Question

TRUE OR FALSE

1. For Company T during 2017, the change in accounts receivable was positive, the change in inventories was positive, and there was no change in accounts payable. Therefore the change in working capital was a cash outflow.

2. In ROC the debt and equity values from the balance sheet are taken from the same year as the income statement.

3. ROA can be estimated by multiplying the operating profit margin by the asset turnover ratio.

Answer 1

1. FALSE

Explanation:

Change in working capital= (change in current assets) - (change in current liabilities)

= (change in inventories + change in accounts receivable) - (change in accounts payable)

since the change in current both inventories and accounts receivable is positive the value within first bracket will increase. Change in accounts payable = 0. hence change in working capital will be positive too. (i.e. cash inflow)

2.TRUE

ROC =EBIT/CAPITAL EMPOLYED

When ratios are being calculated, both the numerator and denominator of the ratio should correspond to the same year.

The EBIT taken from income statement should be of the same year as the balace sheet from which debt and equity values are taken.

3.FALSE

ROA= NET INCOME/AVERAGE TOTAL ASSETS

OPERATING PROFIT MARGIN = EBIT/REVENUE

ASSET TURNOVER RATIO = REVENUE/AVERAGE TOTAL ASSETS

multiplying operating profit margin by asset turnover ratio we get , EBIT/AVERAGE TOTAL ASSETS which is not the same as NET INCOME/AVERAGE TOTAL ASSETS