58
13) The financial leverage multiplier is the ratio of ________.
A) current assets to common stockholders’ equity
B) total assets to common stockholders’ equity
C) total assets to total debt
D) current assets to current liabilities
14) Using the DuPont system of analysis, holding other factors constant, an increase in financial
leverage will result in ________.
A) an increase in the return on equity
B) a decrease in the gross profit margin
C) an increase in the gross profit margin
D) an increase in retained earnings
59
Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2019
Balance Sheet
Dana Dairy Products
December 31, 2019
15) The current ratio for Dana Dairy Products in 2019 was ________. (See Table 3.2)
A) 1.58
B) 0.63
C) 1.10
D) 0.91
16) Since 2018, the liquidity of Dana Dairy Products ________. (See Table 3.2)
A) has deteriorated
B) has remained the same
C) has improved
D) is not determinable
17) The net working capital for Dana Dairy Products in 2019 was ________. (See Table 3.2)
A) $10,325
B) -$10,325
C) -$1,425
D) $14,250
18) The inventory turnover for Dana Dairy Products in 2019 was ________. (See Table 3.2)
A) 43
B) 5
C) 20
D) 25
19) The inventory management at Dana Dairy Products ________ since 2018. (See Table 3.2)
A) has deteriorated
B) has remained the same
C) has improved slightly
D) cannot be determined
20) The average collection period for Dana Dairy Products in 2019 was ________. (See Table
3.2)
A) 32.5 days.
B) 11.8 days.
C) 25.3 days.
D) 35.9 days.
21) If Dana Dairy Products has credit terms which specify that accounts receivable should be
paid in 25 days, the average collection period ________ since 2018. (See Table 3.2)
A) has deteriorated
B) has remained the same
C) has improved
D) cannot be determined
22) Dana Dairy Products had a ________ degree of financial leverage than the industry standard,
resulting in ________. (See Table 3.2)
A) lower; lower return on total assets
B) lower; lower return on equity
C) higher; higher return on equity
D) higher; higher return on total assets
23) The debt ratio for Dana Dairy Products in 2019 was ________. (See Table 3.2)
A) 50 percent
B) 11 percent
C) 55 percent
D) 44 percent
24) Dana Dairy Products’ gross profit margin was inferior to the industry standard. This may
have resulted from ________. (See Table 3.2)
A) a high sales price
B) the high cost of goods sold
C) excessive selling and administrative expenses
D) excessive interest expense
25) The gross profit margin and net profit margin for Dana Dairy Products in 2019 were
________. (See Table 3.2)
A) 13 percent and 0.9 percent, respectively
B) 13 percent and 1.5 percent, respectively
C) 2 percent and 0.9 percent, respectively
D) 2 percent and 1.5 percent, respectively
26) The return on total assets for Dana Dairy Products for 2019 was ________. (See Table 3.2)
A) 0.9 percent
B) 5.5 percent
C) 25 percent
D) 2.5 percent
27) The return on equity for Dana Dairy Products for 2019 was ________. (See Table 3.2)
A) 0.6 percent
B) 5.6 percent
C) 0.9 percent
D) 50 percent
28) Using the modified DuPont formula allows the analyst to break Dana Dairy Products return
on equity into 3 components: the net profit margin, the total asset turnover, and a measure of
leverage (the financial leverage multiplier). Which of the following mathematical expressions
represents the modified DuPont formula relative to Dana Dairy Products’ 2019 performance?
(See Table 3.2)
A) 5.6(ROE) = 2.5(ROA) × 2.22(Financial leverage multiplier)
B) 5.6(ROE) = 3.3(ROA) × 1.70(Financial leverage multiplier)
C) 4.0(ROE) = 2.5(ROA) × 2.00(Financial leverage multiplier)
D) 2.5(ROE) = 5.6(ROA) × 2.22(Financial leverage multiplier)
29) As the financial leverage multiplier increases, this may result in ________.
A) an increase in the net profit margin and return on investment, due to the decrease in interest
expense as debt decreases
B) an increase in the net profit margin and return on investment, due to the increase in interest
expense as debt increases
C) a decrease in the net profit margin and return on investment, due to the increase in interest
expense as debt increases
D) a decrease in the net profit margin and return on investment, due to the decrease in interest
expense as debt decreases
30) In an effort to analyze Clockwork Company finances, Jim realized that he was missing the
company’s net profits after taxes for the current year. Find the company’s net profits after taxes
using the following information.
