Question 1:2A2-CQ48Collins Company reported net income of
$350,000 for the year. The company had 10,000 shares of $100 par
value, non-cumulative, 6% preferred stock and 100,000 shares of $10
par value common stock outstanding. There were also 5,000 shares of
common stock in treasury during the year. Collins declared and paid
all preferred dividends as well as a $1 per share dividend on
common stock. Collins' earnings per share of common stock for the
year was:
*Source: Retired ICMA CMA Exam Questions.$2.90.
$3.50.
$2.76.
$3.33.
Formula = (Net income Preferred Dividends) / Weighted Average
shares outstanding. (350,000 net income 60,000 [10,000(100)(.06)]
preferred dividend) / 100,000 common shares = 290,000/100,000 =
$2.90 earnings per share of common stock.Question 2:2A2-LS34AEW
Corporation 's net income is $5,000,000, and its dividend payout is
$1.20 per share, with 500,000 shares outstanding. Its average
common shareholders' equity is $7,000,000. What is AEW's dividend
payout ratio?0.10.
0.12.
0.8.
0.714.
AEW Corporation's net income is $10 per share ($5,000,000 net
income 500,000 shares outstanding), and its dividend payout is
$1.20 per share. Its dividend payout ratio is its dividend payout
per share divided by income per share, or 0.12 ($1.20 dividend per
share $10 income per share).Question 3:2A2-CQ29The following
information concerning Arnold Company's common stock was included
in the company's financial reports for the last two years.
Based on the price-earnings information, investors wouldmost
likelyconsider Arnold's common stock to:be overvalued at the end of
Year 2.
show a positive trend in growth opportunities in Year 2 compared
to Year 1.
show a decline in growth opportunities in Year 2 compared to
Year 1.
indicate inferior investment decisions by management in Year
2.
The company's P/E (price/earnings) ratio increased from year 1
to year 2. The P/E ratio is calculated by taking the market price
per share and dividing it by the earnings per share.P/E ratio =
(market price per share) / (earnings per share)P/E ratio, year 1 =
$50 / $3 = 16.67P/E ratio, year 2 = $60 / $3 = 20Since the P/E
ratio is increasing from year 1 to year 2, it is showing a positive
trend in growth opportunities in year 2 compared to year 1.Question
4:2A2-LS23ROK Company has $900,000 in current assets, $200,000 in
current liabilities, $1,800,000 in fixed assets, and $400,000 in
long-term liabilities. What is its fixed assets to equity capital
ratio?0.9.
0.86.
1.28.
0.43.
The fixed assets to equity capital ratio is calculated by
dividing fixed assets by shareholders' equity. Shareholders' equity
is assets less liabilities, or $2,100,000 ($2.7 million assets
$600,000 liabilities). Therefore, the company's fixed assets to
equity capital ratio is 0.8571 ($1,800,000/$2,100,000).Question
5:2A2-AT36
Devlin Company's rate of return on assets (ROA) for the year
ended May 31, Year 2, was:7.8%.
7.2%.
11.2%.
7.5%.
ROA is calculated by taking net income and dividing it by
average total assets. Average total assets is equal to the asset
balance at the beginning of the period, plus the asset balance at
the end of the period, all divided by 2 (in order to arrive at an
average for the year).
Average total assets = (beginning asset balance + ending asset
balance) / 2
Devlin's average total assets = ($748 + $691)/2 = $1439/2 =
$719.50
Since net income is $54, then ROA is calculated as:ROA = net
income / average total assetsROA = $54 / $719.50 = 0.075, or
7.5%
ROA is also called return on investment (ROI).Question
6:2A2-CQ19A financial analyst with Mineral Inc. calculated the
company's degree of financial leverage (DFL) as 1.5. If net income
before interest increases by 5%, earnings to shareholders will
increase by:3.33%.
1.50%.
7.50%.
5.00%.
The DFL is calculated by taking the percent change in earnings
to shareholders divided by the percent change in earnings before
interest and taxes (EBIT).DFL is given as 1.5. DFL measures how an
increase in EBIT will affect earnings to shareholders. Therefore, a
5% increase in EBIT will cause a 7.5% (1.5 5%) increase in earnings
to shareholders.Question 7:2A2-CQ24Easton Bank has received loan
applications from three companies in the computer service business
and will grant a loan to the company with the best prospect of
fulfilling the loan obligations. Specific data, shown below, has
been selected from these applications for review and comparison
with industry averages.
Based on the information above, select the strategy that would
fulfill Easton's objective.Grant the loan to SysGen as the company
has the highest net profit margin and degree of financial
leverage.
Easton should not grant any loans as none of these companies
represents a good credit risk.
Grant the loan to CompGo as all the company's data approximate
the industry average.
Grant the loan to Astor as both the debt/equity (D/E) ratio and
degree of financial leverage (DFL) are below the industry
average.
The D/E ratio and the DFL both measure an organization's risk.
The lower the D/E ratio, the lower the risk. Similarly, the lower
the DFL, the lower the risk. In the case of Astor, both the D/E
ratio and DFL measures are below the industry averages. Therefore,
it is the least risky of the three choices.Question 8:2A2-LS54When
reviewing a credit application, the credit manager should be most
concerned with the applicant's:
*Source: Retired ICMA CMA Exam Questions.price-earnings ratio
and current ratio.
working capital and return on equity.
working capital and current ratio.
profit margin and return on assets.
Liquidity measures, such as net working capital and the current
ratio, help determine ability to pay expenses on a timely basis.
Therefore, the credit manager should be most concerned with these
measures in comparison to the others listed in the problem. Profit
margin, price-earnings ratio, and return on equity are
profitability measures.Question 9:2A2-AT28CPZ Enterprises had the
following account information.
The company has an operating cycle of five months.
What will happen to the ratios below if CPZ Enterprises uses
cash to pay 50% of the accounts payable, and both ratios are
greater than 1.0 prior to the payment?current ratio: increase;
quick ratio: increase.
current ratio: decrease; quick ratio: increase.
current ratio: increase; quick ratio: decrease.
current ratio: decrease; quick ratio: decrease.
The current ratio is the ratio of current assets to current
liabilities. The acid-test ratio (quick ratio) is the ratio of
quick assets to current liabilities.
Current assets consist of cash, short-term marketable
securities, accounts receivable, short-term notes receivable,
inventories, and prepaid expenses. Current liabilities are those
due within one year, or one business cycle, whichever is longer.
Current liabilities consist of accounts payable, accrued expenses
payable, interest payable, taxes payable, short-term notes payable,
and the current portion of long-term debt.
The quick assets are cash, short-term investments (marketable
securities), and receivables. The cash payment on accounts payable
will decrease the current and quick assets by the same amount.
Since both the current ratio and the quick ratio are greater than
one, the change will increase both ratios.
For example, if prior to the payment, the current assets were
equal to $200, the quick assets were $150, and the current
liabilities were $100, then the original current ratio would be
$200/$100 = 2 and the original quick ratio would be $150/$100 =
1.5.
Assuming that the current liabilities are all accounts payable,
the payment on 50% of the accounts payable balance would reduce the
current assets to $150, the quick assets to $100, and the current
liabilities to $50. The new current ratio would then be $150/$50 =
3. The new quick ratio would be $100/$50 = 2. By using this
example, one can see that both the current ratio and quick ratio
have increased as a result of CPZ Enterprises using cash to pay off
50% of the account payable balance.Question 10:2A2-CQ16The
following information was obtained from a company's financial
statements.
Total sales for the year were $85,900, of which $62,400 were
credit sales. The cost of goods sold (COGS) was $24,500.The
company's payable turnover was:17.8 times.
6.7 times.
7.3 times.
8.6 times.
The accounts payable turnover is calculated as:Accounts payable
turnover = (purchases for the year) / (average accounts payable
balance)Purchases = cost of goods sold + ending inventory beginning
inventoryPurchases = $24,500 + $7,600 $6,400 = $25,700Average
accounts payable = (beginning balance + ending balance) / 2Average
accounts payable = ($3,320 +$3,680) / 2 = $7,000 / 2 =
$3,500Accounts payable turnover = $25,700 / $3,500 = 7.34, or 7.3
times.Question 11:2A2-CQ38Shown below are selected data from
Fortune Company's most recent financial statements.
What is Fortune's net working capital?
*Source: Retired ICMA CMA Exam Questions.$45,000.
$35,000.
$50,000.
$80,000.
Net working capital is calculated as total current assets minus
current liabilities. Therefore (10,000 + 60,000 + 25,000 + 5,000)
(40,000 + 10,000 + 5,000) = $45,000.Question 12:2A2-CQ06Marge
Halifax, chief financial officer of Strickland Construction, has
been tracking the activities of the company's nearest competitor
for several years. Among other trends, Halifax has noticed that
this competitor is able to take advantage of new technology and
bring new products to market more quickly than Strickland. In order
to determine the reason for this, Halifax has been reviewing the
following data regarding the two companies.
On the basis of this information, which one of the following is
the best initial strategy for Halifax to follow in attempting to
improve the flexibility of Strickland?Seek cost cutting measures
that would increase Strickland's profitability.
Increase Strickland's investment in short-term securities to
increase the current ratio.
Investigate ways to improve asset efficiency and turnover times
to improve liquidity.
Seek additional sources of outside financing for new product
introductions.
Seeking additional sources of outside financing increases the
debt of the firm, therefore increasing the numerator in the formula
for debt-to-equity, thus increasing the ratio to be more in-line
with competition. Also, increasing the assets through the
introduction of new products (inventory) would increase the Degree
of Financial Leverage (Assets / Equity), again, bringing the
financial leverage of Strickland more in line with their
competition.Question 13:2A2-LS45Which of the following statements
is not correct concerning the price to earnings (PE) ratio?PEs tend
to be larger in industries experiencing high growth.
PEs tend to vary a great deal; however, they tend to be similar
within industries.
Assume that a firm gives stock options to its managers and net
income and the PE ratio remain relatively steady. The result of the
stock option issuance would be an increase in stock price.
