Question 1

Which of the following ratios increases when inventory is sold on account for a price equal to its original cost?

Accepted Answer

A) Current 
B) Quick 
C) Return on assets 
D) Return on equity 
A) Current 
B) Quick 
C) Return on assets 
D) Return on equity B

Question 2

The debt-to-equity ratio measures which of the following?

Accepted Answer

A) Liquidity 
B) Solvency 
C) Profitability 
D) Market strength 
A) Liquidity 
B) Solvency 
C) Profitability 
D) Market strength B

Question 3

Packers Corporation reported the following data for the year ended December 31,2010:
 $$\begin{array} { l r } 
\text { Net sales revenue } & \$ 400,000 \
\text { Net income } & \$ 25,000 \
\text { Interest expense (net of tax) } & \$ 3,000 \
\text { Average total assets } & \$ 200,000 \
\text { Average stockholders' equity } & \$ 160,000 \
\text { Average net fixed assets } & \$ 100,000 \
\text { Average shares of common stock outstanding } & 15,000 \
\text { Market value per share } & \$ 16.00
\end{array}$$ Calculate each of the following ratios:
A.Profit margin
B.Return on assets
C.Return on equity
D.Earnings per share
E.Price/earnings ratio
F.Debt-to-equity ratio
G.Financial leverage percentage
H.Fixed asset turnover ratio

Accepted Answer

To calculate the financial ratios for Packers Corporation, we will use the provided data. Here's how each ratio is calculated:

A. Profit Margin
The profit margin ratio measures how much net income is generated for each dollar of sales. It is calculated as:

$$ \text{Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales Revenue}} $$

$$ \text{Profit Margin} = \frac{\$25,000}{\$400,000} = 0.0625 \text{ or } 6.25\% $$

B. Return on Assets (ROA)
The return on assets ratio indicates how efficiently a company uses its assets to generate profit. It is calculated as:

$$ \text{Return on Assets} = \frac{\text{Net Income}}{\text{Average Total Assets}} $$

$$ \text{Return on Assets} = \frac{\$25,000}{\$200,000} = 0.125 \text{ or } 12.5\% $$

C. Return on Equity (ROE)
The return on equity ratio measures the return generated on the shareholders' equity. It is calculated as:

$$ \text{Return on Equity} = \frac{\text{Net Income}}{\text{Average Stockholders' Equity}} $$

$$ \text{Return on Equity} = \frac{\$25,000}{\$160,000} = 0.15625 \text{ or } 15.625\% $$

D. Earnings Per Share (EPS)
Earnings per share is the portion of a company's profit allocated to each outstanding share of common stock. It is calculated as:

$$ \text{Earnings Per Share} = \frac{\text{Net Income}}{\text{Average Shares of Common Stock Outstanding}} $$

$$ \text{Earnings Per Share} = \frac{\$25,000}{15,000} = \$1.67 $$

E. Price/Earnings Ratio (P/E)
The price/earnings ratio compares a company's current share price to its earnings per share. It is calculated as:

$$ \text{Price/Earnings Ratio} = \frac{\text{Market Value per Share}}{\text{Earnings Per Share}} $$

$$ \text{Price/Earnings Ratio} = \frac{\$16.00}{\$1.67} \approx 9.58 $$

F. Debt-to-Equity Ratio
The debt-to-equity ratio measures the relative proportion of shareholders' equity and debt used to finance a company's assets. However, we do not have the total debt provided in the data, so we cannot calculate this ratio with the given information.

G. Financial Leverage Percentage
Financial leverage percentage is a measure of how much a company is using debt to finance its assets relative to equity. Like the debt-to-equity ratio, we cannot calculate this without the total debt information.

