Chapter 17 – Understanding Accounting and Financial Information
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365. Peak Performance Sporting Goods Company has collected the following information
about itself and its competitors:
Which of the following statements explains the importance of this information?
A. Return on Sales is an indication of how well Peak Performance is competing with
others in the industry in generating income from sales.
B. Although this information is important to Peak Performance, it is an internal
calculation. Investors will not compare Peak Performance’s return on sales with others.
There are too many other variables such as higher expenses, which may prevent Peak
Performance from maintaining the lowest measure.
C. Unlike other measurements, a firm hopes that its Return on Sales is the lowest in the
industry, thus, Peak Performance is neither doing the best nor doing the worst in its
industry.
D. As a profitability measurement, return on sales is not as important to the CFO as
earnings per share, because this calculation does not show a dilution of ownership.
Feedback: Firms calculate return on sales in order to evaluate how they are performing
against other firms in their industry. The goal is to generate more income from sales than the
competition. In this example, Olympic, Inc. is outperforming Peak Performance.
366.
Chapter 17 – Understanding Accounting and Financial Information
Peak Performance Sporting Goods Company has reported net income after taxes =
$3,750,000, with 18,250,000 shares outstanding. Basic Earning per Share for Peak
Performance = _________.
A. approximately $.21/share
B. approximately $20.50/share
C. approximately $4.87/share
D. approximately – $2.00/share
Feedback: Basic EPS = Net Income after taxes/Number of common stock shares outstanding.
For this problem, EPS = $3,750,000/18,250,000 = $.2050/share or approximately $.21/share.
367. Bob Stewart plans to visit his financial planner today to discuss investment strategy. As
a young, “20 something” accountant, he knows he can afford to invest in a few riskier
investments. Which of the following ratios will be an important measure of profitability
for Bob?
A. return on sales
B. return on equity
C. inventory turnover
D. acid test ratio
Feedback: Risk is a market variable that concerns investors. Investors are willing to take on
more risk, if they can expect to get a higher return. As an investor, Bob should be calculating
his return on equity. Return on equity measures how much was earned for each dollar
invested by owners.
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6.28%; and, Return on Equity on Major Chemicals = 10.50%. Which of the following
facts is important information for Marshall McBride?
A. The return on equity on new companies is always lower than the return on equity of
well established firms.
B. Investors willing to take added risk, expect higher returns.
C. Return on equity is a liquidity ratio that has very little bearing on profitability.
D. If Marshall wants to know how well his investments are performing, he should
employ leverage ratios such as the debt to equity ratio.
Feedback: Risk is an important concern for investors. Investors are willing to accept higher
risk, if they are rewarded with higher returns. In this particular situation, the riskier
investment is producing lower returns. This should signal concern for the investor.
370. Allison Robards is the owner of Backstreet Books, a small eclectic style bookstore in a
bustling college town. Allison prides herself in selecting hard to find books and
magazines that her clientele enjoy. Recently, Allison is experiencing a cash flow
shortage, and she is concerned that she may be purchasing too many copies of each title.
Having recently completed a business class, you suggest to Allison that she calculate the
______________ ratio for her store, and then compare it to other stores in her industry.
A. current
B. debt to equity
C. return on equity
D. inventory turnover
Feedback: A higher inventory turnover ratio indicates greater efficiency in the operation. The
goal is to maximize the use of cash and minimize inventories.
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372. Explain the differences between managerial and financial accounting, and give
examples of the types of problems and issues examined by each of these areas of
accounting.
373.
Chapter 17 – Understanding Accounting and Financial Information
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Discuss the role of an independent auditor. Provide information about the types of
accounting activities they perform and the recent laws that have emerged to help guide
them as they do their job.
374.
Chapter 17 – Understanding Accounting and Financial Information
Thoroughly describe each of six parts of the accounting cycle.
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376. Explain the meaning of the fundamental accounting equation and its relation to the
Balance Sheet. If it is helpful, create an example using numbers.
377.
Chapter 17 – Understanding Accounting and Financial Information
Explain the difference between current, fixed, and intangible assets. Give two examples
of each of these different types of assets.
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382. The fact that Minnie spends most of her time measuring costs and checking to see if
departments are staying within their budgets suggests that she is often involved in:
A. Auditing.
B. Managerial accounting.
C. Bookkeeping.
D. Departmental certification.
Feedback: Managerial accounting is used to provide managers with information that will help
them make decisions. This area of accounting is frequently concerned with measuring and
reporting costs, preparing budgets, and checking to see whether or not units are staying within
their budgets.
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385. Double Entry Door’s suppliers maintained very stable prices for many years, but Minnie
has noticed that the cost of doors has been rising steadily for the past few years. She is
concerned that, given the company’s current accounting methods of basing its cost on the
most recent doors purchased, this will result in a much lower net income than in the past.
The most likely reason for her concern is that Double Entry has apparently been using:
A. The FIFO inventory valuation method to determine its cost of goods sold.
B. A great deal of equity financing to purchase the doors.
C. The LIFO inventory valuation method to determine its cost of goods sold.
D. A depreciation method based on the average value of inventory.
Feedback: The LIFO inventory valuation method uses the cost of the last items bought to
determine the cost of goods sold. With FIFO, the cost of goods sold is based on the oldest
(first) items in inventory. In a period of rising inventory prices, LIFO would result in a higher
cost of goods sold than FIFO. Since cost of goods sold is subtracted from revenue in the
determination of net income, LIFO would result in a smaller net income.
386.
Chapter 17 – Understanding Accounting and Financial Information
Minnie knows that Double Entry has a lot of short-term debt coming due in the next
year, and wants to make sure that the company will have the ability to make the required
payments. Given a troubling downturn in construction activity over the past couple of
months, she is not confident that Double Entry can count on selling its current inventory
of doors before the debt comes due. Which of the following ratios would be most
relevant to Minnie?
A. current ratio
B. debt to equity ratio
C. return on sales
D. acid-test ratio
Feedback: Liquidity ratios, such as the current ratio and the acid-test ratio, are calculated to
provide insight into the ability of firms to meet their short-term debt obligations. They do this
by comparing current assets (which are expected to convert into cash in the next year) to
current liabilities (which must be paid within the year). In a situation where a firm may have
difficulty selling its inventory, the acid-test ratio is a better measure of liquidity because the
acid-test ratio excludes inventory from the calculation.