Exam 10: Credit Analysis

The current ratio is a superior tool to cash flow projections and pro forma financial statements in assessing short-term liquidity.

Indicate the effect of the following actions on cash levels and current ratio. Assume the company has a current ratio greater than one. Indicate whether the effect is to increase (I), decrease (D) or if it has no effect (NE). Consider each action independently of others. Current Ratio Cash Increased credit limits to maintain sales levels Convert to just-in-time inventory system Change from FIFO to weighted average inventory method (rising prices) Pay suppliers more slowly Sell accounts receivable at face value Capitalize leases that were previously classified as operating leases Increase bad debt expense Sell equity Issue stock dividend Write-down inventory

Which of the following is least likely to increase the overall risk of a company?

Which of the following industries would you expect to have the longest operating cycle?

Refer to Wal-Mart's financial statements, below. Shareholders' Equity Preferred stock ( $\$ 0.10$ par value; 100 share authorized. none issued) Common stock ( $\$ 0.10$ par value; 5.500 million shares authorized. 2,285 million and 2,293 million issued and outstanding in 1997 and 1996, respectively) 228 229 Capital in excess of par value 547 545 Retained earnings 16,768 14,394 Foreign currency translation adjustment Total shareholders' equity Total liabilities and shareholders' equity a. Calculate: total debt to equity ratio and times interest earned ratio for fiscal X6 and X7. Comment on your results. b. Analysis of Wal-Mart's footnotes reveals the existence of significant operating leases. Explain whether this would change your answer in part a) and how you would make the changes.

The total debt to total capital ratio is more useful than the total debt to equity capital ratio.

When calculating earnings coverage ratios, it is common to remove the effects of extraordinary gains and losses and other one-time gains and losses from the numerator.

Which of the following is not included in the computation of Altman's Z-score?

If a company's current ratio increases from 1.2 to 1.4 from one year to the next, and its quick ratio decreases from 0.2 to 0.15 over the same time period, this indicates:

Which of the following statements concerning the current ratio is true? I. It is always larger than the acid-test (quick) ratio. II. Companies can window-dress their current ratios. III. In isolation the current ratio has little meaning. IV. It is a good indicator of solvency of a company.

If accounts payable turnover decreases, this could be an indication that suppliers are cutting off credit to the company.

Debt may contain sinking fund provisions. This means that bond is insured by government and that in the event of default on the debt, the government will sink into its funds in order to honor the debt.

Which of the following is not likely to be used to measure a company's liquidity?

Minority shareholders' interest on the balance sheet represents a liability to the company and should always be included in debt when calculating the debt to equity ratio.

If a company sells its receivables, this is an indication that it has very high quality receivables.