978-1337276337 Test Bank Chapter 13 Part 2

Chapter 13

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57. The calculations for some profitability ratios are the same as the calculations for common-size analysis of the income

statement. Which of the following profitability ratios would also be determined through a common-size analysis of the

income statement?

a. Gross profit ratio

b. Debt-to-equity ratio

c. Acid-test ratio

d. Earnings per share

58. Starship Inc.’s gross profit ratio decreased from 36.5% in 2017 to 28.6% in 2018. What is the trend in this change?

a. It is an upward positive trend.

b. It is a downward negative trend.

c. It depends on whether net sales increased or decreased during the period.

d. Trends cannot be determined without the dollar amount of the increase provided.

59. In a vertical analysis of the income statement, the 100% amount is

a. net income.

b. gross profit.

c. operating income.

d. net sales.

60. In a vertical analysis of the balance sheet, the 100% amount is

a. current assets.

b. working capital.

c. total assets.

d. total stockholders’ equity.

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62. What numerators are used in the computation of the following ratios?

Inventory turnover ratio Accounts receivable turnover ratio

a.

Cost of Goods Sold Cost of Goods Sold

b.

Net Credit Sales Net Credit Sales

c.

Net Credit Sales Cost of Goods Sold

d.

Cost of Goods Sold Net Credit Sales

63. Which of the following is considered a liquidity analysis tool?

a. Gross profit ratio

b. Acid-test ratio

c. Dividend yield ratio

d. Return on assets ratio

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64. Which of the following ratios is least useful in evaluating a company’s ability to pay its current debts as they become

due?

a. Current ratio

b. Debt-to-equity ratio

c. Debt service coverage ratio

d. Acid-test ratio

65. Which of the following is a total dollar measure of liquidity?

a. Accounts receivable turnover ratio

b. Cash-to–cash operating cycle

c. Number of days’ sales in inventory

d. Working capital

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66. If Tommy’s Subs Company has a current ratio of 2.5 and current assets of $195,000, the amount of working capital is

a. $117,000.

b. $330,000.

c. $380,000.

d. $78,000.

67. If Mussel Company has working capital of $540,000 and a current ratio of 3 to 1, the amount of current assets is

a. $540,000.

b. $810,000.

c. $270,000.

d. $405,000.

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70. Refer to the data for Fawnsworth Industries.

Based on this information, what is Fawnsworth’s inventory turnover ratio for the current period?

a. 1.67 times

b. 2.73 times

c. 0.33 time

d. 3.00 times

71. Refer to the data for Fawnsworth Industries.

Based on this information, what is Fawnsworth’s number of days’ sales in inventory (assuming a 360-day year)?

a. 132 days

b. 216 days

c. 1,091 days

d. 120 days

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72. Which of the following is a measure of the time that it takes to convert current assets into cash?

a. Accounts receivable turnover ratio

b. Cash-to–cash operating cycle

c. Number of days’ sales in inventory

d. Working capital

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73. Refer to the data for Pinecrest Company.

The current ratio for 2018 is

a. 0.60 to 1.

b. 0.99 to 1.

c. 1.34 to 1.

d. 1.68 to 1.

74. Refer to the data for Pinecrest Company.

The amount of working capital at the end of 2018 is

a. $36,000.

b. $44,000.

c. $99,000.

d. $174,000.

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75. Refer to the data for Pinecrest Company.

Which of the following statements is true?

a. The current ratio increased from 2017 to 2018.

b. The acid-test ratio decreased from 2017 to 2018.

c. The amount of working capital decreased from 2017 to 2018.

d. Assuming extreme conditions do not exist, the company appears to be in a worse position to pay its current debts

at the end of 2018 compared to 2017.

76. Refer to the data for Pinecrest Company.

Which of the following statements is true?

a. Net income must be at least $36,000 for 2018.

b. Net income must be less than $36,000 for 2018.

c. Cash flows from operating activities is twice as large as net income for 2018.

d. The amount of net income for 2018 cannot be determined based on the data provided.

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77. Refer to the data for Pinecrest Company.

Competitors in Pinecrest Company’s industry have an average inventory turnover of 20.8 times. Its inventory turnover for

2018

a. indicates that the company has too little inventory on hand at the end of 2018.

b. indicates that the company is pricing its products too low.

c. is equal to the number of days’ sales in the company’s inventory.

d. indicates that the market may be reacting to problems in the sales department by reducing demand for the

company’s products.

78. Refer to the data for Pinecrest Company.

Competitors in Pinecrest Company’s industry have an average accounts receivable turnover of 10.8 times. Pinecrest

reported accounts receivable at December 31, 2018, of $42,000 and has normal credit terms requiring payment within 30

days. Pinecrest’s accounts receivable turnover for 2018 is

a. indicating that the company probably has stricter credit terms and policies than the industry as a whole, which may

repel potential buyers.

b. of no value to bankers and other creditors.

c. less efficient in its collection policies in 2018 than the industry as a whole.

d. less than the industry, which means that its customers are paying on their accounts in a more timely manner than

are customers reflected by the industry average.

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79. Liquidity analysis is required

a. in order to evaluate the profitability over past accounting periods.

b. to assess the nearness to cash of a company’s assets and liabilities.

c. to be reported in the financial statements for all companies publicly traded.

d. when a company reports nonrecurring items in its financial statements.

80. Which of the following is an example of liquidity analysis?

a. Bonds payable are divided by total liabilities and stockholders’ equity.

b. Net income is divided by total assets.

c. Net income is divided by the number of shares of stock outstanding

d. Current assets are divided by current liabilities.

