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FINA 2201 Chapter Notes - Chapter 4: Inventory Turnover, Asset Turnover, Market Liquidity

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lilacmule890
14 Mar 2016
School
Northeastern University
Department
Finance & Insurance
Course
FINA 2201
Professor
Sidi Boubker Drissi Messouak

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Document Summary

Liquid asset one that trades in an active market and thus be quickly converted to cash. If a company is having financial problems their current liabilities will rise faster than current assets. Quick ratio = ca i / c/l. How often is inventory turnover in a year. Inventories is a year end amount whereas sales is accrued throughout the year: may have to make a adjusted for this. The average amount of time a firm must wait to receive cash after making a sale. Should look at the firms credit policy to understand what a good number for dos should be: fixed assets turnover ratio. How well does the firm use it plant and equipment. Problems arise from: fixed assets being recorded at historical cost and depreciated, a older firm may have a better ratio than a new one with new fixed assets, total assets turnover ratio. Measures the turnover of all of the firm"s assets.

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Related Questions

QUESTION 1

Determine the cost of sales for a firm with the following financial ratios and data:

Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times

a.

$6,000,000
b.

$3,000,000
c.

$2,000,000
d.

$1,000,000

8.3 points

QUESTION 2

What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

a.

2.65
b.

2.1
c.

1.1
d.

1.2

8.3 points

QUESTION 3

A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

a.

$20,000
b.

$ 5,000
c.

$10,000
d.

$15,000

8.3 points

QUESTION 4

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must

a.

increase its equity multiplier
b.

increase sales and increase assets
c.

decrease its equity multiplier
d.

reduce sales and increase assets

8.3 points

QUESTION 5

The sales-to-inventory ratio:

a.

is technically inferior to other commonly used ratios.
b.

is superior to the inventory turnover ratio.
c.

as a determination of financial performance, is good comparison tool.
d.

was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole.

8.5 points

QUESTION 6

Primary sources of comparative financial data include

a.

Dun and Bradstreet
b.

Richard Moore, Inc.
c.

Framingham Financial Library
d.

New York Times

8.3 points

QUESTION 7

____ indicate the ability of the firm to meet its short-term financial obligations

a.

Leverage ratios
b.

Profitability ratios
c.

Activity ratios
d.

Liquidity ratios

8.3 points

QUESTION 8

If a firm’s common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:

a.

on total assets as a percentage of long-term liabilities.
b.

on cost of goods sold as a percentage of sales.
c.

on taxes paid as a percentage of stockholders’ equity.
d.

on expenses as a percentage of current assets.

8.3 points

QUESTION 9

The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.

a.

payout
b.

earnings
c.

return on earnings
d.

dividend yield

8.3 points

QUESTION 10

The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:

a.

based on the company's accounting information system (AIS)
b.

constructed in conformity with generally accepted accounting principles
c.

developed using management's choice of accounting enhancement techniques
d.

an accurate picture of the company's market position

8.3 points

QUESTION 11

The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.

a.

liquidity
b.

profitability
c.

size
d.

risk

8.3 points

QUESTION 12

The type of ratio that indicates the firm’s ability to provide adequate returns in the form of dividends and share price appreciation is:

a.

Profitability ratios
b.

Asset management ratios
c.

Financial leverage management ratios
d.

