54) Refer to the Acme annual report above. Calculate return on equity for 2012.
A) 39.3%
B) 49.0%
C) 32.7%
D) The answer cannot be determined from the information given.
The following selected information is from Acme’s annual report for the years ended December
31:
2012 2011 2010
Sales $ 44,000 $ 29,300 $ 23,200
Cost of goods sold 24,000 15,000 12,000
Operating expenses 7,000 6,000 5,000
Interest expense 1,000 300 200
Net income $ 12,000 $ 8,000 $ 6,000
Accounts receivable 5,000 3,000 2,000
Inventory 9,000 5,000 3,000
Accounts payable 6,000 4,500 3,500
55) Refer to the Acme annual report above. Calculate the inventory turnover ratio for 2010.
A) 4.0 times
B) 0.25 times
C) 7.7 times
D) The answer cannot be determined from the information given.
56) Refer to the Acme annual report above. Calculate the inventory turnover ratio for 2011.
A) 3.75 times
B) 6.0 times
C) 7.3 times
D) The answer cannot be determined from the information given.
57) Refer to the Acme annual report above. Calculate the inventory turnover ratio for 2012.
A) 4.9 times
B) 2.7 times
C) 3.4 times
D) The answer cannot be determined from the information given.
58) Refer to the Acme annual report above. What business event could explain the change in the
inventory turnover ratio from 2011 to 2012?
A) Acme had a lot of obsolete inventory at the beginning of 2011 that was difficult to sell.
B) Acme expects to have much higher sales in 2013, and built up its inventory at the end of 2012
to get ready for these higher sales.
C) Foreign competition made it much more difficult to sell merchandise in 2011.
D) Acme lowered its prices in 2012 and was able to sell goods much more quickly.
59) Refer to the Acme annual report above. Calculate the accounts receivable turnover ratio for
2010.
A) 4.9 times
B) 2.7 times
C) 3.4 times
D) The answer cannot be determined from the information given.
60) Refer to the Acme annual report above. Calculate the accounts receivable turnover ratio for
2011.
A) 7.3 times
B) 9.8 times
C) 11.7 times
D) The answer cannot be determined from the information given.
61) Refer to the Acme annual report above. Calculate the accounts receivable turnover ratio for
2012.
A) 11.0 times
B) 6.0 times
C) 8.8 times
D) The answer cannot be determined from the information given.
62) Refer to the Acme annual report above. Which of the following statements is TRUE about
the accounts receivable turnover ratios for 2011 and 2012?
A) The ratio is higher in 2012. This means management is doing a better job of collecting
accounts receivable in 2012.
B) The ratio is higher in 2012. This means management is doing a worse job of collecting
accounts receivable in 2012.
C) The ratio is lower in 2012. This means management is doing a better job of collecting
accounts receivable in 2012.
D) The ratio is lower in 2012. This means management is doing a worse job of collecting
accounts receivable in 2012.
The following selected information is from Acme’s annual report for the years ended December
31:
2012 2011 2010
Sales $ 44,000 $ 29,300 $ 23,200
Cost of goods sold 24,000 15,000 12,000
Operating expenses 7,000 6,000 5,000
Interest expense 1,000 300 200
Net income $ 12,000 $ 8,000 $ 6,000
Cash $ 2,500 $ 2,000 $ 1,000
Accounts receivable 5,000 3,000 2,000
Inventory 9,000 5,000 3,000
Property, plant & equipment 30,000 16,000 10,000
Total assets $ 46,500 $ 26,000 $ 16,000
63) Refer to the Acme annual report above. Calculate return on assets for 2010.
A) 37.5%
B) 145%
C) 60%
D) The answer cannot be determined from the information given.
64) Refer to the Acme annual report above. Calculate return on assets for 2011.
A) 28.6%
B) 38.1%
C) 51.9%
D) The answer cannot be determined from the information given.
65) Refer to the Acme annual report above. Calculate return on assets for 2012.
A) 33.1%
B) 38.1%
C) 22.1%
D) The answer cannot be determined from the information given.
66) Refer to the Acme annual report above. Which of the following statements is TRUE about
the return on assets for 2011 and 2012?
A) Return on assets increased in 2012 because the company made a large investment in
additional property, plant & equipment in 2012.
B) Return on assets increased in 2012 because net income is 50% higher in 2012 than in 2011,
while property, plant and equipment increased 87.5%.
C) Return on assets decreased in 2012 because the large investment in additional property, plant
& equipment did not generate enough additional operating income.
D) Return on assets decreased in 2012 because net income for 2012 is much larger than in 2011.
The following selected information is from Acme’s annual report for the years ended December
31:
2012 2011 2010
Sales $ 44,000 $ 29,300 $ 23,200
Interest expense 1,000 300 200
Net income 12,000 8,000 6,000
Total assets 46,500 26,000 16,000
67) Refer to the Acme annual report above. Calculate the asset turnover ratio for 2010.
