11
33) Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker’s
current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season,
and will pay for the inventory with short-term debt. How much inventory can Baker purchase without
violating its debt agreement if their total current assets equal $15 million?
A) $0.50 million
B) $1.67 million
C) $4.50 million
D) $6.00 million
Keywords: Current Ratio, Debt Covenant
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
34) Williams Inc. has a current ratio equal to 3, a quick ratio equal to 1.8, and total current assets of $6
million. Williams’ inventory balance is
A) $2,000,000.
B) $2,400,000.
C) $4,000,000.
D) $4,800,000.
Keywords: Current Ratio, Quick Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
35) Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the
company‘s current ratio?
A) The company collects $500,000 of its accounts receivable.
B) The company sells $1 million of inventory on credit.
C) The company pays back $50,000 of its long-term debt.
D) The company writes a $30,000 check to pay off some existing accounts payable.
Keywords: Current Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
36) For a retailer with inventory to sell, the acid-test ratio will be
A) less than the current ratio, thus providing a more stringent measure of liquidity.
B) greater than the current ratio, thus providing a more stringent measure of liquidity.
C) greater than the current ratio, thus providing a less stringent measure of liquidity.
D) unimportant because it doesn’t include inventory.
Keywords: Acid-test Ratio, Current Ratio, Inventory
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking
12
37) Company A has a higher days sales outstanding ratio than Company B. Therefore,
A) Company A sells more on credit than Company B.
B) Company A has a higher percentage of cash to credit sales than Company B.
C) Company A must be collecting its accounts receivable faster than Company B, on average.
D) other things being equal, Company B has a cash flow advantage over Company A.
Keywords: Days Sales Outstanding, Credit Policy
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
38) When comparing inventory turnover ratios, other things being equal,
A) a lower inventory turnover is preferred in order to keep inventory costs low.
B) a higher inventory turnover is preferred to improve liquidity.
C) higher inventory turnover results from old or obsolete inventory increasing the inventory balance on
the balance sheet.
D) higher inventory turnover results from an increase in the selling price of the product.
Keywords: Inventory Turnover, Liquidity
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
39) Company A and Company B have the same gross profit margin and the same total asset turnover, but
company A has a higher return on equity. This may result from
A) Company B has more common stock.
B) Company A has a lower debt ratio.
C) Company A has lower selling and administrative expenses, resulting in a higher net profit margin.
D) Company A has lower cost of goods sold, resulting in a higher net profit margin.
Keywords: Return on Equity, Profit Margin, Total Asset Turnover, Leverage
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
40) Nelson Industries has a higher debt ratio than Butler, Inc., and Nelson also has a higher times interest
earned ratio than Butler. If Nelson and Butler both have the same amount of total assets, then
A) Nelson must have higher operating income than Butler.
B) if both companies have the same operating income, Butler must be paying a higher interest rate on its
long-term debt than Nelson is paying.
C) Nelson may have more non-interest bearing liabilities, such as accounts payable, than Butler has.
D) if both companies have the same operating income, a mistake was made in the calculations because
the company with a higher debt ratio must have a lower times interest earned ratio.
Keywords: Debt Ratio, Times Interest Earned Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
13
41) HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this
year, nearly 10% higher than the industry average. However, HighLev‘s stock price decreases relative to
its industry counterparts. How is this possible?
A) Markets are inefficient and fail to recognize the benefits of leverage.
B) The increased debt resulted in interest payments that made HighLev’s operating income drop even
though return on equity increased.
C) Shareholders are not interested in return on equity.
D) The high levels of debt increased the riskiness of HighLev relative to its competitors.
Keywords: Leverage, Return on Equity
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking
42) Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and
100,000 shares of common stock outstanding. If Benkart’s P/E ratio is 12, what is the company‘s current
stock price?
A) $60 per share
B) $96 per share
C) $240 per share
D) $360 per share
Keywords: P/E Ratio, Earnings Per Share
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
43) Which of the following statements concerning Economic Value Added (EVA) is MOST correct?
A) The higher the cost of capital, the higher the EVA, other things being held constant.
B) EVA can be negative even if operating profits are positive.
C) A company with positive net income will have positive EVA.
D) Higher operating return on assets will result in lower EVA for a company with a debt ratio over 50%.
Keywords: Economic Value Added
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking
44) The acid-test ratio of a firm would be unaffected by which of the following?
A) Accounts payable are reduced by obtaining a short-term loan.
B) Common stock is sold and the money is invested in marketable securities.
C) Inventories are sold for cash.
D) Inventories are sold on a short-term credit basis.
Keywords: Acid-test Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
14
45) The acid-test ratio of a firm would be unaffected by which of the following?
A) Several short-term loans are consolidated and paid off using long-term debt.
B) Equipment is purchased, financed by a long-term debt issue.
C) Additional inventory is purchased for cash.
D) Large accounts receivable balances are collected.
