45) GAAP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of
$1,855,062, and a net proit 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%
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
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%
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
47) Which of the following will help an analyst determine how well a irm is able to meet its
debt obligations?
A) Total liability turnover
B) Times-interest-earned
C) Return on debt
D) Asset ratio
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
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 irm’s operating proit margin is
16.1%, and it pays a 10% rate of interest on its notes payable. How much is the irm’s
times-interest-earned?
A) 15.6
B) 45.3
C) 20.2
D) 3.0
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
49) An increase in ________ will decrease the times-interest-earned ratio.
A) the tax rate
B) gross proit
C) interest expense
D) common stock
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
50) Dew Point Dynamite, Inc. generated a 1.23 total asset turnover in its latest iscal year
on assets of $2,112,077. The irm has total liabilities of $950,997. The irm’s net proit
margin was 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%
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
51) An example of a liquidity ratio is the
A) quick ratio.
B) debt ratio.
C) times-interest-earned.
D) return on assets.
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
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 proit margin = 50%
Inventory turnover (COGS/Inv) = 5
2001 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net ixed assets $500 Equity 250
Total assets $900 Total liab. & equity ?
A) 0.3
B) 0.8
C) 1.6
D) 2.2
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
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 proit margin = 50%
Inventory turnover (COGS/Inv) = 5
2001 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net ixed assets $500 Equity 250
Total assets $900 Total liab. & equity ?
A) 0.2
B) 0.4
C) 0.6
D) 0.8
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
54) A irm 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) Eiciency
D) Proitability
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
55) In the times-interest-earned ratio, dividend payments are included in
A) the numerator.
B) the denominator.
C) both the numerator and the denominator.
D) neither the numerator nor the denominator.
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
56) Assume that a particular irm has a total asset turnover ratio lower than the industry
norm. In addition, this irm’s current ratio and ixed asset turnover ratio also meet industry
standards. Based on this information, we can conclude that this irm must have excessive
A) accounts receivable.
B) ixed assets.
C) debt.
D) inventory.
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
57) Assume that a particular irm has a total asset turnover ratio lower than the industry
norm. In addition, this irm’s current ratio and acid test ratio also meet industry standards.
Based on this information, we can conclude that this irm must have excessive
A) accounts receivable.
B) ixed assets.
C) debt.
D) inventory.
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
58) A irm 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.
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
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.
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
Use the following information to answer the following question(s).
Key Ratios for ABC, Inc. and Its Industry
ABC, Inc. 2013 Ratios Industry Average Ratios in 2013
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 proit margin 1.15% 1.5%
Return on equity 5.21% 7.32%
ABC, Inc. Income Statement (in thousands)
December 31, 2014
Sales (all credit) $200,000
Cost of goods sold 140,000
Gross proit 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, 2014
Assets
Cash $2,000
Accounts receivable 17,800
Inventories 8,700
Total current assets 28,500
Gross ixed assets 70,000
Accumulated depreciation 26,500
Net ixed 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
Retained earnings 30,400
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.
28
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
61) In 2014, ABC’s inventory turnover is
A) 23.9.
B) 20.3.
C) 15.5.
D) 16.1.
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
62) In 2014, ABC’s ixed asset turnover is
A) 2.78.
B) 5.0.
C) 4.6.
D) 4.8.
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
63) Since 2013, ABC’s eiciency at using its assets has
A) improved.
B) deteriorated.
C) remained the same.
D) been variable across components of the eiciency measures.
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
64) In 2014, 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 proitable.
C) ABC utilized its total assets more eiciently in 1995.
D) None of the above explain the improvement in ABC’s return on equity.
Question Status: Revised
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
29
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk-Return Tradeof
65) Since 2013, ABC’s liquidity has
A) improved.
B) deteriorated.
C) remained the same.
D) been variable across components of the liquidity measures.
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
66) Since 2013, ABC’s inventory management has
A) improved.
B) deteriorated.
C) remained the same.
D) changed but in an indeterminate manner.
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
67) An increase in the current ratio would indicate an increase in
A) leverage.
B) liquidity.
C) return on investment.
D) operating income.
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
68) Which of the following is NOT a component of return on assets (ROA)?
A) Total assets
B) Cost of goods sold
C) Sales
D) Leverage
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
30