978-0133423822 chapter 4 Part 2

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15) An increase in ________ will increase common equity.

A) paid in capital

B) retained earnings

C) dividends paid

D) both A and C

Question Status: Revised

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

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

16) Another name for the acid test ratio is the

A) current ratio.

B) quick ratio.

C) inventory turnover ratio.

D) average collection period.

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

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

17) Which of the following inancial ratios is the best measure of the operating

efectiveness of a irm’s management?

A) Current ratio

B) Gross proit margin

C) Quick ratio

D) Return on investment

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

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

18) Which of the following is included in the denominator of the times-interest-earned

ratio?

A) Lease payments

B) Principal payments

C) Interest expense

D) Gross proit

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

19) The quick ratio is a better measure of liquidity than the current ratio if the irm has

current assets composed primarily of

A) cash.

B) inventory.

C) marketable securities.

D) accruals.

Question Status: Revised

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

20) If a company’s average collection period is higher than the industry average, then the

company might be

A) enforcing credit conditions upon its customers which are too stringent.

B) allowing its customers too much time to pay their bills.

C) too tough in collecting its accounts.

D) too liquid.

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

21) Why is the quick ratio a more reined measure of liquidity than the current ratio?

A) It measures how quickly cash and other liquid assets low through the company.

B) Inventories are omitted from the numerator of the ratio because they are generally the

least liquid of the irm’s current assets.

C) It is a quicker calculation to make.

D) Cash is the most liquid current asset.

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

22) Smith Corporation has current assets of $11,400, inventories of $4,000, and a current

ratio of 2.6. What is Smith’s quick or acid test ratio?

A) 1.69

B) 0.54

C) 0.74

D) 1.35

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

23) Kingsbury Associates has current assets as follows:

Cash $3,000

Accounts receivable $4,500

Inventories $8,000

If Kingsbury has a current ratio of 3.2, what is its quick ratio?

A) 2.07

B) 1.55

C) 0.48

D) 0.96

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

24) Water Works, Inc. has a current ratio of 1.33, current liabilities of $540,000, and

inventory of $400,000. What is Water Works, Inc.’s quick ratio?

A) 1.11

B) 0.86

C) 1.90

D) 0.59

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

25) Which of the following ratios indicates how rapidly the irm’s credit accounts are being

collected?

A) Debt ratio

B) Gross proit margin

C) Accounts receivable turnover ratio

D) Fixed asset turnover

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

26) Smart and Smiley Incorporated has an average collection period of 74 days. What is the

accounts receivable turnover ratio for Smart and Smiley?

A) 4.93

B) 2.47

C) 2.66

D) 1.68

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

27) Billing’s Pit Corporation has an accounts receivable turnover ratio of 3.4. What is

Billing’s Pit Corporation’s average collection period?

A) 107 days

B) 102 days

C) 73 days

D) 55 days

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

28) Which of the following statements is true?

A) As a general rule, management would want to reduce the irm’s average collection

period.

B) As a general rule, management would want to reduce the irm’s accounts receivable

turnover ratio.

C) As a general rule, management would want to increase the irm’s average collection

period.

D) As a general rule, a irm is not inancially afected by the amount of time required to

collect its accounts receivable.

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

29) Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net proit margin of

3.5%. The total debt ratio for the irm is 50%. Calculate Millers‘s return on equity.

A) 17.5%

B) 19.5%

C) 21.5%

D) 23.5%

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

31) A decrease in the return on equity ratio could be caused by an increase in

A) tax rate.

B) cost of goods sold.

C) total assets.

D) both B and C.

Question Status: Revised

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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?

A) $387,000

B) $1,548

C) $1,060

D) $3,521

Question Status: Revised

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

36) In 1996, Snout and Smith, Inc. had a gross proit of $27,000 on sales of $110,000. S &

S’s operating expenses for 1996 were $13,000, and its net proit margin was .0585. Snout

and Smith had no interest expense in 1996. Using this information, what was S & S’s

operating proit margin for 1996?

A) 0.245

B) 0.118

C) 0.127

D) 0.157

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

38) Skrit Corporation has a net proit 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%

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

40) Which of the following is the best indicator of management’s efectiveness at managing

the irm’s balance sheet?

A) Debt ratio

B) Total asset turnover

C) Times-interest-earned

D) Operating proit margin

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

41) Which of the following is the best indicator of management’s efectiveness at

generating proits relative to the irm’s assets?

A) Quick ratio

B) Fixed assets turnover

C) Return on assets

D) Accounts receivable turnover

Question Status: Revised

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

42) Storm King Associates has a total asset turnover ratio of 1.90 and a return on total

assets of 7.20%. What is Storm King’s net proit margin?

A) 3.79

B) 13.68

C) 9.10

D) None of the above

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

43) A decrease in ________ will increase gross proit margin.

A) cost of goods sold

B) depreciation expense

C) interest expense

D) both A and B

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s

performance.

Keywords: inancial ratios

Principles: Principle 2: There Is a Risk–Return Tradeof