A) 1.45 times
B) 0.375 times
C) 1.10 times
D) The answer cannot be determined from the information given.
68) Refer to the Acme annual report above. Calculate the asset turnover ratio for 2011.
A) 1.1 times
B) 0.375 times
C) 1.4 times
D) The answer cannot be determined from the information given.
69) Refer to the Acme annual report above. Calculate the asset turnover ratio for 2012.
A) 1.2 times
B) 0.9 times
C) 1.4 times
D) The answer cannot be determined from the information given.
70) Refer to the Acme annual report above. Which of the following statements is TRUE about
the asset turnover ratio for 2011 and 2012?
A) The asset turnover ratio decreased in 2012 because management was using the company’s
assets less efficiently.
B) The asset turnover ratio decreased in 2012 because management was using the company’s
assets more efficiently.
C) The asset turnover ratio increased in 2012 because management was using the company’s
assets less efficiently.
D) The asset turnover ratio increased in 2012 because management was using the company’s
assets more efficiently.
71) Alpha Enterprise has total current assets of $2,000,000 and total current liabilities of
$800,000. If the company collects $100,000 of its accounts receivable, while none of its other
assets and liabilities change, its current ratio will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
72) Alpha Enterprise has total current assets of $2,000,000 and total current liabilities of
$800,000. If the company purchases $100,000 of inventory for cash, while none of its other
assets and liabilities change, its current ratio will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
73) Alpha Enterprise has total current assets of $2,000,000 and total current liabilities of
$800,000. If the company purchases $100,000 of inventory on account, while none of its other
assets and liabilities change, its current ratio will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
74) Alpha Enterprise has total current assets of $2,000,000 and total current liabilities of
$800,000. If the company pays $100,000 of its accounts payable, its current ratio will ________.
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information given.
75) A stock with a high dividend yield appeals to ________.
A) no one
B) all investors
C) investors who hope to profit in the future from a large increase in the market price of the
shares that they own
D) investors who need income now to help pay their living expenses
76) A high P/E ratio indicates that ________.
A) a company is highly profitable
B) investors believe that a company has the potential for significant growth
C) the company paid a large dividend compared with its earnings per share
D) a company has high earnings per share
77) The price/earning (P/E) ratio equals the market price of a share of stock divided by that
company’s earnings per share.
78) The dividend yield ratio equals the market price of a share of stock divided by that
company’s dividend per share.
79) The accounts receivable turnover ratio is a measure of a company’s solvency.
80) Cash from operations to current liabilities measures a company’s solvency.
81) Cash from operations to current liabilities measures a company’s liquidity.
82) Cash from operations to current liabilities measures a company’s profitability.
83) The accounts receivable turnover ratio is a measure of a company’s liquidity.
84) To be useful, a ratio must be compared with the same ratio from previous periods, compared
with ratios of other companies in the same industry, or compared with industry averages.
85) The debt-to-equity ratio is a measure of a company’s solvency.
86) The dividend yield ratio is a measure of a company’s profitability.
87) The dividend yield ratio is a market indicator.
88) The price-earnings ratio is a measure of a company’s profitability.
89) The price-earnings ratio is a market indicator.
90) The debt-to-equity ratio is a measure of a company’s liquidity.
91) The current ratio is a measure of a company’s solvency.
92) What are the major categories of ratios used to analyze financial statements, and what do
they measure?
93) What are the market indicators used to evaluate companies, and what do they measure?
94) Analyze the liquidity of Circuit City using the current ratio and inventory turnover ratio.
All data are in millions.
Cash
$ 394.0
Accounts receivable
429.5
Average inventory
1,328.9
Total current assets
2,220.8
Total current liabilities
940.5
Sales
9,100.0
Cost of goods sold
6,870.5
95) Use the information provided to analyze the solvency of T-Shirt City using the debt-to-equity
ratio.
Net income
$ 38,880
Interest expense
5,765
Total liabilities
160,000
Total shareholders’ equity
200,000
96) Use the information provided to analyze the profitability of T-Shirt City using the following
ratios: return on assets, return on equity, gross profit ratio, and earnings per share. T-Shirt City
has no preferred stock.
$ 350,000
$ 196,000
$ 38,880
$ 5,765
$ 360,000
$ 200,000
25,000
XOAXOA: LO 10-3
97) Use the information provided to analyze the stock of T-Shirt City using the following ratios:
earnings per share, price/earnings ratio, and dividend yield. T-Shirt City has no preferred stock.
Net income
$38,880
Interest expense
$5,765
Market price per share
$28.15
Dividends per share
$0.75
Average shares outstanding
25,000
98) Analyze the liquidity of Wurst Buy, a sausage manufacturer, using the current ratio,
inventory turnover ratio, and accounts receivable turnover ratio.
All data are in millions
Cash
$ 961
Average net accounts
receivable
1,236
Average inventory
2,092
Total current assets
4,503
Total current liabilities
3,847
Net credit sales
19,050
Cost of goods sold
14,954
99) Use this information to analyze the solvency of T-Shirt City using the debt-to-equity ratio.
Net income
$ 115,000
Interest expense
2,875
Total liabilities
375,000
Total shareholders’ equity
500,000
100) Wilson Wong received an inheritance from his grandfather. Wilson wants to invest the
money in stocks. He is interested in long-term investments in companies with solid financial
performance. Explain to Wilson the four major categories of financial ratios and how they are
used to help investors analyze the performance of companies.
101) Put an X in the appropriate boxes to indicate the financial statement(s) that are needed to
calculate each of the following items. If an item needs information from more than one financial
statement, be sure to indicate all of the statements required.
Income
statement
Balance
sheet
Statement
of cash
flows
1
Current ratio
2
Debt-to-equity ratio
3
Return on assets
4
Return on equity
5
Asset turnover ratio
6
Gross profit ratio
7
Inventory turnover ratio
8
Accounts receivable turnover
ratio
9
Cash from operations to
current liabilities
10
Profit margin ratio
Income
statement
Balance
sheet
Statement
of cash
1
Current ratio
2
Debt-to-equity ratio
3
Return on assets
4
Return on equity
5
Asset turnover ratio
6
Gross profit ratio
7
Inventory turnover ratio
8
Accounts receivable turnover
ratio
9
Cash from operations to
current liabilities
10
Profit margin ratio
102) Put an X in the appropriate box to show how each of the following items would be
classified:
Liquidity
ratio
Solvency
ratio
Profitability
ratio
Market
indicator
1
Current ratio
2
Debt-to-equity ratio
3
Return on assets
4
Earnings per share
5
Return on equity
6
Asset turnover ratio
7
Gross profit ratio
8
Price-earnings ratio
9
Inventory turnover ratio
10
Dividend yield ratio
Liquidity
Solvency
Profitability
1
Current ratio
2
Debt-to-equity ratio
3
Return on assets
4
Earnings per share
5
Return on equity
6
Asset turnover ratio
7
Gross profit ratio
8
Price-earnings ratio
9
Inventory turnover
ratio
10
Dividend yield ratio
103) Use the information provided to analyze the profitability of T-Shirt City using the following
ratios: return on assets, return on equity, gross profit ratio, and earnings per share. T-Shirt City
has no preferred stock.
Sales
$ 350,000
Gross profit
206,500
Net income
115,000
Interest expense
2,875
Average total assets
875,000
Average total shareholders’ equity
500,000
Weighted-average common shares outstanding
25,000
104) Use the information provided to analyze the stock of T-Shirt City using the following
ratios: earnings per share, price/earnings ratio, and dividend yield. T-Shirt City has no preferred
stock.
Net income
$115,000
Interest expense
$2,875
Market price per share
$35.72
Dividends per share
$0.80
Weighted-average common shares outstanding
25,000
105) Refer to the balance sheet above.
a. What is Little Company’s current ratio now?
b. If Little Company buys a $10,000 warehouse by paying $1,000 down and signing a ten-year
mortgage note for the remainder, what will Little Company’s current ratio be?
c. If Little Company buys a $10,000 warehouse by paying cash for the full amount, what will
Little Company’s current ratio be?
d. Is it ethical to structure business transactions so that the company’s ratios look as good as
possible?
106) Refer to the balance sheet above.
a. What is Little Company’s debt-to-equity ratio now?
b. If Little Company buys a $10,000 warehouse by paying $1,000 down and signing a ten-year
mortgage note for the remainder, what will Little Company’s debt-to-equity ratio be?
c. If Little Company buys a $10,000 warehouse by paying cash for the full amount, what will
Little Company’s debt-to-equity ratio be?
d. Is it ethical to structure business transactions so that the company’s ratios look as good as
possible?
The following information has been adapted from the 2005 and 2006 annual reports of Microsoft
Corporation’s worldwide operations, available online at
http://www.microsoft.com/msft/reports/default.mspx:
Microsoft Corporation
Income Statements
For the Years Ended June 30
2006 2005 2004
Revenue $44,282 $39,788 $36,835
Operating expenses:
Cost of goods sold 7,650 6,031 6,596
Research & development 6,584 6,097 7,735
Sales & marketing 9,818 8,563 8,195
General & administrative 3,758 4,536 5,275
Total operating expenses 27,810 25,227 27,801
Operating income 16,472 14,561 9,034
Investment income 1,790 2,067 3,162
Income before income taxes 18,262 16,628 12,196
Income tax expense 5,663 4,374 4,028
Net income $12,599 $12,254 $8,168
Additional information that might be useful:
Cash dividends declared per common share$0.35 $3.40 $0.16
Weighted average shares outstanding 10,438 10,839 10,808
Market price per share $24.63 $25.10
In 2005, Microsoft declared and paid a one-time cash dividend of $3.00 per share. At the same
time, Microsoft announced plans to repurchase a large amount of its own stock.
