Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
31. Selected financial information for Park’s Company is provided below:
| Sale | $2.3 million |
| Cost of goods sold | $0.98 million |
| Cash | $0.5 million |
| Accounts receivable | $0.8 million |
| Inventory | $0.25 million |
| Accounts payable | $0.5 million |
The company’s cash conversion cycle (in days) is closest to:
- Option : A
- Explanation : CCC = DOH + DSO – Days Payables = 365/(0.98/0.25) + 365/(2.3/0.8) – 365/(0.98/0.5) = 33.9. When purchases are not available (as in this case), the COGS can be used to estimate payables turnover.
32. The interest coverage ratio is most likely an indicator of a company’s:
- Option : C
- Explanation : Interest coverage ratio measures a company’s ability to meet its interest obligations and is an indicator of company’s solvency.
33. The balance sheet data of a company is presented below:
| Current Assets | |
| Cash and cash equivalents | $1,900 |
| Marketable securities | 300 |
| Notes and accounts receivable, trade | 1,750 |
| Allowance for doubtful accounts | (500) |
| Inventories | 1,000 |
| Deferred income taxes | 540 |
| Other current assets | 250 |
| Total current assets | $5,240 |
| Current Liabilities | |
| Accounts payable and other accrued liabilities | $2,800 |
| Current portion of borrowings | 1,020 |
| Other current liabilities | 1,260 |
| Total current liabilities | $5,080 |
The company’s quick ratio is closest to:
- Option : A
- Explanation : Quick Ratio = (cash + marketable securities + receivables) / current liabilities = (1900 + 300 + 1750 - 500) / 5080 = 0.68. Note that ‘allowance for doubtful accounts’ needs to be subtracted to come up with the receivables number.
34. The following selected balance sheet and ratio data are available for a company:
| Metric | 2012 | 2011 |
| Cash and cash equivalents | 90.0 | |
| Marketable securities | 350.5 | |
| Accounts receivables | 10.0 | |
| Other current assets | 120.1 | |
| Total current assets | 570.6 | |
| Deferred revenues | 75.0 | |
| Other current liabilities | 112.5 | |
| Total current liabilities | 187.5 | |
| Cash ratio | 2.15 | |
| Quick ratio | 2.70 | |
| Current ratio | 2.89 |
Which of the following ratios decreased between 2011 and 2012?
- Option : C
- Explanation : Cash ratio = (Cash + Marketable securities) / (Current liabilities) = (90 + 350.5) / 187.5 = 2.3 Current ratio = (Current assets) / (Current liabilities) = 570.6 / 187.5 = 3.0 Quick ratio = (Cash + Marketable securities + Accounts receivables) / (Current liabilities) = (90 + 350.5 + 10) / 187.5 = 2.4 Between 2011 and 2012 the quick ratio declined while the other two ratios increased.
35. The financial information for Pear Company is provided below:
| Sales | $2.8 million |
| Cost of goods sold | $2.3 million |
| Purchases | $2.1 million |
| Average receivables | $0.6 million |
| Average inventory | $0.5 million |
| Average payables | $0.2 million |
The company’s cash conversion cycle (in days) is closest to:
- Option : B
- Explanation : CCC = DSO + DOH – Days Payables = 365 / (2.8/0.6) + 365 / (2.3/0.5) – 365 / (2.1/0.2) = 122
