94
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: A
Explanation: Quick ratio = = = 0.789
Difficulty: 2 Medium
Topic: Short-term solvency ratios
Learning Objective: 03-02 Ratios can be used to measure profitability, asset utilization,
liquidity, and debt utilization.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
95
119)
MARNI COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
100,000
Inventory
200,000
Net plant and equipment
650,000
Total assets
$
1,000,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
100,000
Accrued expenses
90,000
Long-term debt
250,000
Common stock
100,000
Paid-in capital
50,000
Retained earnings
410,000
Total liabilities and stockholders’ equity
$
1,000,000
MARNI COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
2,000,000
Cost of goods sold
1,750,000
Gross profit
$
250,000
Sales and administrative expenses
30,000
Fixed lease expenses
10,000
Depreciation
60,000
Operating profit
$
150,000
Interest expense
25,000
Profit before taxes
$
125,000
Taxes (40%)
50,000
Net income
$
75,000
Refer to the tables above. Marni’s current ratio is ________.
A) 0.80:1
B) 0.5:1
C) 1.84:1
D) None of the options
96
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: C
Explanation: Current ratio = = = 1.84
Difficulty: 2 Medium
Topic: Short-term solvency ratios
Learning Objective: 03-02 Ratios can be used to measure profitability, asset utilization,
liquidity, and debt utilization.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
97
120)
MARNI COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
100,000
Inventory
200,000
Net plant and equipment
650,000
Total assets
$
1,000,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
100,000
Accrued expenses
90,000
Long-term debt
250,000
Common stock
100,000
Paid-in capital
50,000
Retained earnings
410,000
Total liabilities and stockholders’ equity
$
1,000,000
MARNI COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
2,000,000
Cost of goods sold
1,750,000
Gross profit
$
250,000
Sales and administrative expenses
30,000
Fixed lease expenses
10,000
Depreciation
60,000
Operating profit
$
150,000
Interest expense
25,000
Profit before taxes
$
125,000
Taxes (40%)
50,000
Net income
$
75,000
Refer to the tables above. The firm’s debt-to-asset ratio is ________.
A) 44%
B) 33%
C) 19%
D) 2.27%
98
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: A
Explanation: Debt to total assets = = = 0.44
Difficulty: 2 Medium
Topic: Long-term solvency ratios
Learning Objective: 03-02 Ratios can be used to measure profitability, asset utilization,
liquidity, and debt utilization.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
99
121)
MARNI COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
100,000
Inventory
200,000
Net plant and equipment
650,000
Total assets
$
1,000,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
100,000
Accrued expenses
90,000
Long-term debt
250,000
Common stock
100,000
Paid-in capital
50,000
Retained earnings
410,000
Total liabilities and stockholders’ equity
$
1,000,000
MARNI COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
2,000,000
Cost of goods sold
1,750,000
Gross profit
$
250,000
Sales and administrative expenses
30,000
Fixed lease expenses
10,000
Depreciation
60,000
Operating profit
$
150,000
Interest expense
25,000
Profit before taxes
$
125,000
Taxes (40%)
50,000
Net income
$
75,000
Refer to the tables above. Times interest earned for Marni Company is ________.
A) 3x
B) 5x
C) 80x
D) 6x
100
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: D
Explanation: Times interest earned = = = 6
Difficulty: 3 Hard
Topic: Long-term solvency ratios
Learning Objective: 03-02 Ratios can be used to measure profitability, asset utilization,
liquidity, and debt utilization.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
101
122)
MARNI COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
100,000
Inventory
200,000
Net plant and equipment
650,000
Total assets
$
1,000,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
100,000
Accrued expenses
90,000
Long-term debt
250,000
Common stock
100,000
Paid-in capital
50,000
Retained earnings
410,000
Total liabilities and stockholders’ equity
$
1,000,000
MARNI COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
2,000,000
Cost of goods sold
1,750,000
Gross profit
$
250,000
Sales and administrative expenses
30,000
Fixed lease expenses
10,000
Depreciation
60,000
Operating profit
$
150,000
Interest expense
25,000
Profit before taxes
$
125,000
Taxes (40%)
50,000
Net income
$
75,000
Refer to the tables above. Fixed charge coverage for Marni Company is ________.
A) 15x
B) 7.5x
C) 0.9x
D) 4.6x
102
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: D
Explanation: Fixed charge coverage =
= = 4.6
Difficulty: 3 Hard
Topic: Long-term solvency ratios
Learning Objective: 03-02 Ratios can be used to measure profitability, asset utilization,
liquidity, and debt utilization.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
123) If Randolph Co. has sales of $3,000,000, net income of $200,000, and total asset turnover
of 1.5x, what is its return on assets (ROA)?
A) 10%
B) 17%
C) 14%
D) 6%
124) If Baxter Unlimited has annual sales of $5,000,000 (80% on credit), and receivables equal
to 35% of credit sales, what is its receivables turnover?
A) 3.6 times
B) 2.9 times
C) 2.3 times
D) 7.9 times
125) If Crossroads International has $3,000,000 in total sales (75% on credit) and receivables of
$500,000, what is its average collection period? Assume a 360-day calendar year.
A) 80 days
B) 60 days
C) 4.5 days
D) 6 days
126) All of the following are common examples of possible distortion in reported income except
A) inflation.
B) treatment of nonrecurring items.
C) reporting of cash.
D) reporting of revenue.
127) Trend and industry analysis provide all of the following information except
A) benchmarking.
B) the progress of the company.
C) a basis for decision making about capital structure.
D) future information about the company.
128) If Turnpoint Inc. has net income of $400,000, assets of $5,000,000, sales of $2,000,000, and
debt of 2,000,000, what is its return on equity (ROE)?
A) 13.3%
B) 8%
C) 66.7%
D) 2%
129) In 2016, Turnpoint Inc. had net income of $400,000, assets of $5,000,000, sales of
$2,000,000, and debt of 2,000,000. In 2017, Turnpoint Inc. had net income of $700,000, assets of
$4,000,000, sales of $1,300,000, and debt of 2,000,000. Did Turnpoint Inc’s return on equity
improve from 2016 to 2017?
A) No
B) Yes
C) Stayed the same
D) Not enough information to answer
130) In 2016, Bubble Inc. had net income of $500,000, assets of $5,000,000, sales of $2,000,000,
and debt of 2,000,000. In 2017, Bubble Inc. had net income of $600,000, assets of $7,000,000,
sales of $1,300,000, and debt of 2,000,000. Did Bubble Inc’s return on assets improve from 2016
to 2017?
A) No
B) Yes
C) Stayed the same
D) Not enough information to answer
131) In 2016, Bubble Inc. had net income of $500,000, assets of $5,000,000, sales of $2,000,000,
and equity of $2,000,000. In 2017, Bubble Inc. had net income of $600,000, assets of
$7,000,000, sales of $1,300,000, and equity of $1,700,000. Is Bubble Inc’s 2017 debt to total
asset better than its 2016 debt to total assets?
A) No
B) Yes
C) Stayed the same
D) Not enough information to answer