The PE ratio is a measure of investor confidence in the
management of a firm. A high ratio implies greater confidence.
The PE ratio is defined as the market price of the stock divided
by fully diluted earnings per share (EPS). If a firm issues stock
options, fully diluted EPS should decrease. If the firm's PE ratio
is fairly constant, then the firm's stock price must fall.Question
14:2A2-AT16When comparing current year financial ratios to prior
years, you find that Charley, Inc., has an improving current ratio
and a deteriorating acid test (quick) ratio. Which of the following
actions would be a logical management action step given these
results?Offer cash discounts for early payment on accounts
receivable.
Increase budget controls so that expenses are reduced.
Reduce long-term debt by issuing new stock.
Work with suppliers on reducing inventory levels.
The current ratio is current assets divided by current
liabilities. The acid-test ratio (also known as the quick ratio) is
the ratio of quick assets to current liabilities.
Current assets consist of cash, short-term marketable
securities, accounts receivable, short-term notes receivable,
inventories, and prepaid expenses.
Current liabilities are those due within one year, or one
business cycle, whichever is longer. Current liabilities include
accounts payable, accrued expenses payable, interest payable, taxes
payable, short-term notes payable, and the current portion of
long-term debt.
The quick assets are cash, short-term investments (marketable
securities), and receivables.
An improving current ratio and a deteriorating acid test (quick)
ratio would indicate that Charley, Inc. is increasing its inventory
at a rate faster than necessary for the growth of the business.
Charley, Inc. can begin to remedy the problem by working with
suppliers to reduce the inventory levels.Question 15:2A2-LS12Assume
that a firm generally has solvency ratios very close to industry
averages. An increase in which of the following ratios would
generally be considered a good sign when considering the solvency
of a firm?Times interest earned.
Financial leverage index.
Debt-to-equity ratio.
Current ratio.
The current ratio is considered a liquidity ratio and not a
solvency ratio. An increase in the financial leverage index or the
debt-to-equity ratio implies greater reliance on debt. An increase
in times interest earned implies that the firm is better able to
make debt payments and is therefore considered a good change in
financial health.Question 16:2A2-AT23The following financial
information applies to Sycamore Company.
What is the acid-test (or quick) ratio for Sycamore?1.97.
5.63.
2.13.
1.56.
Quick ratio = (cash + marketable securities + accounts
receivable)/(accounts payable + current portion of long-term debt)
= ($10,000 + $18,000 + $120,000)/($75,000 + $20,000) = 1.558, which
would round to 1.56.Question 17:2A2-CQ42Interstate Motors has
decided to make an additional investment in its operating assets
which are financed by debt. Assuming all other factors remain
constant, this increase in investment will have which one of the
following effects?
*Source: Retired ICMA CMA Exam Questions.Increase; No Change;
Decrease.
No Change; Decrease; Decrease.
No Change; Increase; Decrease.
Decrease; Decrease; Decrease.
A purchase of assets would have no effect on operating income
margin (operating income divided by sales). It would decrease both
operating asset turnover (sales divided by average total assets)
and return on operating assets (operating income divided by average
total assets) by increasing assets.Question 18:2A2-LS07Current
statements for LMN Company reveal the following:
1. beginning and ending inventory balance of $730,000 and
$770,000, respectively,2. sales of $15 million, and,3. a gross
profit ratio of 66 2/3%.
What is LMN Company's days' sales in inventory ratio?9.2
days.
6.67 days.
54.75 days.
15 days.
Before computing the days' sales ratio, one needs to find
average inventory (the average of $730,000 and $770,000, which is
$750,000) and then find cost of goods sold (COGS). Since the gross
profit rate is 66 2/3%, gross profit must be $10 million. Since
gross profit is sales less COGS and gross profit is $10 million,
then COGS must be $5 million. The calculation for days' sales in
inventory ratio is:
Question 19:2A2-AT22A financial analyst has obtained the
following data from Kryton Industries' financial statements.
In order to determine Kryton's ability to pay current
obligation, the financial analyst would calculate Kryton's cash
ratio as:0.50.
1.20.
0.80.
1.00.
Cash ratio = (Cash + Cash Equivalents + Marketable securities) /
Current liabilities = ($200,000 + 0 + $100,000) / $600,000 =
0.50.Question 20:2A2-LS37XYB Company has a book value of $25 per
share, net income of $3.3 million, annual preferred dividends of
$300,000, and 1 million common stock shares outstanding. The
company's common stock has a current market price of $45. What is
the price to book value ratio?0.12
0.56
0.067
1.8
The price to book value ratio is calculated by dividing current
market price by the book value per share. $45 current market price
$25 book value per share = 1.8.Question 21:2A2-CQ28The assets of
Moreland Corporation are presented below.
For the year just ended, Moreland had net income of $96,000 on
$900,000 of sales. Moreland's total asset turnover ratio
is:1.48.
1.37.
1.50.
1.27.
Total asset turnover is calculated as:Total asset turnover =
(net sales) / (average total assets for the year)Average total
assets = (beginning asset balance + ending asset balance) / 2Total
assets = cash + marketable securities + accounts receivable +
inventory + plant & equipmentBeginning total assets = ($48,000
+ $42,000 + $68,000 + $125,000 + $325,000) = $608,000Ending total
assets = ($62,000 + $35,000 + $47,000 + $138,000 + $424,000) =
$706,000Average fixed assets = ($608,000 + $706,000) / 2 =
$1,314,000 / 2 = $657,000Total asset turnover = $900,000 / $657,000
= 1.37.Question 22:2A2-LS17LMN Corporation has return on common
equity of 7% and return on total assets of 10%. Which of the
following statements is true?The financial leverage index is 1.43,
which is considered a good value.
The financial leverage index is 1.43, which is considered a poor
value.
The financial leverage index is 0.7, which is considered a good
value.
The financial leverage index is 0.7, which is considered a poor
value.
The formula for the financial leverage index is return on common
equity divided by return on total assets. The financial leverage
index for LMN Corporation is 0.7 (7%/10%). Any value above 1 is
considered good; an index value below 1 is considered poor.Question
23:2A2-LS36ABC Company has revenues of $5,000,000, with a net
profit margin of 15%. Its operating cash flow is $1,300,000, its
total assets are $6,000,000 (with current assets of $1,500,000),
and its total liabilities are $2,500,000 (with current liabilities
of $500,000). This leaves equity of $3,500,000, of which $500,000
is preferred shareholders' equity. ABC Company has 1,000,000 shares
of common stock outstanding. What is ABC Company's operating cash
flow to income ratio?0.26.
0.58.
0.22.
1.73.
The operating cash flow to income ratio is calculated by
dividing operating cash flow by income. Net profit can be computed
as $5 million 15% or $750,000. The operating cash flow to income
ratio is 1.73 ($1,300,000 operating cash flow $750,000 net
income).Question 24:2A2-AT31Residco Inc. expects net income of
$800,000 for the next fiscal year. Its targeted and current capital
structure is 40% debt and 60% common equity. The director of
capital budgeting has determined that the optimal capital spending
for next year is $1.2 million. If Residco follows a strict residual
dividend policy, what is the expected dividend payout ratio for
next year?90%.
10%.
67%.
40%.
The dividend payout ratio is the ratio of dividends to net
income in a period. Residco plans to invest $1,200,000 next year.
Given a targeted capital structure of 40% debt and 60% equity, the
$1,200,000 would be financed $480,000 (40%) by debt and $720,000
(60%) by equity from earnings. Given the projected earnings of
$800,000, $80,000 would be left for dividends ($800,000 net income
- $720,000 reinvested = $80,000 remaining to be paid as
dividends).
Dividend payout ratio = dividends / net income
Residco's dividend payout ratio = $80,000 / $800,000 = 0.1, or
10%.Question 25:2A2-CQ36The following information concerning Arnold
Company's common stock was included in the company's financial
reports for the last two years.
Arnold's dividend yield in Year 2:has declined compared to Year
1.
has increased compared to Year 1.
is the same as Year 1.
is indicative of the company's failure to provide a positive
return to the investors.
The dividend yield on common stock is calculated as:Dividend
yield on common stock = (annual dividend per common share) /
(market price of common stock)Dividend yield, year 1 = $1 / $50 =
0.02, or 2.0%Dividend yield, year 2 = $1 / $60 = 0.0167, or
1.67%
Therefore, the dividend yield in year 2 has declined compared to
year 1.Question 26:2A2-LS62A steady drop in a firm's price/earnings
(P/Es) ratio could indicate that:
*Source: Retired ICMA CMA Exam Questions.both earnings per share
and the market price of the stock are rising.
earnings per share has been steadily decreasing.
earnings per share has been increasing while the market price of
the stock has held steady.
the market price of the stock has been steadily rising.
The P/Es ratio is the price of the stock divided by the earnings
per share.Question 27:2A2-CQ31At year-end, Appleseed Company
reported net income of $588,000. The company has 10,000 shares of
$100 par value, 6% preferred stock and 120,000 shares of $10 par
value common stock outstanding and 5,000 shares of common stock in
treasury. There are no dividend payments in arrears, and the market
price per common share at the end of the year was $40. Appleseed's
price/earnings (P/E) ratio is:8.16.
8.50.
9.47.
9.09.
The P/E ratio is calculated by taking the market price per share
and dividing it by the earnings per share.P/E ratio = (market price
per share) / (earnings per share)Earnings per share (EPS) = (net
income preferred stock dividends) / (weighted average number of
shares of common stock outstandingEPS = ($588,000 (0.06
$100))(10,000 shares)) / 120,000 sharesEPS = ($588,000 $60,000) /
120,000 shares = $528,000 / 120,000 shares = $4.40P/E ratio = $40 /
$4.40 = 9.09.Question 28:2A2-CQ22Grand Savings Bank has received
loan applications from three companies in the plastics
manufacturing business and currently has the funds to grant only
one of these requests. Specific data, shown below, has been
selected from these applications for review and comparison with
industry averages.
