Question

QutsLIVITI zpus You are given the following information: Income before interest and taxes Less: Interest expense Balance Less: Taxes (at 40% rate) Income after taxes Less: Preferred dividends Income available to common stockholders $1,400,000 _(200,000) $1,200,000 _(480,000) $ 720,000 _(180,000) $ 540,000 The number of times interest was earned is: 6.00 times 3.60 times O 7.00 times 2.70 times

Answer 1

Question 1:

Number of times interest earned = Income before Interest & taxes / Interest Expense

= $ 1,400,000 / 200,000

= 7 times

Number of times interest earned = 7 times

Question 2:

Rate of return on operating assets = (Net Income / Operating Assets) *100

= ( $ 400,000 / 72,00,000) *100

= 5.56%

Question 3:

Turnover of accounts receivable = Net Credit Sales / Average Accounts Receivables

Average Accounts Receivables = (Opening Accounts Receivables + Closing Accounts Receivables) / 2

Here Net Sales is given and no information regarding credit sales, so it is assumed that net sales = net credit sales for current scenario

Average Accounts Receivables= ($ 80,000 + 120,000) / 2 = $ 100,000

Turnover of accounts receivable = $ 860,000 / 100,000

= 8.6 times per year

Question 4:

Yes, the horizontal analysis and trend percentage analysis are quite similar forms of financial statement analysis. The statement is true. In Horizontal analysis, financial data of different reporting periods is compared to analyse the financial position of an entity. The comparison is done in absolute terms. In trend percentage analysis also, financial data of different reporting periods is compared but in percentage form. First or Starting year is considered as base year. Every year's data is compared with the base year data.

Question 5:

Average collection Period = 365 / Accounts Receivable Turnover Ratio

Accounts Receivable Turnover Ratio= Net Credit Sales / Average Accounts Receivables

Average Accounts Receivables = (Opening Accounts Receivables + Closing Accounts Receivables) / 2

Here Net Sales is given and no information regarding credit sales, so it is assumed that net sales = net credit sales for current scenario

Average Accounts Receivables= ($ 250,000 + 150,000) / 2

= $ 200,000

Accounts Receivable Turnover Ratio= $ 1,300,000 / 200,000 = 6.5 times

Average collection Period = 365 / 6.5 =56.15 = 56 days