Chapter 13
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Page 41
101. Carlton, Inc. presented the following information in a note to its financial statements for the year ending December
31, 2017:
1. The current ratio should remain at least 2.0 to 1 at all times.
2. The debt-to-equity ratio should not exceed 0.7 to 1 at any time.
3. The times interest earned should be 5.0 or better.
4. The inventory turnover should be 4.0 or better.
The ratios at year-end are current ratio, 2.3 to 1; debt-to-equity ratio, 0.6 to 1; times interest earned, 7.1; and inventory
turnover, 3.7. Which of the following statements is true?
a. Carlton was in default because of the inventory turnover.
b. Carlton was in default because of the current ratio.
c. Carlton was in default because of the debt-to-equity ratio.
d. Carlton was in default because of the times interest earned.
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102. Scrubber, Inc. presented the following information in a note to its financial statements for the year ending December
31, 2017:
1. The current ratio should remain at least 2.0 to 1 at all times.
2. The debt-to-equity ratio should not exceed 0.7 to 1 at any time.
3. The company must maintain $75,000 cash at all times.
The ratios at year-end are current ratio, 2.3 to 1 and debt-to-equity ratio, 0.2 to 1. The amount of cash on the bank
statement is $75,400, but the Cash account after the adjustments from the bank reconciliation has a balance of $74,900.
Has Scrubber violated its loan agreement?
a. No
b. Yes, the cash balance is less than $75,000.
c. Yes, the current ratio is 0.3 or 30% larger than the agreement indicates.
d. Yes, the cash balance is less than $75,000, and the debt-to-equity ratio is overstated.
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Page 44
104. Refer to the Westmoreland Company data.
The company’s times interest earned ratio for 2018
a. shows an increase in the company’s ability to pay its current debt when it comes due.
b. indicates the company cannot meet its current year interest payments out of current year earnings.
c. increased, which indicates the company’s lenders will be pleased.
d. decreased, which indicates the company has more cash to pay interest on its debt.
105. Refer to the Westmoreland Company data.
The cash flow from operations to capital expenditures ratio for 2018 is an indicator that Westmoreland Company
a. has been effectively able to use operations to finance its acquisitions of productive assets.
b. has increased profits by $13,000.
c. has decreased cash, but is offset by the increase in net income.
d. has net income that is more than it would have been had dividends of $30,000 been paid.
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Page 45
106. Refer to the Westmoreland Company data.
The company’s debt-to-equity ratio was 0.83 to 1 in 2018 and 0.89 to 1 in 2017. Which of the following statements is true
concerning Westmoreland?
a. The company has a smaller percentage of capital from owners at the end of 2018 than at the end of 2017.
b. The company relied more on creditors for financing during 2018 than in 2017.
c. The company is improving its debt-to-equity ratio.
d. The company appears to be in a weaker position at the end of 2018 to finance capital expenditures from cash flow
generated by operating activities.
107. Refer to the Westmoreland Company data.
The company’s debt service coverage ratio for 2018 indicates that the
a. company’s ability to pay principal and interest to creditors has declined.
b. company has more net income available to allocate to stockholders after the payment of debt.
c. company had significant changes in current assets and current liabilities during the period.
d. company generates about $2 of cash from operations to cover every $1 of debt.
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Page 46
108. Which of the following solvency ratios is the best measure of a company’s ability to pay interest and maturing
principal amounts on its long-term debt?
a. Debt-to-equity ratio
b. Times interest earned ratio
c. Debt service coverage ratio
d. Earnings per share
109. Which of the following solvency ratios is the best measure to determine the degree to which a company relies on
outsiders for funds?
a. Debt-to-equity ratio
b. Times interest earned ratio
c. Debt service coverage ratio
d. Cash flow from operations to capital expenditures ratio
110. Which of the following ratios is the best measure in analyzing a company’s ability to pay interest on long-term debt
and to repay the long-term debt over several years?
a. Debt-to-equity ratio
b. Times interest earned ratio
c. Debt service coverage ratio
d. Acid-test ratio
111. Below are selected data from the financial statements of Moriarty Company.
2018 2017
Total liabilities $1,205,000 $952,000
Common stock ($30 par) 250,000 225,000
Chapter 13
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Page 47
Paid-in capital in excess of par—common stock 150,000 135,000
Retained earnings 155,000 145,000
The debt-to-equity ratio for 2018 is
a. increasing, which should be a major cause of concern for Moriarty Company.
b. increasing, which should be a good sign in investors’ eyes.
c. decreasing, which should be a major cause of concern for Moriarty Company.
d. decreasing, which should be a good sign in investors’ eyes.
112. Solvency and liquidity differ in a company’s ability
a. to show a profit.
b. to remain in business over a long or short period of time.
c. to collect cash from customers during the short or long term.
d. to increase gross profit percentages over long or short periods of time.
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Page 48
113. The cash flow from operations to capital expenditures ratio measures a company’s ability to
a. use operations to finance its acquisitions of productive assets.
b. use cash flows from capital expenditure transactions to maintain working capital.
c. increase its capital expenditures as a result of profitable operations.
d. pay its current bills from profits made using productive assets.
114. Return ratios are measures of the relationship between the
a. income earned and the investment made in the company by the various groups.
b. revenue earned and the total equity of a company.
c. total equity of a company and its cash flows for the period.
d. profitability and liquidity aspects of a company.