Based on the information above, select the strategy that should
be themostbeneficial to Grand Savings.Grand should not grant any
loans as none of these companies represents a good credit risk.
Grant the loan to Springfield as all the company's data
approximate the industry average.
Grant the loan to Reston as both the debt/equity (D/E) ratio and
degree of financial leverage (DFL) are below the industry
average.
Grant the loan to Valley as the company has the highest net
profit margin and degree of financial leverage.
The D/E ratio and the DFL both measure an organization's risk.
The lower the D/E ratio, the lower the risk. Similarly, the lower
the DFL, the lower the risk. In the case of Reston, both the D/E
ratio and DFL measures are below the industry averages. Therefore,
it is the least risky of the three choices.Question
29:2A2-CQ35Mayson Company reported net income of $350,000 for last
year. The company had 100,000 shares of $10 par value common stock
outstanding and 5,000 shares of common stock in treasury during the
year. Mayson declared and paid $1 per share dividends on common
stock. The market price per common share at the end of last year
was $30. The company's dividend yield for the year was:30.03%.
28.57%.
11.11%
3.33%.
The dividend yield on common stock is calculated as:Dividend
yield on common stock = (annual dividend per common share) /
(market price of common stock)Therefore, the dividend yield = $1 /
$30 = 0.0333, or 3.33%.Question 30:2A2-CQ39Zubin Corporation
experiences a decrease in sales and the cost of goods sold, an
increase in accounts receivable, and no change in inventory. If all
else is held constant, what is the total effect of these changes on
the receivables turnover and inventory ratios?
*Source: Retired ICMA CMA Exam Questions.Inventory Turnover:
Increased; Receivables Turnover: Increased.
Inventory Turnover: Decreased; Receivables Turnover:
Increased.
Inventory Turnover: Increased; Receivables Turnover:
Decreased.
Inventory Turnover: Decreased; Receivables Turnover:
Decreased.
The inventory turnover ratio is cost of goods sold (COGS)
divided by average inventory. The accounts receivables turnover is
net sales on credit divided by average receivables. Since sales and
COGS decreased, accounts receivable increased, and inventory
remained constant, both ratios would decrease.Question 1:2A2-LS04A
firm's total assets are $10,000,000, its total liabilities are
$4,000,000, its current assets are $2,800,000 ($600,000 cash,
$1,000,000 money market investments, $700,000 inventory, and
$500,000 receivables), its current liabilities are $900,000
($400,000 accounts payable, $500,000 notes payable), and its equity
is $6,000,000. Its operating cash flow is $1,500,000. What is the
firm's cash flow ratio?1.5.
3.75.
1.67.
3.
Cash flow ratio = Operating Cash Flow / Current Liabilities =
$1,500,000 / $900,000 = 1.67.Question 2:2A2-AT37
Assuming that Lisa Inc.'s net income for Year 2 was $35,000 and
there are no preferred stock dividends in arrears, Lisa's return on
common equity (ROE) for Year 2 was:12.4%.
10.6%.
7.8%.
10.9%.
ROE is calculated as:
ROE = (net income preferred stock dividends) / (average common
shareholders' equity)
The average common shareholders' equity is calculated by taking
the beginning balance of common shareholders' equity less the
preferred stock equity, plus the ending balance of common
shareholders' equity less the preferred stock equity, and dividing
that total by 2. Dividing by two calculates the average for the
period.
Average common shareholders' equity = [(beginning balance common
shareholders' equity preferred stock equity) + (ending balance
common shareholders' equity preferred stock equity)] / 2
Lisa's average common shareholders' equity = [($390 - $100) +
($375 $100)] / 2 = ($565) / 2 = $282.50
Lisa's preferred stock dividend is 5% of $100, or 0.05($100) =
$5. Net income is $35.
Therefore, ROE = ($35 $5) / ($282.50) = $30/$282.50 = 0.106, or
10.6%.Question 3:2A2-LS18During the current year, Beverly
Industries reports an inventory turnover of 10 times, a gross
profit margin of 30%, a net profit margin of 4%, and average
inventory of $21,000. What are net sales for the
year?$2,800,000.
$700,000.
$210,000.
$300,000.
Since we know that average inventory is $21,000 and the
inventory turnover rate is 10X, we can find that cost of goods sold
(COGS) is $210,000. Since the gross profit margin is 30%, the
firm's COGS must be 70% of net sales. Therefore, net sales must be
$300,000.Question 4:2A2-CQ30Devlin Inc. has 250,000 shares of $10
par value common stock outstanding. For the current year, Devlin
paid a cash dividend of $3.50 per share and had earnings per share
of $4.80. The market price of Devlin's stock is $34 per share.
Devlin's price/earnings (P/E) ratio is:9.71.
2.08.
2.85.
7.08.
The P/E ratio is calculated by taking the market price per share
and dividing it by the earnings per share.P/E ratio = (market price
per share) / (earnings per share)P/ E ratio = $34 / $4.80 =
7.08.Question 5:2A2-AT34
Devlin Company's times interest earned for the year ended May
31, Year 2, was:12.25 times.
11.25 times.
6.75 times.
18.75 times.
The number of times interest is earned (interest coverage)
measures a firm's ability to pay long-term debt using operating
income. Times interest earned is calculated by dividing operating
income by the interest expense. Operating income is calculated by
taking net sales and subtracting both cost of goods sold and
operating expenses (selling, general, and administrative).
For Devlin, operating income is calculated by taking income
before taxes plus interest expense ($90 + $8 = $98).
Devlin's times interest earned is calculated as:Times interest
earned = operating income / interest expenseTimes interest earned =
$98 / $8 = 12.25.Question 6:2A2-CQ09Maydale Inc.'s financial
statements show the following information.
Maydale's accounts receivable turnover ratio is:11.25.
0.10.
9.
10.
The accounts receivable turnover per year is calculated
as:Accounts receivable turnover per year = (Net credit sales for
year) / (average accounts receivable balance for the year)Average
accounts receivable balance for the year = (beginning balance +
ending balance) / 2Average accounts receivable balance for the year
= ($320,000 + $400,000) / 2 = $720,000 / 2 = $360,000Turnover per
year = $3,600,000 / $360,000 = 10 times.Question 7:2A2-AT17Which of
the following would decrease a firm's working capital?The firm
purchases a fixed asset, paying 20% of the purchase price in cash
and signing a long-term note for the remaining balance.
The firm purchases inventory on account.
The firm receives payment on an outstanding accounts
receivable.
The firm writes off a bad account (receivable). The firm uses
the allowance method for bad debts.
Working capital is calculated by taking current assets less
current liabilities. Current assets consist of cash, short-term
marketable securities, accounts receivable, short-term notes
receivable, inventories, and prepaid expenses. Current liabilities
are those due within one year, or one business cycle, whichever is
longer. Current liabilities consist of accounts payable, accrued
expenses payable, interest payable, taxes payable, short-term notes
payable, and the current portion of long-term debt.
Working capital decreases when current assets decrease by more
than current liabilities or increase by less than current
liabilities. The purchase of a fixed (long-term) asset partly by
cash and partly by signing a long-term note will decrease current
assets without affecting current liabilities. Therefore, working
capital will decrease.Question 8:2A2-LS01Consider the following
transactions:I. A firm receives cash on account.II. A firm sells
goods on account (cost of goods sold (COGS) is less than sales
price).III. A firm makes a payment on account.IV. A firm purchases
inventory on account.
If a firm has a current ratio greater than one, which of the
transactions above would cause its current ratio to increase?I, II,
III, and IV.
I, II, and III.
II, III, and IV.
II and III.
The current ratio is defined as current assets divided by
current liabilities. Examine each transaction for its effect on
either current assets or current liabilities:I. Debit to cash,
credit to accounts receivable; the net result is no change in
either current assets or current liabilities. Therefore, there is
no change to the current ratio.II. Debit to accounts receivable,
credit to sales for an amount greater than a debit to COGS and a
credit to inventory. The result will be an increase in current
assets. Therefore, there is an increase in the current ratio.III.
Debit to accounts payable, credit to cash. The result of this
transaction is an equal decrease in current assets and current
liabilities. Given that the current ratio is greater than 1, this
transaction will result in an increase in the current ratio.IV.
Debit to inventory and credit to accounts payable. The result of
this transaction is an equal increase in current assets and current
liabilities. Given that the current ratio is greater than 1, this
transaction will result in a decrease in the current ratio.Question
9:2A2-LS02Consider the following transactions:I. A firm receives
cash on account.II. A firm sells goods on account (cost of goods
sold [COGS] is less than sales price).III. A firm makes a payment
on account.IV. A firm purchases inventory on account.
If a firm has a quick ratio greater than one, which of the
transactions above would cause its quick ratio to decrease?I, II,
and III.
I and IV.
None of these choices.
IV only.
br/> The quick ratio is defined as current assets less
inventory divided by current liabilities. Examine each transaction
for its effect on either current assets or current liabilities:I.
Debit to cash, credit to accounts receivable; the net result is no
change in either current assets or current liabilities. Therefore,
there is no change to the quick ratio.II. Debit to accounts
receivable, credit to sales for an amount greater than a debit to
COGS and a credit to inventory. The result will be an increase in
current assets less inventory. Therefore, there is an increase in
the quick ratio.III. Debit to accounts payable, credit to cash. The
result of this transaction is an equal decrease in current assets
and current liabilities. Given that the quick ratio is greater than
1, this transaction will result in an increase in the quick
ratio.IV. Debit to inventory and credit to accounts payable. The
result of this transaction is no change in current assets less
inventory and an increase in current liabilities. This transaction
will decrease the quick ratio.Question 10:2A2-CQ32Archer Inc. has
500,000 shares of $10 par value common stock outstanding. For the
current year, Archer paid a cash dividend of $4.00 per share and
had earnings per share of $3.20. The market price of Archer's stock
is $36 per share. The average price/earnings (P/E) ratio for
Archer's industry is 14.00. When compared to the industry average,
Archer's stock appears to be:undervalued by approximately 20%.
overvalued by approximately 10%.
undervalued by approximately 25%.
overvalued by approximately 25%.
