Chapter 03 Fundamental Interpretations Made from Financial
Statement Data Answer Key
Multiple Choice Questions
1.
Financial statement ratios support informed judgments and decision making most
effectively:
2.
When comparing entity financial ratios with industry ratios:
3.
The return on investment measure of performance:

4.
Another term for return on investment is:
5.
The return on investment measure of performance:
6.
An advantage of the DuPont model for calculating ROI is that:
7.
A firm has an ROI of 15%, turnover of 3, and sales of $12 million. The firm’s margin is:
8.
A firm’s net income is $630,000 on sales of $63 million. Average assets for the period were
$14 million. For the year:
9.
Another term for return on equity is:
10.
Return on equity:
11.
A firm’s net income for the year was $800,000. Average assets totaled $6 million, and
average liabilities totaled $1.2 million. Return on equity was:
12.
Which of the following is
not
usually considered a measure of an entity’s liquidity?
13.
A current ratio of 6.0 is usually an indication that the firm:
14.
For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a
current liability is that it:
15.
Which of the following is a universally accepted measure of profitability?
16.
If a firm borrowed money on a six-month bank loan, the firm’s working capital immediately
after obtaining the loan, relative to its working capital just prior to the loan, would be:
17.
Which of the following accounts is part of working capital?
18.
Financial ratios:
Essay Questions
19.
Presented below are the comparative balance sheets of Big Apple, Inc., at December 31,
2017, and 2016. Sales for the year ended December 31, 2017, totaled $1,780,000.
BIG APPLE, INC.
Balance Sheets
December 31, 2017, and 2016
2017
2016
Assets
Cash
$90,000
$98,000
Accounts receivable
268,000
212,000
Merchandise inventory
402,000
394,000
Total current assets
$760,000
$704,000
Land
132,000
120,000
Plant and equipment
728,000
650,000
Less: Accumulated
depreciation
(372,000)
(314,000)
Total assets
$1,248,000
$1,160,000
Liabilities
Short-term debt
$98,000
$86,000
Accounts payable
184,000
168,000
Other accrued
liabilities
128,000
134,000
Total current
liabilities
$410,000
$388,000
Long-term debt
174,000
214,000
Total liabilities
$584,000
$602,000
Stockholders’ Equity
Common stock, no par,
100,000 shares
authorized, 35,000 and
28,000 shares issued,
respectively
$204,000
$156,000
Retained earnings:
Beginning balance
402,000
336,000
Net income for the
year
148,000
134,000
Dividends for the
year
(90,000)
(68,000)
Ending balance
$460,000
$402,000
Total stockholders’
equity
$664,000
$558,000
Total liabilities and
stockholders’ equity
$1,248,000
$1,160,000
Required:
A) Calculate ROI for 2017.
B) Calculate ROE for 2017.
C) Calculate working capital at December 31, 2017.
D) Calculate the current ratio at December 31, 2017.
E) Calculate the acid-test ratio at December 31, 2017.
20.
Firm V has a current ratio of 1.9 and current assets of $136,800.
Required:
Calculate Firm V’s current liabilities and working capital.
21.
Firm W has accounts receivable of $4,100, cash of $3,500, property, plant, and equipment
of $30,200, merchandise inventory of $2,200, accounts payable of $5,700, other accrued
liabilities of $1,300, common stock of $10,000, and retained earnings of $23,000.
Required:
Calculate Firm W’s working capital and current ratio.
22.
Firm X has net income of $18,000, sales of $300,000, and average total assets of $125,000.
Required:
Calculate Firm X’s margin, turnover, and return on investment (ROI).
23.
Firm Y has a margin of 7%, turnover of 1.2, and sales of $2,100,000.
Required:
Calculate Firm Y’s net income, average total assets, and return on investment (ROI).
24.
Firm Z had net assets at the end of the year of $320,000. The only transactions affecting
stockholders’ equity during the year were net income of $51,000 and dividends of $11,000.
Required:
Calculate Firm Z’s average stockholders’ equity and return on equity (ROE).