Question

In: Finance

1.The balance sheet for PalletPaper, Inc. shows cash is $73,500, accounts receivable are $185,400, inventories are...

1.The balance sheet for PalletPaper, Inc. shows cash is $73,500, accounts receivable are $185,400, inventories are $447,300, fixed assets are $820,000, current liabilities are $489,450, accounts payable are $132,500, accrued payroll is $145,000 and long-term debt is $900,000? What is the current ratio for PalletPaper?

A.more than 1.5

B.more than 1.46but less than 1.53

C.more than 1.39but less than1.4

D.more than 1.32 but less than 1.39

E.less than 1.32

2.Which of the following statements is correct?(x)If a firm undertakes a short-term bank loan for $125,000 and uses $118,500 to purchase equipment, then the firm’s current ratio necessarily increases. (y)Suppose a firm has a current ratio of 1.2 and a quick ratio of 0.85. If the firm does not have any other source of cash, the firm can meet all of its obligations regarding current liabilities if it sells enough of its inventory but it could not satisfy those obligations if it does not sell inventory. (z)If a firm reduces inventory (at full value) by selling to customers for cash, the current ratio remains the same but the quick ratio and cash ratio decrease

.A.(x), (y) and (z

)B.(x) and (y) only

C.(x) and (z) only

D.(y) and (z) only

E.(y) only

3.Which of the following statements is correct?(x)Suppose a firm has sales of $625,000, net income of $145,000, cash equals $36,000, current assets of $198,000, and accounts receivable of 75,000. As a result, the firm's accounts receivable turnover is more than 8.25 times.(y)A firm has working capitalof $446,280 and fixed assets of $1,800,000. Its fixed asset turnover is 1.2 times. Therefore,the firm's sales to working capital ratio is more than 4.75times but less than 4.95times.(z)Suppose a firm has current assets of $350,000, current liabilities of $264,600, cash of $65,140, fixed assets of $685,000, cost of goods sold of $452,300, and inventory of $84,225. As a result, the firm's inventory turnover is more than 4.75 times but less than 5.25 times.

A.(x), (y) and (z)

B.(x) and (y) only

C.(x) and (z) only

D.(y) and (z) only

E.(x) only

Solutions

Expert Solution

Answer 1:

Correct answer is:

C. more than 1.39 but less than 1.46

Explanation:

Current ratio = Current assets / Current liabilities = (73500 + 185400 + 447300) / 489450 = 1.44

As such option C is correct and other options A, B, D and E are incorrect.

Answer 2:

Correct answer is:

E. (y) only

Explanation:

Statement x is incorrect since taking short term loan will increase current liability. Use of proceeds of short term loan to purchase equipment will increase fixed assets. As such with this transaction current liabilities will increase by $125,000, fixed assets will increase by $118,500 and current assets (Cash) will increase by (125000 - 118500 =) $6,500. Overall this will decrease current ratio.

Statement y is correct. Current ratio is 1.2 and quick ratio is 0.85. This implies that if the firm does not have any other source of cash, the firm can meet all of its obligations regarding current liabilities if it sells enough of its inventory. Further it could not satisfy those obligations if it does not sell inventory since quick ratio is 0.85 only.

Statement z is incorrect. If inventories are sold for cash, current ratio will remain same but since cash increases quick ratio and cash ratio will increases.

As such only statement y is correct.

As such option E is correct and other options A, B, C and D are incorrect.

Answer 3:

Correct answer is:

B. (x) and (y) only

Explanation:

Statement x is correct. Accounts receivable turnover = Credit sales / average receivable = 625000 / 75000 = 8.33

Statement y is correct.

Fixed asset turnover is 1.2. Fixed assets = $1,800,000. Hence sales = 1800000 * 1.2 = $2,160,000.

Working capital = $446,280

Firm's sales to working capital ratio = Sales / Working capital = 2160000 / 446280 =4.84. As such the firm's sales to working capital ratio is more than 4.75 times but less than 4.95 times

Statement z is incorrect.

Firm's inventory turnover = Cost of goods sold / Average inventory = 452300 / 84225 = 5.37. The statement 'the firm's inventory turnover is more than 4.75 times but less than 5.25 times' is incorrect.

As such statements x and y are correct.

Hence option B is correct and other options A, C, D and E are incorrect.

jeff jeffy answered 1 year ago

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