The P/E ratio is calculated by taking the market price per share
and dividing it by the earnings per share.P/E ratio = (market price
per share) / (earnings per share)If Archer's stock tracked with the
market, then its stock price would be equal to its EPS multiplied
by the industry P/E ratio, as:Archer's stock price = ($3.20 per
share)(14) = $44.80Since the stock is selling at only $36, it is
undervalued by approximately 20%, which is calculated as: ($44.80
$36) / $44.80 = $8.80 / $44.80 = 0.196, which rounds to
20%.Question 11:2A2-LS32Selected data from KJ, Inc., financial
statements for the end of the current year are:
What is ending inventory for the current year?$210,000.
$600,000.
$90,000.
$390,000.
If current liabilities are $300,000 and the current ratio is
2.0, then total current assets must be $600,000. If current
liabilities are $300,000 and the quick ratio is 1.3, then total
current assets less inventory must be 390,000. The difference
between $600,000 and $390,000 represents inventory, which is
$210,000.Question 12:2A2-AT12Assume the following information for
Ramer Company, Matson Company and for their common industry for a
recent year.
The attitudes of both Ramer and Matson concerning risk
arebestexplained by the:debt/equity ratio and times interest
earned.
current ratio and earnings per share.
return on investment and dividend payout ratio.
current ratio, accounts receivable turnover, and inventory
turnover.
Risk is a function of financial leverage. Financial leverage is
measured by the debt/equity ratio and the number of times interest
is earned (interest coverage).Question 13:2A2-AT11Assume the
following information for Ramer Company, Matson Company and for
their common industry for a recent year.
Which is correct if both companies have the same total assets
and the same sales?Matson has a shorter operating cycle than
Ramer.
Ramer has fewer current liabilities than Matson.
Ramer has more cash than Matson.
Matson is more effectively using financial leverage.
The operating cycle is the time period from the acquisition of
raw materials to the collection of the cash from the sale of the
goods produced from the raw materials. It is the combination of the
number of days on hand for inventory and the accounts receivable
collection period.
The days on hand is calculated as 365 days divided by the
inventory turnover. The accounts receivable collection period is
calculated as 365 days divided by the accounts receivable
turnover.
Ramer's and Matson's operating cycles are calculated
as:Operating cycle = (365 days / company's inventory turnover) +
(365 days / company's accounts receivable turnover)
Ramer's operating cycle = (365 days / 6.2 days) + (365 days / 5
days) = 53.9 days + 73 days = 131.9 days
Matson's operating cycle = (365 days / 8 days) + (365 days / 8.1
days) = 45.6 days + 45.1 days = 90.7 days
From these calculations, it is evident that Matson has a shorter
operating cycle than Ramer.Question 14:2A2-LS59The use of debt in
the capital structure of a firm:
*Source: Retired ICMA CMA Exam Questions.increases its operating
leverage.
decreases its financial leverage.
decreases its operating leverage.
increases its financial leverage.
Financial leverage is the use of debt (fixed cost funds) to
increase returns to owners (stockholders).Question 15:2A2-LS15In
which of the following circumstances would financial leverage be
likely to increase?Firm issues bonds to repurchase some of its own
common stock.
Firm purchases assets with cash.
Firm signs a contract to rent a new manufacturing site.
Firm accepts a large order from a new customer. Excess capacity
exists to fill the order.
Financial leverage relates to the fixed financing costs of a
firm. Of the choices given, issuing new bonds is the only one that
affects fixed financing costs.Question 16:2A2-LS03A firm's total
assets are $10,000,000, its total liabilities are $4,000,000, its
current assets are $2,800,000 million ($600,000 cash, $1,000,000
money market investments, $700,000 inventory, and $500,000
receivables), its current liabilities are $900,000 ($400,000
accounts payable, $500,000 notes payable), and its equity is
$6,000,000. What is the firm's cash ratio?2.5.
3.11.
1.5.
1.78.
The cash ratio is cash and cash equivalents and marketable
securities divided by current liabilities. ($600,000 cash +
$1,000,000 money market) $900,000 = $1,600,000/$900,000 =
1.78.Question 17:2A2-AT27CPZ Enterprises had the following account
information.
The company has an operating cycle of five months.
What is the company's acid test (quick) ratio?1.68 to 1.
2.14 to 1.
5.29 to 1.
2.31 to 1.
The acid-test ratio (also known as the quick ratio) is the ratio
of quick assets to current liabilities. Quick assets are those
easily converted to cash without significant loss. The quick assets
are cash, short-term investments (marketable securities), and net
receivables. Current liabilities are those due within one year, or
one business cycle, whichever is longer. Current liabilities
consist of accounts payable, accrued expenses payable, interest
expense payable, taxes payable, short-term notes payable, and the
current portion of long-term debt.
CPZ's acid-test ratio is calculated as:Acid-test ratio = (cash +
marketable securities + net receivables) / current
liabilitiesAcid-test ratio = ($100,000 cash + $200,000 accounts
receivable) / ($80,000 accounts payable + $10,000 interest payable
+ $50,000 notes payable (due in six months))
Acid-test ratio = ($300,000) / ($140,000) = ratio of 2.14 to
1.Question 18:2A2-LS20A company has $500,000 in current assets and
$1,500,000 in fixed assets. Its paid-in capital is $100,000 and
retained earnings are $1,400,000. 40% of the debt is considered to
be current. What is its long-term debt-to-equity capital
ratio?5.
0.2.
0.21.
0.53.
The long-term debt-to-equity capital ratio is calculated by
dividing long-term debt by shareholders' equity. The company's
total shareholders' equity is $1,500,000 ($100,000 paid-in capital
+ $1,400,000 retained earnings). Its debt is $500,000 (assets
equity = $2 million $1,500,000). If current debt is 40% of debt,
then long-term debt is 60% of $500,000, or $300,000. Therefore, its
long-term debt-to-equity capital ratio is 0.2
($300,000/$1,500,000).Question 19:2A2-LS58Firms with high degrees
of financial leverage would be best characterized as having:
*Source: Retired ICMA CMA Exam Questions.high fixed-charge
coverage.
zero coupon bonds in their capital structures.
high debt-to-equity ratios.
low current ratios.
Financial leverage is the use of debt (fixed cost funds) to
increase returns to owners (stockholders). A high degree of
financial leverage means the benefits from tax-deductibility of
interest (from additional debt) is more than offset by the increase
in the payments to repay the debt.Question 20:2A2-CQ02Birch
Products Inc. has the following current assets.
If Birch's current liabilities are $1,300,000, the
firm's:current ratio will decrease if a payment of $100,000 cash is
used to pay $100,000 of accounts payable.
current ratio will not change if a payment of $100,000 cash is
used to pay $100,000 of accounts payable.
quick ratio will not change if a payment of $100,000 cash is
used to purchase inventory.
quick ratio will decrease if a payment of $100,000 cash is used
to purchase inventory.
The quick ratio is calculated as:Quick ratio = (cash +
marketable securities + receivables) / (current liabilities).
Question 21:2A2-CQ41Douglas Company purchased 10,000 shares of
its common stock at the beginning of the year for cash. This
transaction will affect all of the following except the:
*Source: Retired ICMA CMA Exam Questions.net profit margin.
earnings per share.
current ratio.
debt-to-equity ratio.
The issuance of stock has no effect on profit margin (net income
divided by sales). It would increase equity, decreasing the
debt/equity ratio. The increased number of shares outstanding would
decrease earnings per share (net income divided by shares). The
cash received would increase cash, a current asset, and the current
ratio (current assets divided by current liabilities).Question
22:2A2-AT40The average collection period for a firm measures the
number of days:beyond the end of the credit period before a typical
customer payment is received.
before a typical account becomes delinquent.
after a typical credit sale is made until the firm receives the
payment.
it takes a typical check to "clear" through the banking
system.
The accounts receivable collection period is the average length
of time between when a credit sale is made and when it is
collected. It is calculated by dividing the number of days in a
year (365) by the accounts receivable turnover. The accounts
receivable turnover is the annual sales divided by the average
accounts receivable balance for the year.Question 23:2A2-LS25ROK
Company has $900,000 in current assets and $2,100,000 in fixed
assets, including $300,000 goodwill and patents. Its paid-in
capital is $100,000 and retained earnings are $1,900,000. What is
its total liabilities to net tangible assets ratio?0.37.
2.57.
0.47.
0.56.
The total liabilities to net tangible assets ratio is calculated
by dividing total liabilities by net tangible assets. Total
liabilities are 1,000,000 (total assets less equity = $3 million $2
million). Net tangible assets for ROK Company are $2,700,000
($900,000 current assets + $2,100,000 fixed assets $300,000
intangible assets). The total liabilities to net tangible assets
ratio is 0.37 ($1,000,000 total liabilities $2,700,000 net tangible
assets).Question 24:2A2-LS13ABC Company has $1 million in assets
and a debt-to-equity ratio of 66 2/3%. If ABC purchases an asset
worth $200,000 with debt, its new debt-to-equity ratio will
be:100%.
80%.
75%.
66 2/3%.
The debt-to-equity ratio is defined as total debt divided by
total equity. Given that the current debt-to-equity ratio is 66
2/3% = 2/3, then debt must currently be $400,000 and equity must be
$600,000. After the transaction occurs, debt will be $600,000 and
equity will not change. Therefore, the new debt-to-equity ratio
must be 100%.Question 25:2A2-LS39ABW Corporation's net income is
$1,000,000, and it has 1,000,000 shares of common stock
outstanding. It also has 50,000 shares of 10%, $20 par preferred
stock outstanding. What is ABW Corporation's earnings per
share?$0.90.
$1.
$2.
$20.
