cafe locations in 40 states and in Ontario, Canada. The company has
grown from serving approximately 60 customers a day at its first bakery-cafe to currently serving
nearly six million customers a week system-wide, becoming one of the largest food service
companies in the United States. Sara Lee Corporation is a global manufacturer and marketer of
high-quality, brand-name products for consumers throughout the world focused primarily on the
meats, bakery and beverage categories. Selected financial information about each company
follows:
Sara Lee
Panera Bread
Sales
$10,793 million
$1,353.5 million
Net Income
$527 million
$86.8 million
Return on Assets (ROA)
8.32%
11.55%
Profit margin
7.05%
6.45%
Asset turnover
1.18
1.79
Required:
a. Why is Sara Lee less profitable than Panera Bread?
b. Return on assets and return on sales in the bakery industry are 4.85% and 8.16%, respectively.
How do these two companies compare to their industry and what might explain any noted
differences?
94. Selected data of the Peninsula Company follow:
As of December 31
Balance Sheet Data
2019
2018
Accounts receivable
$671,000
$642,000
Allowance for doubtful accounts
31,000
22,000
Net accounts receivable
$640,000
$620,000
Inventories—lower of cost or market
$542,500
$642,500
Year Ended December 31
Income Statement Data
2019
2018
Net credit sales
$3,150,000
$3,000,000
Net cash sales
800,000
600,000
Net sales
$3,950,000
$3,600,000
Cost of goods sold
$2,370,000
$2,160,000
Selling, general, and administrative expenses
475,000
350,000
Other
150,000
125,000
Total operating expenses
$2,995,000
$2,635,000
Net income
$955,000
$965,000
Required:
a. What is the accounts receivable turnover for 2019?
b. What is the inventory turnover for 2019?
95. Selected information taken from the 2019 annual report of Aardvark Company follows.
During 2019, the company had no nonoperating or nonrecurring items included in income and
had no outstanding preferred stock.
($ in millions)
2019
2018
Sales
$19,903
$18,781
Interest expense
130
169
Net income
1,153
1,088
Total assets
12,673
12,461
Dividends
(153)
(131)
Total stockholders’ equity
$4,288
$4,007
Assumed tax rate
35%
35%
Industry ROA
7.32%
Industry operating profit margin
6.1%
Required:
a. For 2019, calculate: ROA, ROCE, operating profit margin, and asset turnover. Round your
percentage answers to one decimal place. For example, .1234 = 12.3%.
b. Based on the industry data provided, does Aardvark appear to have a competitive advantage
(briefly explain your answer)? If so, what strategy is the firm apparently following?
[QUESTION]
96. In comparison of 2019 to 2018 performance, Weir Company’s inventory turnover decreased
substantially, although sales and inventory amounts were essentially unchanged.
Required:
Which of the following statements best explains the decreased inventory turnover ratio? Explain
your answer choice.
a. Cost of goods sold increased.
b. Gross profit percentage increased.
c. Accounts receivable turnover decreased.
d. Total asset turnover decreased.
97. On January 1, 2018 Creek Company’s beginning inventory was $500,000. During 2018 the
company purchased $2,400,000 of additional inventory, and on December 31, 2018 Creek’s
ending inventory was $300,000.
Required:
What was Creek’s inventory turnover for 2018?
98. Rome Company’s net accounts receivable was $200,000 at December 31, 2018 and
$350,000 at December 31, 2019. Net cash sales for 2019 were $250,000. The accounts
receivable turnover for 2019 was 8.0, and this turnover figure was computed from net credit
sales for the year.
Required:
What were Rome’s total net sales for 2019?
Topic: Financial ratios to assess liquidity
[QUESTION]
99. Crue Company’s merchandise inventory and other related accounts for 2019 follow:
Sales
$3,937,500
Cost of goods sold
2,756,250
Merchandise inventory:
Beginning of year
750,000
End of year
825,000
Required:
Calculate Crue’s inventory turnover during 2019 assuming that the merchandise inventory
buildup was relatively constant during the year.
[QUESTION]
100. Selected information taken from the accounting records of Rigor Company follows:
Net accounts receivable at December 31, 2018
$800,000
Net accounts receivable at December 31, 2019
$900,000
Accounts receivable turnover
7 to 1
Inventories at December 31, 2018
$1,000,000
Inventories at December 31, 2019
$1,200,000
Inventory turnover
3 to 1
Required:
a. What was Rigor’s gross margin for 2019?
b. Suppose there are 360 business days in the year. What was the number of days’ sales
outstanding in average receivables and the number of days’ sales outstanding in average
inventories for 2019, respectively?
[QUESTION]
101. Jones Corporation wrote off $150,000 of obsolete inventory at December 31, 2018.
Required:
Describe the effect of this write-off on the company’s 2018 current and quick ratios.
102. Vince Corporation has current assets of $300,000 and current liabilities of $175,000.
Required:
Compute the effect of each of the following transactions on Vince’s current ratio:
a. Refinanced a $50,000 long-term mortgage with a short-term note.
b. Purchasing $80,000 of merchandise inventory with short-term accounts payable.
c. Paying $30,000 of short-term accounts payable.
d. Collecting $40,000 of short-term accounts receivable.
[QUESTION]
103. The following data were taken from the financial records of Happy Corporation for 2018:
Sales
$3,600,000
Bond interest expense
100,000
Income taxes
700,000
Net income
900,000
Required:
How many times was bond interest covered in 2018?
