Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:
2008 2009
Total sales 202 212
Cost of sales -148 -172
Gross Proit 54 40
Selling, general,
and administrative expenses -22 -20
Research and development -8 -7
Depreciation and amortization -4 -3
Other income 4 6
Earnings before interest
and taxes (EBIT) 24 16
Interest income (expense) -7 -4
Pretax income 14 12
Taxes -4 -3
Net Income 10 9
7) Consider the above Income Statement for Xenon Manufacturing. All values are in
millions of dollars. Calculate the operating margin for 2008 and 2009. What does the
change in the operating margin between these two years imply about the company?
A) The eiciency of Xenon Manufacturing has signiicantly risen between 2008 and 2009.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs
of producing them rose between 2008 and 2009.
C) The eiciency of Xenon Manufacturing has signiicantly fallen between 2008 and 2009.
D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
41
8) Consider the above Income Statement for Xenon Manufacturing. All values are in
millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in
the gross margin between these two years imply about the company?
A) The eiciency of Xenon Manufacturing has signiicantly risen between 2008 and 2009.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs
of producing them rose between 2008 and 2009.
C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs
of producing them fell between 2008 and 2009.
D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
9) In 2009, an agricultural company introduced a new cropping process which reduced the
cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but
the gross margin increased from 2.8% to 3.9% between those years, by what amount was
the cost of sales reduced?
A) $330,000
B) $660,000
C) $264,000
D) $462,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
42
10)
Firm A: Firm B:
Assets Assets
Current assets 4 Current assets 7
Fixed assets 10 Fixed assets 7
Total assets 14 Total assets 14
Firm A: Firm B:
Total sales 12 Total sales 12
Cost of sales -5 Cost of sales -7
Gross Proit 7 Gross Proit 5
Above are portions of the balance sheet and income statement for two companies in 2008.
Based upon this information, which of the following statements is most likely to be true?
A) Asset turnover ratios indicate that irm A is generating greater revenue per dollar of
assets than irm B.
B) Fixed asset turnover ratios indicate that irm A generating fewer sales for the assets it
employs than irm B.
C) Both asset turnover ratios and ixed asset turnover ratios indicate that irm A is
generating greater revenue per dollar of assets than irm B.
D) Fixed asset turnover ratios indicate that irm A generating more sales for the assets it
employs than irm B.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
43
11) Balance Sheet
Assets Liabilities
Current Assets Current Liabilities
Cash 50 Accounts payable 42
Accounts receivable 22 Notes payable/short-term debt 7
Inventories 17
Total current assets 89 Total current liabilities 49
Long-Term Assets Long-Term Liabilities
Net property, plant,
and equipment 121 Long-term debt 128
Total long-term assets 121 Total long-term liabilities 128
Total Liabilities 177
Stockholders’ Equity 33
Total Liabilities and
Total Assets 210 Stockholders’ Equity 210
Income Statement
Total sales 312
Cost of sales -210
Gross Proit 102
Selling, general,
and administrative expenses -34
Research and development -10
Depreciation and amortization -5
Operating Income 53
Other income –
Earnings before interest
and taxes (EBIT) 53
Interest income (expense) -20
Pretax income 33
Taxes -8
Net Income 25
The balance sheet and income statement of a particular irm are shown above. What does
the account receivable days ratio tell you about this company?
A) It takes on average about 4 weeks to collect payment from its customers.
B) It takes on average about 6 weeks to collect payment from its customers.
C) It takes on average about 7 weeks to collect payment from its customers.
D) It takes on average about 11 weeks to collect payment from its customers.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
44
12) Which of the following is the LEAST likely explanation for a irm’s high ROE?
A) The irm is growing.
B) The irm is able to ind investment opportunities that are very proitable.
C) The irm has very eicient use of its assets.
D) The irm enjoys high sales margins.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Which of the following irms would be expected to have a high ROE?
A) a medical supply company that provides very precise instruments at a high price to large
medical establishments such as hospitals
B) a high-end fashion retailer that has a very high mark-up on all items it sells
C) a brokerage irm that has high levels of leverage
D) a grocery store chain that has very high turnover, selling many multiples of its assets
per year
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
14) Which of the following irms would be expected to have a high ROE based on that irm’s
high proitability?