81. Which of the following statements is generally considered desirable?

a. A large decrease in the accounts receivable turnover ratio

b. A decrease in the number of days’ sales in receivables

c. An increase in sales along with a larger decrease in the gross profit ratio

d. A decrease in the cash flow from operations to current liabilities ratio

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82. Which of the following generally indicates a positive change?

a. Earnings per share decreases.

b. The debt service coverage decreases.

c. The acid-test ratio decreases.

d. The number of days’ sales in inventory decreases.

83. Moonbeam Gift Shop’s inventory turned over six times during the year. Similar gift shops have an inventory turnover

equal to 12 times per year. What might explain Moonbeam’s state of inventory management?

a. Moonbeam sold too much inventory during the year.

b. Moonbeam needs to increase sales and decrease the amount of inventory on hand.

c. Moonbeam is performing twice as well as its competitors.

d. Moonbeam should increase the amount of goods on hand to accommodate the additional inventory demand.

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84. Sandy Shores, Inc. reported the following amounts in its financial statements:

2018 2017

Average merchandise inventory $ 200,000 $ 120,000

Cost of goods sold 4,000,000 3,000,000

From 2017 to 2018, the company’s management of inventory is

a. declining, because the number of days’ sales in inventory is getting larger.

b. increasing, because the number of days’ sales in inventory is getting larger.

c. declining, because the number of days’ sales in inventory is getting smaller.

d. increasing, because the number of days’ sales in inventory is getting smaller.

85. The current ratio

a. is generally smaller than the quick ratio.

b. decreases when a company becomes more liquid.

c. increases when a company allows more customers to charge on account instead of collecting cash.

d. is larger when a company is more liquid.

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86. Seashell Company is considered “very liquid” for the year ended December 31, 2017. This means that Seashell

a. has a small quick ratio.

b. must decrease its liquidity in order to appear favorable to stockholders.

c. should sell plant assets in order to remain in business.

d. is able to pay its current debts using its current assets.

87. Most companies

a. are not concerned with the management of working capital because cash flows are good.

b. strive for a balance between current assets and current liabilities.

c. try to maintain protection from the creditors by keeping only a small amount of cash available.

d. agree that working capital of $3,000,000 is sufficient for business operations.

88. The acid-test ratio differs from the current ratio in that it

a. represents the amount of cash on hand instead of the amount of working capital.

b. excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and

possible nonpayment.

c. is a stricter test of a company’s ability to pay its current debts as they are due.

d. signals the need to liquidate marketable securities when it drops below 5 to 1.

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89. The current and quick ratios have two limitations. These ratios

a. emphasize the ineffectiveness of analysts’ calculations and focus on liquid assets at a point in time instead of a

period of time.

b. focus on cash instead of working capital, and they represent a point in time instead of covering a period of time.

c. focus on working capital instead of cash, and they represent a point in time instead of covering a period of time.

d. are ignored by most creditors and focus on working capital instead of cash.

90. Turnover ratios differ from the current and quick ratios in that they

a. are based on working capital instead of cash.

b. are based on a point of time instead of a period of time.

c. are activity ratios.

d. measure the profitability of a company instead of its liquidity.

91. The cash–to–cash operating cycle is the number of days’ sales in

a. receivables and working capital.

b. receivables and plant assets.

c. inventory and receivables.

d. inventory and plant assets.

92. The operating cycle of a manufacturer is the length of time between the

a. purchase of raw materials and the sale of the goods.

b. sale of the goods and the collection of any outstanding receivables from the sale of the product.

c. purchase of raw materials and collection of any outstanding receivables from the sale of the product.

d. purchase of raw materials and the production of goods.

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95. If the current ratio is 3 to 1 and the working capital is $100,000, then the current assets are

a. $150,000.

b. $200,000.

c. $300,000.

d. $450,000.

96. Which of the following is true regarding the relationship of the current ratio to the quick ratio?

a. The current ratio is based on a more conservative measure of liquidity.

b. Both focus on the relationship between part or all of the firm’s current assets and all of its current liabilities.

c. Both focus on the relationship between all of the firm’s current assets and part or all of its current liabilities.

d. For a company in the service industry, the current ratio and quick ratio will be significantly different.

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97. Assume the current ratio for Allegheny Supply Co. is 2 to 1. If the company purchased supplies on credit, the effect of

this transaction is to

a. increase the current ratio.

b. decrease the current ratio.

c. have no effect on the current ratio.

d. decrease cash.

98. Which of the following will decrease working capital?

a. Collection of accounts receivable

b. Purchase of a new computer with cash

c. Payment of salaries payable

d. Purchase of merchandise on credit

99. The net assets of a company are equal to

a. current assets less current liabilities.

b. total assets less current assets.

c. long-term assets less accumulated depreciation.

d. the stockholders’ equity.

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100. The following items appear on the balance sheet of The Piano Company at the end of 2018 and 2017:

2018 2017

Current assets $6,000 $3,000

Long-term assets 7,000 4,000

Current liabilities 2,000 3,000

Long-term liabilities 7,000 0

Stockholders’ equity 4,000 4,000

Between 2017 and 2018,

a. The Piano Company’s debt-to–equity ratio and current ratio both increased.

b. The Piano Company’s debt-to-equity ratio and current ratio both decreased.

c. The Piano Company’s debt-to–equity ratio increased, and its debt-to-total assets ratio decreased.

d. The Piano Company’s debt-to-equity ratio decreased, and its debt-to-total assets ratio increased.