21
77) Which of the following financial ratios is the best measure of the operating effectiveness of a
firm’s management?
A) times interest earned
B) net profit margin
C) operating return on assets
D) operating efficiency quotient
Please refer to Table 4-4 for the following questions.
Table 4-4
Wes Donnell, Inc.
Balance Sheet
2009
2010
Cash
$2,500
$?????
Accounts receivable
6,000
7,000
Inventories
8,500
9,000
Land
7,000
7,000
Other fixed assets
15,000
15,500
Accumulated
depreciation
(5,000)
(6,000)
Total assets
$34,000
$?????
Accounts payable
$4,000
$5,000
Bonds
6,000
6,500
Common stock
15,000
15,000
Retained earnings
9,000
?????
Liabilities & Equity
$34,000
$?????
Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
Sales
$100,000
Cost of goods sold
(70,000)
Gross profit
30,000
Operating expenses
(16,000)
Depreciation
(1,000)
EBIT
13,000
Interest expense
(500)
EBT
12,500
Taxes
(1,900)
Net Income
$10,600
78) In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s
retained earnings balance for 2010?
A) $10,000
B) $8,000
C) $19,600
D) $2,600
79) In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s
inventory turnover for 2010?
A) 0.13
B) 11.1
C) 9.3
D) 7.78
80) In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s
total asset balance for 2010?
A) $42,500
B) $36,500
C) $38,500
D) $26,900
81) In addition to the information contained in Table 4-4, you know that the current ratio for
2010 is 4 and that the corporation paid $11,600 in dividends in 2010. What is Wes Donnell’s
cash balance for 2010?
A) $2,500
B) $13,600
C) $4,000
D) $6,500
82) Gemini Corp. reported the following balance sheet:
Cash
$28,000
$5,000
Accounts receivable
15,000
12,000
Inventory
45,000
17,000
Net Fixed Assets
122,000
45,000
10,000
121,000
Total assets
$210,000
$210,000
Gemini Corp.’s current ratio is
A) 2.59.
B) 2.74.
C) 2.98.
D) 3.88.
83) Gemini Corp. reported the following balance sheet:
Cash
$28,000
$5,000
Accounts receivable
15,000
12,000
Inventory
45,000
17,000
Net Fixed Assets
122,000
45,000
10,000
121,000
Total assets
$210,000
$210,000
Gemini Corp.’s debt ratio is
A) 32.17%.
B) 37.62%.
C) 39.45%.
D) 42.95%.
84) Gemini Corp. reported the following balance sheet:
Cash
$28,000
$5,000
Accounts receivable
15,000
12,000
Inventory
45,000
17,000
Net Fixed Assets
122,000
45,000
10,000
121,000
Total assets
$210,000
$210,000
Gemini has sales of $600,000 and net income of $50,000. Gemini’s return on equity is
A) 5.00%.
B) 50.00%.
C) 38.17%.
D) 41.13%.
85) Which of the following ratios would be the poorest indicator of how rapidly the firm’s credit
accounts are being collected?
A) times interest earned
B) average collection period
C) accounts receivable turnover ratio
D) cash conversion cycle
86) Price and Domann Inc. has an average collection period of 74 days. What is the accounts
receivable turnover ratio for Price and Domann?
A) 4.93
B) 2.47
C) 2.66
D) 1.74
87) High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an accounts
receivable turnover ratio of 5. Assuming that High and Low have the same sales level, which of
the following statements is correct?
A) High’s average collection period is less than Low’s
B) Low’s average collection period is less than High’s
C) High has a higher accounts receivable balance on average than does Low Company
D) Low Company has (on average) a lower accounts receivable balance than does High
88) Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accounts
receivable balance of $100,000, what is Jeter’s average daily credit sales?
A) $745.23
B) $1,232.88
C) $22,222.22
D) $1,893.45
89) Acme Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000 and total assets
of $70,000. What is Acme’s level of current liabilities?
A) $8,400
B) $9,400
C) $12,348
D) $10,600
90) SRC has a debt ratio of .4, current liabilities of $18,000, and total assets of $100,000. What is
the level of SRC’s total liabilities?
A) $22,000
B) $40,000
C) $58,000
D) $63,934
91) Lorna Doom Inc. has an annual interest expense of $30,000 and pays income tax equal to 40
percent of taxable income (EBT). Lorna Doom’s times-interest-earned ratio is 4.2. What is Lorna
Doom’s net income?
A) $96,000
B) $57,000
C) $126,000
D) $57,600
92) Sharky’s Loan Co. has an annual interest expense of $40,000. If Sharky’s times-interest-
earned ratio is 3.0, what is Sharky’s Earnings Before Taxes (EBT)?
A) $80,000
B) $13,333
C) $120,000
D) $160,000
27
Please refer to Table 4-5 for the following questions.
Table 4-5
Yen Inc.
Balance Sheet
2009
2010
Cash
$8,000
$12,200
Accounts receivable
12,000
13,000
Inventories
9,000
10,000
Land
20,000
20,000
Other fixed assets
16,000
19,800
Accumulated
depreciation
(4,000)
(5,000)
Total assets
$61,000
$70,000
Accounts payable
$11,000
$12,000
Long-term Bonds
24,000
24,000
Common stock
14,000
14,000
Retained earnings
12,000
20,000
Liabilities & Equity
$61,000
$70,000
Yen Inc.