H. Fixed Asset Turnover Ratio
The fixed asset turnover ratio measures how effectively a company uses its fixed assets to generate sales. It is calculated as:

$$ \text{Fixed Asset Turnover Ratio} = \frac{\text{Net Sales Revenue}}{\text{Average Net Fixed Assets}} $$

$$ \text{Fixed Asset Turnover Ratio} = \frac{\$400,000}{\$100,000} = 4.0 $$

These are the calculated ratios based on the provided data. For the ratios that require debt information (F and G), additional data would be needed to perform the calculations.

Question 4

The following data were reported by Universe Company at year-end:
 $$\begin{array} { l r } 
\text { Total assets } & \$ 525,000 \
\text { Quick assets } & 105,000 \
\text { Noncurrent assets } & 375,000 \
\text { Current liabilities } & 75,000 \
\text { Long-term liabilities } & 75,000 \
\text { Common stock (par } \$ 10 ) & 170,000 \
\text { Total owners' equity } & 375,000
\end{array}$$ Calculate each of the following ratios:
A.Debt-to-equity
B.Current ratio
C.Quick ratio
D.Which,if any,of the above are liquidity ratios?
E.Which,if any,of the above are profitability ratios?

Accepted Answer

To calculate the debt-to-equity ratio, w

Question 5

If the current ratio is 2,the payment of a cash dividend,which was recorded as a liability on the date of declaration,will result in which of the following?

Accepted Answer

A) An increase in the current ratio. 
B) A decrease in the current ratio. 
C) No effect on the current ratio. 
D) A decrease in the cash coverage ratio 
A) An increase in the current ratio. 
B) A decrease in the current ratio. 
C) No effect on the current ratio. 
D) A decrease in the cash coverage ratio

Question 6

The return on assets ratio is influenced significantly by a company's relative debt and equity financing of its assets.

Accepted Answer

A) True 
 B)False

Question 7

The dividend yield ratio decreases when earnings per share increases.

Accepted Answer

A) True 
 B)False

Question 8

The following data were shown in the records of Victoria Company at the end of 2010:
 $$\begin{array} { l r } 
\text { Quick assets } & \$ 180,000 \
\text { Current assets } & 225,000 \
\text { Average net receivables } & 10,000 \
\text { Average inventory } & 42,000 \
\text { Current liabilities } & 50,000 \
\text { Net credit sales } & 120,000 \
\text { Cost of goods sold } & 84,000 \
\text { Assume } 365 \text { days in the year } &
\end{array}$$ Calculate each of the following ratios:
A.Quick ratio
B.Current ratio
C.Receivable turnover ratio
D.Inventory turnover ratio
E.Average age of receivables
F.Average days' supply in inventory

Accepted Answer

To calculate the financial ratios for Vi

Question 9

The following return on investment ratios were computed for Steven Company:
 $$\begin{array} { l l l l l l } 
& \underline{2010} & \underline{2009}& \underline{2008} &2007\
\text { Return on assets } & { 12 \% } &  { 15 \% } &  { 15 \% } & { 18 \% } \
\text { Return on equity } & 12 \% & 15 \% & 11 \% & 20 \%
\end{array}$$ Requirements:
A.Compute financial leverage percentage for each year.
B.Explain briefly the stockholders' advantage or disadvantage for each year.

Accepted Answer

A. To compute the financial leverage per

Question 10

Finding comparable companies in order to compare performance is important because ratios in isolation are difficult to evaluate.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is correct?

Accepted Answer

A) Purchasing fixed assets through debt financing decreases financial leverage. 
B) Accruing an expense does not affect the net profit margin ratio. 
C) Return on equity increases when the financial leverage ratio decreases. 
D) Purchasing treasury stock results in a decrease in asset turnover. 
A) Purchasing fixed assets through debt financing decreases financial leverage. 
B) Accruing an expense does not affect the net profit margin ratio. 
C) Return on equity increases when the financial leverage ratio decreases. 
D) Purchasing treasury stock results in a decrease in asset turnover.

