Deck 9: Financial Statement Analysis

Question 1

The drawback of studying absolute amounts reported in financial statements is the problem of differing materiality levels.

Answer 1

True

Question 2

While horizontal analysis examines one item over many time periods, vertical analysis examines many items in the same interval of time.

Answer 2

True

Question 3

Jenkins Company's current ratio is higher than the average for its industry, while its quick ratio is below the industry average. One possible interpretation for these results is that Jenkins carries less inventory than most companies in its industry.

Answer 3

False

Question 4

A company has an obligation to provide highly detailed information on its financial statements.

Question 5

In terms of solvency, the higher the number of times interest is earned, the better.

Question 6

Vertical analysis always involves comparing financial statement elements over a span of time.

Question 7

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

Question 8

Factors involved in communicating useful information is are:

A) Attributes of the users
B) Purpose for which the information will be used
C) Process by which the information is analyzed
D) All of these answers are correct.

Question 9

The quick ratio, although similar to the current ratio, is more conservative.

Question 10

When debt is used to finance the purchase of assets, the term or time span of the debt should always be shorter than the life span of the assets.

Question 11

Financial analysis typically involves some form of comparison, such as changes in the same item over a number of years.

Question 12

The accounting profession assumes that financial statement users have an expert knowledge of business.

Question 13

A vertical analysis uses percentages to compare each of the parts of an individual statement to a key statement figure. For example, on an income statement each item would be shown as a percentage of net sales.

Question 14

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Question 15

Working capital is current assets minus current liabilities.

Question 16

Solvency ratios are used to analyze the long-term debt-paying ability and the composition of the financing structure of the firm.

Question 17

The accounts receivable turnover ratio can be used to asses a firm's solvency.

Question 18

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Question 19

Profitability ratios attempt to assess the company's ability to generate earnings.

Question 20

The current ratio is one of the most common measures of solvency.

Question 21

Milton Company has total current assets of $63,000, including inventory of $19,000, and current liabilities of $39,000. The company's current ratio is:

A) 0.62.
B) 1.62.
C) 2.10.
D) 1.13.

Question 22

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

A) Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area.
B) To correctly evaluate an absolute amount, the analyst must consider its relative importance.
C) Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses.
D) Using absolute amounts eliminates the problem of varying materiality levels.

Question 23

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?

A) No impact
B) Increase it
C) Decrease it
D) Not enough information is provided to answer the question.

Question 24

Common methods of financial statement analysis include all of the following except:

A) Incremental analysis.
B) Horizontal analysis.
C) Vertical analysis.
D) Ratio analysis.

Question 25

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

A) $12,000.
B) $52,000.
C) $144,000.
D) $84,000.

Question 26

Current financial reporting standards assume that users of accounting information:

A) Have an expert's understanding of economic and financial events and conditions.
B) Have a reasonably informed knowledge of business.
C) Have widely differing levels of knowledge about business, and that financial reporting must meet these differing needs.
D) Have only minimal knowledge of business.

Question 27

Select the correct statement regarding vertical analysis.

A) Vertical analysis of the income statement involves showing each item as a percentage of sales.
B) Vertical analysis of the balance sheet involves showing each asset as a percentage of total assets.
C) Vertical analysis examines two or more items from the financial statements of one accounting period.
D) All of these answers are correct.

Question 28

Darden Company has cash of $37,000, accounts receivable of $47,000, inventory of $24,500, and equipment of $67,000. Assuming current liabilities of $32,500, this company's working capital is:

A) $106,000.
B) $51,500.
C) $76,000.
D) $14,500.

Question 29

Working capital is defined as:

A) Current assets divided by current liabilities.
B) Total assets minus total liabilities.
C) Current assets less current liabilities.
D) Current liabilities divided by total liabilities.

Question 30

Which of the following statements regarding ratio analysis is incorrect?

A) Ratio analysis is a specific form of horizontal analysis.
B) There are many different ratios available for evaluating a firm's performance.
C) Some ratios involve an account from the balance sheet and one from the income statement.
D) Ratio analysis involves making comparisons between different accounts in the same set of financial statements.

Question 31

Financial ratios can be used to assess which of the following aspects of a firm's performance?

A) Liquidity
B) Solvency
C) Profitability
D) All of these answers are correct.

Question 32

The study of an individual financial statement item over several accounting periods is called:

A) Horizontal analysis.
B) Vertical analysis.
C) Ratio analysis.
D) Time and motion analysis.

Question 33

Financial statement analysis involves forms of comparison including:

A) Comparing changes in the same item over a number of periods.
B) Comparing key relationships within the same year.
C) Comparing key items to industry averages.
D) All of these answers are correct.

Question 34

Knoell Company paid its sales employees $15,000 in sales commissions. What impact will this transaction have on the firm's working capital?

A) No impact
B) Increase it
C) Decrease it
D) Not enough information is provided to answer the question.

Question 35

Which of the following statements regarding the information disclosed in financial statements is incorrect?

A) The costs of providing all possible information about a firm would be prohibitively high for the business.
B) Some information disclosed in financial statements may be irrelevant to some users.
C) Financial statements should be detailed enough to answer any financial-related question an investor might have.
D) When too much information is presented, users may suffer from information overload.

Question 36

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

A) Ratio analysis.
B) Contribution analysis.
C) Horizontal analysis.
D) Vertical analysis.

Question 37

Which of the following statements regarding the quick ratio is incorrect?

A) The quick ratio is also known as the acid-test ratio.
B) The quick ratio ignores some current assets that are less liquid than others.
C) The quick ratio is a conservative variation of the current ratio.
D) The quick ratio equals quick assets divided by total liabilities.

Question 38

Which of the following is an (are) objective(s) of ratio analysis?

A) Assessing past performance.
B) Assessing the prospects for future performance.
C) Analyzing how a company finances its operations.
D) All of these answers are correct.

Question 39

All of the following are considered to be measures of a company's short-term debt-paying ability except:

A) Current ratio.
B) Earnings per share.
C) Inventory turnover.
D) Average collection period.

Question 40

Which of the following statements regarding horizontal analysis is incorrect?

A) Percentage analysis involves establishing the relationship of one amount to another.
B) A horizontal analysis of cost of goods sold on the income statement includes dividing net income by total revenue.
C) Percentage analysis attempts to eliminate the materiality problem of comparing firms of different sizes.
D) In doing horizontal analysis, an account is expressed as a percentage of the previous balance of the same account.

Question 41

The following balance sheet information is provided for Gaynor Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } &{\text { Year 1 }} \\\text { Cash } & \$ 4,000 & \$ 2,000 \\\text { Accounts receivable } & 15,000 & 12,000 \\\text { Inventory } & \$ 35,000 & \$ 38,000\end{array}$ Assuming Year 2 cost of goods sold is $153,300, what is the company's inventory turnover?

A) 4.0 times
B) 4.4 times
C) 4.2 times
D) None of these answers are correct.

Question 42

Milton Company has total current assets of $46,000, including inventory of $10,000, and current liabilities of $20,000. The company's current ratio is:

A) 0.4.
B) 1.8.
C) 2.8.
D) 2.3.

Question 43

The following balance sheet information is provided for Greene Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 5,400 \\\text { Accounts receivable } & 15,500 \\\text { Inventory } & 18,000 \\\text { Prepaid expenses } & 1,600 \\\text { Plant and equipment, net of depreciation } & 20,200 \\\text { Land } & \underline{ 19,950 }\\\text { Total assets } &\underline{ \$ 80,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 4,500 \\\text { Salaries payable } & 11,500 \\\text { Bonds payable (Due in ten years) } & 19,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } &\underline{ 15,650} \\\text { Total liabilities and stockholders' equity }& \$ 80,650\end{array}$
What is the company's quick (acid-test) ratio?

