21
Please refer to Table 4-2 for the following questions.
Table 4-2
Drummond Company
Balance Sheet
Assets:
Cash and marketable securities
$400,000
Accounts receivable
1,415,000
Inventories
1,847,500
Prepaid expenses
24,000
Total current assets
3,686,500
Fixed assets
2,800,000
Less: accum. depr.
(1,087,500)
Net fixed assets
1,712,500
Total assets
$5,399,000
Liabilities:
Accounts payable
$600,000
Notes payable
875,000
Accrued taxes
92,000
Total current liabilities
$1,567,000
Long-term debt
900,000
Common Stock (100,000 shares)
700,000
Retained Earnings
2,232,000
Total liabilities and owner‘s equity
$5,399,000
Net sales (all credit)
$6,375,000
Less: Cost of goods sold
(4,375,000)
Selling and administrative expense
(1,000,000)
Depreciation expense
(135,000)
Interest expense
(100,000)
Earnings before taxes
$765,000
Income taxes
(306,000)
Net income
$459,000
64) Based on the information in Table 4-2, the current ratio is
A) 2.97.
B) 2.46.
C) 2.35.
D) 2.23.
Keywords: Current Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
22
65) Based on the information in Table 4-2, the acid-test ratio is
A) 1.17.
B) 1.33.
C) 1.39.
D) 2.15.
Keywords: Acid-test Ratio, Quick Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
66) Based on the information in Table 4-2, the average collection period is
A) 70 days.
B) 81 days.
C) 89 days.
D) 127 days.
Keywords: Average Collection Period
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
67) Based on the information in Table 4-2, the debt ratio is
A) 28.12%.
B) 34.74%.
C) 45.69%.
D) 42.03%.
Keywords: Debt Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
68) Based on the information in Table 4-2, the return on equity is
A) 19.33%.
B) 18.47%.
C) 16.66%.
D) 15.65%.
Keywords: Return on Equity/ Common Equity
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
23
69) Based on the information in Table 4-2, and assuming the company‘s stock price is $50 per share, the
P/E ratio is
A) 10.89.
B) 14.33.
C) 24.44.
D) 27.50.
Keywords: Price/Earnings Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
70) Based on the information in Table 4-2, the times interest earned ratio is
A) 11.48.
B) 5.25.
C) 4.88.
D) 8.65.
Keywords: Times Interest Earned Ratio, Operating Income
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
71) Based on the information in Table 4-2, the inventory turnover ratio is
A) 1.29 times.
B) 2.37 times.
C) 4.43 times.
D) 2.99 times.
Keywords: Inventory Turnover Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
24
Please refer to Table 4-3 for the following questions.
Table 4-3
Emery Corporation
Balance Sheet Income Statement
Assets:
Cash
$250,000
Sales (all credit)
$8,000,000
Accounts receivable
450,000
Cost of goods sold
(4,000,000)
Inventory
500,000
Operating expense
(2,900,000)
Net fixed assets
2,100,000
Interest expense
(150,000)
Total assets
$3,300,000
Income taxes
(380,000)
Net income
$570,000
Liabilities and owners’ equity:
Accounts payable
$100,000
Notes payable
450,000
Long-term debt
1,050,000
Owners’ Equity
1,700,000
Total liabilities and owner‘s equity
$3,300,000
72) Based on the information in Table 4-3, the average collection period is
A) 38.01 days.
B) 27.36 days.
C) 20.53 days.
D) 17.49 days.
Keywords: Average Collection Period
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
73) Based on the information in Table 4-3, the operating return on total assets is
A) 55.62%.
B) 10.06%.
C) 44.74%.
D) 33.33%.
Keywords: Operating Return on Assets, EBIT
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
25
74) Based on the information in Table 4-3, the operating profit margin is
A) 13.75%.
B) 18.59%.
C) 25.80%.
D) 33.33%.
Keywords: Operating Profit Margin, EBIT
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
75) Based on the information in Table 4-3, the total asset turnover is
A) 2.10 times.
B) 2.42 times.
C) 2.87 times.
D) 3.25 times.
Keywords: Total Asset Turnover
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
76) Based on the information in Table 4-3, the debt ratio is
A) 18.38%.
B) 40.24%.
C) 48.48%.
D) 53.43%.
Keywords: Debt Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
77) Based on the information in Table 4-3, the current and acid-test ratios are, respectively,
A) 2.37 and 1.39.
B) 2.37 and 1.27.
C) 2.18 and 1.39.
D) 2.18 and 1.27.
Keywords: Current Ratio, Quick Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
26
78) Based on the information in Table 4-3, assuming that the firm has no preferred stock, and paid
$300,000 in common dividends, the firm‘s return on equity was
A) 79.43%.
