Question 1

During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes

Accepted Answer

A)  higher reported sales. 
B)  higher incomes taxes. 
C)  lower ending inventory. 
D)  higher incomes taxes and lower ending inventory. 
E)  None of the options are correct. 
A)  higher reported sales. 
B)  higher incomes taxes. 
C)  lower ending inventory. 
D)  higher incomes taxes and lower ending inventory. 
E)  None of the options are correct.

Question 2

A firm has a lower quick (or acid test) ratio than the industry average, which implies

Accepted Answer

A)  the firm has a lower P/E ratio than other firms in the industry. 
B)  the firm is less likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm may be more profitable than other firms in the industry. 
D)  the firm has a lower P/E ratio than other firms in the industry, and the firm is less likely to avoid insolvency in the short run than other firms in the industry. 
E)  the firm is less likely to avoid insolvency in the short run than other firms in the industry, and the firm may be more profitable than other firms in the industry. 
A)  the firm has a lower P/E ratio than other firms in the industry. 
B)  the firm is less likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm may be more profitable than other firms in the industry. 
D)  the firm has a lower P/E ratio than other firms in the industry, and the firm is less likely to avoid insolvency in the short run than other firms in the industry. 
E)  the firm is less likely to avoid insolvency in the short run than other firms in the industry, and the firm may be more profitable than other firms in the industry.

Question 3

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$50,000 \
450,000 \
\underline { 270,000} \
\$ 770,000 \
\underline { 2,000,000} \
\underline { \$ 2,770,000} \
\
\$170,000 \
\underline { 440,000} \
\$ 610,000 \
\underline { 860,000} \
\$ 1,470,000 \
\$ 120,000 \
\underline { 1,300,000 }\
\underline { \$ 2,890,000} \
\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's return on equity ratio for 2009 is

Accepted Answer

A)  12.24%. 
B)  14.63%. 
C)  15.50%. 
D)  14.50%. 
E)  16.9%. 
A)  12.24%. 
B)  14.63%. 
C)  15.50%. 
D)  14.50%. 
E)  16.9%.

Question 4

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on sales ratio for 2009 is

Accepted Answer

A)  15.5%. 
B)  14.6%. 
C)  14.0%. 
D)  15.0%. 
E)  16.5%. 
A)  15.5%. 
B)  14.6%. 
C)  14.0%. 
D)  15.0%. 
E)  16.5%.

Question 5

In periods of inflation, accounting depreciation is __________ relative to replacement cost, and real economic income is________.

Accepted Answer

A)  overstated; overstated 
B)  overstated; understated 
C)  understated; overstated 
D)  understated; understated 
E)  correctly stated; correctly stated 
A)  overstated; overstated 
B)  overstated; understated 
C)  understated; overstated 
D)  understated; understated 
E)  correctly stated; correctly stated

Question 6

The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM) because

Accepted Answer

A)  the DDM uses a different price in the numerator. 
B)  the DDM uses different earnings measures in the denominator. 
C)  the prices reported are not accurate. 
D)  the people who construct the ratio from financial statements have inside information. 
E)  They are not different- this is a "trick" question. 
A)  the DDM uses a different price in the numerator. 
B)  the DDM uses different earnings measures in the denominator. 
C)  the prices reported are not accurate. 
D)  the people who construct the ratio from financial statements have inside information. 
E)  They are not different- this is a "trick" question.

Question 7

A firm has a higher asset turnover ratio than the industry average, which implies

Accepted Answer

A)  the firm has a higher P/E ratio than other firms in the industry. 
B)  the firm is more likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm is more profitable than other firms in the industry. 
D)  the firm is utilizing assets more efficiently than other firms in the industry. 
E)  the firm has higher spending on new fixed assets than other firms in the industry. 
A)  the firm has a higher P/E ratio than other firms in the industry. 
B)  the firm is more likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm is more profitable than other firms in the industry. 
D)  the firm is utilizing assets more efficiently than other firms in the industry. 
E)  the firm has higher spending on new fixed assets than other firms in the industry.

Question 8

Economic value added (EVA) is also known as

Accepted Answer

A)  excess capacity. 
B)  excess income. 
C)  value of assets. 
D)  accounting value added. 
E)  residual income. 
A)  excess capacity. 
B)  excess income. 
C)  value of assets. 
D)  accounting value added. 
E)  residual income.

Question 9

Comparability problems arise because

Accepted Answer

A)  firms may use different generally accepted accounting principles. 
B)  inflation may affect firms differently due to accounting conventions used. 
C)  financial analysts do not know how to compare financial statements. 
D)  firms may use different generally accepted accounting principles, and inflation may affect firms differently due to accounting conventions used. 
E)  firms may use different generally accepted accounting principles, and financial analysts do not know how to compare financial statements. 
A)  firms may use different generally accepted accounting principles. 
B)  inflation may affect firms differently due to accounting conventions used. 
C)  financial analysts do not know how to compare financial statements. 
D)  firms may use different generally accepted accounting principles, and inflation may affect firms differently due to accounting conventions used. 
E)  firms may use different generally accepted accounting principles, and financial analysts do not know how to compare financial statements.