Earnings per share (EPS) is calculated by dividing the earnings
available to common shareholders by the number of common shares
outstanding. Remember that earnings available to common
shareholders is net income minus preferred dividends. Preferred
dividends are computed as 50,000 shares 10% of $20 par or $100,000.
Earnings available to common shareholders are $900,000 ($1,000,000
net income $100,000 preferred dividend). EPS is $0.90 ($900,000
1,000,000 shares of common stock outstanding).Question
26:2A2-CQ05Selected financial data for Boyd Corporation are shown
below.
Boyd's net income for the year was $96,000. Boyd's current ratio
at the end of the year is:2.71.
1.55.
1.71.
2.97.
The current ratio is defined as follows:Current ratio = (current
assets) / (current liabilities)Current assets include cash,
receivables, trading securities, and inventories. Current
liabilities include accounts payable and accrued
liabilities.Current ratio = ($62,000 + $47,000 + $35,000 +
$138,000) / ($84,000 + $11,000)Current ratio = $282,000 / $95,000 =
2.97.Question 27:2A2-CQ43Colonie Inc. expects to report net income
of at least $10 million annually for the foreseeable future.
Colonie could increase its return on equity by taking which of the
following actions with respect to its inventory turnover and the
use of equity financing?
Inventory Turnover Use of Equity Financing:
*Source: Retired ICMA CMA Exam Questions.Inventory Turnover:
Decrease; Use of Equity Financing: Decrease.
Inventory Turnover: Increase; Use of Equity Financing:
Decrease.
Inventory Turnover: Increase; Use of Equity Financing:
Increase.
Inventory Turnover: Decrease; Use of Equity Financing:
Increase.
To increase its return on equity (net income divided by average
common shareholders' equity. Colonie could increase its inventory
turnover by liquidating inventory and increasing net income.
Colonie could also increase the return by decreasing the use of
equity financing. The decrease would lower the denominator in the
formula without affecting the numerator.Question 28:2A2-LS52Garstka
Auto Parts must increase its acid test ratio above the current 0.9
level in order to comply with the terms of a loan agreement. Which
one of the following actions is most likely to produce the desired
results?
*Source: Retired ICMA CMA Exam Questions.Expediting collection
of accounts receivable.
Selling auto parts on account.
Purchasing marketable securities for cash.
Making a payment to trade accounts payable.
The acid test ratio is calculated as current assets less
inventories and prepayments divided by total current liabilities.
Selling auto parts on account would increase the acid test ratio
increasing the accounts receivable without changing current
liabilities.Question 29:2A2-AT45Clauson Inc. grants credit terms of
1/15, net 30 and projects gross sales for next year of $2,000,000.
The credit manager estimates that 40% of their customers pay on the
discount date, 40% on the net due date, and 20% pay 15 days after
the net due date. Assuming uniform sales and a 365-day year, what
is the projected days sales outstanding (rounded to the nearest
whole day)?27 days.
30 days.
20 days.
24 days.
The average days sales outstanding is 27. 40% are outstanding
for 15 days, 40% are outstanding for 30 days, and 20% are
outstanding for 45 days, which works out to: 0.4(15) + 0.4(30) +
0.2(45) = 6 + 12 + 9 = 27 days.Question 30:2A2-LS10Which of the
following ratios is NOT considered a solvency measure?Times
interest earned.
Debt-to-equity ratio.
Current ratio.
Financial leverage index.
The current ratio is considered a liquidity ratio and not a
solvency ratio. The other ratios listed are considered to be
solvency ratios.Question 1:2A2-CQ25The following information has
been derived from the financial statements of Boutwell Company.
The company's debt-to-equity ratio is:0.50 to 1.
0.33 to 1.
0.37 to 1.
0.13 to 1.
The debt/equity (D/E) ratio is the ratio of total liabilities to
total stock equity.Total liabilities = long-term liabilities +
current liabilitiesCurrent ratio = (current assets) / (current
liabilities)Current assets are given as $640,000; Current ratio is
given as 3.2. Input these values, then rearrange the equation to
solve for current liabilities.3.2 = $640,000 / (current
liabilities)Current liabilities = $640,000 / 3.2 = $200,000Total
liabilities = $130,000 of long-term liabilities + $200,000 of
current liabilities = $330,000Total stock equity = total assets
total liabilitiesTotal stock equity = $990,000 $330,000 =
$660,000D/E ratio = (total liabilities) / (total stock equity)D/E
ratio = $330,000 / $660,000 = 0.5 to 1.Question 2:2A2-AT07The
Statement of Financial Position for King Products Corporation for
the fiscal years ended June 30, Year 2, and June 30, Year 1, is
presented below. Net sales and cost of goods sold for the year
ended June 30, Year 2, were $600,000 and $440,000,
respectively.
King Products Corporation's quick (acid test) ratio at June 30,
Year 2, was:1.12 to 1.
2.00 to 1.
1.81 to 1.
0.63 to 1.
The acid-test ratio (also known as the quick ratio) is the ratio
of quick assets to current liabilities. Quick assets are those
easily converted to cash without significant loss. The quick assets
are cash, short-term investments (marketable securities), and net
receivables.
King's acid-test ratio for Year 2 is calculated as:Acid-test
ratio = (cash + marketable securities + net receivables) / current
liabilitiesAcid-test ratio = ($60 cash + $40 marketable securities
+ $90 net accounts receivable) / ($170 current
liabilities)Acid-test ratio = $190 / $170 = ratio of 1.12 to
1.Question 3:2A2-CQ26The interest expense for a company is equal to
its earnings before interest and taxes (EBIT). The company's tax
rate is 40%. The company's times-interest earned ratio is equal
to:1.0.
2.0.
0.6.
1.2.
The times-interest earned ratio (interest coverage) is the ratio
of EBIT to interest expense. If EBIT is equal to interest expense,
then the ratio will equal 1.Question 4:2A2-LS49On a manufacturing
company's income statement, sales are $50 million and cost of goods
manufactured equals $25 million. If beginning and ending finished
goods inventory are $3 million and $4 million, respectively, which
of the following statements is true?Gross profit equals $26
million.
Gross profit equals $25 million.
Contribution margin equals $25 million.
Gross profit equals $24 million.
The gross profit is sales minus the cost of goods sold. Cost of
goods sold is beginning finished goods inventory plus cost of goods
manufactured minus ending finished goods inventory ($3 + 25 4 = $24
million). Therefore, gross profit is $50 million $24 million = $26
million.Question 5:2A2-LS35ABC Company has revenues of $5,000,000,
with net income of $750,000. Its total assets are $6,000,000 (with
current assets of $1,500,000), and its total liabilities are
$2,500,000 (with current liabilities of $500,000). This leaves
equity of $3,500,000, of which $500,000 is preferred shareholders'
equity. ABC Company has 1,000,000 shares of common stock
outstanding. What is ABC Company's book value per common
share?$3.
$3.50.
$1.
$2.
Book value per share is calculated by dividing common
shareholders' equity by number of shares outstanding. Common
shareholders' equity is $3,000,000 ($3,500,000 total equity
$500,000 preferred shareholders' equity). Book value per share is
$3 ($3,000,000 common equity 1,000,000 shares).Question
6:2A2-AT14Birch Corporation had net income for the year of $101,504
and a simple capital structure consisting of the following common
shares outstanding.
Birch Corporation's earnings per share (EPS) (rounded to the
nearest cent) was:$3.44.
$3.26.
$3.20.
$4.23.
EPS = (net income the preferred stock dividend) / (weighted
average number of common stock shares outstanding)Birch has no
preferred stock.
Therefore, EPS = (net income) / (weighted average number of
common stock shares outstanding)
The weighted average number of common stock shares outstanding
(W) is calculated as follows:
W = (24,000 shares for 2 months) + (29,400 shares for 4 months)
+ (36,000 shares for 5 months) + (35,040 shares for 1 month)W =
(2/12)(24,000) + (4/12)(29,400) + (5/12)(36,000) + (1/12)(35,040) =
4,000 + 9,800 + 15,000 + 2,940 = 31,720 shares.
EPS = ($101,504) / (31,720 shares) = $3.20 per share.Question
7:2A2-LS43Which of the following are limitations of ratio
analysis?I. Ratios must have something to compare to in order to
have meaning.II. There must be a relationship between the two
accounts used in the ratio.III. The analyst must be aware of the
accounting principles employed by the business.IV. The analyst must
be certified by the PAA.I only.
I and III only.
I, II, III, and IV.
I, II, and III only.
Whether or not analysts must be certified, choice IV does not
represent a limitation of ratios themselves.Question 8:2A2-AT06The
Statement of Financial Position for King Products Corporation for
the fiscal years ended June 30, Year 2, and June 30, Year 1, is
presented below. Net sales and cost of goods sold for the year
ended June 30, Year 2, were $600,000 and $440,000,
respectively.
King Products Corporation's average collection period for the
fiscal year ended June 30, Year 2, using a 365-day year, was:46
days.
36 days.
54 days.
61 days.
The accounts receivable collection period is calculated by
taking the number of days in a year (in this case, that would be
365 days) and dividing that number by the accounts receivable
turnover.
Accounts receivable turnover is calculated by dividing net sales
by the average accounts receivable balance.
The average accounts receivable, if not given, is calculated by
adding together the beginning and ending balances and dividing by
2. Note that the beginning accounts receivable balance for Year 2
is the same as the ending accounts receivable balance for Year
1.
King's average accounts receivable, accounts receivable
turnover, and average collection period are calculated as:
King's average accounts receivable for Year 2 = ($90 +$60)/2 =
$160/2 = $75.
Accounts receivable turnover = net sales / average accounts
receivable balanceKing's accounts receivable turnover for year 2 =
$600 / $75 = 8 times
King's average collection period for year 3 is then calculated
by taking the number of days in a year and dividing it by the
accounts receivable turnover.King's average collection period = 365
days / 8 = 45.6 days, round to 46 daysQuestion 9:2A2-AT09Nelson
Industries increased earnings before interest and taxes by 17%.
During the same period, net income after tax increased by 42%. The
degree of financial leverage (DFL) that existed during the year
is:2.47.
1.70.
1.68.
4.20.
The DFL is defined as the percent change in net income after tax
given a percent change in operating income (earnings before
interest and taxes, or EBIT).
Nelson's degree of financial leverage is calculated as:DFL = (%
change in net income after tax) / (% change in operating income, or
EBIT)
Nelson's DFL = (42%) / (17%) = 2.47.Question 10:2A2-AT43The
Dawson Corporation projects the following for the year.
The expected common stock dividend per share for Dawson
Corporation for the year is:$2.10.
$1.80.
$2.70.
$3.90.
The expected common stock dividend for the year is $2.10 per
share, which is calculated as:
The dividend payout ratio is 30% of earnings to common
shareholders. Earnings to common shareholders is $14 million.
The dividend per share is ($14,000,000)(0.3)/(2,000,000 shares)
= $ 4,200,000/2,000,000 shares = $2.10 per share.
The $14,000,000 in earnings to common shareholders (E to CS) is
calculated as follows:EBIT = earnings before interest and taxes
E to CS = [(EBIT Interest)(1 Tax Rate)] (Preferred Stock
Dividend)E to CS = [($35,000,000 $5,000,000)(1 - 0.4)]
($4,000,000)= [$30,000,000(0.6)] ($4,000,000)= $18,000,000
$4,000,000 = $14,000,000.Question 11:2A2-LS60Which one of the
following statements concerning the effects of leverage on earnings
before interest and taxes (EBIT) and earnings per share (EPS) is
correct?
*Source: Retired ICMA CMA Exam Questions.Financial leverage
affects both EPS and EBIT, while operating leverage only effects
EBIT.
If Firm A has a higher degree of operating leverage than Firm B,
and Firm A offsets this by using less financial leverage, then both
firms will have the same variability in EBIT.
For a firm using debt financing, a decrease in EBIT will result
in a proportionally larger decrease in EPS.
A decrease in the financial leverage of a firm will increase the
beta value of the firm.
Debt financing creates financial leverage (the percent change in
EPS given a percent change in EBIT) which is always greater than
one. Therefore, a change in EBIT causes a proportionally larger
change in EPS.Question 12:2A2-AT05The Statement of Financial
Position for King Products Corporation for the fiscal years ended
June 30, Year 2, and June 30, Year 1, is presented below. Net sales
and cost of goods sold for the year ended June 30, Year 2, were
$600,000 and $440,000, respectively.
King Products Corporation's accounts receivable turnover for
this period was:8.
10.
6.7.
5.9.
Accounts receivable turnover is calculated by dividing net sales
by the average accounts receivable balance. The average accounts
receivable, if not given, is calculated by adding together the
beginning and ending balances and dividing by 2. Note that the
beginning accounts receivable balance for year 2 is the same as the
ending accounts receivable balance for year 1.
King's average accounts receivable balance and accounts
receivable turnover are calculated as follows:King's average
accounts receivable for year 2 = ($90 +$60)/2 = $160/2 = $75
Accounts receivable turnover = net sales / average accounts
receivable balanceKing's accounts receivable turnover for year 2 =
$600 / $75 = 8 times.Question 13:2A2-CQ44Donovan Corporation
recently declared and issued a 50% stock dividend. This transaction
will reduce the company's:
*Source: Retired ICMA CMA Exam Questions.book value per common
share.
return on operating assets.
debt-to-equity ratio.
current ratio.
Book value per common share (common shareholders' equity divided
by number of common shares outstanding). A stock dividend would
increase the number of shares outstanding without affecting the
equity.Question 14:2A2-AT41A firm's financial risk is a function of
how it manages and maintains its debt. Which one of the following
sets of ratios characterizes the firm with the greatest amount of
financial risk?high debt-to-equity ratio, low interest coverage
ratio, volatile return on equity.
low debt-to-equity ratio, low interest coverage ratio, volatile
return on equity.
high debt-to-equity ratio, high interest coverage ratio,
volatile return on equity.
low debt-to-equity ratio, high interest coverage ratio, stable
return on equity.
Financial risk is represented by the variability in expected
returns, and a volatile return on equity is risky. An increase in
the debt-to-equity ratio increases risk by the increased debt load.
A decrease in the interest coverage ratio increases risk by
decreasing the organization's ability to service its debt.Question
15:2A2-AT38The two financial statements that are most important for
assessing a firm's liquidity are the:balance sheet and retained
earnings statement.
income statement and statement of cash flows.
income statement and balance sheet.
balance sheet and statement of cash flows.
Liquidity is typically measured by cash flow from operations in
the statement of cash flows, by the current and quick ratios taken
from the balance sheet, and by the operating cash flow to current
liabilities ratio which uses both statements. The current ratio
equals current assets divided by current liabilities. The quick
ratio (acid test) equals the quick assets divided by the current
liabilities. The quick assets are cash, cash equivalents,
short-term investments, and receivables.Question 16:2A2-LS30MON
Corporation has total assets of $2,000,000. Its net profit margin
is 5% with revenues of $13,050,000, and its preferred dividends are
$25,000. What is MON Corporation's return on total assets
ratio?0.36.
0.33.
0.48.
0.28.
The return on total assets ratio is calculated by dividing net
income by total assets. Net income for MON Corporation is $652,500
($13,050,000 5%). Its return on total assets ratio is 0.33
($652,500 net income $2,000,000 assets).Question 17:2A2-CQ03Shown
below are beginning and ending balances for certain of Grimaldi
Inc.'s accounts.
Grimaldi's acid test ratio or quick ratio at the end of the year
is:1.15.
1.52.
0.83.
1.02.
The quick ratio is calculated as:Quick ratio = (current assets
inventories prepayments) / (current liabilities)
Current assets = (cash + marketable securities + receivables +
inventory)Current Assets = $62,000 + $35,000 + $47,000 + $138,000 =
$282,000Current liabilities = (accounts payable + accrued
liabilities)Current liabilities = $84,000 + $11,000 = $95,000Quick
Ratio = (Current assets Inventory Prepayments) / Current
LiabilitiesQuick Ratio = ($282,000 $138,000 $0) / $95,000Quick
ratio = $144,000 / $95,000 = 1.516, which rounds to 1.52.Question
18:2A2-LS53The owner of a chain of grocery stores has bought a
large supply of mangoes and paid for the fruit with cash. This
purchase will adversely impact which one of the following?
*Source: Retired ICMA CMA Exam Questions.Current ratio.
Working capital.
Price earnings ratio.
Quick or acid test ratio.
The acid test ratio is calculated as current assets less
inventories and prepayments divided by total current liabilities.
Purchasing inventory and paying cash would adversely impact this
ratio by decreasing cash. The cash purchase of inventory has no
effect on current assets and, therefore, will not affect working
capital (current assets current liabilities) or the current ratio
(current assets divided by current liabilities). Purchases have no
effect on the price earnings ratio (stock price divided by
EPS).Question 19:2A2-LS55The acid test ratio shows the ability of a
company to pay its current liabilities without having to:
*Source: Retired ICMA CMA Exam Questions.reduce its cash
balance.
liquidate its inventory.
borrow additional funds.
collect its receivables.
The acid test ratio is calculated as current assets less
inventories and prepayments divided by total current liabilities.
The acid test ratio shows the ability of a company to pay its
current liabilities without having to liquidate its
inventory.Question 20:2A2-LS57If a company has a current ratio of
2.1 and pays off a portion of its accounts payable with cash, the
current ratio will:
*Source: Retired ICMA CMA Exam Questions.increase.
decrease.
move closer to the quick ratio.
remain unchanged.
The current ratio is calculated as current assets divided by
current liabilities. Paying off a portion of accounts payable with
cash will cause the current ratio to increase by decreasing both
current assets and current liabilities by the same amount.Question
21:2A2-LS41ABC Corporation has fully diluted earnings per share of
$5, pays a dividend of $1 per share, and has a current market price
of $60 per share. What is ABC Corporation 's dividend payout
ratio?0.012.
0.2.
0.017.
0.083.
The dividend payout ratio is calculated by dividing dividends
per common share by fully diluted earnings per share. $1 dividend
per share $5 fully diluted earnings per share = 0.2.Question
22:2A2-AT15At the beginning of the fiscal year, June 1, Year 1,
Boyd Corporation had 80,000 shares of common stock outstanding.
Also outstanding was $200,000 of 8% convertible bonds that had been
issued at $1,000 par. The bonds were convertible into 20,000 shares
of common stock; however, no bonds were converted during the year.
The company's tax rate is 34%, and the Aa bond interest rate has
been 10%. Boyd's net income for the year was $107,000. The fully
diluted earnings per share (EPS) (rounded to the nearest cent) of
Boyd common stock for the fiscal year ended May 31, Year 2,
was:$1.18.
$1.12.
$1.23.
$1.07.
EPS = (net income the preferred stock dividend)/(weighted
average number of common stock shares outstanding).
Calculating fully diluted EPS requires the adjusting of the
numerator and denominator for the effects of conversions of
convertible securities and/or the exercise of options or
warrants.
Boyd's basic EPS = (net income) / (80,000 shares) =
($107,000)/(80,000 shares)
Fully diluted EPS requires adjusting the numerator for the
after-tax effect of the interest expense eliminated by the
conversion, and adjusting the denominator for the additional 20,000
shares from the conversion. The conversion is assumed to occur at
the earliest possible date; in this case, June 1 of Year 1.
The after-tax effect of the interest expense = (1 tax
rate)(interest expense)= (1 0.34)(0.08)($200,000) = (0.66)($16,000)
= $10,560
Boyd's fully diluted EPS = ($107,000 + $10,560) / (80,000 shares
+ 20,000 shares) = ($117,560)/(100,000 shares) = $1.18 per
share.Question 23:2A2-LS56All of the following are included when
calculating the acid test ratio except:
*Source: Retired ICMA CMA Exam Questions.six-month treasury
bills.