B) 61.89%.
C) 43.34%.
D) 33.53%.
Keywords: Return on Equity
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
79) Which of the following financial ratios is the best measure of the operating effectiveness of a firm‘s
management?
A) times interest earned
B) net profit margin
C) operating return on assets
D) operating efficiency quotient
Keywords: Operating Return on Assets
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking
27
Please refer to Table 4-4 for the following questions.
Table 4-4
Wes Donnell, Inc.
Balance Sheet
2009
2010
Cash
$2,500
$?????
Accounts receivable
6,000
7,000
Inventories
8,500
9,000
Land
7,000
7,000
Other fixed assets
15,000
15,500
Accumulated depreciation
(5,000)
(6,000)
Total assets
$34,000
$?????
Accounts payable
$4,000
$5,000
Bonds
6,000
6,500
Common stock
15,000
15,000
Retained earnings
9,000
?????
Liabilities & Equity
$34,000
$?????
Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
Sales
$100,000
Cost of goods sold
(70,000)
Gross profit
30,000
Operating expenses
(16,000)
Depreciation
(1,000)
EBIT
13,000
Interest expense
(500)
EBT
12,500
Taxes
(1,900)
Net Income
$10,600
80) In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and
that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s retained earnings balance
for 2010?
A) $10,000
B) $8,000
C) $19,600
D) $2,600
Keywords: Dividends, Retained Earnings
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
28
81) In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and
that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s inventory turnover for
2010?
A) 0.13
B) 11.1
C) 9.3
D) 7.78
Keywords: Inventory Turnover
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
82) In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and
that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s total asset balance for 2010?
A) $42,500
B) $36,500
C) $38,500
D) $26,900
Keywords: Total Assets, Balance Sheet Equation, Current Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
83) In addition to the information contained in Table 4-4, you know that the current ratio for 2010 is 4 and
that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s cash balance for 2010?
A) $2,500
B) $13,600
C) $4,000
D) $6,500
Keywords: Cash, Balance Sheet Equation, Current Ratio
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
29
84) Apollo Corp. reported the following balance sheet:
Cash
$28,000
Accounts payable
$5,000
Accounts receivable
15,000
Notes Payable
12,000
Inventory
45,000
Accruals
17,000
Net Fixed Assets
122,000
Long-Terms Debt
45,000
Common Stock
10,000
Retained Earnings
121,000
Total assets
$210,000
Total Liab. & Equity
$210,000
Apollo Corp.’s current ratio is
A) 2.59.
B) 2.74.
C) 2.98.
D) 3.88.
Keywords: Current Ratio, Current Assets, Current Liabilities
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
85) Apollo Corp. reported the following balance sheet:
Cash
$28,000
Accounts payable
$5,000
Accounts receivable
15,000
Notes Payable
12,000
Inventory
45,000
Accruals
17,000
Net Fixed Assets
122,000
Long-Terms Debt
45,000
Common Stock
10,000
Retained Earnings
121,000
Total assets
$210,000
Total Liab. & Equity
$210,000
Apollo Corp.’s debt ratio is
A) 32.17%.
B) 37.62%.
C) 39.45%.
D) 42.95%.
Keywords: Debt Ratio, Total Liabilities
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
30
86) Apollo Corp. reported the following balance sheet:
Cash
$28,000
Accounts payable
$5,000
Accounts receivable
15,000
Notes Payable
12,000
Inventory
45,000
Accruals
17,000
Net Fixed Assets
122,000
Long-Terms Debt
45,000
Common Stock
10,000
Retained Earnings
121,000
Total assets
$210,000
Total Liab. & Equity
$210,000
Apollo has sales of $600,000 and net income of $50,000. Apollo’s return on equity is
A) 5.00%.
B) 50.00%.
C) 38.17%.
D) 41.13%.
Keywords: Return on Equity, Total Common Equity
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking
87) Which of the following ratios would be the poorest indicator of how rapidly the firm’s credit accounts
are being collected?
A) times interest earned
B) average collection period
C) accounts receivable turnover ratio
D) cash conversion cycle
Keywords: Credit Policy, Cash Conversion Cycle, Average Collection Period, Accounts Receivable Turnover
Learning Obj.: L.O. 4.2
AACSB: Reflective Thinking
88) Septon Inc. has an average collection period of 74 days. What is the accounts receivable turnover ratio
for Septon Inc.?
A) 4.93
B) 2.47
C) 2.66
D) 1.74
Keywords: Accounts Receivable Turnover, Average Collection Period
Learning Obj.: L.O. 4.2
AACSB: Analytical Thinking