Scenario 8-2 -In Scenario 8-2, After Analyzing the Debt Ratio, You Concluded

question 24

Multiple Choice

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } &\text { Denny's Diner } & \text { Industry } & \\\text { Current Ratio }& 1.51 & 1.62 \\\text { Average Collection Period } & 2.50 & 5.00 \\\text { Inventory Turnover } & 80 & 75 \\\text { Debt Ratio } &43 \% & 52 \% \\\text { Net Profit Margin } & 10.2 & 8.3 \end{array}$$
-In Scenario 8-2, after analyzing the debt ratio, you concluded that ______.

• A) Denny has a problem because the number is so low
• B) Denny has a higher risk factor than the industry
• C) Denny has financed 43 percent of the assets with borrowed funds
• D) Denny needs to be concerned about this ratio and increase it in the near future

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Definitions:

Perpetual Inventory System

A method of accounting for inventory that records sales and purchases of inventory instantly through the use of computerized point-of-sale systems and enterprise asset management software.

FIFO

An inventory valuation method that assumes the first items placed in inventory are the first sold (First In, First Out).

Cost of Goods Sold

Specific costs directly linked to the creation of products sold by a business.