Chapter 17 5 As a bank loan officer, you are considering a loan application by Bama Bart's Sporting Goods. The company has provided you with its balance sheet and income statement

323. (p. 471) Carlisle Communications is preparing its statement of cash flows. Among other things, this statement

will show:

A. net income from operations after taxes.

324. (p. 469, Legal Briefcase box) ElecTech Industries had in inventory two transformers, one purchased in February for

$11,800 and the other acquired in September for $13,300. In December, they sold one of the transformers to

Ram Enterprises for $16,400 and reported a gross margin of $3,100. Tiger Industries evidently uses the

________ inventory valuation method.

D. Flexplus

325. (p. 470) Nebraska Communications is considering the purchase of a new satellite. The firm believes the

satellite will help generate future earnings. In addition, the firm recognizes the tax benefits of a lower net

income provided by the annual ________ of the asset.

A. inventory valuation

326. (p. 473) The financial ratios that measure a firm’s ability to pay its short-term debts are called:

D. profitability ratios.

327. (p. 473) The current ratio is a commonly used ________ ratio.

A. leverage

328. (p. 474) Which of the following ratios is a liquidity ratio?

D. basic earnings per share

329. (p. 473) The purpose of the current ratio is to evaluate the firm’s ability to:

A. generate sales with a given level of current assets.

330. (p. 474) The _______ ratio helps determine the ability of a firm to repay its short-term debts even if it has

difficulty selling its inventory.

D. required reserve

331. (p. 474) Financial ratios that reflect the degree to which a firm relies on borrowed funds are called the

________ ratios.

D. profitability

332. (p. 474) The __________ ratio is a commonly used leverage ratio.

D. inventory turnover

333. (p. 474-475) Earnings per share, return on sales, and return on equity are all examples of:

A. leverage ratios.

334. (p. 475) ________ measures the amount of profit earned by a company for each share of outstanding common

stock.

D. Return on shares outstanding (RSO)

335. (p. 475) __________ earnings per share measures the amount of profit a firm earns per share of outstanding

common stock when preferred stock, stock options, warrants and convertible debt securities are also taken into

account.

D. Broad-based

336. (p. 475) Generally the higher the risk involved in an activity, the ________ the rate of return expected by

investors.

D. less frequent

337. (p. 475) The financial ratios that measure management’s effectiveness in using the assets of the organization

are called the ________ ratios.

A. leverage

338. (p. 476) ________ measures the speed of inventory moving through the firm and its conversion into sales.

D. Cost of goods sold turnover

339. (p. 473) To accurately evaluate a firm’s financial ratios you should compare the ratios to:

D. to the largest firms in the country.

340. (p. 474) If a firm has a debt to owners’ equity ratio of .54 (or 54%) we can conclude that:

A. its has relied more on debt than equity to finance its operations.

341. (p. 474) Generally, a high ___________ ratio could lead investors and creditors to view the company as being

very risky.

D. inventory turnover

342. (p. 474) In order to calculate the current ratio for your firm, you would divide current assets by:

C. owners’ equity.

D. cost of goods sold.

343. (p. 474) Leverage ratios indicate the extent to which ________ has been used to fund a business’s operations.

D. profit

344. (p. 476) As you increase the number of times a table is “turned over” at a restaurant, you would expect to see

a __________ rate of return on the owners’ investment.

D. less flexible

345. (p. 473) Your firm is a supplier to a major chain of discount stores. You have heard rumors that this chain of

discount stores is in some financial difficulty. Which financial ratios would indicate the discount stores’ ability

to pay their short-term debts?

