61
102)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. The firm’s inventory turnover ratio is ________.
A) 10x
B) 8x
C) 2.7x
D) 0.1x
62
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: A
Explanation: Inventory turnover = = = 10
Difficulty: 2 Medium
Topic: Asset management ratios
Learning Objective: 03-02 Ratios can be used to measure profitability, asset utilization,
liquidity, and debt utilization.
Bloom’s: Apply
AACSB: Analytical Thinking
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63
103)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. The firm’s fixed asset turnover ratio is ________.
A) 2.0x
B) 1.6x
C) 0.5x
D) 1.3x
64
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: A
Explanation: Fixed asset turnover = = = 2.0
Difficulty: 2 Medium
Topic: Asset management ratios
Learning Objective: 03-02 Ratios can be used to measure profitability, asset utilization,
liquidity, and debt utilization.
Bloom’s: Apply
AACSB: Analytical Thinking
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65
104)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. What is Tew’s total asset turnover?
A) 2.9x
B) 1.3x
C) 0.63x
D) 1.25x
66
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: D
Explanation: Total asset turnover = = = 1.25
Difficulty: 2 Medium
Topic: Asset management 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
67
105)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. Tew’s quick ratio is ________.
A) 1.5:1
B) 1:1
C) 2:1
D) None of the options
68
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: B
Explanation: Quick ratio = = = 1.0
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
69
106)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. Tew’s current ratio is ________.
A) 1.5:1
B) 1:1
C) 2:1
D) None of the options
70
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: A
Explanation: Current ratio = = = 1.5
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
71
107)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. The firm’s debt to assets ratio is ________.
A) 58%
B) 33%
C) 25%
D) 100%
72
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 = = = 0.58
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
73
108)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. Times interest earned for Tew Company is ________.
A) 6.8x
B) 10.5x
C) 25x
D) 11.5x
74
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 = = = 11.5
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
75
109)
TEW COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
20,000
Accounts receivable
80,000
Inventory
50,000
Net plant and equipment
250,000
Total assets
$
400,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
40,000
Accrued expenses
60,000
Long-term debt
130,000
Common stock
100,000
Paid-in capital
10,000
Retained earnings
60,000
Total liabilities and stockholders’ equity
$
400,000
TEW COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
500,000
Cost of goods sold
200,000
Gross profit
$
300,000
Sales and administrative expenses
20,000
Fixed lease expenses
10,000
Depreciation
40,000
Operating profit
$
230,000
Interest expense
20,000
Profit before taxes
$
210,000
Taxes (35%)
73,500
Net income
$
136,500
Refer to the tables above. Fixed charge coverage for Tew Company is ________.
A) 23x
B) 1.95x
C) 1.3x
D) 8.0x
76
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 =
= = 8.0
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
77
110)
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. What is Marni’s after-tax profit margin?
A) 12.5%
B) 3.75%
C) 30%
D) None of the options
78
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: B
Explanation: Profit margin = = = 0.0375
Difficulty: 2 Medium
Topic: Profitability 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
79
111)
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. Using the DuPont method, the return on assets (investment) for Marni
is approximately ________.
A) 11.54%
B) 7.5%
C) 3.75%
D) None of the options
80
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Answer: B
Explanation: Return on assets = Profit margin × Asset turnover
= × = 0.075
Difficulty: 2 Medium
Topic: DuPont identity
Learning Objective: 03-03 The DuPont system of analysis identifies the true sources of return
on assets and return to stockholders.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation