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Appendix B
Indicate whether the statement is true or false.
1. Depreciation is an unusual expense because it does not involve an actual cash expense.
a. True
b. False
2. Cost of goods sold represents the revenue a firm receives from goods sold to customers.
a. True
b. False
3. The gross profit margin is the percentage of each sales dollar that a firm earns in profit after all expenses have
been paid.
a. True
b. False
4. A balance sheet contains more marketing-related information than an income statement.
a. True
b. False
5. All successful organizations have the same inventory turnover ratio.
a. True
b. False
6. Subtracting depreciation and net interest expense from the firm’s operating profit reveals the firm’s taxable
income.
a. True
b. False
7. Receivables are collected credit sales.
a. True
b. False
8. An income statement is a snapshot of what a company owns (called assets) and what it owes (called
liabilities) at a point in time.
a. True
b. False
9. While calculating the accounts receivable turnover ratio, sales to buyers using credit cards such as
MasterCard and Visa are counted as credit sales because the seller is providing credit to the buyer who buys
without cash.
a. True
b. False
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Appendix B
10. The difference between assets and liabilities of a company is referred to as owner’s equity.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
11. The operations manager at a lumber supply company is analyzing how well his company is using its
resources. He knows that sales for the past year were $3.5 million. He also knows that he had $850,000 in
inventory twelve months ago, and he currently has $550,000. What important ratio can he calculate from this
information?
a. He can determine that his inventory turnover is 5.
b. He can determine that his inventory turnover is 11.6.
c. He can determine that his net profit margin is 20%.
d. He can determine that his accounts receivable turnover is 20%.
12. Twelve months ago, Genevieve’s cupcake business had a net income of $36,250 and sales of $145,000. Now
that this current year is coming to an end, she’s determined that her business had a net income of $33,600 and
sales of $168,000 over the last twelve months. What does Genevieve’s net profit margin reveal about her
business?
a. Her business is doing better this year than last; her net profit margin and sales are increasing.
b. Her business is fine; her net profit margin has remained stable and sales are increasing.
c. Her business is doing better this year than last; her net profit margin is decreasing.
d. Her business is not doing as well as it did last year; her net profit margin is decreasing.
13. Radiance Solar Panels, which sells solar systems to the construction industry, sells all of its products on
credit, and requires its customers to pay within 30 days. Last year, the company’s credit sales totaled about
$800,000 and its average accounts receivable was close to $80,000. Which statement is true about the
company’s accounts receivable turnover?
a. Radiance’s accounts receivable turnover is about 10% and the average age of its receivables is roughly 80
days, which means that nearly all customers are paying late, given its 30-day payment policy.
b. Radiance’s accounts receivable turnover is about 10 times per year and the average age of its receivables
is roughly 30 days, which means that most customers are paying on time, given its 30-day payment policy.
c. Radiance’s accounts receivable turnover is about 8 times per year so the average age of its receivables is
roughly 45 days, which means that many customers are paying late, given its 30-day payment policy.
d. Radiance’s accounts receivable turnover is about 10 times per year so the average age of its receivables
is roughly 36.5 days, which means that some customers are paying late, given its 30-day payment policy.
14. In the context of financial statements, which of the following represents the systematic reduction over time
in the value of certain company assets?
a. Depreciation
b. Attrition
c. Recession
d. Deduction
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Appendix B
15. Venus Inc., a software consulting firm, had made a gross profit of $350.0 million for the year 2012. For the
same year, it had made sales of $890.0 million. What was its gross profit margin?
a. 69.32%
b. 59.32%
c. 49.32%
d. 39.32%
16. Venus Inc., a software consulting firm, had depreciation of $20.8 million and a net interest expense of
$3.2 million for the past year. The firm’s operating profit for the same year was $319.0 million. What was the
firm’s taxable income for the past year?
a. $400 million
b. $299.2 million
c. $295 million
d. $316.8 million
17. Which of the following profitability ratios measures the firm’s efficiency in generating sales and profits
from the total amount invested in the company?
a. Inventory turnover
b. Gross profit margin
c. Return on assets
d. Net interest expense
18. Explain the difference between an income statement and a balance sheet.
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Appendix B
Answer Key