Return on total assets = 2%
Total asset turnover = 0.5
Cost of goods sold = $105,000
Gross profit margin = 0.30
66
31) Given the following balance sheet, income statement, historical ratios and industry averages,
calculate the Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze
its overall financial situation for the most recent year. Analyze its overall financial situation from
both a cross-sectional and time-series viewpoint. Break your analysis into an evaluation of the
firm’s liquidity, activity, debt, and profitability.
Income Statement
Pulp, Paper, and Paperboard, Inc.
For the Year Ended December 31, 2019
Balance Sheet
Pulp, Paper, and Paperboard, Inc.
December 31, 2019
67
Historical and Industry Average Ratios
Pulp, Paper and Paperboard, Inc.
68
Copyright © 2019 Pearson Education, Inc.
Answer: Historical and Industry Average Ratios
Pulp, Paper and Paperboard, Inc.
LIQUIDITY: The liquidity of the firm is on target with the industry standard in 2019 and shows
no trend since 2017. The firm’s liquidity is stable.
ACTIVITY: Inventory and accounts receivable management has deteriorated since 2018 and is
inferior when compared to the industry standard. The low inventory turnover may be caused by
overstocking and/or obsolete inventories. The high average collection period may have resulted
from poor collections procedures or from relaxed credit terms. Further investigation is necessary
to determine the cause of the variances.
DEBT: The firm has less debt than the industry average. The trend since 2017 has been toward
reducing the debt ratio. The firm, therefore, is subject to less financial risk than any other firm in
the industry.
PROFITABILITY: Although the gross profit margin is inferior to the industry average, the
operating and net profit margin far exceed the standards, boosting return on total assets and
return on equity. The trend in the gross profit margin is unfavorable and may either be caused by
a slide in product prices or an escalation in cost of sales. The cause of the poor gross profit
margin should be investigated.
Overall, the firm needs to focus attention on inventory and accounts receivable management and
the cause of the poor gross profit margin. In general, the firm is in good financial condition.
Diff: 3
Topic: Complete Ratio Analysis
Learning Obj.: LG 6
Learning Outcome: F-02
AACSB: Analytical Thinking
69
32) Complete the balance sheet for General Aviation, Inc. based on the following financial data.
Balance Sheet
General Aviation, Inc.
December 31, 2019
Key Financial Data (2019)
1. Sales totaled $720,000.
2. The gross profit margin was 38.7 percent.
3. Inventory turned 6 times.
4. There are 360 days in a year.
5. The average collection period was 31 days.
6. The current ratio was 2.35.
7. The total asset turnover was 2.81.
8. The debt ratio was 49.4 percent.
9. Total current assets equal $159,565.
70
Copyright © 2019 Pearson Education, Inc.
Answer: Balance Sheet
General Aviation, Inc.
December 31, 2019
Diff: 3
Topic: A Complete Ratio Analysis
Learning Obj.: LG 6
Learning Outcome: F-02
AACSB: Analytical Thinking
33) Construct the DuPont system of analysis using the following financial data for Key Wahl
Industries and determine which areas of the firm need further analysis.
Key Financial Data
72
Copyright © 2019 Pearson Education, Inc.
Table 3.1
Information (2019 values)
1. Sales totaled $110,000
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent.
34) Inventory for CEE in 2019 was ________. (See Table 3.1)
A) $36,667
B) $32,448
C) $27,500
D) $9,167
35) Notes payable for CEE in 2019 was ________. (See Table 3.1)
A) $113,466
B) $52,372
C) $41,372
D) $10,609
36) Accounts receivable for CEE in 2019 was ________. (See Table 3.1)
A) $14,056
B) $19,861
C) $14,895
D) $18,333
37) Net fixed assets for CEE in 2019 were ________. (See Table 3.1)
A) $45,484
B) $48,975
C) $54,511
D) $69,341
38) Total assets for CEE in 2019 were ________. (See Table 3.1)
A) $45,895
B) $124,300
C) $58,603
D) $97,345
39) Long-term debt for CEE in 2019 was ________. (See Table 3.1)
A) $30,763
B) $52,372
C) $10,608
D) $41,372