Assignment
CHAPTER 11-EXPANDED ANALYSIS
MULTIPLE CHOICE
1. Which of the following ratios is given the highest significance rating by commercial loan officers?
a. Inventory Turnover In Days
b. Degree of Financial Leverage
c. Times Interest Earned
d. Fixed Charge Coverage
e. Debt/Equity
2. Which of the following ratios is given the highest significance rating by Certified Public Accountants?
a. Quick Ratio
b. Debt/Equity
c. Net Profit Margin
d. Current Ratio
e. Times Interest Earned
3. Edward I. Altman developed a multivariate model to predict bankruptcy. The model produces an overall discriminant score called a Z value. Which of the following statements is probably an unreasonable statement relating to the Z value?
a. The sales generating ability of the firm's assets is one of the important considerations in the Z value.
b. The lack of a market value for a company's stock will reduce the significance of the Z value approach.
c. Total assets is an important consideration in the Z value computation.
d. Cumulative profitability over time is considered in the Z value computation.
e. A Z score of 2.00 or below indicates a very healthy company.
4. Which of the following is not a reasonable matching?
Item Related Conservative Policy
I. inventory LIFO
II. fixed assets accelerated depreciation
III. intangible assets short period of time for amortization
IV. pensions short period of time to amortize prior service cost
V. receivables direct write-off method
a. I
b. II
c. III
d. IV
e. V
TRUE/FALSE
1. Most of the ratios given a high significance rating by commercial loan officers have a primary measure of liquidity or debt.
2. A review of the computational methodology used to compute the ratios for annual reports indicated that there were wide differences of opinion on how many of the ratios should have been computed.
3. Under inflationary conditions, the least conservative inventory method is lifo.
4. The straight-line depreciation method is a conservative depreciation method.
5. With the Altman model, the higher the Z score, the more likely the firm will go bankrupt.
6. A column graph has columns in horizontal form.
7. The financial literature and valuation books strongly support the use of multiperiod discounted valuation model either in terms of earnings or cash flow.
PROBLEM
1. Answer the questions below.
|
Firm Using LIFO Inventory
|
2012
|
2011
|
|
Selected Balance Sheet Data:
|
|
|
|
Merchandise inventories
|
$ 24,000
|
$ 22,000
|
|
Total current assets
|
41,000
|
39,000
|
|
Total assets
|
85,000
|
75,000
|
|
Total current liabilities
|
25,000
|
24,000
|
|
Total long-term debt
|
30,000
|
30,000
|
|
|
|
|
|
Selected Income Statement Data:
|
|
|
|
Net sales
|
$360,000
|
$320,000
|
|
Cost of merchandise sold
|
295,000
|
260,000
|
|
Net income
|
4,200
|
4,500
|
|
Net income per common share
|
$2.60
|
$2.80
|
|
Effective tax rate
|
40%
|
40%
|
Selected partial note with 2012 financial statements: Inventories have been reduced by $10,000 and $7,000 at December 31, 2012, and December 31, 2011 respectively, from amounts which would have been reported under the fifo method (which approximated current cost). Had the company valued all of its inventories under the fifo method, net income would have been approximately $5,600 in 2012 and $5,601 in 2011.
Required:
a. Compute the following ratios for 2012 from the financial statements (using lifo):
1. Days' Sales in Inventory
2. Working Capital
3. Current Ratio
4. Debt Ratio
b. Compute the following ratios for 2012, using fifo disclosure:
1. Days' Sales in Inventory
2. Working Capital
3. Current Ratio
4. Debt Ratio
c. Comment on the difference in the indicated liquidity and debt between the ratios computed under lifo and the ratios computed under fifo.