The following information pertains to Fox Co. for the calendar year 2:
Sales (all on credit) $2,000,000
Gross profit on sales 900,000
Net income 150,000
Inventory at end of year 200,000
Accounts receivable at beginning of year 600,000
Accounts receivable at end of year 400,000
Stockholders’ equity at end of year:
Common stock outstanding (unchanged during year)—300,000 shares at par of $1 per share $300,000
Retained earnings 500,000 800,000
Dividends paid during the year totaled $0.25 per share. The market price per share of Fox’s stock was $5 at the end of the year. Fox’s inventory turnover for year 2 was
- 2 times.
- 2.2 times.
- 4.4 times.
- 5 times.
Cost of goods sold
Although cost of goods sold is not given, it is equal to sales minus gross margin on sales ($2,000,000 − $900,000 = $1,100,000). Beginning inventory (not given) equals cost of goods sold plus ending inventory (given) minus purchases ($1,100,000 + $200,000 − $1,000,000 = $300,000). Average inventory is the sum of the beginning and ending inventory divided by 2 [($300,000 + $200,000) ÷ 2 = $250,000]. Finally, using the above formula, the inventory turnover is $1,100,000 ÷ $250,000 = 4.4 times.
Boe Corp.’s stockholders’ equity at December 31, year 2, was as follows:
6% noncumulative preferred stock, $100 par (liquidation value $105 per share)$100,000
Common stock, $10 par 300,000
Retained earnings 95,000
At December 31, year 2, Boe’s book value per common share was
The book value per common share is calculated as common stockholders’ equity divided by outstanding shares. If preferred dividends are in arrears, the preferred stock is participating, or if preferred stock has a redemption or liquidation value higher than its carrying amount, retained earnings must be allocated between the preferred and common stockholders in computing book value. In this problem, the liquidation value of the preferred stock is $105,000 ($105,000 − $100,000), which is more than the carrying amount ($100,000) of the preferred stock. Thus, the following allocation must be made:
Redwood Co.'s financial statements had the following information at year end:
Allowance for uncollectible accounts8,000
Short-term marketable securities90,000
What was Redwood's quick ratio?
- 0.81 to 1
- 0.83 to 1
- 0.94 to 1
- 1.46 to 1
1. The quick ratio is the quotient of very liquid current assets to total current liabilities. Inventories and prepaids are not included in the numerator because they are not considered sufficiently liquid. As such, it is a more stringent test of liquidity than the current ratio. In this case, the quick ratio consists of: cash + net AR + marketable securities divided by current liabilities: ($60,000 + $180,000 − $8,000 + $90,000)/$400,000) = .805. The closest answer is 0.81 to 1.
On December 31, Year 2, Curry Co. had the following balances in selected asset accounts:
Year 2 Increase over Year 1
Cash $300 $100
Accounts receivable, net 1,200 400
Inventory 500 200
Prepaid expenses 100 40
Other assets 400 150
Total assets $2,500 $890
Curry had current liabilities of $1,000 on December 31, Year 2 and net credit sales of $7,200 for the year ended.
What was the average number of days to collect Curry's accounts receivable during Year 2?
3. This computation uses a value of $400 for beginning Year 2 AR. This is a math error because $400 is the amount by which AR increased during the period. Beginning Year 2 AR was $800.
Selected information for Irvington Company is as follows:
Year 1 Year 2
Preferred stock, 8%, par $100, nonconvertible, noncumulative $125,000 $125,000
Common stock 300,000 400,000
Retained earnings 75,000 185,000
Dividends paid on preferred stock for year ended 10,000 10,000
Net income for year ended 60,000 120,000
Irvington’s return on common stockholders’ equity, rounded to the nearest percentage point, for year 2 is
Irvington’s return on common stockholders’ equity for year 2 is computed by dividing net income available to common stockholders (net income less preferred dividends) by average common stockholders’ equity.
$120,000 − $10,000
($375,000 + $585,000)/2
Lind Corp. declared a cash dividend of $50,000 on March 10, year 2, to stockholders of record March 25, year 2, payable on April 5, year 2. As a result of this cash dividend, working capital
- Decreased on March 10 by $50,000.
- Decreased on March 25 by $50,000.
- Decreased on April 5 by $50,000.
- Did not change.
This answer is correct. Lind Corporation makes the following entry to record the dividend on the declaration date (March 10, year 2):
Dividends payable 50,000
No entry is made on the date of record (March 25, year 2). When the dividends are paid on April 5, year 2, Lind makes the following entry:
Working capital equals current assets minus current liabilities. On March 10, current liabilities (dividends payable) increased by $50,000, thereby reducing working capital by $50,000. On April 5, both a current asset (cash) and a current liability are decreased by the same amount ($50,000), and this therefore has no effect on total working capital.
On December 30, 2004, Solomon Co. had a current ratio greater than 1:1 and a quick ratio less than 1:1.
On December 31, 2004, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
Current ratio Quick ratio
- Decreased Decreased
- Decreased Increased
- Increased Decreased
- Increased Increased
3. Cash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased.