Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
51. The current ratio for an industry is 2.4. Data for a firm in the industry is presented below:
| As on December 31 | £ ‘000s |
| cash | 120 |
| Accounts receivable | 400 |
| Inventory | 1400 |
| Accounts payable | 350 |
| Taxes payable | 250 |
| Installment loan payable, due in three equal annual payments on June 30. | 600 |
As compared to the industry, the company is:
- Option : A
- Explanation : Current ratio = Current assets ÷ Current liabilities
Current ratio = 2.4
This is the same as the current ratio of the industry. Hence we can say that the company is as liquid as the industry.
52. The following information (in millions) for a company is available:
| 2013 | 2012 | |
| Short-term borrowings | $150 | $152 |
| Current portion of long-term interest bearing debt | 200 | 195 |
| Long-term interest bearing debt | 1,200 | 1,150 |
| Total shareholders’ equity | 2,580 | 2,400 |
| EBIT | 362.5 | 325 |
| Interest payments | 75 | 62 |
| Operating lease payments | 30 | 34 |
What is the most appropriate conclusion an analyst can make about the
solvency of the company? Solvency has:
solvency of the company? Solvency has:
- Option : A
- Explanation : The debt–equity ratio decreased, thereby improving solvency; the fixed charge ratio remained the same. Fixed charge coverage ratio = (EBIT + Lease payments) / (Interest payments + Lease payment) Fixed charge coverage ratio 2013 = (362.5 + 30) / (75 + 30) = 3.74 Fixed charge coverage ratio 2012 = (325 + 34) / (62 + 34) = 3.74 Debt-to-equity ratio 2013 = (Total debt) / Equity Debt-to-equity ratio 2013 = (150 + 200 + 1200) / 2580 = 60.0% Debt-to-equity ratio 2012 = (152 + 195 + 1150) / 2400 = 62.4%.
| 2013 | 2012 | |
| Current Assets | ||
| Cash & investments | $150,250 | $135,000 |
| Accounts receivable | 200,000 | 180,200 |
| Inventories | 205,000 | 150,800 |
| Total current assets | $555,250 | $466,000 |
| Current Liabilities | ||
| Accounts payable | $150,000 | $125,000 |
| Other current liabilities | $50,000 | $50,000 |
| Total current liabilities | $500,000 | $75,000 |
The company operates in an industry in which suppliers offer terms of 2/10, net 30. The payables turnover for the average company in the industry is 8.5 times. Which of the following statements is most accurate? In 2013, the company on average:
- Option : C
- Explanation : Purchases = COGS + Ending inventory – Beginning inventory Purchases = 1250000 + 205000 – 150800 = 1304200 Payables Turnover = Purchases ÷ Average payables Payables Turnover = 1304200 ÷ (1/2 x (150000 + 125000)) = 9.5 Days Payables = 365 / 9.5 = 38.4 The firm’s days in payables is 38.5 days; therefore, it appears the firm does not normally take supplier-provided discounts (paying in 10 days) nor pay its accounts within the 30-day terms provided. However, on average, the firm is paying faster than the average firm in the industry (42.9 days).
54. In which of the following situations will cross-sectional analysis be most useful?
- Option : A
- Explanation : Cross-sectional analysis is most helpful when comparing companies of different sizes which are in the same industry. Option B is not correct because ratios might not be comparable across industries. Option C deals with time-series analysis.
55. An analyst gathered the following data for two companies in the same industry:
| Company A | Company B | |
| Days in sales outstanding | 24 | 30 |
| Days of inventory on hand | 25 | 31 |
| Days of payables | 44 | 40 |
| Current assets | $182,000 | $189,000 |
| Total assets | $401,000 | $569,000 |
| Current liabilities | $60,000 | $66,000 |
| Total liabilities | $329,000 | $450,000 |
| Shareholders' equity | $132,000 | $121,000 |
Which of the following is the most appropriate conclusion the analyst can make? Compared to Company B, Company A:
- Option : C
- Explanation : Company A has a higher current ratio and shorter cash conversion cycle and it is therefore more liquid. The lower financial leverage ratio indicates that it has less financial risk, not more, and it has less time between cash outlay and cash collection.
