69) ________ indicates management’s efectiveness in managing the irm’s income
statement.
A) Gross proit margin
B) Operating proit margin
C) Net proit margin
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
70) Holding all other variables constant, which of the following could cause a irm’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.
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
71) A irm has a return on equity of 20% and a total asset turnover of 4. Assuming a debt
ratio of 50% and sales of $1,000,000, calculate net income.
A) $25,000
B) $50,000
C) $75,000
D) $100,000
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
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
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
73) Which of the following is NOT a driving force of the operating proit margin?
A) The average selling price for each product
B) The ability to control all of the irm’s expenses
C) The ability to control general and administrative expenses
D) The number of units of product sold
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
32
74) Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 1995. In
addition, the irm’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.
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
75) Which of the following ratios would be the most useful in evaluating the ability of a irm
to meet its short-term obligations?
A) The quick ratio (acid test)
B) Return on equity
C) Total asset turnover
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
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?
A) $191,781
B) $57,143
C) $5,556
D) $97,222
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
77) Which of the following inancial ratios is the best measure of how efectively a irm’s
management is serving its stockholders?
A) Current ratio
B) Debt ratio
C) ACP
D) Return on equity
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
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
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
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 proit of 6% of sales.
The irm has a marginal tax rate of 40%. What is the irm’s times-interest-earned ratio?
A) 10
B) 11
C) 12
D) 13
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
80) Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an after-tax
proit 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%
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
81) Paper Clip Oice Supply had $24,000,000 in sales last year. Its total asset turnover was
3.0. Interest expense was $100,000 (5% on its $2,000,000 of debt). The company is
inanced entirely with debt and common equity. What is Paper Clip’s debt ratio?
A) 20%
B) 30%
C) 25%
D) 60%
E) 16%
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
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
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
83) Champion Company has sales of $20 million, total debt of $1.5 million, and a debt ratio
of 40%. What is Champion’s total asset turnover?
A) 13.33
B) 9.11
C) 6.55
D) 5.33
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
84) The focus of DuPont Analysis is to provide management information as to how the irm
is using its resources to maximize returns on owners’ investments.
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
85) The current ratio and the acid test ratio are both measures of inancial leverage.
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
86) Ratios that examine proit relative to investment are useful in evaluating the overall
efectiveness of the irm’s management.
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
87) Financial ratios that are higher than industry averages may indicate problems which
are as detrimental to the irm as ratios that are too low.
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
88) According to the DuPont Analysis, an increase in net proit margin will decrease 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
89) Financial ratios comprise the principal tool of inancial analysis since they can be used
to answer a variety of questions regarding a irm’s inancial condition.
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
90) Financial ratios can highlight a irm’s inancial performance with regard to liquidity,
solvency, and 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
91) Ratios are used to standardize inancial information.
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
92) There is no such thing as a liquidity ratio being too high.
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
93) A retailer that accepts credit cards will have a higher accounts receivable turnover
ratio than a retailer with its own credit department.
Question Status: New question
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
94) One weakness of the times-interest-earned ratio is that it includes only the annual
interest expense as a inance expense that must be paid.
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
Table 3
Financial Data for Dooley Sportswear December 31, 2013
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 inancial ratios for
the Dooley Sportswear Company.
current ratio operating proit margin
acid test ratio net proit margin
average collection period total tangible asset turnover
inventory turnover times interest earned
gross proit margin
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
39
Table 4
Hokie Corporation Comparative Balance Sheet
For the Years Ending March 31, 2013 and 2014
(Millions of Dollars)
Assets 2013 2014
Current assets:
Cash $2 $10
Accounts receivable 16 10
Inventory 22 26
Total current assets $40 $46
Gross ixed assets: $120 $124
Less accumulated depreciation 60 64
Net ixed assets 60 60
Total assets $100 $106
Liabilities and Owners’ Equity
Current liabilities:
Accounts payable $16 $18
Notes payable 10 10
Total current liabilities $26 $28
Long-term debt 20 18
Owners’ equity:
Common stock 40 40
Retained earnings 14 20
Total liabilities and owners’ equity $100 $106
Hokie had net income of $26 million for 1996 and paid total cash dividends of $20 million
to their common stockholders.
96) Calculate the following inancial ratios for the Hokie Corporation using the information
given in Table 4 and 2014 information.
current ratio
acid test ratio
debt ratio
long-term debt to total capitalization
return on total assets
return on common equity
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
97) McKinny Enterprises must raise $580,000 to pay of a bank loan at the end of the year.
The irm expects sales of $5,200,000 for the year. Depreciation for the year is $315,000.
The company’s net proit margin is 5%. Can the company pay of its loan through the
retention of earnings?