ECON 4 Lecture Notes - Lecture 4: Double-Entry Bookkeeping System, Cash Cash, Bookkeeping
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Problem 3-14
Comprehensive Ratio Analysis
The Jimenez Corporation's forecasted 2014 financial statements follow, along with some industry average ratios.
Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2014
| Assets | |
| Cash | $ 72,000 |
| Accounts receivable | 439,000 |
| Inventories | 894,000 |
| Total current assets | $1,405,000 |
| Fixed assets | 431,000 |
| Total assets | $1,836,000 |
| Liabilities and Equity | |
| Accounts payable | $ 332,000 |
| Notes payable | 100,000 |
| Accruals | 170,000 |
| Total current liabilities | $ 602,000 |
| Long-term debt | 404,290 |
| Common stock | 575,000 |
| Retained earnings | 254,710 |
| Total liabilities and equity | $1,836,000 |
Jimenez Corporation: Forecasted Income Statement for 2014
| Sales | $4,290,000 |
| Cost of goods sold | 3,580,000 |
| Selling, general, and administrative expenses | 370,320 |
| Depreciation and amortization | 159,000 |
| Earnings before taxes (EBT) | $ 180,680 |
| Taxes (40%) | 72,272 |
| Net income | $ 108,408 |
| Per Share Data | |
| EPS | $ 4.71 |
| Cash dividends per share | $ 0.95 |
| P/E ratio of | 5.0 |
| Market price (average) | $ 23.57 |
| Number of shares outstanding | 23,000 |
| Industry Financial Ratios (2013)* | |
| The quick ratio of | 1.0 |
| The current ratio of | 2.7 |
| Inventory turnover** | 7.0 |
| Days sales outstanding*** | 32.0 days |
| Fixed assets turn over** | 13.0 |
| Total assets turnover** | 2.6 |
| Return on assets | 9.1% |
| Return on equity | 18.2% |
| The profit margin on aales of | 3.5% |
| Debt-to-assets ratio | 21.0% |
| Liabilities-to-assets ratio | 50.0% |
| P/E ratio of | 6.0 |
| Price/Cash flow ratio of | 3.5 |
| Market/Book ratio of | 3.5 |
| *Industry average ratios have been constant for the past 4 years. | |
| **Based on year-end balance sheet figures. | |
| ***Calculation is based on a 365-day year. | |
Calculate Jimenez's 2014 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez's projected strengths and weaknesses. Assume that there are no changes from the prior period to any of the operating balance sheet accounts. Round DSO to the nearest whole number. Round the other ratios to one decimal place.
| Ratios | Firm | Industry | Comment |
| Quick ratio | 1.0 | -Select-Strong Weak Item 2 | |
| Current ratio | 2.7 | -Select-Strong Weak Item 4 | |
| Inventory turnover | 7.0 | -Select-Poor Rich Item 6 | |
| Days sales outstanding | days | 32 days | -Select-Poor Rich Item 8 |
| Fixed assets turnover | 13.0 | -Select-Poor Rich Item 10 | |
| Total assets turnover | 2.6 | -Select-Poor Rich Item 12 | |
| Return on assets | % | 9.1% | -Select-Bad Good Item 14 |
| Return on equity | % | 18.2% | -Select-Bad Good Item 16 |
| The profit margin on sales | % | 3.5% | -Select-Bad Good Item 18 |
| Debt ratio | % | 21.0% | -Select-Low High item 20 |
| Liabilities-to-assets | % | 50.0% | -Select-Low High Item 22 |
| EPS | $4.71 | n.a. | -- |
| Stock Price | $23.57 | n.a. | -- |
| P/E ratio | 6.0 | -Select-PoorRich Item 24 | |
| P/CF ratio | 3.5 | -Select-PoorRich Item 26 | |
| M/B ratio | n.a. | -- |
So, the firm appears to be -Select-badly good item 28 managed
QUESTION 31
The Board of Governors of the Federal Reserve System is
| composed of seven members who are appointed by the President and approved by the Senate. | ||
| composed of 12 members of the Senate and the U.S. House of Representatives. | ||
| elected by the general public. | ||
| composed of representatives from the country's 12 largest commercial banks. |
1.11 points
QUESTION 32
The Fed is said to be the "lender of last resort" in that
| it charges a higher interest rate to borrowers than does any other bank. | ||
| it functions as the government's bank only when commercial banks fail to do so. | ||
| it makes loans to individuals whom commercial banks do not believe are credit-worthy. | ||
| it stands ready to lend to any depository institution that it has decided should not fail. |
1.11 points
QUESTION 33
The Federal Reserve System acts as the government's fiscal agent by
| providing checking account services for the government. | ||
| preparing the budget the President presents to Congress every year. | ||
| determining how to finance a deficit. | ||
| auditing taxpayers. |
1.11 points
QUESTION 34
The Federal Reserve System was established in which year?
| 1913. | ||
| 1929. | ||
| 1865. | ||
| 1941. |
1.11 points
QUESTION 35
By serving as the lender of last resort,
| the Fed provides check clearing services. | ||
| the Fed aids in the sale of government securities. | ||
| the Fed supervises depository institutions. | ||
| the Fed can prevent bank failures. |
1.11 points
QUESTION 36
Depository institutions must
| use and pay for the services of the Federal Reserve System. | ||
| set their interest rates according to schedules established by the Federal Reserve System. | ||
| keep a certain percentage of their deposits as reserves. | ||
| turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed. |
1.11 points
QUESTION 37
The Federal Reserve System has
| 50 district banks. | ||
| 24 district banks. | ||
| 12 district banks. | ||
| 7 district banks. |
1.11 points
QUESTION 38
The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is
| the Board of Governors. | ||
| the Federal Advisory Committee. | ||
| the Federal Open Market Committee. | ||
| the Federal Reserve district banks. |
1.11 points
QUESTION 39
The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a
| systemic risk. | ||
| liquidity risk. | ||
| lending risk. | ||
| moral hazard. |
1.11 points
QUESTION 40
A system in which depository institutions hold reserves that are less than the amount of total deposits is called
| fiat money banking. | ||
| required reserve banking. | ||
| fractional reserve banking. | ||
| central banking system. |
1.11 points
QUESTION 41
Total reserves of private banks are
| all customer deposits. | ||
| the minimum amount banks need to hold against time deposits. | ||
| federal reserve notes. | ||
| deposits held at the Fed and vault cash. |
1.11 points
QUESTION 42
A statement of assets and liabilities of any business entity is called
| a cash flow statement. | ||
| an income statement. | ||
| a balance sheet. | ||
| a statement of net worth. |
1.11 points
QUESTION 43
Which of the following actions has no effect on the total money supply?
| The Federal Open Market Committee buys government securities. | ||
| There is a transfer of deposits from one bank to another bank. | ||
| There is change in the money multiplier. | ||
| The Federal Open Market Committee sells government securities. |
1.11 points
QUESTION 44
Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of
| $80. | ||
| $0. | ||
| $400. | ||
| $20. |
1.11 points
QUESTION 45
The Federal Open Market Committee has responsibility for
| appointing members to the Board of Governors of the Federal Reserve system. | ||
| issuing orders to buy or sell government securities for the Fed. | ||
| advising the Treasury Department on monetary policy. | ||
| printing money. |