A) a medical supply company that provides very precise instruments at a high price to large
medical establishments such as hospitals
B) a low-end retailer that has a low mark-up on all items it sells
C) a brokerage irm that has high levels of leverage
D) a grocery store chain that has very high turnover, selling many multiples of its assets
per year
AACSB Objective: Relective Thinking Skills
Author: JP
Question Status: New
45
15) Manufacturer A has a proit margin of 2.2%, an asset turnover of 1.7 and an equity
multiplier of 5.0.
Manufacturer B has a proit margin of 2.5%, an asset turnover of 1.2 and an equity
multiplier of 4.7.
How much asset turnover should manufacturer B have to match manufacturer A’s ROE?
A) 1.59%
B) 3.18%
C) 2.23%
D) 1.27%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
16) Firm A Firm B Firm C Firm D
Net Income $34.1 million $5.7 million $31.1 million $13.2 million
Market Capitalization $310 million $53 million $280 million$112 million
Earnings per share $4.10 $4.05 $6.75 $12.70
The above data is for four regional trucking irms. Based on price-earnings ratios, which
irm’s stock is the best value?
A) Firm A
B) Firm B
C) Firm C
D) Firm D
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
17) Why must care be taken when comparing a irm’s share price to its operating income?
A) Both share price and operating income are related to the whole irm.
B) Share price is a quantity related to the entire irm, while operating income is an amount
that is related solely to equity holders.
C) Both share price and operating income are related solely to equity holders.
D) Share price is a quantity related to equity holders, while operating income is an amount
that is related to the whole irm.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
46
2.6 The Statement of Cash Flows
1) A irm’s statement of cash lows uses the balance sheet and the income statement to
determine the amount of cash a irm has generated and how it has used that cash during a
given period.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) Which of the following is NOT a reason that the income statement does not accurately
indicate how much cash a irm has earned?
A) It includes entries for the depreciation of assets.
B) It does not include entries for expenditures on inventory.
C) It does not include entries for collection of money from account receivables.
D) It includes cash inlows from services rendered.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following is a way that the operating activity section of the statement of
cash lows adjusts Net Income from the balance sheet?
A) It subtracts all expenses and costs related to a irm’s operating activities.
B) It adds all non-cash entries related to a irm’s operating activities.
C) It adds the cash that lows from investors to a irm.
D) It removes the cash used for investment purposes.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
47
4) Allen Company bought a new copy machine to be depreciated straight line for three
years for use by sales personnel. Where would this purchase be relected on the Statement
of Cash Flows?
A) It would be an expense on the income statement so it would be relected in operating
cash lows.
B) It would be an addition to property, plant and equipment so it would be an investing
activity.
C) It would be an addition to cash so it would be relected in the change in cash.
D) None of the above answers is correct.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
5) A printing company prints a brochure for a client and then bills them for this service. At
the time the printing company‘s inancial disclosure statements are prepared, the client has
not yet paid the bill for this service. How will this transaction be recorded?
A) The sale will be added to Net Income on the income statement and retained in Net
Income on the statement of cash lows.
B) The sale will be added to Net Income on the income statement but deducted from Net
Income on the statement of cash lows.
C) The sale will not be added to Net Income on the income statement but added to Net
Income on the statement of cash lows.
D) The sale will neither be added to Net Income on the income statement nor used to
adjust Net Income on the statement of cash lows.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6) A manufacturer of plastic bottles for the medical trade purchases a new compression
blow molder for its bottle production plant. How will the cost to the company of this piece
of equipment be recorded?
A) It will be depreciated over time on the income statement and subtracted as a capital
expenditure on the statement of cash lows.
B) It will be depreciated over time on the income statement and subtracted as Inventory on
the statement of cash lows.
C) It will be depreciated over time on the income statement and therefore not be recorded
separately on the statement of cash lows.
D) It will be subtracted from Gross Proit on the income statement and therefore, not be
recorded separately on the statement of cash lows.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) A software company acquires a smaller company in order to acquire the patents that it
holds. Where will the cost of this acquisition be recorded on the statement of cash lows?
A) as an outlow under operating activities
B) as an outlow under investment activities
48
C) as an outlow under inancial activities
D) not recorded on the statement of cash lows
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
49