Liquidity ratios

8.5 points

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Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)
Assets 2010 2009
Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 218,400 200,000
Total assets $379,659 $327,240
Liabilities and equity
Accounts payable $33,600 $32,000
Accruals 12,600 12,000
Notes payable 19,929 6,480
Total current liabilities $66,129 $50,480
Long-term debt 67,662 58,320
Total liabilities $133,791 $108,800
Common stock 183,793 178,440
Retained Earnings 62,075 40,000
Total common equity $245,868 $218,440
Total liabilities and equity $379,659 $327,240
Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
2010 2009
Sales $420,000 $400,000
Expenses excluding depr. and amort. 327,600 320,000
EBITDA $92,400 $80,000
Depreciation and Amortization 19,660 18,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (40%) 26,800 23,016
Net Income $40,200 $34,524
Common dividends $18,125 $17,262
Addition to retained earnings $22,075 $17,262
Other Data 2010 2009
Year-end Stock Price $90.00 $96.00
# of shares (Thousands) 4,052 4,000
Lease payment (Thousands of Dollars) $20,000 $20,000
Sinking fund payment (Thousands of Dollars) $0 $0
Ratio Analysis 2010 2009 Industry Avg
Liquidity Ratios
Current Ratio 2.38 2.52 2.58
Quick Ratio 1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover 1.11 1.22 7.69
Days Sales Outstanding 45.63 43.80 47.45
Fixed Assets Turnover 1.92 2.00 2.04
Total Assets Turnover 3.81 5.64 1.23
Debt Management Ratios
Debt Ratio 32.1%
Times-interest-earned ratio 15.33
EBITDA coverage ratio 4.18
Profitability Ratios
Profit Margin 9.57% 8.63% 8.86%
Basic Earning Power 19.16% 18.95% 19.48%
Return on Assets 10.59% 10.55% 10.93%
Return on Equity 21.87% 19.35% 16.10%
Market Value Ratios
Earnings per share NA
Price-to-earnings ratio 10.65
Cash flow per share NA
Price-to-cash flow ratio 7.11
Book Value per share NA
Market-to-book ratio 1.72
a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17
b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.
c. How has Joshua & White's profitability changed during the last year?
d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
ROE = PM x TA Turnover x Equity Multiplier
2010
2009
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Common Size Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?
Percent Change Balance Sheets Base
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Base
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Base
Percent Change Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)
Assets 2010 2009
Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 218,400 200,000
Total assets $379,659 $327,240
Liabilities and equity
Accounts payable $33,600 $32,000
Accruals 12,600 12,000
Notes payable 19,929 6,480
Total current liabilities $66,129 $50,480
Long-term debt 67,662 58,320
Total liabilities $133,791 $108,800
Common stock 183,793 178,440
Retained Earnings 62,075 40,000
Total common equity $245,868 $218,440
Total liabilities and equity $379,659 $327,240
Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
2010 2009
Sales $420,000 $400,000
Expenses excluding depr. and amort. 327,600 320,000
EBITDA $92,400 $80,000
Depreciation and Amortization 19,660 18,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (40%) 26,800 23,016
Net Income $40,200 $34,524
Common dividends $18,125 $17,262
Addition to retained earnings $22,075 $17,262
Other Data 2010 2009
Year-end Stock Price $90.00 $96.00
# of shares (Thousands) 4,052 4,000
Lease payment (Thousands of Dollars) $20,000 $20,000
Sinking fund payment (Thousands of Dollars) $0 $0
Ratio Analysis 2010 2009 Industry Avg
Liquidity Ratios
Current Ratio 2.38 2.52 2.58
Quick Ratio 1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover 1.11 1.22 7.69
Days Sales Outstanding 45.63 43.80 47.45
Fixed Assets Turnover 1.92 2.00 2.04
Total Assets Turnover 3.81 5.64 1.23
Debt Management Ratios
Debt Ratio 32.1%
Times-interest-earned ratio 15.33
EBITDA coverage ratio 4.18
Profitability Ratios
Profit Margin 9.57% 8.63% 8.86%
Basic Earning Power 19.16% 18.95% 19.48%
Return on Assets 10.59% 10.55% 10.93%
Return on Equity 21.87% 19.35% 16.10%
Market Value Ratios
Earnings per share NA
Price-to-earnings ratio 10.65
Cash flow per share NA
Price-to-cash flow ratio 7.11
Book Value per share NA
Market-to-book ratio 1.72
a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17
b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.
c. How has Joshua & White's profitability changed during the last year?
d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
ROE = PM x TA Turnover x Equity Multiplier
2010
2009
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Common Size Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?
Percent Change Balance Sheets Base
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Base
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Base
Percent Change Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income