Midterm Revision Answers

➢ Question 1: True & False

1- Time series analysis is a type of analysis where an investor, analyst or portfolio manager
compares a particular company to its industry peers. (F)
- Cross sectional Analysis

2- A common-size balance sheet expresses all account balances as a percentage of net sales. (F)
- Total Assets

3- The inventory turnover is computed by dividing cost of goods sold by inventory. (T)

4- The accounts receivable turnover is computed by dividing purchases on credit by accounts

receivables. (F)
- Sales

5- The ratio of the sales revenue to total assets is often called the total assets turnover. (T)

6- The balance sheet summarizes the assets, liabilities and owners' equity of a company for a
period of time. (F)
- At a point of time

7- The current ratio is never larger than the quick ratio. (F)

8- Assets are listed in order of increasing liquidity on the balance sheet. (F)
- decreasing

9- To calculate EPS, we divide net income available for common shareholders by the number of
authorized shares. (F)
- Outstanding

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10- The first level of analysis in the income statement is EBT. (F)
- Operating Income

11- Liquidity ratios include Current ratio and Quick ratio. (T)

12- The current ratio computes the relationship between fixed assets and current liabilities. (F)
- Current assets

13- The current ratio will decrease if current assets increase, while everything else remains
unchanged. (F)
- Increase

14- If a company has inventory, the quick ratio will always be greater than the current ratio. (F)
- Smaller

15- Deducting the cost of goods sold from net income gives us operating income. (F)

16- The gross profit rate is gross profit expressed as a percentage of net sales. (T)

17- ROE - return on equity - is measured by dividing net income by average number of shares
outstanding. (F)

- EPS or Equity

18- The debt ratio is computed by dividing total liabilities by current assets. (F)
- Total assets

19- From a creditor's point of view, the lower the debt ratio, the safer the creditors’ position. (T)

20- The return on equity may be either higher or lower than the return on assets. (F)
- ROA can’t be higher than ROE

21- Taxes are calculated by taking the tax rate and multiplying it by the net sales. (F)
- EBT

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22- To be included in the marketable securities account, the security should be liquid and can be
converted into cash at a fair or reasonable value. (T)

23- The product cycle is the time that firm takes to purchase inventory or produce it, sell the
product, and collect the cash. (F)
- Operating Cycle

24- The current assets include cash and other assets that will likely to be converted into cash or
used up within one year or one operating cycle, whichever is shorter. (F)
- Greater

25- The role of financial statement analysis is to use the information in a company’s financial
statements, along with other relevant information, to make economic decisions. (T)

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➢ Question 2: MCQ
-Problem One:
ABC Inc. had sales totaling $40,000,000 in fiscal year 2019. Some ratios for the company
are listed. Use this information to determine the dollar values of various income
statement and balance sheet accounts as requested.

ABC Inc.
Year ended December 31, 2019
Gross Profit Margin 50%
Operating Profit Margin (EBIT) 30%
Net Profit Margin 15%
Return on Total Assets 30%
Return on Equity 40%
Total Asset Turnover 2
Average Collection Period 72 Days
Tax rate 40%

1- Cost of Goods Sold for ABC Inc. were

a- 25,000,000
b- 30,000,000
c- 20,000,000
d- None of the above
2- Operating Profits (EBIT) for ABC Inc. were
a- 12,000,000
b- 12,500,000
c- 11,000,000
d- None of the above
3- Operating Expenses for ABC Inc. were
a- 9,000,000
b- 8,000,000
c- 7,000,000
d- None of the above
4- Net Profit for ABC Inc. were
a- 6,000,000
b- 6,200,000
c- 5,800,00
d- None of the above

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5- Total Assets for ABC Inc. were
a- 22,000,000
b- 2,000,000
c- 20,000,000
d- None of the above
6- Total Equity for ABC Inc. were
a- 15,000,000
b- 15,100,000
c- 15,008,000
d- None of the above
7- Total Liabilities for ABC Inc. were
a- 500,000
b- 5,001,000
c- 5,000,000
d- None of the above
8- Tax Payments for ABC Inc. were
a- 4,000,000
b- 16,000,000
c- 8,000,000
d- None of the above
9- Interest Payment for ABC Inc. were
a- 2,500,000
b- 5,000,000
c- 2,000,000
d- None of the above
10- Account Receivables for ABC Inc. were
a- 800,000
b- 8,000,000
c- 8,009,000
d- None of the above

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-Question #2:

XYZ Inc. Balance Sheet

31st Dec. 2019

Assets $ Liabilities & Equity $

Current Assets Current Liabilities

Cash 100,000 Accounts Payable

Marketable Securities 150,000 Notes Payable 150,000

Account Receivable Accruals 50,000

Inventory Total Current Liabilities

Total Current Assets

Long - Term Debt @ 10%

Fixed Assets Stockholder’s Equity

Total Assets Total Liabilities & Equity

- Sales totaled $2,000,000 - The gross profit margin was 40%

- Inventory turnover was 4.0 - There are 360 days in the year.