Question 10

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's times interest earned ratio for 2009 is

Accepted Answer

A)  2.897. 
B)  2.719. 
C)  3.375. 
D)  3.462. 
A)  2.897. 
B)  2.719. 
C)  3.375. 
D)  3.462.

Question 11

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm

Accepted Answer

A)  utilizes assets effectively. 
B)  has too much equity in the capital structure. 
C)  has relatively high current liabilities. 
D)  has a relatively low dividend-payout ratio. 
E)  None of the options are correct. 
A)  utilizes assets effectively. 
B)  has too much equity in the capital structure. 
C)  has relatively high current liabilities. 
D)  has a relatively low dividend-payout ratio. 
E)  None of the options are correct.

Question 12

The financial statements of Snapit Company are given below. $\begin{array}{c}
 
\text {  Snapit Company  } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  4,000,000 \
\text { Cost of goods sold } &   \underline {3,040,000} \
\text { Gross profit } & 960,000  \
\text { Selling \& administrative expenses } &  \underline { 430,000} \
\text { Operating profit } &  530,000  \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 370,000 \
\text { Tax expense } &  \underline {148,000} \
 \text { Net income } &  \underline {\$ 222,000} \
\end{array} 
\end{array}$
 \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  550,000  \
 \text {   Inventory } &  \underline {690,000} \
 \text {Total current assets  } &\$ 1,300,000 \
 \text {Fixed assets  } &  \underline {1,300,000} \
 \text { Total assets } &  \underline {\$  2,600,000} \
\
 \text { Accounts Payable } &\$ 270,000 \
 \text { Bank loan } & \underline {580,000 } \
 \text { Total current liabilities } & \$ 850,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  1,750,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 2500,000 \
 \text {Retained earnings  } & \underline {600,000}\
 \text { Total liabilities \& equity } &  \underline {\$  2,600,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
500,000 \
 \underline { 620,000  }\
 \$   1,170,000 \
 \underline { 1,230,000} \
 \underline { \$ 2,400,000 }\
\

\$  250,000 \
 \underline { 500,000 } \
 \$  750,000   \
 \underline {1,000,000} \
 \underline {\$  1,750,000 }\
\$  250,000\
 \underline {400,000} \
 \underline { \$ 2,400,000 } \
\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's average collection period for 2009 is _______ days.

Accepted Answer

A)  47.91 
B)  48.53 
C)  46.06 
D)  47.65 
E)  None of the options are correct. 
A)  47.91 
B)  48.53 
C)  46.06 
D)  47.65 
E)  None of the options are correct.

Question 13

Return on total assets is the product of

Accepted Answer

A)  interest rates and pre-tax profits. 
B)  the debt-equity ratio and P/E ratio. 
C)  the after-tax profit margin and the asset turnover ratio. 
D)  sales and fixed assets. 
E)  None of the options are correct. 
A)  interest rates and pre-tax profits. 
B)  the debt-equity ratio and P/E ratio. 
C)  the after-tax profit margin and the asset turnover ratio. 
D)  sales and fixed assets. 
E)  None of the options are correct.

Question 14

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's inventory turnover ratio for 2009 is

Accepted Answer

A)  3.15. 
B)  3.63. 
C)  3.69. 
D)  2.58. 
E)  4.20. 
A)  3.15. 
B)  3.63. 
C)  3.69. 
D)  2.58. 
E)  4.20.

Question 15

The financial statements of Snapit Company are given below. $\begin{array}{c}
 
\text {  Snapit Company  } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  4,000,000 \
\text { Cost of goods sold } &   \underline {3,040,000} \
\text { Gross profit } & 960,000  \
\text { Selling \& administrative expenses } &  \underline { 430,000} \
\text { Operating profit } &  530,000  \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 370,000 \
\text { Tax expense } &  \underline {148,000} \
 \text { Net income } &  \underline {\$ 222,000} \
\end{array} 
\end{array}$
 \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  550,000  \
 \text {   Inventory } &  \underline {690,000} \
 \text {Total current assets  } &\$ 1,300,000 \
 \text {Fixed assets  } &  \underline {1,300,000} \
 \text { Total assets } &  \underline {\$  2,600,000} \
\
 \text { Accounts Payable } &\$ 270,000 \
 \text { Bank loan } & \underline {580,000 } \
 \text { Total current liabilities } & \$ 850,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  1,750,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 2500,000 \
 \text {Retained earnings  } & \underline {600,000}\
 \text { Total liabilities \& equity } &  \underline {\$  2,600,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
500,000 \
 \underline { 620,000  }\
 \$   1,170,000 \
 \underline { 1,230,000} \
 \underline { \$ 2,400,000 }\
\

\$  250,000 \
 \underline { 500,000 } \
 \$  750,000   \
 \underline {1,000,000} \
 \underline {\$  1,750,000 }\
\$  250,000\
 \underline {400,000} \
 \underline { \$ 2,400,000 } \
\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's return on equity ratio for 2009 is

Accepted Answer

A)  0.1235. 
B)  0.0296. 
C)  0.2960. 
D)  2.2960. 
A)  0.1235. 
B)  0.0296. 
C)  0.2960. 
D)  2.2960.

Question 16

__________ is a false statement.

Accepted Answer

A)  During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used 
B)  During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used 
C)  During periods of inflation, LIFO overstates earnings relative to FIFO 
D)  During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than . if LIFO were used, and LIFO overstates earnings relative to FIFO 
E)  None of the options are correct. 
A)  During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used 
B)  During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used 
C)  During periods of inflation, LIFO overstates earnings relative to FIFO 
D)  During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than . if LIFO were used, and LIFO overstates earnings relative to FIFO 
E)  None of the options are correct.

Question 17

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$55,000 \
495,000 \
 \underline {295,000} \
 \$ 845,000 \
\underline { 2,175,000} \
\underline { \$ 3,020,000 }\

\
\$ 195,000 \
\underline { 455,000} \
\$ 650,000 \
\underline { 860,000 }\
\underline { \$ 1,510,000} \
115,000 \
\underline { 1,395,000 }\
\underline { \$  3,020,000} \

\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's asset turnover ratio for 2009 is

Accepted Answer

A)  1.86. 
B)  0.63. 
C)  0.83. 
D)  1.63. 
A)  1.86. 
B)  0.63. 
C)  0.83. 
D)  1.63.

Question 18

The financial statements of Black Barn Company are given below. $\begin{array}{c}
\text { Black Barn Company }\
\text { Income Statement (2009) }\
\begin{array}{lr}
\text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } & 5,260,000 \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } & 1,500,000 \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } & 140,000 \
\text { Income before tax } & 1,100,000 \
\text { Tax expense } & 440,000 \
 \text { Net income } & \$ 660,000 \

\end{array}\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's current ratio for 2009 is

Accepted Answer

A)  2.31. 
B) 1.87. 
C)  2.22. 
D)  2.46. 
A)  2.31. 
B) 1.87. 
C)  2.22. 
D)  2.46.

Question 19

A measure of asset utilization is

Accepted Answer

A)  sales divided by working capital. 
B)  return on total assets. 
C)  return on equity capital. 
D)  operating profit divided by sales. 
E)  None of the options are correct. 
A)  sales divided by working capital. 
B)  return on total assets. 
C)  return on equity capital. 
D)  operating profit divided by sales. 
E)  None of the options are correct.

Question 20

The financial statements of Snapit Company are given below. $\begin{array}{c}
 
\text {  Snapit Company  } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  4,000,000 \
\text { Cost of goods sold } &   \underline {3,040,000} \
\text { Gross profit } & 960,000  \
\text { Selling \& administrative expenses } &  \underline { 430,000} \
\text { Operating profit } &  530,000  \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 370,000 \
\text { Tax expense } &  \underline {148,000} \
 \text { Net income } &  \underline {\$ 222,000} \
\end{array} 
\end{array}$
 \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  550,000  \
 \text {   Inventory } &  \underline {690,000} \
 \text {Total current assets  } &\$ 1,300,000 \
 \text {Fixed assets  } &  \underline {1,300,000} \
 \text { Total assets } &  \underline {\$  2,600,000} \
\
 \text { Accounts Payable } &\$ 270,000 \
 \text { Bank loan } & \underline {580,000 } \
 \text { Total current liabilities } & \$ 850,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  1,750,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 2500,000 \
 \text {Retained earnings  } & \underline {600,000}\
 \text { Total liabilities \& equity } &  \underline {\$  2,600,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
500,000 \
 \underline { 620,000  }\
 \$   1,170,000 \
 \underline { 1,230,000} \
 \underline { \$ 2,400,000 }\
\

\$  250,000 \
 \underline { 500,000 } \
 \$  750,000   \
 \underline {1,000,000} \
 \underline {\$  1,750,000 }\
\$  250,000\
 \underline {400,000} \
 \underline { \$ 2,400,000 } \
\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's market-to-book value for 2009 is

Accepted Answer

A)  0.7256. 
B)  1.5294. 
C)  2.9400. 
D)  3.6142. 
A)  0.7256. 
B)  1.5294. 
C)  2.9400. 
D)  3.6142.

During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes

A firm has a lower quick (or acid test) ratio than the industry average, which implies

In periods of inflation, accounting depreciation is __ relative to replacement cost, and real economic income is.

The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM) because

A firm has a higher asset turnover ratio than the industry average, which implies

Economic value added (EVA) is also known as

Comparability problems arise because

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm

Return on total assets is the product of

__________ is a false statement.

A measure of asset utilization is

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Exam 19: Financial Statement Analysis

During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes

A firm has a lower quick (or acid test) ratio than the industry average, which implies

In periods of inflation, accounting depreciation is __________ relative to replacement cost, and real economic income is________.

The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM) because

A firm has a higher asset turnover ratio than the industry average, which implies

Economic value added (EVA) is also known as

Comparability problems arise because

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm

Return on total assets is the product of

__________ is a false statement.

A measure of asset utilization is

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

In periods of inflation, accounting depreciation is __ relative to replacement cost, and real economic income is.