978-0132757089 Chapter 04 Part 3

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Total stockholders’ equity 32,400

Total liabilities and equity $72,000

60) In 1995, ABC’s average collection period is:

A) 30 days.

B) 32.5 days.

C) 25 days.

D) 35 days.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

61) In 1995, ABC’s inventory turnover is:

A) 23.9.

B) 20.3.

C) 15.5.

D) 16.1.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

62) In 1995, ABC’s fixed asset turnover is:

A) 2.78.

B) 5.0.

C) 4.6.

D) 4.8.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

63) Since 1994, ABC’s efficiency at using its assets has:

A) improved.

B) deteriorated.

C) remained the same.

D) been variable across components of the efficiency measures.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

64) In 1995, the improvement in ABC’s return on equity occurred because:

A) ABC used more debt than in 1994.

B) ABC lowered its expenses in 1995 and was, therefore, more profitable.

C) ABC utilized its total assets more efficiently in 1995.

D) None of the above explain the improvement in ABC’s return on equity.

Topic: 4.3 Using Financial Ratios

Keywords: risk, return

Principles: Principle 2: There Is a Risk-Return Tradeoff

65) Since 1994, ABC’s liquidity has:

A) improved.

B) deteriorated.

C) remained the same.

D) been variable across components of the liquidity measures.

Topic: 4.3 Using Financial Ratios

Keywords: liquidity

Principles: Principle 3: Cash Flows Are the Source of Value

66) Since 1994, ABC’s inventory management has:

A) improved.

B) deteriorated.

C) remained the same.

D) changed but in an indeterminate manner.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

67) An increase in the current ratio would indicate an increase in:

A) leverage.

B) liquidity.

C) return on investment.

D) operating income.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

68) Which of the following is NOT a component of operating income return on investment?

A) Total assets

B) Cost of goods sold

C) Sales

D) Taxes

Topic: 4.3 Using Financial Ratios

Keywords: return on equity

Principles: Principle 3: Cash Flows Are the Source of Value

69) ________ indicates management’s effectiveness in managing the firm’s income statement.

A) Gross profit margin

B) Operating profit margin

C) Net profit margin

D) Return on assets

Topic: 4.3 Using Financial Ratios

Keywords: profit margin

Principles: Principle 3: Cash Flows Are the Source of Value

70) Holding all other variables constant, which of the following could cause a firm’s current ratio

to decrease from 3.0 to 2.5? An increase in:

A) inventory

B) long-term debt

C) accounts receivable

D) accounts payable

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

50% and sales of $1,000,000, calculate net income.

A) $25,000

B) $50,000

C) $75,000

D) $100,000

Topic: 4.3 Using Financial Ratios

Keywords: DuPont ratios

Principles: Principle 3: Cash Flows Are the Source of Value

72) Which of the following will increase return on equity?

A) An increase in sales with a proportionate increase in costs and expenses

B) An increase in sales relative to the asset base

C) A decrease in leverage

D) Both A and C

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

73) Which of the following is NOT a driving force of the operating profit margin?

A) The average selling price for each product

B) The ability to control all of the firm’s expenses

C) The ability to control general and administrative expenses

D) The number of units of product sold

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

74) Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 1995. In addition, the

firm’s total assets were $2,500,000, and its capital structure is comprised of 40% debt and 60%

equity. What was Corbin’s return on equity in 1995?

A) 15%

B) 2.5%

C) 10%

D) Return on equity cannot be determined with the information provided.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

75) Which of the following ratios would be the most useful in evaluating the ability of a firm to

meet its short-term obligations?

A) The quick ratio (acid test)

B) Return on equity

C) Total asset turnover

D) Operating profit margin

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

76) If Challenge Corporation has sales of $2 million per year (all credit) and an average

collection period of 35 days, what is its average amount of accounts receivable (assume a 360-

day year)?

A) $194,444

B) $57,143

C) $5,556

D) $97,222

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

77) Which of the following financial ratios is the best measure of how effectively a firm’s

management is serving its stockholders?

A) Current ratio

B) Debt ratio

C) ACP

D) Return on equity

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

78) Colton Corp. has current assets of $4.5 million. The current ratio is 1.25 and the quick ratio

is 0.75. What is the amount of Colton’s current liabilities (in millions)?

A) $4.5

B) $1.8

C) $2.4

D) $2.9

E) $3.6

Topic: 4.3 Using Financial Ratios

Keywords: liability

Principles: Principle 3: Cash Flows Are the Source of Value

79) Consolidated Industries has total interest charges of $20,000 per year. Sales of $2 million

generated an operating income of $220,000 and an after-tax profit of 6% of sales. The firm has a

marginal tax rate of 40%. What is the firm‘s times-interest-earned ratio?

A) 10

B) 11

C) 12

D) 13

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

80) Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an after-tax profit

margin of 11.04% and sales of $2.5 million. What is Hi Sky’s return on equity?

A) 15%

B) 35%

C) 27%

D) 13%

Topic: 4.3 Using Financial Ratios

Keywords: DuPont ratios

Principles: Principle 3: Cash Flows Are the Source of Value

81) Paper Clip Office Supply had $24,000,000 in sales last year. Its total asset turnover was 6.0.

Interest expense was $100,000 (10% on its $1,000,000 of debt). The company is financed

entirely with debt and common equity. What is Paper Clip’s debt ratio?

A) 20%

B) 30%

C) 25%

D) 60%

E) 16%

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

82) Kiosk Corp. has current assets of $4.5 million and current liabilities of $3.6 million. The

current ratio is 1.25, and the quick ratio is 0.75. How much does Kiosk have invested in

inventory (in millions)?

A) $0.8

B) $1.8

C) $2.4

D) $2.9

E) $3.6

Topic: 4.3 Using Financial Ratios

Keywords: balance sheet

Principles: Principle 3: Cash Flows Are the Source of Value

40%. What is Champion’s total asset turnover?

A) 13.33

B) 9.11

C) 6.55

D) 5.33

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

84) The focus of DuPont Analysis is to provide management information as to how the firm is

using its resources to maximize returns on owners’ investments.

Topic: 4.3 Using Financial Ratios

Keywords: DuPont ratios

Principles: Principle 3: Cash Flows Are the Source of Value

85) The current ratio and the acid test ratio are both measures of financial leverage.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

86) Ratios that examine profit relative to investment are useful in evaluating the overall

effectiveness of the firm’s management.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

87) Financial ratios that are higher than industry averages may indicate problems which are as

detrimental to the firm as ratios that are too low.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

88) According to the DuPont Analysis, an increase in net profit margin will decrease return on

assets.

Topic: 4.3 Using Financial Ratios

Keywords: DuPont ratios

Principles: Principle 3: Cash Flows Are the Source of Value

89) Financial ratios comprise the principal tool of financial analysis since they can be used to

answer a variety of questions regarding a firm’s financial condition.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

90) Financial ratios can highlight a firm’s financial performance with regard to liquidity,

solvency, and profitability.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

91) Ratios are used to standardize financial information.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

92) There is no such thing as a liquidity ratio being too high.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

93) The lower the average collection period ratio, the more efficient is the firm in managing its

investment in accounts receivable.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

94) One weakness of the times-interest-earned ratio is that it includes only the annual interest

expense as a finance expense that must be paid.

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value

Table 3

Financial Data for Dooley Sportswear December 31, 1996

Inventory $206,250

Long-term debt 300,000

Interest expense 5,000

Accumulated depreciation 442,500

Cash 180,000

Net sales (all credit) 1,500,000

Common stock 800,000

Accounts receivable 225,000

Operating expenses 525,000

Notes payable-current 187,500

Cost of goods sold 937,500

Plant and equipment 1,312,500

Accounts payable 168,750

Marketable securities 95,000

Prepaid insurance 80,000

Accrued wages 65,000

Retained earnings-current-year ?

Federal income taxes 5,750

95) From the information presented in Table 3, calculate the following financial ratios for the

Dooley Sportswear Company.

current ratio operating profit margin

acid test ratio net profit margin

average collection period total tangible asset turnover

inventory turnover times interest earned

gross profit margin

Topic: 4.3 Using Financial Ratios

Keywords: financial ratios

Principles: Principle 3: Cash Flows Are the Source of Value