B) the last or “bottom” line of the income statement
C) a measure of the firm’s profitability over a given period
D) all of the above
57) What is a firm’s gross profit?
A) the difference between the sales and other income generated by the firm, and all costs, taxes, and
expenses incurred by the firm in a given period
B) the difference between sales revenues and the costs associated with those sales.
C) the difference between sales revenues and cash expenditures associated with those sales.
D) all of the above
58) Which of the following is NOT considered to be an operating expense on the income statement?
A) administrative expenses and overhead
B) corporate taxes
C) salaries
D) depreciation and amortization
Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:
2008 2009
Total sales 202 212
Cost of sales –148 –172
Gross Profit 54 40
Selling, general,
and administrative expenses –22 –20
Research and development –8 –7
Depreciation and amortization –4 –3
Other income 4 6
Earnings before interest
and taxes (EBIT) 24 16
Interest income (expense) –7 –4
Pretax income 14 12
Taxes –4 –3
Net Income 10 9
59) Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If
Xenon Manufacturing has 25 million shares outstanding, what is its EPS in 2009?
A) $0.36
B) $0.40
C) $0.63
D) $0.84
Use the table for the question(s) below.
Income Statement for CharmCorp:
2008 2009
Total sales 600 540
Cost of sales –532 –488
Gross Profit 68 52
Selling, general,
and administrative expenses –36 –21
Research and development –4 –5
Depreciation and amortization –5 –5
Operating Income 23 21
Other income 1 5
Earnings before interest
and taxes (EBIT) 24 26
Interest income (expense) –7 –7
Pretax income 14 19
Taxes –4 –5
Net Income 10 14
60) Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp
has 6 million shares outstanding, and its managers and employees have stock options for 1 million shares,
what is its diluted EPS in 2009?
A) $1.42
B) $1.67
C) $2.00
D) $2.33
61) Which of the following statements regarding the income statement is INCORRECT?
A) The income statement shows the earnings and expenses at a given point in time.
B) The income statement shows the flow of earnings and expenses generated by the firm between two
dates.
C) The last or “bottom” line of the income statement shows the firm’s net income.
D) The first line of an income statement lists the revenues from the sales of products or services.
62) Gross profit is calculated as
A) Total sales – Cost of sales – Selling, general, and administrative expenses – Depreciation and
amortization
B) Total sales – Cost of sales – Selling, general, and administrative expenses
C) Total sales – Cost of sales
D) none of the above
63) Which of the following is not an operating expense?
A) interest expense
B) depreciation and amortization
C) selling, general, and administrative expenses
D) research and development
Use the table for the question(s) below.
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $ millions)
2006
2005
Total sales
610.1
578.3
Cost of sales
(500.2)
(481.9)
Gross profit
109.9
96.4
Selling, general, and
administrative expenses
(40.5)
(39.0)
Research and development
(24.6)
(22.8)
Depreciation and amortization
(3.6)
(3.3)
Operating income
41.2
31.3
Other income
—
—
Earnings before interest and taxes (EBIT)
41.2
31.3
Interest income (expense)
(25.1)
(15.8)
Pretax income
16.1
15.5
Taxes
(5.5)
(5.3)
Net income
10.6
10.2
Price per share
$16
$15
Shares outstanding (millions)
10.2
8.0
Stock options outstanding (millions)
0.3
0.2
Stockholders’ Equity
126.6
63.6
Total Liabilities and Stockholders’ Equity
533.1
386.7
64) Refer to the income statement above. For the year ending December 31, 2006 Luther’s earnings per share are
closest to:
A) $1.01
B) $1.04
C) $1.58
D) $4.04
65) Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for
the year ending December 31, 2006 Luther’s diluted earnings per share are closest to:
A) $1.01
B) $1.04
C) $1.53
D) $3.92
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
66) How does a firm select the dates for preparation of its income statement?
67) What will be the effect on the income statement if a firm buys a new processing plant through a new loan?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
68) Price–earnings ratios tend to be high for fast–growing firms.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Use the table for the question(s) below.
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $ millions)
2006
2005
Total sales
610.1
578.3
Cost of sales
(500.2)
(481.9)
Gross profit
109.9
96.4
Selling, general, and
administrative expenses
(40.5)
(39.0)
Research and development
(24.6)
(22.8)
Depreciation and amortization
(3.6)
(3.3)
Operating income
41.2
31.3
Other income
—
—
Earnings before interest and taxes (EBIT)
41.2
31.3
Interest income (expense)
(25.1)
(15.8)
Pretax income
16.1
15.5
Taxes
(5.5)
(5.3)
Net income
10.6
10.2
Price per share
$16
$15
Shares outstanding (millions)
10.2
8.0
Stock options outstanding (millions)
0.3
0.2
Stockholders’ Equity
126.6
63.6
Total Liabilities and Stockholders’ Equity
533.1
386.7
69) Refer to the income statement above. Luther‘s operating margin for the year ending December 31, 2005 is
closest to:
A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%
70) Refer to the income statement above. Luther‘s net profit margin for the year ending December 31, 2005 is
closest to:
A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%
71) Refer to the income statement above. Luther‘s earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the year ending December 31, 2006 is closest to:
A) $19.7 million
B) $37.6 million
C) $41.2 million
D) $44.8 million
72) Refer to the income statement above. Luther‘s return on equity (ROE) for the year ending December 31,
2006 is closest to:
A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%
73) Refer to the income statement above. Luther‘s return on assets (ROA) for the year ending December 31,
2006 is closest to:
A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%
Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:
2008 2009
Total sales 202 212
Cost of sales –148 –172
Gross Profit 54 40
Selling, general,
and administrative expenses –22 –20
Research and development –8 –7
Depreciation and amortization –4 –3
Other income 4 6
Earnings before interest
and taxes (EBIT) 24 16
Interest income (expense) –7 –4
Pretax income 14 12
Taxes –4 –3
Net Income 10 9
74) Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars.
Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between
these two years imply about the company?
A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing
them rose between 2008 and 2009.
C) The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009.
D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.
75) Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars.
Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two
years imply about the company?
A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing
them rose between 2008 and 2009.
C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing
them fell between 2008 and 2009.
D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.
76) In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing
some of its crops. If sales in 2008 and 2009 were steady at $25 million, but the gross margin increased from
2.3% to 3.4% between those years, by what amount was the cost of sales reduced?
A) $275,000
B) $325,000
C) $425,000
D) $575,000
77) Firm A: Firm B:
Assets Assets
Current assets 4 Current assets 7
Fixed assets 10 Fixed assets 7
Total assets 14 Total assets 14
Firm A: Firm B:
Total sales 12 Total sales 12
Cost of sales –5 Cost of sales –7
Gross Profit 7 Gross Profit 5
Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this
information, which of the following statements is most likely to be true?
A) Asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B.
B) Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets they employ than
firm B.
C) Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater
revenue per dollar of assets than firm B.
D) Fixed asset turnover ratios indicate that firm A generating more sales for the assets they employ than
firm B.
78) Balance Sheet
Assets Liabilities
Current Assets Current Liabilities
Cash 50 Accounts payable 42
Accounts receivable 22 Notes payable/short–term debt 7
Inventories 17
Total current assets 89 Total current liabilities 49
Long–Ter
m Assets
Long–Term Liabilities
Net
property
, plant,
and
equipme
nt 121 Long–term debt 128
Total
long–ter
m assets
121 Total long–term liabilities 128
Total Liabilities 177
Stockholders’ Equity 33
Total
Assets 210 Total Liabilities and 210
Stockholders’ Equity
Income Statement
Total sales 312
Cost of sales –210
Gross Profit 102
Selling, general,
and administrative expenses –34
Research and development –10
Depreciation and amortization –5
Operating Income 53
Other income –
Earnings before interest
and taxes (EBIT) 53
Interest income (expense) –20
Pretax income 33
Taxes –8
Net Income 25
The balance sheet and income statement of a particular firm are shown above. What does the account
receivable days ratio tell you about this company?
A) It takes on average about 4 weeks to collect payment from its customers.
B) It takes on average about 6 weeks to collect payment from its customers.
C) It takes on average about 7 weeks to collect payment from its customers.
D) It takes on average about 11 weeks to collect payment from its customers.
79) Which of the following is the LEAST likely explanation for a firm’s high ROE?
A) The firm is growing.
B) The firm is able to find investment opportunities that are very profitable.
C) The firm has very efficient use of its assets.
D) The firm enjoys high sales margins.
80) Which of the following firms would be expected to have a high ROE based on that firm’s high operating
efficiency?
A) a medical supply company that provides very precise instruments at a high price to large medical
establishments such as hospitals
B) a high–end fashion retailer that has a very high mark–up on all items it sells
C) a brokerage firm that has high levels of leverage
D) a grocery store chain that has very high turnover, selling many multiples of their assets per year
81) Which of the following firms would be expected to have a high ROE based on that firm’s high profitability?
A) a medical supply company that provides very precise instruments at a high price to large medical
establishments such as hospitals
B) a low–end retailer that has a low mark–up on all items it sells
C) a brokerage firm that has high levels of leverage
D) a grocery store chain that has very high turnover, selling many multiples of their assets per year
82) Manufacturer A has a profit margin of 2.0%, an asset turnover of 1.7 and an equity multiplier of 4.9.
Manufacturer B has a profit margin of 2.3%, an asset turnover of 1.1 and an equity multiplier of 4.7.
How much asset turnover should manufacturer B have to match manufacturer A’s ROE?
A) 1.54%
B) 3.00%
C) 3.09%
D) 4.77%
83) Firm A Firm B Firm C Firm D
Net Income $34.1 million $5.7 million $31.1 million $13.2 million
Market Capitalization $310 million $53 million $280 million $112 million
Earnings per share $4.10 $4.05 $6.75 $12.70
The above data is for four regional trucking firms. Based on price–earnings ratios, which firm’s stock is the
best value?
A) Firm A
B) Firm B
C) Firm C
D) Firm D
84) Why must care be taken when comparing a firm’s share price to its operating income?
A) Both share price and operating income are related to the whole firm.
B) Share price is a quantity related to the entire firm, while operating income is an amount that is related
solely to equity holders.
C) Both share price and operating income are related solely to equity holders.
D) Share price is a quantity related to equity holders, while operating income is an amount that is related
to the whole firm.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
85) The firm’s statement of cash flows uses the balance sheet and the income statement to determine the amount
of cash a firm has generated and how it has used that cash during a given period.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
86) Which of the following is NOT a reason that the income statement does not accurately indicate how much
cash a firm has earned?
A) It includes entries for the depreciation of assets.
B) It does not include entries for expenditures on inventory.
C) It does not include entries for collection of money from account receivables.
D) It includes cash inflows from services rendered.
87) Which of the following is a way that the Operating Activity section of the statement of cash flows adjusts Net
Income from the balance sheet?
A) It subtracts all expenses and costs related to the firm’s operating activities.
B) It adds all non–cash entries related to the firm’s operating activities.
C) It adds the cash that flows from investors to the firm.
D) It removes the cash used for investment purposes.
88) Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales
personnel. Where would this purchase be reflected on the Statement of Cash Flows?
A) It would be an expense on the income statement, so it would be reflected in operating cash flows.
B) It would be an addition to property, plant and equipment, so it would be an investing activity.
C) It would be an addition to cash, so would be reflected in the change in cash.
D) None of the above answers is correct.