Microsoft Corporation
Condensed Statement of Cash Flows
For the Year Ended June 30
2006 2005 2004
Net cash from operating activities $ 14,404 $ 16,605 $14,626
Net cash from (used in) investing 8,003 15,027 (3,342)
Net cash used for financing (20,562) (41,078) (2,364)
Net change in cash $ 1,845 $ (9,446) $ 8,920
Microsoft Corporation
Balance Sheets
June 30
2006 2005 2004
Assets
Current assets:
Cash $ 6,714 $ 4,851 $ 14,304
Short-term investments 27,447 32,900 46,288
Accounts receivable 9,316 7,180 5,890
Inventory 1,478 491 421
Other current assets 4,055 3,315 3,663
Total current assets 49,010 48,737 70,566
Property & equipment, net 3,044 2,346 2,326
Long-term investments 9,232 11,004 12,210
Goodwill 3,866 3,309 3,115
Intangible assets, net 539 499 569
Other long-term assets 3,906 4,920 5,582
Total assets $69,597 $70,815 $94,368
Liabilities & shareholders’ equity
Current liabilities:
Accounts payable $ 2,909 $ 2,086 $ 1,717
Wages payable 1,938 1,662 1,339
Income taxes payable 1,557 2,020 3,478
Short-term unearned revenue 9,138 7,502 6,514
Other payables 6,900 3,607 1,921
Total current liabilities 22,442 16,877 14,969
Long-term unearned revenue 1,764 1,665 1,663
Other long-term liabilities 5,287 4,158 2,911
Total liabilities 29,493 22,700 19,543
Shareholders’ equity:
Common stock & paid-in capital 59,005 60,413 56,396
Retained earnings (deficit) (18,901) (12,298) 18,429
Total shareholders’ equity 40,104 48,115 74,825
Total liabilities & shareholders’ equity$69,597 $70,815 $94,368
107) Divide the class into teams of three or four people. Each team member should work the
following problem separately outside of class. Then give the students time in class to compare
answers with their teammates and put together a final, correct copy of the problem. Each team
should turn in only one copy of the problem for grading. All team members will receive the same
grade.
Required:
Use the adapted financial statements from Microsoft Corporation to answer the following
questions:
1. Calculate the current ratio for 2005.
2. Calculate the current ratio for 2006.
3. Did the current ratio improve in 2006?
4. Calculate the cash from operations to current liabilities for 2005.
5. Calculate the cash from operations to current liabilities for 2006.
6. Did the cash from operations to current liabilities improve in 2006?
7. Calculate the inventory turnover ratio for 2005.
8. Calculate the inventory turnover ratio for 2006.
9. Did the inventory turnover ratio improve in 2006?
10. Calculate the accounts receivable turnover ratio for 2005.
11. Calculate the accounts receivable turnover ratio for 2006.
12. Did the accounts receivable turnover ratio improve in 2006?
13. Use the liquidity ratios you have just calculated to discuss Microsoft’s liquidity.
14. Calculate the debt-to-equity ratio for 2005.
15. Calculate the debt-to-equity ratio for 2006.
16. Did the debt-to-equity ratio improve in 2006?
17. Calculate the return on assets for 2005.
18. Calculate the return on assets for 2006.
19. Did the return on assets improve in 2006?
20. Calculate the asset turnover ratio for 2005.
21. Calculate the asset turnover ratio for 2006.
22. Did the asset turnover ratio improve in 2006?
23. Calculate the return on equity for 2005. (Microsoft has no preferred stock)
24. Calculate the return on equity for 2006. (Microsoft has no preferred stock)
25. Did the return on equity improve in 2006?
26. Calculate the gross profit ratio for 2005.
27. Calculate the gross profit ratio for 2006.
28. Did the gross profit ratio improve in 2006?
29. Calculate earnings per share for 2005. (Microsoft has no preferred stock)
30. Calculate earnings per share for 2006. (Microsoft has no preferred stock)
31. Did earnings per share improve in 2006?
32. Use the profitability ratios you have just calculated to discuss Microsoft’s profitability.
33. Calculate the price-earnings ratio for 2005.
34. Calculate the price-earnings ratio for 2006.
35. Did the price-earnings ratio improve in 2006?
36. Calculate the dividend yield ratio for 2006.
37. Based on ALL of the ratios you have just calculated, do you consider Microsoft to be a good
investment? Why?