Chapter 4
Q-1 Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphases affect the ratios they focus on?
Credit analyst for extending loans
Stock analysts for buy and sell recommendations
Managers to help manage the finances of the company
Q-6 If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.
If the ROE is low you might borrow more money to increase your business. This is called financial leverage.
Q-10 Indicate the effects of the transactions listed in the following table on total current assets, current ratios, and net income. Use (+) to indicate an increases, (-) to indicate decrease, and (0) to indicate either no effect or an indeterminate effect.
4-10
| Total Current Assets | Current Ratio | Effect on New Income | a. Cash in acquired through issuance of additional common stock | + | + | 0 | b. Merchandise is sold for cash | + | + | + | c. Federal income tax sue for the previous year is paid | - | + | 0 | d. A fixed asset is sold for less than book value | + | + | - | e. A fixed asset is sold for more than book value | + | + | + | f. Merchandise is sold on credit | + | + | + | g. Payment is made to trade creditors for previous purchases | - | + | 0 | h. A cash dividend is declared and paid | - | - | 0 | i. Cash is obtained through short-term bank loans. | + | - | 0 | j. Short-term notes receivable are sold at a discount. | - | - | - | k. Marketable securities are sold below cost. | - | - | - | l. Advances are made to employees | 0 | 0 | 0 | | Total Current Assets | Current Ratio | Effect on New Income | m. Current operating expenses are paid | - | - | - | n. Short-term promissory notes are issued to trade creditors in exchange for past due accounts payable. | 0 | 0 | 0 | o. 10-year notes are issued to pay off accounts payable | 0 | + |
Credit analyst for extending loans
Stock analysts for buy and sell recommendations
Managers to help manage the finances of the company
Q-6 If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.
If the ROE is low you might borrow more money to increase your business. This is called financial leverage.
Q-10 Indicate the effects of the transactions listed in the following table on total current assets, current ratios, and net income. Use (+) to indicate an increases, (-) to indicate decrease, and (0) to indicate either no effect or an indeterminate effect.
4-10
| Total Current Assets | Current Ratio | Effect on New Income | a. Cash in acquired through issuance of additional common stock | + | + | 0 | b. Merchandise is sold for cash | + | + | + | c. Federal income tax sue for the previous year is paid | - | + | 0 | d. A fixed asset is sold for less than book value | + | + | - | e. A fixed asset is sold for more than book value | + | + | + | f. Merchandise is sold on credit | + | + | + | g. Payment is made to trade creditors for previous purchases | - | + | 0 | h. A cash dividend is declared and paid | - | - | 0 | i. Cash is obtained through short-term bank loans. | + | - | 0 | j. Short-term notes receivable are sold at a discount. | - | - | - | k. Marketable securities are sold below cost. | - | - | - | l. Advances are made to employees | 0 | 0 | 0 | | Total Current Assets | Current Ratio | Effect on New Income | m. Current operating expenses are paid | - | - | - | n. Short-term promissory notes are issued to trade creditors in exchange for past due accounts payable. | 0 | 0 | 0 | o. 10-year notes are issued to pay off accounts payable | 0 | + |