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30) Snype, Inc. has an accounts receivable turnover ratio of 7.3. Stork Company has an accounts
receivable turnover ratio of 5.0. Which of the following statements is correct?
A) Snype's average collection period is less than Stork's.
B) Stork's average collection period is less than Snype's.
C) Snype has a lower accounts receivable account on average than does Stork Company.
D) Stork Company has (on average) a lower accounts receivable account than does Snype.
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
31) A decrease in the operating income return on investments could be caused by an increase in:
A) tax rate.
B) cost of goods sold.
C) total assets.
D) both B and C.
E) all of the above.
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
32) Ortny Industries has an accounts receivable turnover ratio of 4.3. If Ortny has an accounts
receivable balance of $90,000, what is Ortny's average daily credit sales? You may use a 360-day
year.
A) $387,000
B) $1,548
C) $1,075
D) $3,521
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
33) Spinnit, Limited has a debt ratio of .57, current liabilities of $14,000, and total assets of
$70,000. What is the level of Spinnit, Limited's total liabilities?
A) $25,900
B) $24,600
C) $39,900
D) $53,900
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
11
34) Snort and Smiley Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000, and
total assets of $70,000. What is Snort and Smiley's level of current liabilities?
A) $8,400
B) $9,400
C) $12,340
D) $10,600
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
35) Lorna Dome, Inc. has an annual interest expense of $30,000. Lorna Dome's times-interest-
earned ratio is 4.2. What is Lorna Dome's operating income?
A) $96,000
B) $57,000
C) $126,000
D) $57,600
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
Table 2
In 1996, Snout and Smith, Inc. had a gross profit of $27,000 on sales of $110,000. S & S's
operating expenses for 1996 were $13,000, and its net profit margin was .0585. Snout and Smith
had no interest expense in 1996.
36) Using the information in Table 2, what was S & S's operating profit margin for 1996?
A) 0.245
B) 0.118
C) 0.127
D) 0.157
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
12
37) Sharky's Loan Co. has an annual interest expense of $30,000. If Sharky's times-interest-
earned ratio is 2.9, what is Sharky's Earnings Before Taxes (EBT)?
A) $87,000
B) $57,000
C) $117,000
D) $60,000
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
38) Skrit Corporation has a net profit margin of 15% and a total asset turnover of 1.7. What is
Skrit's return on total assets?
A) 12.3%
B) 25.5%
C) 8.8%
D) 11.1%
Topic: 4.3 Using Financial Ratios
Keywords: DuPont ratios
Principles: Principle 3: Cash Flows Are the Source of Value
39) Sputter Motors has sales of $3,450,000, total assets of $1,240,000, cost of goods sold of
$2,550,000, and an inventory turnover of 6.38. What is the amount of Sputter's inventory?
A) $421,054
B) $638,112
C) $543,000
D) $399,687
Topic: 4.3 Using Financial Ratios
Keywords: balance sheet
Principles: Principle 3: Cash Flows Are the Source of Value
40) Which of the following is the best indicator of management's effectiveness at managing the
firm's balance sheet?
A) Debt ratio
B) Total asset turnover
C) Times-interest-earned
D) Operating profit margin
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
13
41) Which of the following is the best indicator of management's effectiveness at generating
profits relative to the firm's assets?
A) Quick ratio
B) Fixed assets turnover
C) Operating income return on investment
D) Accounts receivable turnover
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
7.20%. What is Storm King's net profit margin?
A) 3.79
B) 13.68
C) 9.10
D) None of the above
Topic: 4.3 Using Financial Ratios
Keywords: DuPont ratios
Principles: Principle 3: Cash Flows Are the Source of Value
43) A decrease in ________ will increase gross profit margin.
A) cost of goods sold
B) depreciation expense
C) interest expense
D) both A and B
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
44) Other things held constant, an increase in ________ will decrease the current ratio. Assume
an initial current ratio greater than 1.0.
A) accruals
B) common stock
C) average collection period
D) cash
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
14
45) GAAP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of $1,855,062,
and a net profit margin of 2.9%. What is GAAP's return on equity? Round to the nearest 0.1%.
A) 8.6%
B) 24.0%
C) 16.4%
D) 4.4%
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
46) Wireless Communications has a total asset turnover of 2.66, total liabilities of $1,004,162,
and sales revenues of $7,025,000. What is Wireless's debt ratio?
A) 38.0%
B) 14.3%
C) 26.7%
D) 81.1%
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
47) Which of the following will help an analyst determine how well a firm is able to meet its
debt obligations?
A) Total liability turnover
B) Times-interest-earned
C) Return on debt
D) Asset ratio
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
15
48) Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of
$275,000, which consist strictly of notes payable. The firm's operating profit margin is 16.1%,
and it pays a 10% rate of interest on its notes payable. How much is the firm's times-interest-
earned?
