Finance: Critical Thinking Questions

Topics: Generally Accepted Accounting Principles, Balance sheet, Financial ratios Pages: 2 (340 words) Published: November 4, 2012
James Gutierrez
Finance
MW 3:50
Ch.4 Assignment
Critical Thinking Questions
4.2 Why is too much liquidity not a good thing?
Using too much liquidity could sometime indicate that the company is not using the money as the shareholders would expect too. The company’s manager may be holding on to the cash and investing in low purchased assets.

4.10 Why is it not enough for an analyst to look at just the short-term and long-term debt on a firm’s balance sheet?
It is not enough because the balance sheet does not provide the total obligated amount of liabilities of a firm. It is important for an analyst to look beyond the short-term and long-term debt on the balance sheet and to look upon the financial notes within the sheet and by doing so the analyst will have a true statement that the firm is responsible for.

Questions and Problems
4.1 Explain why the quick ratio or acid-test is a better measure of a firm’s liquidity than the current ratio.
The quick ratio is a better because it provides an accurate liquid measurement of the current assets.

4.2
$11,845,175 – x$11,845,175 – x * .89
$5,311,020= .89$5,311,020 1 = 4726807.8 = 11,845,175 –x
-11,845,175 = 11,845,175 – x
-7,118,367.2 = -x
-x -x = 7,118,367.2

4.16
Account Receivable Turnover Ratio
$6,216,900
$1,223,675 = 5.08 % times
DSO
365 days
5.08= 71 days

4.18
Time-Interest-Earned
$1,254,338
$78,112= 16.06
Cash Coverage Ratio
$1,254,338 + $108,905 = $1,363,243
$78,112= 17.45

4.21
Gross Profit Margin
$51.407 billion – $25.076 billion
$51.407 billion= .51 or 51%
Operating Profit Margin
$9.827 billion
$51.407 billion= .19 or 19%
Net Profit Margin
$6.481 billion
$51.407 billion= .12 or 12%

4.24
$4.401 billion
$6.735 billion= $0.65 per share
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