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Exam 5: Analyzing and Interpreting Financial Statements

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Question 31

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Selected recent balance sheet and income statement information for Catnip, Inc. follows: A. Calculate accounts receivable turnover (ART) for 2016 and 2015. Has ART improved during the year or worsened? B. Calculate inventory turnover (INVT) for 2016 and 2015. Has INVT improved during the year or worsened?

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A. 2016 ART = $43,335 / $4,488 = 9.66
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Question 32

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Return on assets can be disaggregated into profit margin and an expense-to-sales ratio.

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B) False

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Question 33

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What does the current ratio measure?

Use the selected balance sheet and income statement information below for Brahtz, Inc. to compute the current ratio. Explain what information this ratio provides.

K Grocers' 2016 financial statements show net income of $1,505 million, sales of $225,935 million, and average total assets of $46,982 million. How much is K Grocers' asset turnover for the year?

Charlie Plumbing Supplies has a return on assets (ROA) of 24%, while the industry average of similar companies is 13%. This means that Charlie Plumbing Supplies' asset turnover is higher than the industry average.

Ratio analysis is more complicated when a company is a conglomerate. Why?

The income statements for Bullseye Corporation for fiscal years 2015, 2014, and 2013 follow: Prepare a pro-forma income statement for 2016 for Bullseye assuming the following: A. Total revenues are $142,000 million. B. Cost of sales is 68% of net sales. C. Selling, general and administrative expenses increase by 10% from 2015. Credit card expense increases by 12%. D. Depreciation increases by 5% E. There is no gain on receivables held for sale. F. Interest costs remain the same. G. The effective income tax rate is 35%.

Use the following selected balance sheet and income statement information for Sirius Supply Co. to compute ROA, to the nearest hundredth.

Explain the trade-off between profit margin and asset turnover.

Highly leveraged firms have higher ROE than lower leveraged firms.