60-day certificates of deposit.
prepaid insurance.
accounts receivable.
The acid test ratio is calculated as cash plus marketable
securities plus accounts receivable divided by total current
liabilities or as current liabilities less inventories and
prepayments divided by current liabilities.Question
24:2A2-CQ14Cornwall Corporation's net accounts receivable were
$68,000 and $47,000 at the beginning and end of the year,
respectively. Cornwall's condensed Income Statement is shown
below.
Cornwall's average number of days' sales in accounts receivable
(using a 365-day year) is:23 days.
13 days.
8 days.
19 days.
The average number of days in accounts receivable is calculated
as:Average number of days in accounts receivable = (# days in a
year) / (the accounts receivable turnover per year)Accounts
receivable turnover per year = (Net credit sales for year) /
(average accounts receivable balance for the year)Average accounts
receivable balance for the year = (beginning balance + ending
balance) / 2Average accounts receivable balance for the year =
($68,000 + $47,000) / 2 = $115,000 / 2 = $57,500Accounts receivable
turnover per year = $900,000 / $57,500 = 15.65 times per
yearAverage number of days in accounts receivable = 365 days /
15.65 times = 23 days.Question 25:2A2-CQ11Garland Corporation's
Income Statement for the year just ended is shown below.
Garland's average inventory turnover ratio is:4.01.
3.82.
6.84.
6.52.
The inventory turnover per year is calculated as:Inventory
turnover per year = (cost of goods sold for year) / (average
inventory balance for the year)Average inventory balance for the
year = (beginning balance + ending balance) / 2Average inventory
balance for the year = ($125,000 + $138,000) / 2 = $263,000 / 2 =
$131,500Turnover per year = $527,000 / $131,500 = 4.01
times.Question 26:2A2-AT13Assume the following information for
Ramer Company, Matson Company and for their common industry for a
recent year.
Some of the ratios and data for Ramer and Matson are affected by
income taxes. Assuming no interperiod income tax allocation, which
one of the following items would be directly affected by income
taxes for the period?times interest earned and current ratio.
current ratio and debt/equity ratio.
return on investment (ROI) and earnings per share (EPS).
debt/equity ratio and dividend payout ratio.
ROI and earnings per share would be directly affected by income
taxes for the period. ROI is calculated by taking net income and
dividing it by average total assets. Net income is the amount left
over after taxes are paid. EPS is calculated by taking net income
and subtracting the preferred stock dividend, then dividing that
total by the weighted average number of common stock shares
outstanding for the year.Question 27:2A2-LS50All of the following
are affected when merchandise is purchased on credit except:
*Source: Retired ICMA CMA Exam Questions.current ratio.
total current assets.
net working capital.
total current liabilities.
When merchandise is purchased on credit, total current assets
increase and total current liabilities increase by the same amount
. . . therefore, the net working capital (current assets current
liabilities remains the same when merchandise is purchased on
credit. The current ratio, however, will change.Question
28:2A2-AT21In the 20X3 fiscal year, Newman Manufacturing's gross
profit margin remained unchanged from the 20X2 fiscal year. But, in
20X3, the company's net profit margin declined from the level
reached in 20X2. This could have happened because in 20X3:common
share dividends increased.
cost of goods sold increased relative to sales.
corporate tax rates increased.
sales increased at a faster rate than operating expenses.
Increasing taxes will reduce net income after tax and thus the
net profit margin.Question 29:2A2-CQ13Lancaster Inc. had net
accounts receivable of $168,000 and $147,000 at the beginning and
end of the year, respectively. The company's net income for the
year was $204,000 on $1,700,000 in total sales. Cash sales were 6%
of total sales. Lancaster's average accounts receivable turnover
ratio for the year is:10.87.
10.79.
10.15.
9.51.
The accounts receivable turnover per year is calculated
as:Accounts receivable turnover per year = (Net credit sales for
year) / (average accounts receivable balance for the year)Average
accounts receivable balance for the year = (beginning balance +
ending balance) / 2Average accounts receivable balance for the year
= ($168,000 + $147,000) / 2 = $315,000 / 2 = $157,500The net credit
sales for the year is calculated by taking total sales of
$1,700,000 and multiplying it by one minus the percent of sales
made in cash.Net credit sales = $1,700,000(1 0.06) =
$1,700,000(0.94) = $1,598,000Accounts receivable turnover per year
= $1,598,000 / $157,500 = 10.15 times.Question 30:2A2-AT24A
bondholder would bemostconcerned with which one of the following
ratios?Inventory turnover.
Times interest earned.
Earnings per share.
Quick ratio.
Times-interest-earned ratio reflects the company's ability to
meet interest payments when they are due. Since long-term creditors
(bond holders) are interested in the company's long-run solvency,
the times-interest-earned ratio provides a valuable
analysis.Question 1:2A2-CQ15The following financial information is
given for Anjuli Corporation (in millions of dollars).
Between the prior year and the current year, did the days sales
in inventory and days sales in receivables for Anjuli increase or
decrease? Assume a 365-day year.Days Sales in Inventory =Decreased;
Days Sales in Receivables =Increased
Days Sales in Inventory =Decreased; Days Sales in Receivables
=Decreased
Days Sales in Inventory =Increased; Days Sales in Receivables
=Decreased
Days Sales in Inventory =Increased; Days Sales in Receivables
=Increased
The days sales in inventory is calculated as:Days sales in
inventory = (# days in a year) / (inventory turnover)Inventory
turnover = (cost of goods sold (COGS) / (average inventory)The COGS
increased by 16.7%, which is calculated by taking the
year-over-year change in cost of goods sold, or (7 6) / 6 =
16.7%.Inventory increased by 25%, which is also calculated by
taking the year-over-year change in inventory, or (5 4) / 4 =
25%.Because both the COGS and the inventory increased, the
inventory turnover would decrease, resulting in an increase in the
days sales in inventory.Average number of days in accounts
receivable = 365 / (the accounts receivable turnover per
year)Accounts receivable turnover per year = (Net credit sales for
year) / (average accounts receivable balance for the year)Since the
sales increased by 10% ((11 10) / 10 = 10%), and the accounts
receivable increased by 33% ((4 3) / 4 = 33%), the accounts
receivable turnover would decrease, increasing the days sales in
accounts receivable.Question 2:2A2-LS63The dividend yield ratio is
calculated by which one of the following methods?
*Source: Retired ICMA CMA Exam Questions.Earnings per share
divided by dividends per share.
Dividends per share divided by market price per share.
Market price per share divided by dividends per share.
Dividends per share divided by earnings per share.
The dividend yield ratio is calculated by taking dividends per
share divided by market price per share.Question 3:2A2-AT29Birch
Corporation had net income for the year of $101,504 and a simple
capital structure consisting of the following common shares
outstanding.
Assume Birch Corporation issued a 20% stock dividend on August
1st. In this case, earnings per share (EPS) (rounded to the nearest
cent) were:$2.87.
$2.72.
$2.41.
$2.67.
EPS = (net income the preferred stock dividend) / (weighted
average number of common stock shares outstanding)Birch has no
preferred stock.
Therefore, EPS = (net income) / (weighted average number of
common stock shares outstanding).
The weighted average number of common stock shares outstanding
(W) is calculated as follows:W = (24,000 shares for 2 months) +
(29,400 shares for 4 months) + (36,000 shares for 5 months) +
(35,040 shares for 1 month)W = (2/12)(24,000) + (4/12)(29,400) +
(5/12)(36,000) + (1/12)(35,040) = 4,000 + 9,800 + 15,000 + 2,940 =
31,720 shares.
A stock dividend or split occurring during the year is assumed
to have occurred at the beginning of the year when calculating W.W,
therefore, = 31,720 shares (1.20 stock dividend factor) = 38,064
shares.
EPS = ($101,504) / (38,064 shares) = $2.67 per share.Question
4:2A2-CQ34For the most recent fiscal period, Oakland Inc. paid a
regular quarterly dividend of $0.20 per share and had earnings of
$3.20 per share. The market price of Oakland stock at the end of
the period was $40.00 per share. Oakland's dividend yield
was:2%.
1%.
6.25%.
0.50%.
The dividend yield on common stock is calculated as:Dividend
yield on common stock = (annual dividend per common share) /
(market price of common stock)Annual dividend = (4 quarters)($0.20)
= $0.80Dividend yield = $0.80 / $40 = 0.02, or 2%.Question
5:2A2-AT44The Dawson Corporation projects the following for the
year.
If Dawson Corporation's common stock is expected to trade at a
price/earnings (P/E) ratio of eight, the market price per share (to
the nearest dollar) would be:$56.
$125.
$68.
$72.
The P/E ratio for a stock is the ratio of its market price to
the corporation's earning per share (EPS). The P/E ratio is given
here, but it is necessary to determine the stock price using the
other available information.
The stock price, then, is $56, which is the EPS of $7,
multiplied by the P/E of 8.
The EPS of $7 is calculated by taking the $14,000,000 in
earnings to common shareholders and dividing it by 2,000,000 common
shares outstanding.
The earnings to common shareholders (E to CS) is calculated as
follows:EBIT = earnings before interest and taxes
E to CS = [(EBIT Interest)(1 Tax Rate)] (Preferred Stock
Dividend)E to CS = [($35,000,000 $5,000,000)(1 0.4)] ($ 4,000,000)=
[$30,000,000(0.6)] ($ 4,000,000)= $18,000,000 $4,000,000 =
$14,000,000.Question 6:2A2-CQ01Broomall Corporation has decided to
include certain financial ratios in its year-end annual report to
shareholders. Selected information relating to its most recent
fiscal year is provided below.
Broomall's working capital at year end is:$37,000.
$10,000.
$28,000.
$40,000.