- The quick ratio was 1.25 - The average collection period is 45 days.
- Long-term debt to equity ratio 60 % - Return on Assets (ROA) 10%.
- The net profit margin was 10%. - The operating expenses were 10%.

- Number of outstanding shares was 100,000. - Number of authorized Shares was 500,000
- Number of issued shares was 300,000

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1- Inventories for XYZ Inc.in 2019 were
a- $200,000
b- $250,000
c- $500,000
d- $300,000

2- Accounts Receivable for XYZ Inc.in 2019 were

a- $200,000
b- $250,000
c- $500,000
d- $300,000
3- Accounts Payable for XYZ Inc.in 2019 were
a- $200,000
b- $250,000
c- $500,000
d- $300,000
4- Fixed assets for XYZ Inc.in 2019 were
a- $2,000,000
b- $800,000
c- $1,000,000
d- $1,200,000
5- Long-term debt for XYZ Inc.in 2019 were
a- $1,600,000
b- $600,000
c- $1,000,000
d- $400,000
6- Return on Equity (ROE) for XYZ Inc.in 2019 were
a- 12%
b- 20%
c- 25%
d- 10%
7- Times interest earned for XYZ Inc.in 2019 were
a- $10
b- 10 times
c- 10%
d- None of the above
8- Taxes for XYZ Inc.in 2019 were
a- $240,000
b- $200,000

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 c- $540,000
d- $340,000
9- Total assets for XYZ Inc.in 2019 were
a- $800,000
b- $1,200,000
c- $1,000,000
d- $2,000,000

10- Earnings Per Share (EPS) for XYZ Inc.in 2019 were
a- $0.4
b- $0.67
c- $2.00
d- $1.00

-Question #3:

_______________________________________
Sales to total assets 3.0 times

Total debt to total assets 40%

Current Ratio 2.0 times

Inventory turnover 6.0 times

Average collection period 30 days

Fixed assets turnover 7.5 times

Return on Assets (ROA) 18.00%
Gross Profit Margin 40.00%

General & Admin. Expenses $700,000

AAA Inc. subject to 40% corporate tax.

_______________________________________

Given that expected sales revenue for the year 2020 counts for $15,000,000 to predict the
AAA Inc.’s Balance Sheet and Income Statement for the year 2020:

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Assets $$ % Liabilities & Equity $$ %
Current Assets
Cash $250,000 5% Current Liabilities $1,500,000 30%
Account Receivables $1,250,000 25%
Inventory $1,500,000 30% Long-term Debt @ $500,000 10%
10%
Total Current Assets $3,000,000 60% Total Debt $2,000,000 40%
Fixed Assets $2,000,000 40% Equities $3,000,000 60%
Total Assets $5,000,000 100% Total Debt & Equity $5,000,000 100%

Projected Income Statement $$ %

Sales Revenue $15,000,000 100%
- Cost of Goods Sold ($9,000,000) 60%
Gross Profit $6,000,000 40%
- Operating Expenses ($3,750,000) 25%
Operating Income $2,250,000 15%
- General & Admin. Exp. ($700,000) 4.67%
EBIT $1,550,000 10.33%
- Interest ($50,000) 0.33%
EBT $1,500,000 10%
- Tax ($600,000) 4%
Net Profit $900,000 6%

1- Inventories for AAA Inc. were

a- $1,250,000
b- $1,500,000
c- $1,025,000
d- None of the above
2- Accounts Receivable for AAA Inc. were
a- $1,250,000
b- $1,500,000
c- $1,025,000
d- None of the above
3- Total assets for AAA Inc. were
a- $2,000,000
b- $4,000,000
c- $6,000,000

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 d- None of the above

4- Total debt for AAA Inc. were

a- $2,000,000
b- $3,000,000
c- $5,000,000
d- None of the above
5- Equity for AAA Inc. were
a- $2,000,000
b- $3,000,000
c- $5,000,000
d- None of the above
6- Operating Expenses for AAA Inc. were
a- $3,570,000
b- $3,075,000
c- $3,057,000
d- None of the above
7- Interest for AAA Inc. were
a- $50,000
b- $75,000
c- $55,000
d- None of the above
8- Taxes for AAA Inc. were
a- $6,000,000
b- $600,000
c- $60,000
d- None of the above
9- Net Profit for AAA Inc. were
a- $950,000
b- $930,000
c- $1,000,000
d- None of the above
10- EPS for AAA Inc. were
a- $1.80
b- $4.50
c- $3.00
d- None of the above

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