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    Ex 5.5

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    aquarius21012003

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    Ex 5.5

    Uploaded by

    aquarius21012003
    19 views1 page

    Original Title

    EX 5.5

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    19 views1 page

    Ex 5.5

    Uploaded by

    aquarius21012003

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 1

    1.

    Your company had the following balance sheet and income statement
    information for 2008:

    Balance sheet:
    Cash $ 20
    A/R 1,000
    Inventories 5,000
    Total C.A. $ 6,020 Debt $ 4,000
    Net F.A. 2,980 Equity 5,000
    Total Assets $ 9,000 Total claims $ 9,000

    Income statement:
    Sales $10,000
    Cost of goods sold 9,200
    EBIT $ 800
    Interest (10%) 400
    EBT $ 400
    Taxes (40%) 160
    Net Income $ 240

    The industry average inventory turnover is 5. You think you can change
    your inventory control system so as to cause your turnover to equal the
    industry average, and this change is expected to have no effect on
    either sales or cost of goods sold. The cash generated from reducing
    inventories will be used to buy tax-exempt securities which have a 7
    percent rate of return. What will your profit margin be after the
    change in inventories is reflected in the income statement?

    a. 2.1%
    b. 2.4%
    c. 4.5%
    d. 5.3%
    e. 6.7%
    2.Thomas Corp. has the following simplified balance sheet:

    Cash $ 50,000 Current liabilities $125,000


    Inventory 150,000
    Accounts receivable 100,000 Long-term debt 175,000
    Net fixed assets 200,000 Common equity 200,000
    Total $500,000 Total $500,000

    Sales for the year totaled $600,000. The company president believes the
    company carries excess inventory. She would like the inventory turnover
    ratio to be 8 and would use the freed up cash to reduce current
    liabilities. If the company follows the president's recommendation and
    sales remain the same, the new quick ratio would be:

    a. 2.4
    b. 4.0
    c. 4.5
    d. 1.2
    e. 3.0

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