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21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Answer: C
Explanation: Debt-to-equity ratio = 2,3000,000/900,000 = 2.56
Difficulty: 2 Medium
Topic: Ratio Analysis
Learning Objective: 14-03 Use ratio decomposition analysis to show how profitability depends
on efficient use of assets; profit margin; and leverage.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22
33) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's cash
flow from operating activities for 2017 was ________.
A) $810,000
B) $775,000
C) $755,000
D) $735,000
24
34) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The industry
average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please
keep in mind that when a ratio involves both income statement and balance sheet numbers, the
balance sheet numbers for the beginning and end of the year must be averaged.)
A) Flathead's receivables are outstanding about 9 fewer days than the industry average.
B) Flathead's receivables are outstanding about 15 fewer days than the industry average.
C) Flathead's receivables are outstanding about 12 more days than the industry average.
D) Flathead's receivables are outstanding about 6 more days than the industry average.
26
35) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total
asset turnover for 2017 is ________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning and
end of the year must be averaged.)
A) 3.56
B) 3.26
C) 3.14
D) 3.02
28
36) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. In 2017 Flathead
generated ________ of EBIT for every dollar of sales.
A) $0.075
B) $0.086
C) $0.092
D) $0.099
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Answer: B
Explanation: ROS = = 0.086
Difficulty: 2 Medium
Topic: Ratio Analysis
Learning Objective: 14-03 Use ratio decomposition analysis to show how profitability depends
on efficient use of assets; profit margin; and leverage.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
30
37) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on
equity ratio for 2017 is ________. (Please keep in mind that when a ratio involves both income
statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the
year must be averaged.)
A) 6.5%
B) 26.5%
C) 33.4%
D) 38%
32
38) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's P/E ratio
for 2017 is ________.
A) 3.39
B) 3.6
C) 13.33
D) 10.67
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Answer: C
Explanation: P/E = 15/(225,000/200,000) = 13.33
Difficulty: 2 Medium
Topic: Ratio Analysis
Learning Objective: 14-03 Use ratio decomposition analysis to show how profitability depends
on efficient use of assets; profit margin; and leverage.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34
39) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's
compound leverage ratio is ________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning and
end of the year must be averaged.)
A) 1.5
B) 2
C) 2.5
D) 3
36
40) The financial statements of Burnaby Mountain Trading Company are shown below.
Income Statement 2017
Sales
$
7,000,000
Cost of Goods Sold
5,000,000
Gross Profit
$
2,000,000
Selling and Administrative Expenses
1,700,000
EBIT
$
300,000
Interest Expense
50,000
Income before Tax
$
250,000
Taxes
100,000
Net Income
$
150,000
Burnaby Mountain Trading Company
Comparative Balance Sheets
2017
2016
Cash
$
90,000
$
80,000
Accounts Receivable
810,000
800,000
Inventory
800,000
720,000
Total Current Assets
$
1,700,000
$
1,600,000
Fixed Assets
2,600,000
2,400,000
Total Assets
$
4,300,000
$
4,000,000
Accounts Payable
$
500,000
$
400,000
Bank Loans
100,000
100,000
Total Current Liabilities
$
600,000
$
500,000
Long-term Bonds
400,000
300,000
Total Liabilities
$
1,000,000
$
800,000
Common Stock (200,000 shares)
500,000
500,000
Retainded Earnings
2,800,000
2,700,000
Total Equity
$
3,300,000
$
3,200,000
Total Liabilities and Equity
$
4,300,000
$
4,000,000
Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's current
ratio for 2017 is ________.
A) 1.3
B) 1.5
C) 1.69
D) 2.83
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Answer: D
Explanation: CR = = 2.83
Difficulty: 2 Medium
Topic: Ratio Analysis
Learning Objective: 14-03 Use ratio decomposition analysis to show how profitability depends
on efficient use of assets; profit margin; and leverage.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38
41) The financial statements of Burnaby Mountain Trading Company are shown below.
Burnaby Mountain Trading Company
Income Statement 2017
Sales
$
7,000,000
Cost of Goods Sold
5,000,000
Gross Profit
$
2,000,000
Selling and Administrative Expenses
1,700,000
EBIT
$
300,000
Interest Expense
50,000
Income before Tax
$
250,000
Taxes
100,000
Net Income
$
150,000
Burnaby Mountain Trading Company
Comparative Balance Sheets
2017
2016
Cash
$
90,000
$
80,000
Accounts Receivable
810,000
800,000
Inventory
800,000
720,000
Total Current Assets
$
1,700,000
$
1,600,000
Fixed Assets
2,600,000
2,400,000
Total Assets
$
4,300,000
$
4,000,000
Accounts Payable
$
500,000
$
400,000
Bank Loans
100,000
100,000
Total Current Liabilities
$
600,000
$
500,000
Long-term Bonds
400,000
300,000
Total Liabilities
$
1,000,000
$
800,000
Common Stock (200,000 shares)
500,000
500,000
Retainded Earnings
2,800,000
2,700,000
Total Equity
$
3,300,000
$
3,200,000
Total Liabilities and Equity
$
4,300,000
$
4,000,000
Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's quick ratio
for 2017 is ________.
A) 1.3
B) 1.5
C) 1.69
D) 2.83
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Answer: B
Explanation: QR = (Cash + AR)/CL = ($90,000 + 810,000)/$600,000 = 1.5
Difficulty: 2 Medium
Topic: Ratio Analysis
Learning Objective: 14-03 Use ratio decomposition analysis to show how profitability depends
on efficient use of assets; profit margin; and leverage.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) The financial statements of Burnaby Mountain Trading Company are shown below.
Income Statement 2017
Sales
$
7,000,000
Cost of Goods Sold
5,000,000
Gross Profit
$
2,000,000
Selling and Administrative Expenses
1,700,000
EBIT
$
300,000
Interest Expense
50,000
Income before Tax
$
250,000
Taxes
100,000
Net Income
$
150,000
Burnaby Mountain Trading Company
Comparative Balance Sheets
2017
2016
Cash
$
90,000
$
80,000
Accounts Receivable
810,000
800,000
Inventory
800,000
720,000
Total Current Assets
$
1,700,000
$
1,600,000
Fixed Assets
2,600,000
2,400,000
Total Assets
$
4,300,000
$
4,000,000
Accounts Payable
$
500,000
$
400,000
Bank Loans
100,000
100,000
Total Current Liabilities
$
600,000
$
500,000
Long-term Bonds
400,000
300,000
Total Liabilities
$
1,000,000
$
800,000
Common Stock (200,000 shares)
500,000
500,000
Retainded Earnings
2,800,000
2,700,000
Total Equity
$
3,300,000
$
3,200,000
Total Liabilities and Equity
$
4,300,000
$
4,000,000
Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's leverage
ratio for 2017 is ________.