Question 12

The records of Everyday Electronics Corporation for a particular period include the following: $$\begin{array} { l r } 
\text { Average total assets } & \$ 760,000 \
\text { Average total liabilities } & 485,000 \
\text { Total revenue } & 200,500 \
\text { Total expenses (including income tax) } & 135,000
\end{array}$$ What is the return on equity ratio?

Accepted Answer

A) 13.2%. 
B) 23.8%. 
C) 24.0%. 
D) 8.4%. 
A) 13.2%. 
B) 23.8%. 
C) 24.0%. 
D) 8.4%.

Question 13

Indicate the effect of each item on the ratios given below in the following manner:
 if an item would cause an increase in the ratio,place a check in the + column; if a decrease place a check in - column; and if no change,check the 0 column.Each item is independent of the others.

Accepted Answer

The answer of Indicate the effect of each item on...

Question 14

Carolina Company computed the following ratios for a two year period:
 $$\begin{array} { l l c c } 
& \underline { \text { Ratio } } & \underline { 2009 } & \underline { 2010 } \
\text { A. } & \text { Current ratio } & 1.3 \text { to } 1 & .6 \text { to } 1 \
\text { B. } & \text { Return on equity } & 25 \% & 16 \% \
\text { C. } & \text { Quality of income } & 1.7 & .5 \
\text { D. } & \text { Cash coverage ratio } &  346& 122 \
\text { E. } & \text { Profit margin } &6 \% & 4 \%
\end{array}$$ Required:
Comment on the trend of each of the ratios from 2009 to 2010.State concerns or possible implications for the future of each.

Accepted Answer

The current ratio decreased from 1.3 to

Question 15

The records of Marshall Company include the following: $$\begin{array} { l r } 
\text { Average total assets } & \$ 3,500,000 \
\text { Average total liabilities } & 1,220,000 \
\text { Total revenue } & 4,580,000 \
\text { Total expense (including income tax) } & 4,100,000 \
\text { Interest expense (included in total expenses) } & 90,000 \
\text { Income tax rate } 40 \% &
\end{array}$$ The financial leverage percentage is which of the following?

Accepted Answer

A) 1.8% 
B) 2.8%. 
C) 5.8%. 
D) 6.4%. 
A) 1.8% 
B) 2.8%. 
C) 5.8%. 
D) 6.4%.

Question 16

Thomas Company had income before interest and taxes of $120,000.Interest expense for the period was $17,000 and income taxes amounted to $28,500.The average stockholders' equity was $680,000.What is Thomas' return on equity (ROE)?

Accepted Answer

A) 17.65%. 
B) 15.15%. 
C) 13.46%. 
D) 10.96%. 
A) 17.65%. 
B) 15.15%. 
C) 13.46%. 
D) 10.96%.

Question 17

Financial statement analysis is very precise and doesn't involve judgment.

Accepted Answer

A) True 
 B)False

Question 18

The cash ratio is less sensitive to small transactions involving cash than is either the current or quick ratios.

Accepted Answer

A) True 
 B)False

Question 19

Cromwell Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.The net sales for the year were $983,000 with a gross profit on sales of $295,000.What was the inventory turnover ratio?

Accepted Answer

A) 2.78 
B) 9.27 
C) 6.49 
D) 2.89 
A) 2.78 
B) 9.27 
C) 6.49 
D) 2.89

Question 20

Which of the following statements is correct?

Accepted Answer

A) A ratio calculation is most relevant in isolation. 
B) One of the advantages of ratio analysis is that it allows companies of different sizes to be compared. 
C) Finding benchmarks for comparison is a straight-forward task. 
D) It is always preferable to compare a company's performance to industry-wide ratios rather than to use a competitor's ratios. 
A) A ratio calculation is most relevant in isolation. 
B) One of the advantages of ratio analysis is that it allows companies of different sizes to be compared. 
C) Finding benchmarks for comparison is a straight-forward task. 
D) It is always preferable to compare a company's performance to industry-wide ratios rather than to use a competitor's ratios.

Which of the following ratios increases when inventory is sold on account for a price equal to its original cost?

The debt-to-equity ratio measures which of the following?

If the current ratio is 2,the payment of a cash dividend,which was recorded as a liability on the date of declaration,will result in which of the following?

The return on assets ratio is influenced significantly by a company's relative debt and equity financing of its assets.

The dividend yield ratio decreases when earnings per share increases.

The following return on investment ratios were computed for Steven Company: 2007 Return on assets 12\% 15\% 15\% 18\% Return on equity 12\% 15\% 11\% 20\% Requirements: A.Compute financial leverage percentage for each year. B.Explain briefly the stockholders' advantage or disadvantage for each year.

Finding comparable companies in order to compare performance is important because ratios in isolation are difficult to evaluate.

Which of the following statements is correct?

The records of Everyday Electronics Corporation for a particular period include the following: Average total assets \ 760,000 Average total liabilities 485,000 Total revenue 200,500 Total expenses (including income tax) 135,000 What is the return on equity ratio?

Indicate the effect of each item on the ratios given below in the following manner: if an item would cause an increase in the ratio,place a check in the + column; if a decrease place a check in - column; and if no change,check the 0 column.Each item is independent of the others.

Thomas Company had income before interest and taxes of $120,000.Interest expense for the period was $17,000 and income taxes amounted to $28,500.The average stockholders' equity was $680,000.What is Thomas' return on equity (ROE)?

Financial statement analysis is very precise and doesn't involve judgment.

The cash ratio is less sensitive to small transactions involving cash than is either the current or quick ratios.

Cromwell Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.The net sales for the year were $983,000 with a gross profit on sales of $295,000.What was the inventory turnover ratio?

Which of the following statements is correct?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Balance Sheet

Operating Decisions and the Income Statement

Adjustments,Financial Statements,and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Reporting and Interpreting Liabilities

Reporting and Interpreting Bonds

Reporting and Interpreting Owners Equity

Reporting and Interpreting Investments in Other Corporations

Statement of Cash Flows

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Exam 14: Analyzing Financial Statements

Which of the following ratios increases when inventory is sold on account for a price equal to its original cost?

The debt-to-equity ratio measures which of the following?

If the current ratio is 2,the payment of a cash dividend,which was recorded as a liability on the date of declaration,will result in which of the following?

The return on assets ratio is influenced significantly by a company's relative debt and equity financing of its assets.

The dividend yield ratio decreases when earnings per share increases.

Finding comparable companies in order to compare performance is important because ratios in isolation are difficult to evaluate.

Which of the following statements is correct?

The records of Everyday Electronics Corporation for a particular period include the following: Average total assets \ 760,000 Average total liabilities 485,000 Total revenue 200,500 Total expenses (including income tax) 135,000 What is the return on equity ratio?

Indicate the effect of each item on the ratios given below in the following manner: if an item would cause an increase in the ratio,place a check in the + column; if a decrease place a check in - column; and if no change,check the 0 column.Each item is independent of the others.

Thomas Company had income before interest and taxes of $120,000.Interest expense for the period was $17,000 and income taxes amounted to $28,500.The average stockholders' equity was $680,000.What is Thomas' return on equity (ROE)?

Financial statement analysis is very precise and doesn't involve judgment.

The cash ratio is less sensitive to small transactions involving cash than is either the current or quick ratios.

Cromwell Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.The net sales for the year were $983,000 with a gross profit on sales of $295,000.What was the inventory turnover ratio?

Which of the following statements is correct?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Balance Sheet

Operating Decisions and the Income Statement

Adjustments,Financial Statements,and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Reporting and Interpreting Liabilities

Reporting and Interpreting Bonds

Reporting and Interpreting Owners Equity

Reporting and Interpreting Investments in Other Corporations

Statement of Cash Flows

Filters