Question

1. Which of the following is the effect on the transaction metrics of a company when it records depreciation?

a.Its profitability and liquidity remain unaffected.

b.Its liquidity increases.

c.Its profitability increases.

d.Its profitability decreases.

2. Aquablue Roadways Corporation operates throughout the United States. The following data (in millions) were adapted from recent financial statements of Aquablue.

	Year 2	Year 1
Sales	$47,250	$49,675
Beginning of year property, plant, and equipment	18,620	15,730
End of year property, plant, and equipment	22,360	18,540

From the above data, what would be the asset turnover for Year 2? (Round the answer to two decimal places.)

a.1.22

b.2.01

c.2.18

d.1.15

3. Which of the following is the effect on a company's liquidity and profitability metrics when it purchases a piece of equipment?

a.Its free cash flow decreases.

b.Its asset turnover remains unaffected.

c.Its free cash flow increases.

d.Its asset turnover increases.

Answer 1

Question 1

Correct answer--------------d.Its profitability decreases.

Depreciation is an expense and is charged to income statement. It reduces net income profitability. It is a non cash expense so it does not have any effect on Cash and liquidity pf the company.

Question 2

Correct answer--------------2.31

Please check all options as correct option is not displayed in the question.

Working

Fixed asset Turnover
Numerator	/	denominator	=	Fixed asset Turnover
Net sales	/	Average Fixed assets	=	Fixed asset Turnover
$        47,250.00	/	$      20,490.00	=	2.31	times

	Year 2
Beginning balance of Total assets	$       18,620.00
Ending value of Total assets	$       22,360.00
Total	$       40,980.00
Divided by	2
Average Assets	$       20,490.00

Question 3

Correct answer--------------a.Its free cash flow decreases.

.

The asset turnover remains same because total assets will remain same since increase in fixed asset is same as decrease in vase.

Free cash flow decreases as capital expenditure has increased.