Keywords: Quick Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
46) The current ratio of a firm would be increased by which of the following?
A) Land held for investment is sold for cash.
B) Equipment is purchased, financed by a long-term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a credit basis.
Keywords: Current Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
47) The current ratio of a firm would be decreased by which of the following?
A) Land held for investment is sold for cash.
B) Equipment is purchased, financed by a long-term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a long-term credit basis.
Keywords: Current Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
48) The current ratio of a firm would equal its quick ratio whenever
A) the firm has no inventory.
B) the firm’s inventory is equal to its other current assets.
C) the firm’s inventory is equal to its current liabilities.
D) the firm‘s current ratio is equal to one.
Keywords: Current Ratio, Quick Ratio
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking
15
49) Given an accounts receivable turnover of 10 and annual credit sales of $900,000, the average collection
period is
A) 18.25 days.
B) 36.50 days.
C) 90 days.
D) 40.56 days.
Keywords: Accounts Receivable Turnover, Average Collection Period
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking
16
Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
Assets:
Cash and marketable securities
$600,000
Accounts receivable
900,000
Inventories
1,500,000
Prepaid expenses
75,000
Total current assets
$3,075,000
Fixed assets
8,000,000
Less: accum. depr.
(2,075,000)
Net fixed assets
$5,925,000
Total assets
$9,000,000
Liabilities:
Accounts payable
$800,000
Notes payable
700,000
Accrued taxes
50,000
Total current liabilities
$1,550,000
Long-term debt
2,500,000
Owner’s equity (1 million shares
of common stock outstanding)
4,950,000
Total liabilities and owner‘s equity
$9,000,000
Net sales (all credit)
$10,000,000
Less: Cost of goods sold
(3,000,000)
Selling and administrative
expense
(2,000,000)
Depreciation expense
(250,000)
Interest expense
(200,000)
Earnings before taxes
4,550,000
Income taxes
(1,820,000)
Net income
$2,730,000
50) Based on the information in Table 4-1, the current ratio is
A) 1.92.
B) 1.98.
C) 2.86.
D) 2.88.
Keywords: Current Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
17
51) Based on the information in Table 4-1, the acid-test ratio is
A) 1.71.
B) 1.67.
C) 1.02.
D) 0.98.
Keywords: Acid-test Ratio, Quick Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
52) Based on the information in Table 4-1, the average collection period is
A) 36.50 days.
B) 32.85 days.
C) 46.34 days.
D) 29.85 days.
Keywords: Average Collection Period
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
53) Based on the information in Table 4-1, the accounts receivable turnover is
A) 10.00.
B) 11.11.
C) 8.11.
D) 9.50.
Keywords: Accounts Receivable Turnover
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
54) Based on the information in Table 4-1, the debt ratio is
A) 24.1%.
B) 32.6%.
C) 45.0%.
D) 55.2%.
Keywords: Debt Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
18
55) Based on the information in Table 4-1, the OROA is
A) 24.73%.
B) 39.50%.
C) 46.54%.
D) 52.78%.
Keywords: Operating Return on Assets
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
56) Based on the information in Table 4-1, the times interest earned ratio is
A) 32.33 times.
B) 23.75 times.
C) 19.00 times.
D) 12.33 times.
Keywords: Times Interest Earned Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
57) Based on the information in Table 4-1, assuming that no preferred dividends were paid, the return on
common equity is
A) 55.15%.
B) 44.86%.
C) 38.83%.
D) 17.56%.
Keywords: Return on Equity
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
58) Based on the information in Table 4-1, the fixed asset turnover ratio is
A) 1.69.
B) 2.17.
C) 4.39.
D) 4.80.
Keywords: Fixed Asset Turnover Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
19
59) Based on the information in Table 4-1, the total asset turnover ratio is
A) 1.11.
B) 1.41.
C) 2.33.
D) 4.45.
Keywords: Total Asset Turnover
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
60) Based on the information in Table 4-1, the operating profit margin is
A) 47.5%.
B) 37.5%.
C) 26.4%.
D) 32.8%.
Keywords: Operating Profit Margin
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
61) Based on the information in Table 4-1, and assuming the company‘s stock price is $30 per share, the
P/E ratio is
A) 3.09.
B) 4.83.
C) 9.85.
D) 10.99.
Keywords: Price/Earnings Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
62) Based on the information in Table 4-1, the inventory turnover ratio is
A) 1.3 times.
B) 2.0 times.
C) 2.5 times.
D) 2.9 times.
Keywords: Inventory Turnover Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
20
63) XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10. It is likely that
A) XYZ’s earnings per share are twice the earnings per share of EFG.
B) investors expect XYZ’s earnings to grow faster than EFG’s earnings.
C) investors believe that for the same level of earnings growth, XYZ is a higher risk company.
D) investors believe XYZ stock is overvalued.
Keywords: P/E Ratio
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking