Week 13 Chapter 19 tutorial Solutions
1. Sing 2 Company Ltd had a profit of $100 000 before tax, after deducting $16 000 in interest
expense. Sing 2's liabilities and equity total $1 000 000. Return on total assets, before finance costs
and tax is:
A. 9%
B. 10%
C. 11%
D. 11.6%
ANSWER D
2. Moana Consultancy reports:
Total assets $ 950 000
Profit 30 000
Current liabilities 285 000
If current assets = 60% of total assets Moana's current ratio is:
A. 1 to 2
B. 3 to 2
C. 2 to 1
D. 2 to 3
ANSWER C
3. Timberland company have been operating for 15 years. It has a current ratio of 3:1. Which action
will decrease this ratio?
A. Issue of long-term debentures
B. Sale of equipment for cash
C. Payment of a dividend
D. Collection of an account receivable
ANSWER C
4. The quick ratio (acid test ratio) reflects:
A. The belief that not all current assets can be liquidated immediately
B. The same information as the Debt Ratio
C. The relationship of quick assets to fixed assets
D. Management's reaction time to avoid losses
ANSWER A
5. Clay Earings has a current ratio of 2.5 to 1 and current liabilities of $12 000. If Clay Earings has
$9000 of inventory, what is the quick ratio?
A. 2.25 to 1
B. 2.00 to 1
C. 1.75 to 1
D. 1.50 to 1
ANSWERC
6. Star Sia’s financial records reveal this information at 30 June 2021.
Net Sales $90 000
Cost of Sales 60 000
Ending Inventory 12 500
Beginning Inventory 17 500
The number of days taken to turn over average inventory for 2021 are:
A. 91 days
B. 71 days
C. 76 days
D. 61 days
ANSWER A
7. This is Horishmas Manufacturing’s balance sheet at year-end.
Current assets $200 000
Long-term assets 400 000
Current liabilities 50 000
Long-term liabilities 100 000
Share capital 200 000
Retained earnings 250 000
The equity ratio is:
A. 33%
B. 50%
C. 75%
D. 300%
ANSWERC
8. All of these ratios are indicators of profitability except:
A. Return on total assets
B. Earnings per share
C. Equity ratio
D. Profit margin
ANSWER C
9. Johnson Foods Company had a before-tax profit of $250 000 after deducting interest expenses
of $18 000. Johnson Foods' liabilities and equity total $1 875 000. Return on total assets, before
finance costs and tax is:
a. 12.37%.
*b. 14.29%.
c. 13.33%.
d. unable to be calculated from the information provided.
General Feedback:
Learning objective 19.4 conduct ratio analysis to assess an entity's profitability, liquidity, and
financial stability.
Feedback: ([$250 000 + $18 000]/$1 875 000) × 100/1
10. Using the following information, calculate the price-earnings ratio of the shares for the current
year.
Per share
Carrying value on 31 December, current year $20
Quoted market value on 31 December, current year 25
Earnings per share for the current year 5
Dividend per share for the current year 2
a. 12.5 to 1.
b. 10 to 1.
*c. 5 to 1.
d. 4 to 1.
General Feedback:
Learning objective 19.4 conduct ratio analysis to assess an entity's profitability, liquidity, and
financial stability.
Feedback: $25/$5
Formulae
1. Accrual basis COGS – beginning Inv + Ending Inventory = Accrual basis Purchases
2. Accrual basis Purchases + opening AP – ending AP = cash paid to suppliers for purchase
3. Accrual basis Sales + begin AR – ending AR = cash receipts from customers
4. Accrual-basis EXP – beginning prepaid expenses + ending prepaid expenses + beginning accrued
expense – ending accrued expense
5. Gross profit ratio = Gross Profit / Net sales x 100
6. Debt ratio = Total Debts / Total Assets
7. Current ratio = Current assets/ Current liabilities
8. Equity ratio = Total Equity / Total Assets
9. Quick ratio = (Current assets – Inventory)
Current liabilities
10. Inventory turnover ratio = Cost of sales / Average inventory balance
11. Average days per inventory turnover = 365/ inventory turnover ratio
12. Average Collection period = Average receivable balance x 365
Net sales revenue