D. profitability ratios

346. (p. 474) As a bank loan officer, you are considering a loan application by Bama Bart’s Sporting Goods. The

company has provided you with its balance sheet and income statement, which contain the following

information: the firm’s only current assets are $25,000 in cash, $45,000 in accounts receivable, and $140,000 in

inventory. It has no marketable securities. The firm also has $190,000 in fixed assets, but no intangible assets. It

has $70,000 in current liabilities and its long-term liabilities are $90,000. By using some of this information,

you can conclude that Bama Bart’s current ratio is:

A. 1.0.

347. (p. 474) As a bank loan officer, you are considering a loan application by Bama Bart’s Sporting Goods. The

company has provided you with its balance sheet and income statement, which contain the following

information: the firm’s only current assets are $25,000 in cash, $45,000 in accounts receivable, and $140,000 in

inventory. It has no marketable securities. The firm also has $190,000 in fixed assets, but no intangible assets. It

has $70,000 in current liabilities and its long-term liabilities are $90,000. By using some of this information,

you can conclude that Bama Bart’s debt to owners’ equity ratio (rounded to the nearest tenth of a percent) is:

D. 133.3%.

348. (p. 474) As a bank loan officer, you are considering a loan application by Bama Bart’s Sporting Goods. The

company has provided you with its balance sheet and income statement, which contain the following

information: the firm’s only current assets are $25,000 in cash, $45,000 in accounts receivable, and $140,000 in

inventory. It has no marketable securities. The firm also has $190,000 in fixed assets, but no intangible assets. It

has $70,000 in current liabilities and its long-term liabilities are $90,000. By using some of this information,

you can conclude that Bama Bart’s acid-test ratio is:

D. 3.0.

349. (p. 475) You have just computed the basic earnings per share (basic EPS) for a company in which you hold

some stock. You then find out that the company recently issued preferred stock and has included additional

stock options in the compensation package for top executives that you were unaware of when you computed the

basic EPS. This additional knowledge:

A. means that the basic EPS you calculated is incorrect, and the true ratio will be higher once the impact of

preferred shares and stock options is included.

350. (p. 474-475) The top managers of Highbrow Bookstores want to indicate to the firm’s shareholders how

effectively they have managed the company. Perhaps the most meaningful way to do this would be by reporting

strong:

A. liquidity ratios.

351. (p. 475) Which group of ratios would you be most interested in if you wanted to determine how efficiently

your managers were using the assets that are available to them?

A. liquidity ratios

352. (p. 474) You are the loan officer of the ABC Bank. A local firm has approached you requesting a sizable loan.

What group of financial ratios would indicate the degree to which this company already is financed by

borrowed funds?

D. profitability ratios

353. (p. 476) We would expect the inventory turnover ratio for a ski shop to be _______ than the turnover for a

convenience store.

A. higher

354. Explain the differences between managerial and financial accounting, and give examples of the types of

problems and issues examined by each of these areas of accounting.

355. Explain the difference between current, fixed, and intangible assets. Give two examples of each of these

different types of assets.

356. What is the difference between a journal and a ledger? How are journals and ledgers incorporated into the

accounting cycle?

357. Identify the three key financial statements that corporations are required to prepare, and describe the type

of information found on each.

358. Identify and explain the differences between LIFO and FIFO inventory valuation methods. What would be

the difference in gross margin using FIFO versus LIFO?

359. What is ratio analysis? Explain the four different types of ratios and how each is used.

360. (p. 457) The fact that Minnie spends most of her time measuring costs and checking to see if departments are

staying within their budgets suggests that she often is involved in:

D. departmental certification.

361. (p. 462) The last major task Minnie completed was the preparation of the:

A. cash budget.

362. (p. 467) The fact that Minnie wants to determine the “bottom line” for Double Entry Doors means that she is

particularly interested in preparing her firm’s:

D. capital budget.

363. (p. 469, Legal Briefcase box) Double Entry Door’s suppliers maintained very stable prices for many years, but

Minnie has noticed that the cost of doors has been rising steadily for the past year. She is concerned that, given

the company’s current accounting methods, this will result in a much lower net income than in the past. The

most likely reason for her concern is that Double Entry has been using:

A. the FIFO inventory valuation method to determine its cost of goods sold.

364. (p. 474) Minnie knows that Double Entry has a lot of short-term debt coming due in the next year, and wants

to make sure that the company will have the ability to make the required payments. Given a troubling downturn

in construction activity over the past couple of months, she is not confident that Double Entry can count on

selling its current inventory of doors before the debt comes due. Which of the following ratios would be most

relevant to Minnie?

A. current ratio

Nickels – Chapter 17 #364

c17 Summary