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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
21
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
22
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
23
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
24
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
25
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
26
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
27
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
28
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
29
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
30