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Page 49
115. Auto Industries Company reported the following on its income statement:
Income before income taxes $420,000
Income tax expense 120,000
Net income $300,000
If the income statement also shows interest expense equal to $80,000, what is the company’s times interest earned ratio?
a. 5 times
b. 8 times
c. 5.25 times
d. 6.25 times
116. A solvency measure that focuses specifically on the extent to which a company relies on outsiders for funds is the
a. cash flow from operations to capital expenditures ratio.
b. debt service coverage ratio.
c. times interest earned ratio.
d. debt-to-equity ratio.
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Page 50
117. In considering equity and debt financing, which of the following statements is true?
a. Compared to equity financing, debt is a more expensive source of funding.
b. Interest and dividends payments are required to be made by the issuing corporation.
c. In general, the higher the proportion of total debt-to-equity ratio, the greater the likelihood the firm will have
difficulty in meeting its obligations in some future period.
d. Most firms prefer to have no debt and rely on equity financing.
118. Santana Company issued additional shares of common stock. The effect of the transaction is that the
a. earnings per share increased.
b. debt-to-equity ratio increased.
c. earnings per share decreased.
d. asset turnover ratio decreased.
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Page 51
119. Crimson Company declared and paid $1,000,000 in dividends to the common stockholders. The effect of this
transaction is that the
a. earnings per share decreased.
b. current ratio increased.
c. debt-to-equity ratio increased.
d. earnings per share increased.
120. Aleve Company purchased inventory on credit. The effect of this transaction is that the
a. earnings per share decreased.
b. working capital increased.
c. debt-to-equity ratio increased.
d. earnings per share increased.
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Page 52
121. Back Company sold merchandise on credit. Its gross profit ratio is 23%. The effect of this transaction is that the
a. earnings per share decreased.
b. current ratio was unchanged.
c. debt-to-equity ratio increased.
d. earnings per share increased.
122. Treetop Company paid off a $100,000 two-year note payable. The effect of this transaction is that the
a. earnings per share increased.
b. current ratio decreased.
c. debt-to-equity ratio increased.
d. debt-to-equity ratio decreased.
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Page 53
123. A nonbusiness entity would be particularly concerned about its
a. earnings per share.
b. price/earnings ratio.
c. liquidity.
d. income tax rate.
124. Which of the following is considered a profitability ratio?
a. Earnings per share
b. Debt-to-equity ratio
c. Acid-test ratio
d. Inventory turnover ratio
125. Which profitability ratio requires the use of earnings per share in its calculation?
a. Price/earnings ratio
b. Return on common stockholders’ equity
c. Dividend yield ratio
d. Profit margin
126. Which profitability ratio requires the use of earnings per share and the current market price?
a. Return on common stockholders’ equity
b. Dividend payout ratio
c. Dividend yield ratio
d. Price/earnings ratio
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Page 57
133. Presented below are selected data from the financial statements of Parade Corp.
2017 2018
Net income $150,000 $123,000
Weighted average number of common shares outstanding 105,000 95,000
Market price per share of common stock at the end of the year $12.00 $10.00
The price/earnings ratio for 2018 is
a. 0.80 to 1.
b. 1.43 to 1.
c. 8.39 to 1.
d. 12.50 to 1.
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Page 58
134. Presented below are selected data from the financial statements of Carnival Corp. for 2018 and 2017.
2018 2017
Net income $110,000 $123,000
Cash dividends paid on common stock $42,000 $38,000
Market price per share of common stock at the end of the year $16.00 $13.00
Shares of common stock outstanding 140,000 140,000
The dividend yield ratio for 2018 is
a. 1.9%.
b. 2.1%.
c. 36.3%.
d. 38.1%.
135. Which of the following yields the return on assets ratio?
a. Return on common stockholders’ equity × Asset turnover
b. Return on sales × Asset turnover
c. Profit margin × Return on sales
d. Profit margin × Asset turnover
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Page 59
136. Which combination of ratios will best analyze Stetson’s income statement performance?
a. Earnings per share, gross profit, and profit margin ratio
b. Gross profit ratio, return on common stockholders’ equity ratio, debt-to-equity ratio
c. Debt-to-equity ratio, gross profit ratio, and profit margin ratio
d. Current ratio, gross profit ratio, and return on common stockholders’ equity ratio
137. Earnings per share is an indication of how much
a. the company paid as dividends for each share of stock held by stockholders.
b. the company earned for each share of outstanding common and preferred stock.
c. the company earned for each share of outstanding common stock.
d. cash the company has for each share of all outstanding stock.
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Page 60
138. Presented below are selected data from the financial statements of Provost Corp.
2018 2017
Net income $110,000 $123,000
Cash dividends paid on common stock $42,000 $38,000
Market price per share of common stock at the end of the year $16.00 $13.00
Shares of common stock outstanding 140,000 140,000
The dividend payout ratio for 2018 is
a. 1.8%.
b. 30.0%.
c. 36.3%.
d. 38.0%.
0.30/0.79 = 38.0%
139. Squid Lips, Inc. wants to measure the relationship between profitability and the investment made by stockholders.
Squid Lips should use the
a. return on stockholders’ equity ratio.
b. earnings per share.
c. profit margin.
d. statement of retained earnings.