A) 15.6
B) 45.3
C) 20.2
D) 3.0
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
49) An increase in ________ will decrease the times-interest-earned ratio.
A) the tax rate
B) gross profit
C) interest expense
D) common stock
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
50) Dew Point Dynamite, Inc. generated a 1.23 total asset turnover in its latest fiscal year on
10.3%. What is Dew Point's return on equity? Round to the nearest 0.1%.
A) 23.1%
B) 12.6%
C) 5.5%
D) 18.2%
Topic: 4.3 Using Financial Ratios
Keywords: DuPont ratios
Principles: Principle 3: Cash Flows Are the Source of Value
16
51) An example of a liquidity ratio is the:
A) quick ratio.
B) debt ratio.
C) times-interest-earned.
D) return on assets.
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
52) Kannan Carpets, Inc. has asked you to calculate the company's current ratio for 2001. All you
have is a partial balance sheet and some assumptions. Using the information provided, calculate
Kannan's current ratio for 2001.
Gross profit margin = 50%
2001 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net fixed assets $500 Equity 250
Total assets $900 Total liab. & equity ?
A) 0.3
B) 0.8
C) 1.6
D) 2.2
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
17
53) Kannan Carpets, Inc. has asked you to calculate the company's quick ratio for 2001. All you
have is a partial balance sheet and some assumptions. Using the information provided, calculate
Kannan's quick ratio for 2001.
Gross profit margin = 50%
2001 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net fixed assets $500 Equity 250
Total assets $900 Total liab. & equity ?
A) 0.2
B) 0.4
C) 0.6
D) 0.8
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
54) A firm that wants to know if it has enough cash to meet its bills would be most likely to use
which kind of ratio?
A) Liquidity
B) Leverage
C) Efficiency
D) Profitability
Topic: 4.3 Using Financial Ratios
Keywords: liquidity
Principles: Principle 3: Cash Flows Are the Source of Value
55) In the times-interest-earned ratio, lease expense is included in:
A) the numerator.
B) the denominator.
C) both the numerator and the denominator.
D) neither the numerator nor the denominator.
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
18
56) Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In
addition, this firm's current ratio and fixed asset turnover ratio also meet industry standards.
Based on this information, we can conclude that this firm must have excessive:
A) accounts receivable.
B) fixed assets.
C) debt.
D) inventory.
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
57) Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In
addition, this firm's current ratio and acid test ratio also meet industry standards. Based on this
information, we can conclude that this firm must have excessive:
A) accounts receivable.
B) fixed assets.
C) debt.
D) inventory.
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
58) A firm is conducting an analysis of trends over time and discovers that its inventory turnover
has declined. This may be due to:
A) an increase in sales.
B) an increase in cost of goods sold.
C) an increase in inventory purchases.
D) a decrease in inventory purchases.
Topic: 4.3 Using Financial Ratios
Keywords: financial ratios
Principles: Principle 3: Cash Flows Are the Source of Value
59) If the total asset turnover decreases, then the return on equity will:
A) decrease.
B) increase.
C) not change.
D) change, but in an indeterminate way.
Topic: 4.3 Using Financial Ratios
Keywords: DuPont ratios
Principles: Principle 3: Cash Flows Are the Source of Value
19
Use the following information to answer the following question(s).
Key Ratios for ABC, Inc. and Its Industry
ABC, Inc. 1994 Ratios Industry Average Ratios in 1994
Current ratio 1.2 1.4
Acid test ratio 0.89 0.94
Average collection period 30 days 25 days
Inventory turnover 18.1 20.3
Fixed assets turnover 4.1 4.8
Total asset turnover 2.78 2.8
Debt ratio 50% 60%
Times-interest-earned 5.5% 4.5%
Net profit margin 1.15% 1.5%
Return on equity 5.21% 7.32%
ABC, Inc. Income Statement (in thousands)
December 31, 1995
Sales (all credit) $200,000
Cost of goods sold 140,000
Gross profit on sales 60,000
Operating expenses 56,000
Operating income 4,000
Interest expense 1,000
Earnings before tax 3,000
Income tax 1,050
Net income available to common stockholders $1,950
ABC, Inc. Balance Sheet (in thousands)
December 31, 1995
Assets
Cash $2,000
Accounts receivable 17,800
Inventories 8,700
Total current assets 28,500
Gross fixed assets 70,000
Accumulated depreciation 26,500
Net fixed assets 43,500
Total assets $72,000
Liabilities and Equity
Accounts payable $18,000
Accruals 13,350
Total current liabilities 31,350
Long-term debt 8,250
Total liabilities 39,600
Common stock (par value and paid in capital) 2,000
