Financial Reporting And Analysis MCQ - 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:

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:

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%.

53 Selected information from a company’s comparative income statements and balance sheets is presented below:

Selected Income Statement Data for the year endedDecember 31st (US $ thousands)

	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:

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?

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:

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.