The term working capital as used by accountants is calculated by
subtracting current liabilities from current assets.Working capital
= current assets current liabilitiesCurrent assets include cash,
accounts receivable, prepaid expenses, inventories, and
available-for-sale securities. (Available-for-sale securities are
carried at fair value, not cost.)Current assets = $10,000 + $20,000
+ $8,000 + $30,000 + $12,000 = $80,000Current liabilities include
accounts payable and notes payable due in 90 days.Current
liabilities = $15,000 + $25,000 = $40,000Working capital = $80,000
$40,000 = $40,000.Question 7:2A2-CQ46Morton Starley Investment
Banking is working with the management of Kell Inc. in order to
take the company public in an initial public offering. Selected
information for the year just ended for Kell is as follows.
If public companies in Kell's industry are trading at a market
to book ratio of 1.5, what is the estimated value per share of
Kell?
*Source: Retired ICMA CMA Exam Questions.$27.50.
$21.50.
$13.50.
$16.50.
The market to book ratio is computed by taking the present
market price of the stock, divided by the book value of the firm's
stock. The book value is computed by taking the total common equity
of $3,000,000, adding additional paid-in-capital of $24,000,000 and
Retained Earnings of $6,000,000, for a total of $33,000,000. Take
the $33,000,000 and divide by the number of shares outstanding
$3,000,000 to get a book value of $11.00. Next, take the $11.00
book value and multiply it by the ratio of 1.5 to get a estimated
value per share of Kell of $16.50.Question 8:2A2-LS09Capital
structure is the:mix of current and long-term assets, such as cash
and fixed assets (plants and equipment).
terms a firm has on its equity, such as dividend payment
schedules, stock repurchase agreements, etc.
mix of equity, such as common stock, preferred stock, paid-in
capital, and retained earnings.
mix of debt and equity the firm uses to finance operations and
asset purchases.
Capital structure is the mix of long-term debt, on which
interest and principal payments must be made, and equity, in the
form of common and preferred stock, which the firm uses to finance
operations.Question 9:2A2-CQ51Roy company had 120,000 common shares
and 100,000 preferred shares outstanding at the close of the prior
year. During the current year Roy repurchased 12,000 common shares
on March 1, sold 30,000 common shares on June 1, and sold an
additional 60,000 common shares on November 1. No change in
preferred shares outstanding occurred during the year. The number
of shares of stock outstanding to be used in the calculation of
basic earnings per share at the end of the current year is:
*Source: Retired ICMA CMA Exam Questions.100,000.
298,000.
137,500.
198,000.
The weighted average common shares calculation: (120,000 2/12) +
(108,000 3/12) + (138,000 5/12) + (198,000 x 2/12) = 20,000 +
27,000 + 57,500 + 33,000 = 137,500.Question 10:2A2-CQ49Ray Company
has 530,000 common shares outstanding at year-end. At December 31,
for basic earnings per share purposes, Ray computed its weighted
average number of shares as 500,000. Prior to issuing its annual
financial statements, but after year-end, Ray split its stock 2 for
1. Ray's weighted average number of shares to be used for computing
annual basic earnings per share is:
*Source: Retired ICMA CMA Exam Questions.1,000,000.
1,060,000.
500,000.
530,000.
The weighted average number of shares would be doubled
retroactively to adjust for the 2 for 1 stock split that occurred
before the financial statements were issued.Question
11:2A2-AT47Gartshore Inc. is a mail-order book company. The company
recently changed its credit policy in an attempt to increase sales.
Gartshore's variable cost ratio is 70% and its required rate of
return is 12%. The company projects that annual sales will increase
from the current level of $360,000 to $432,000, but the average
collection period on receivables will go from 30 to 40 days.
Ignoring any tax implications, what is the cost of carrying the
additional investment in accounts receivable, using a 365-day
year?$2,160.
$1,492.
$1,761.
$2,601.
The cost of carrying the additional investment in accounts
receivable is 12% of 70% of the increase in the average accounts
receivable balance. The increase in accounts receivable is
$17,761.
The new average accounts receivable balance is $47,342, which is
calculated as:$432,000 in sales divided by the accounts receivable
turnover of 9.125 (365 days divided by the collection period of 40
days).
The old average accounts receivable balance is $29,581, which is
calculated as:$360,000 in sales divided by the accounts receivable
turnover of 12.17 (365 days divided by the collection period of 30
days).
The difference between the old and new accounts receivable
balances is an increase of $17,761 (old = $29,581, new = $47,342),
and this incremental amount is used to calculate the increased
carrying cost.
Increased carrying cost = (0.12)(0.7)($17,761) = $1,492.Question
12:2A2-AT30Windsor Company had 720,000 shares of common stock
outstanding on December 31, Year 1. An additional 240,000 shares of
common stock were issued on April 1, Year 2, and 360,000 more on
July 1, Year 2. On October 1, Year 2, Windsor issued 5,000, $1,000
face value, 7% convertible bonds.
Each bond is convertible into 30 shares of common stock. The
bonds were not considered common stock equivalents at the time of
their issuance, and no bonds were converted into common stock in
Year 2. If no other equity transactions will occur, the number of
shares to be used in computing primary earnings per share (EPS) and
fully diluted earnings per share (assuming dilution will occur),
respectively, for the year ending December 31, Year 2, is:1,080,000
and 1,117,500.
1,000,000 and 1,080,000.
1,117,500 and 1,117,500.
1,000,000 and 1,117,500.
The weighted average number of common stock shares outstanding
(W) for primary (basic) EPS is calculated as:
W = (20,000 shares for 3 months) + (720,000 + 240,000 shares for
3 months) + (960,000 + 360,000 for 6 months)W = (3/12)(720,000) +
(3/12)(960,000) + (6/12)(1,320,000)W = 180,000 + 240,000 + 660,000W
= 1,080,000 shares
When calculating the weighted average number of common stock
shares outstanding (W) for fully diluted EPS, conversions of
convertible securities and/or exercises of options or warrants are
assumed to have occurred at the earliest possible date.
For Windsor, the conversion of 5,000 bonds into 30 shares of
common stock each (a total of 150,000 additional shares) is assumed
to have occurred on October 1, Year 1. This results in an
additional 150,000 shares for 3 months or an additional weighted
average number of shares of (3/12)(150,000 shares) = 37,500
shares.
Therefore, the W = 1,080,000 shares + 37,500 shares = 1,117,500
shares.1,080,000 shares will be used to calculate primary EPS and
1,117,500 shares will be used to calculate fully diluted
EPS.Question 13:2A2-LS51Markowitz Company increased its allowance
for uncollectable accounts. This adjustment will:
*Source: Retired ICMA CMA Exam Questions.reduce the current
ratio.
increase the acid test ratio.
increase working capital.
reduce debt-to-asset ratio.
The current ratio is calculated as current assets divided by
current liabilities. By increasing the allowance for doubtful
accounts, the next effect is to reduce the current asset accounts
receivable. Therefore, this adjustment would reduce the current
ratio.Question 14:2A2-CQ40Globetrade is a retailer that buys
virtually all of its merchandise from manufacturers in a country
experiencing significant inflation. Globetrade is considering
changing its method of inventory costing from first-in, first-out
(FIFO) to last-in, first-out (LIFO). What effect would the change
from FIFO to LIFO have on Globetrade's current ratio and inventory
turnover ratio?
*Source: Retired ICMA CMA Exam Questions.Both the current ratio
and the inventory turnover ratio would decrease.
The current ratio would decrease but the inventory turnover
ratio would increase.
The current ratio would increase but the inventory turnover
ratio would decrease.
Both the current ratio and the inventory turnover ratio would
increase.
The value of inventory as a result of changing from FIFO to LIFO
would decrease when prices are rising. The effect of the change in
inventory valuation would cause the current ratio to decrease but
the inventory turnover ratio would increase.Question 15:2A2-AT46A
change in credit policy has caused an increase in sales, an
increase in discounts taken, a decrease in the amount of bad debts,
and a decrease in the investment in accounts receivable. Based upon
this information, the company's:average collection period has
decreased.
working capital has increased.
accounts receivable turnover has decreased.
percentage discount offered has decreased.
An organization's collection period is 365 days divided by its
accounts receivable turnover. The accounts receivable turnover is
net sales divided by the average net accounts receivable balance.
Since the average receivable balance has decreased and sales have
increased, the accounts receivable turnover has increased. The
increased turnover decreases the collection period.Question
16:2A2-CQ50On January 1, Esther Pharmaceuticals had a balance of
10,000 shares of common stock outstanding. On June 1, the company
issued an additional 2,000 shares of common stock for cash. A total
of 5,000 shares of 6%, $100 par, nonconvertible preferred stock was
outstanding all year. Esther's net income was $120,000 for the
year. The earnings per share for the year were:
*Source: Retired ICMA CMA Exam Questions.$7.50.
$8.06.
$10.00.
$10.75.
Formula = (Net income Preferred Dividends) / Weighted Average
shares outstanding. Weighted average shares outstanding (10,000
shares + (2,000 7 /12) = 11,167 weighted average shares
outstanding. (120,000 net income 30,000 [5,000(100)(.060)]
preferred dividend) / 11,167 weighted average shares outstanding =
90,000/11,167 = $8.06 earnings per share.Question 17:2A2-AT32
Devlin Company's acid-test ratio at May 31, Year 2, was:2.04 to
1.
1.86 to 1.
0.60 to 1.
1.14 to 1.
The acid-test ratio (also known as the quick ratio) is the ratio
of quick assets to current liabilities. Quick assets are those
easily converted to cash without significant loss. The quick assets
are cash, short-term investments (trading securities), and net
receivables.
Devlin's acid-test ratio for Year 2 is calculated:Acid-test
ratio = (cash + marketable securities + net receivables) / current
liabilitiesAcid-test ratio = ($45 cash + $30 trading securities +
$68 accounts receivable (net)) / ($125 current
liabilities)Acid-test ratio = $143 / $125 = ratio of 1.14 to
1.Question 18:2A2-LS16If accounts payable is understated at the end
of the year, which of the following statements is correct?The
current ratio is understated.
The times interest earned ratio is understated.
The days' purchases in accounts payable is understated.
The long-term debt-to-equity ratio is understated.