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Chapter 2: Q3-5DQ (page 75)
Is there any validity in rule-of-thumb ratios for all corporations, such asa current ratio of 2 to 1 or debt to assets of 50 percent?
No rule of thumb is valid for all corporations.
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In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status
Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.
b. To what do you attribute the phenomenon shown in part a?
Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of\(156,000 on sales of \)2,010,000. Division B is able to make only \(28,800 onsales of \)329,000. Based on the profit margins (returns on sales), which divisionis superior?
Why is trend analysis helpful in analyzing ratios?
Identify whether each of the following items increases or decreases cash flow:
Increase in accounts receivable | Decrease in prepaid expenses |
Increase in notes payable | Increase in inventory |
Depreciation expense | Dividend payment |
Increase in investment | Increase in accrued expenses |
Decrease in account payable |
Why is interest expense said to cost the firm substantially less than the actual expense, while dividends cost it 100 percent of the outlay?
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