Income Statement
For the year ended December 31, 2010
Sales
$196,000
Cost of goods sold
(140,000)
Gross profit
$56,000
Operating expenses
(26,000)
Depreciation
(2,000)
EBIT
28,000
Interest expense
(2,000)
EBT
26,000
Taxes
(9,000)
Net Income
$17,000
93) Based on the information contained in Tables 4-5, what was the total amount of Yen’s
common stock dividend for 2010?
A) $17,000
B) $12,800
C) $9,000
D) $8,000
94) Based on the information contained in Tables 4-5, what was Yen’s quick ratio at the end of
2010?
A) 2.10
B) 1.43
C) 2.93
D) 1.79
95) Based on the information contained in Tables 4-5, what was Yen’s return on common equity
for 2010?
A) 50.0%
B) 85.0%
C) 121.4%
D) 24.3%
96) Based on the information contained in Tables 4-5, what was Yen’s operating profit margin
for 2010?
A) 26.50%
B) 21.34%
C) 14.29%
D) 11.67%
97) Which of the following does not provide an indication of liquidity?
A) quick ratio
B) debt ratio
C) inventory turnover
D) average collection period
98) KPR, Inc. has current assets of $10,000,000, current liabilities of $4,500,000, inventory of
$1,000,000, and sales of $12,000,000. What is the acid test ratio?
A) 2.0
B) 1.67
C) 0.22
D) 0.1
99) An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate
that
A) the firm has higher sales than the industry average.
B) the firm is selling a product mix that includes more high margin items.
C) the firm is managing its inventory inefficiently.
D) the firm’s products are in inventory for fewer days before they are sold than is average for the
industry.
100) A firm that wants to know if it has enough cash to meet its bills would be most likely to use
which kind of ratio?
A) liquidity
B) leverage
C) efficiency
D) profitability
101) Which of the following ratios would be the most useful to assess the risk associated with a
firm being able to pay off its short-term line of credit?
A) Return on equity
B) The acid test ratio
C) The operating profit margin
D) The fixed asset turnover
102) During the past year the growth corporation increased its sales from $1,000,000 to
$2,000,000 and its EBIT from $250,000 to $400,000. The result of this growth will be
A) a higher operating profit margin and higher net income.
B) a lower operating profit margin and lower net income.
C) a lower operating profit margin and higher net income.
D) a higher P/E ratio.
103) CPR Corp. has cash of $100,000; short-term notes payable of $75,000, accounts receivable
of $125,000; accounts payable of $140,000; inventories of $200,000; and accruals of $55,000.
What is CPR’s current ratio?
A) 1.57
B) 2.71
C) 1.42
D) 0.64
104) Which of the following ratios would be the best way to determine how customers are
paying for their purchases?
A) Inventory turnover
B) Total asset turnover
C) Current ratio
D) Average collection period
105) Secular Electric has total equity of $560,000; sales of $2,250,000; current assets of
$700,000; and total liabilities of $435,000. What is Secular Electric’s total asset turnover?
A) 4.02
B) 3.21
C) 2.26
D) 5.51
106) Solid State, Inc. has a total equity of $560,000; sales of $2,250,000; total assets of
$995,000; and current liabilities of $310,000. What is Solid State’s debt ratio?
A) 55.4%
B) 43.7%
C) 31.2%
D) 66.7%
107) Roxbury has sales of $2,250,000; a gross profit of $825,000; total operating costs of
$620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000.
What is Roxbury’s times interest earned ratio?
A) 1.3
B) 11.4
C) 8.1
D) 45.8
108) Which of the following has the most significant influence on return on equity?
A) Common dividends
B) Principal payments
C) Accruals
D) Operating income
109) S. Panya has total assets of $1,000,000; common equity of $400,000; a gross profit of
$800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of
$74,000; and preferred dividends of $30,000. What is S. Panya’s return on equity?
A) 7.5%
B) 20.0%
C) 21.5%
D) 14.0%
110) Assume that a firm issues a six-month note to purchase inventory. Which of the following
is true if the current ratio before the purchase is 1.0?
A) the firm’s current ratio must decrease
B) the firm’s quick ratio will stay the same
C) the firm’s current ratio will increase
D) the firm’s quick ratio might decrease
111) Which of the following is true if a firm wishes to collect its accounts faster by imposing
stricter credit terms on its customers?
A) the firm’s average collection period is likely to fall
B) the firm’s accounts receivable turnover might rise
C) the firm’s sales might decrease
D) all of the above
112) Anton’s Coffee Shop has a return on assets of 12%. Anton’s assets = $100 while Anton’s
owner’s equity = $40 and its debt equals $60. What is Anton’s return on equity?
A) 18%
B) 20%
C) 30%
D) 12%
113) All of the following will improve a firm’s liquidity position except:
A) increase accounts receivable turnover.
B) increase inventory turnover.
C) increase the average collection period.
D) increase long-term debt and invest the money in marketable securities.
114) A company borrows $10,000 and puts the money into its checking account. This
transaction will increase the company’s current ratio if prior to the transaction the company’s
current ratio was
A) equal to one.
B) greater than one.
C) less than one.
D) greater than or less than one, but not equal to one.
115) Kaylor Corporation increased its financial leverage during 2010 by taking out a loan and
using the proceeds to buy back common stock. At the end of 2010, the corporation reported
higher earnings per share and higher return on equity. However, its stock price declined.
Discuss why this may happen.