41
92)
MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
70,000
Inventory
110,000
Net plant and equipment
220,000
Total assets
$
450,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
70,000
Accrued expenses
50,000
Long-term debt
130,000
Common stock
70,000
Paid-in capital
40,000
Retained earnings
90,000
Total liabilities and stockholders’ equity
$
450,000
MEGAFRAME COMPUTER COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
875,000
Cost of goods sold
600,000
Gross profit
$
275,000
Sales and administrative expenses
30,000
Depreciation
55,000
Operating profit
$
190,000
Interest expense
25,000
Profit before taxes
$
165,000
Taxes (30%)
49,500
Net income
$
115,500
Refer to the tables above. Megaframe’s quick ratio is ________.
A) 1.9:1
B) 1:1
C) 1.8:1
D) 12:1
42
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
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
43
93)
MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
70,000
Inventory
110,000
Net plant and equipment
220,000
Total assets
$
450,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
70,000
Accrued expenses
50,000
Long-term debt
130,000
Common stock
70,000
Paid-in capital
40,000
Retained earnings
90,000
Total liabilities and stockholders’ equity
$
450,000
MEGAFRAME COMPUTER COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
875,000
Cost of goods sold
600,000
Gross profit
$
275,000
Sales and administrative expenses
30,000
Depreciation
55,000
Operating profit
$
190,000
Interest expense
25,000
Profit before taxes
$
165,000
Taxes (30%)
49,500
Net income
$
115,500
Refer to the tables above. Megaframe’s current ratio is ________.
A) 1.9:1
B) 1.8:1
C) 1:1
D) 3.0:1
44
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 = = = 1.9
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
45
94)
MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
70,000
Inventory
110,000
Net plant and equipment
220,000
Total assets
$
450,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
70,000
Accrued expenses
50,000
Long-term debt
130,000
Common stock
70,000
Paid-in capital
40,000
Retained earnings
90,000
Total liabilities and stockholders’ equity
$
450,000
MEGAFRAME COMPUTER COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
875,000
Cost of goods sold
600,000
Gross profit
$
275,000
Sales and administrative expenses
30,000
Depreciation
55,000
Operating profit
$
190,000
Interest expense
25,000
Profit before taxes
$
165,000
Taxes (30%)
49,500
Net income
$
115,500
Refer to the tables above. What is Megaframe Computer’s total asset turnover?
A) 7.58x
B) 3.6x
C) 2x
D) 1.94x
46
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 = = = 1.94
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
47
95)
MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
70,000
Inventory
110,000
Net plant and equipment
220,000
Total assets
$
450,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
70,000
Accrued expenses
50,000
Long-term debt
130,000
Common stock
70,000
Paid-in capital
40,000
Retained earnings
90,000
Total liabilities and stockholders’ equity
$
450,000
MEGAFRAME COMPUTER COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
875,000
Cost of goods sold
600,000
Gross profit
$
275,000
Sales and administrative expenses
30,000
Depreciation
55,000
Operating profit
$
190,000
Interest expense
25,000
Profit before taxes
$
165,000
Taxes (30%)
49,500
Net income
$
115,500
Refer to the tables above. The firm’s debt to total assets ratio is ________.
A) 56.1%
B) 26.7%
C) 28.6%
D) 55.6%
48
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: D
Explanation: Debt to total assets = = = 0.556
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
49
96)
MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31
ASSETS
Cash
$
50,000
Accounts receivable
70,000
Inventory
110,000
Net plant and equipment
220,000
Total assets
$
450,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
$
70,000
Accrued expenses
50,000
Long-term debt
130,000
Common stock
70,000
Paid-in capital
40,000
Retained earnings
90,000
Total liabilities and stockholders’ equity
$
450,000
MEGAFRAME COMPUTER COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)
$
875,000
Cost of goods sold
600,000
Gross profit
$
275,000
Sales and administrative expenses
30,000
Depreciation
55,000
Operating profit
$
190,000
Interest expense
25,000
Profit before taxes
$
165,000
Taxes (30%)
49,500
Net income
$
115,500
Refer to the tables above. Times interest earned for Megaframe Computer is ________.
A) 3.8x
B) 4.6x
C) 11x
D) 7.6x
50
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 = = = 7.6
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
51
97)
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. Compute Tew’s after-tax profit margin.
A) 42.0%
B) 27.3%
C) 59.4%
D) None of the options
52
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 = = = 0.273
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
53
98)
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. Using the DuPont method, return on assets (investment) for Tew is
approximately ________.
A) 80%
B) 34.1%
C) 293.0%
D) None of the options
54
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: B
Explanation: Return on assets = Profit margin × Asset turnover
= × = 0.341
Difficulty: 2 Medium
Topic: Profitability ratios
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
55
99)
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 return on equity is ________.
A) 136.5%
B) 34.13%
C) 80.29%
D) 57.5%
56
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: C
Explanation: Return on equity
= = = 0.8029
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
57
100)
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 receivable turnover is ________. Assume a 360-day
calendar.
A) 57.6x
B) 1.7x
C) 6.25x
D) 0.2x
58
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: C
Explanation: Receivables turnover = = = 6.25
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
59
101)
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 average collection period is (assume a 360-day calendar).
A) 57.6 days.
B) 222 days.
C) 55.6 days.
D) 6.3 days.
60
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Answer: A
Explanation: Average collection period
= = = 57.6 days
Difficulty: 3 Hard
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