A) 0.7
B) 1.4
C) 1.3
D) 3.8

Question 44

The following balance sheet information is provided for Apex Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 4,000 \\\text { Accounts receivable } & 10,150 \\\text { Inventory } & 14,000 \\\text { Prepaid expenses } & 800\\\text { Plant and equipment, net of depreciation }&18,700 \\\text { Land }&12,600 \\\text { rotal assets }& \$ 60,250\\\text { Liabilities and stockholders' equity }\\\text { Accounts payable }&\$ 2,310 \\\text { Salaries payable }&9,030 \\\text { Bonds payable (due in ten years) }&8,000 \\\text { Common stock, no par }&20,910 \\\text { Retained earnings }&20,000\\\text { Total liabilities and stockholders' equity }&\$60,250\end{array}$ What is the company's working capital?

A) $2,810
B) $25,840
C) $8,810
D) $17,610

Question 45

You are considering an investment in Apple stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:

A) Debt to equity ratio.
B) Inventory turnover.
C) Quick ratio.
D) Accounts receivable turnover.

Question 46

The following balance sheet information was provided by O'Connor Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } &{\text { Year 1 }} \\\text { Cash } & \$ 4,000 & \$ 2,000 \\\text { Accounts receivable } & 15,000 & 12,000 \\\text { Inventory } & \$ 35,000 & \$ 38,000\end{array}$
Assuming that net credit sales for Year 2 totaled $270,000, what is the company's most recent accounts receivable turnover?

A) 18 times
B) 20 times
C) 22.5 times
D) 7.7 times

Question 47

The following balance sheet information was provided by Western Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 3,400 & \$ 2,900 \\\text { Accounts receivable } & \$ 22,000 & \$ 20,000 \\\text { Inventory } & \$ 38,000 & \$ 44,000\end{array}$ Assuming Year 2 net credit sales totaled $134,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations.)

A) 54.5 days
B) 114.4 days
C) 59.9 days
D) 57.2 days

Question 48

You are considering an investment in IBM stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:

A) Number of times interest is earned.
B) Debt to assets ratio.
C) Debt to equity ratio.
D) Net margin.

Question 49

The following balance sheet information is provided for Gaynor Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 4,250 & \$ 3,500 \\\text { Accounts receivable } & 17,000 & 15,000 \\\text { Inventory } & \$ 44,500 & \$ 52,000\end{array}$ Assuming Year 2 cost of goods sold is $130,000, what is the company's inventory turnover?

A) 2.50 times
B) 2.69 times
C) 2.92 times
D) None of the these answers are correct.

Question 50

The following balance sheet information is provided for Patton Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 3,300 & \$ 2,900 \\\text { Accounts receivable } & \$ 12,800 & \$ 14,800 \\\text { Inventory } & \$ 29,500 & \$ 36,500\end{array}$ Assuming Year 2 cost of goods sold is $373,000, what is the company's average days to sell inventory? (Use 365 days in a year. Do not round your intermediate calculations.)

A) 32.29 days
B) 28.87 days
C) 35.72 days
D) 54.00 days

Question 51

The following balance sheet information is provided for Duke Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 5,400 \\\text { Accounts receivable } & 15,500 \\\text { Inventory } & 18,000 \\\text { Prepaid expenses } & 1,600 \\\text { Plant and equipment, net of depreciation } & 20,200 \\\text { Land } & \underline{ 19,950 }\\\text { Total assets } &\underline{ \$ 80,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 4,500 \\\text { Salaries payable } & 11,500 \\\text { Bonds payable (Due in ten years) } & 19,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } &\underline{ 15,650} \\\text { Total liabilities and stockholders' equity }& \$ 80,650\end{array}$
What is the company's current ratio? (Round your answer to 2 decimal places.)

A) 1.16
B) 1.31
C) 2.53
D) 3.79

Question 52

The following balance sheet information is provided for Santana Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 5,400 \\\text { Accounts receivable } & 15,500 \\\text { Inventory } & 18,000 \\\text { Prepaid expenses } & 1,600 \\\text { Plant and equipment, net of depreciation } & 20,200 \\\text { Land } & \underline{ 19,950 }\\\text { Total assets } &\underline{ \$ 80,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 4,500 \\\text { Salaries payable } & 11,500 \\\text { Bonds payable (Due in ten years) } & 19,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } &\underline{ 15,650} \\\text { Total liabilities and stockholders' equity }& \$ 80,650\end{array}$
What is the company's debt to equity ratio? (Round your answers to the nearest whole percent.)

A) 42%
B) 130%
C) 43%
D) 77%

Question 53

The following balance sheet information is provided for Apex Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 5,400 \\\text { Accounts receivable } & 15,500 \\\text { Inventory } & 18,000 \\\text { Prepaid expenses } & 1,600 \\\text { Plant and equipment, net of depreciation } & 20,200 \\\text { Land } & \underline{ 19,950 }\\\text { Total assets } &\underline{ \$ 80,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 4,500 \\\text { Salaries payable } & 11,500 \\\text { Bonds payable (Due in ten years) } & 19,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } &\underline{ 15,650} \\\text { Total liabilities and stockholders' equity }& \$ 80,650\end{array}$
What is the company's working capital?

A) $20,300
B) $4,900
C) $22,900
D) $24,500

Question 54

The following balance sheet information was provided by Western Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } &{\text { Year 1 }} \\\text { Cash } & \$ 4,000 & \$ 2,000 \\\text { Accounts receivable } & 15,000 & 12,000 \\\text { Inventory } & \$ 35,000 & \$ 38,000\end{array}$ Assuming Year 2 net credit sales totaled $270,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations.)

A) 18.25 days
B) 47.31 days
C) 16.22 days
D) 20.28 days

Question 55

The following balance sheet information is provided for Duke Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 5,600 \\\text { Accounts receivable } & 11,750 \\\text { Inventory } & 14,800 \\\text { Prepaid expenses } &1,600 \\\text { Plant and equipment, net of depreciation } & 19,500 \\\text { Land } & \underline{ 13,400 }\\\text { Total assets } &\underline{ \$ 66,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$2,790 \\\text { Salaries payable } &8,230 \\\text { Bonds payable (Due in ten years) } & 12,000 \\\text { Common stock, no par } & 16,500 \\\text { Retained earnings } &\underline{ 27,130} \\\text { Total liabilities and stockholders' equity }& \$66,650\end{array}$ What is the company's current ratio? (Round your answer to 2 decimal places.)

A) 1.40
B) 1.57
C) 3.06
D) 0.75

Question 56

The following balance sheet information is provided for Santana Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 6,000 \\\text { Accounts receivable } & 12,150 \\\text { Inventory } & 15,000 \\\text { Prepaid expenses } &1,800 \\\text { Plant and equipment, net of depreciation } & 19,700 \\\text { Land } & \underline{ 13,600 }\\\text { Total assets } &\underline{ \$68,250}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 2,910 \\\text { Salaries payable } & 8,030 \\\text { Bonds payable (Due in ten years) } & 13,000 \\\text { Common stock, no par } & 15,500 \\\text { Retained earnings } &\underline{ 28,810} \\\text { Total liabilities and stockholders' equity }& \$ 78,250\end{array}$ What is the company's debt to equity ratio?

A) 135.11%
B) 33.28%
C) 40.73%
D) 54.03%

Question 57

Solvency ratios are used to assess a company's:

A) Long-term debt-paying ability.
B) Profitability.
C) Short-term debt-paying ability.
D) Efficiency in use of its assets.

Question 58

The following balance sheet information is provided for Greene Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 6,600 \\\text { Accounts receivable } & 12,750 \\\text { Inventory } & 15,300 \\\text { Prepaid expenses } & 2,100 \\\text { Plant and equipment, net of depreciation } & 20,000 \\\text { Land } & \underline{ 13,900 }\\\text { Total assets } &\underline{ \$ 70,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 3,090 \\\text { Salaries payable } & 7,730 \\\text { Bonds payable (Due in ten years) } & 14,500 \\\text { Common stock, no par } & 14,000 \\\text { Retained earnings } &\underline{ 31,330} \\\text { Total liabilities and stockholders' equity }& \$ 70,650\end{array}$ What is the company's quick (acid-test) ratio? (Round your answer to 2 decimal places.)

A) 3.40
B) 1.37
C) 0.76
D) 1.79

Question 59

The following balance sheet information was provided by O'Connor Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 3,600 & \$ 2,600 \\\text { Accounts receivable } & \$ 8,600 & \$ 6,600 \\\text { Inventory } & \$ 36,000 & \$ 37,000\end{array}$ Assuming that net credit sales for Year 2 totaled $161,000, what is the company's most recent accounts receivable turnover?

A) 18.72 times
B) 10.59 times
C) 24.39 times
D) 21.18 times

Question 60

The following balance sheet information is provided for Patton Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } &{\text { Year 1 }} \\\text { Cash } & \$ 4,000 & \$ 2,000 \\\text { Accounts receivable } & 15,000 & 12,000 \\\text { Inventory } & \$ 35,000 & \$ 38,000\end{array}$ Assuming Year 2 cost of goods sold is $730,000, what is the company's average days to sell inventory? (Use 365 days in a year. Do not round your intermediate calculations.)

A) 17.5 days
B) 18.25 days
C) 19 days
D) 20.86 days

Question 61

The Abel Company provided the following information from its financial records: $\begin{array}{lclc}\text { Net income } & \$ 285,000 & \text { Common shares outstanding } &440,000 \\&&1 / 1 \\ \text { Common stock dividends }&\$ 27,000 & \text { Common shares outstanding } &505,000 \\&&12 / 31\\ \text { Preferred stock } & \$ 28,500 & \text { Preferred shares }&27,000 \\\text { dividends } & & \begin{array}{l}\text { outstanding 1/1 }&\end{array} \\\text { Sales } & \$ 970,000 & \text { Preferred shares }& 23,000 \\& & \begin{array}{l}\text { outstanding 12/31 } \\\end{array} \end{array}$ What is the amount of the company's earnings per share?

A) $0.60
B) $0.67
C) $0.54
D) $29.38

Question 62

The Fortune Company reported the following income for Year 2: $\begin{array}{lr}\text {Sales}&\$135,000\\\text {Cost of goods sold}&\underline{82,500}\\\text {Gross margin}&\$52,500\\\text {Selling and administrative expense}&\underline{20,000}\\\text { Operating income } & \$ 32,500 \\\text { Interest expense } & \underline{5,500} \\ \text {Income before taxes } & \$ 27,000 \\\text { Income tax expense } & \underline{ 8,100} \\\text { Net income } & \underline{\$ 18,900}\end{array}$ What is the company's number of times interest is earned ratio?

A) 3.4 times
B) 4.9 times
C) 5.9 times
D) None of these answers are correct.

Question 63

The Dennis Company reported net income of $51,000 on sales of $310,000. The company has average total assets of $515,000 and average total liabilities of $110,000. What is the company's return on equity ratio?

A) 16.4%
B) 9.9%
C) 46.36%
D) 12.6%

Question 64

The Miller Company reported gross sales of $850,000, sales returns and allowances of $15,000, and sales discounts of $5,000. The company has average total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio? (Round your answer to 2 decimal places.)

A) 3.32 times
B) 1.67 times
C) 1.66 times
D) 1.70 times

Question 65

The following partial balance sheet is provided for Groome Company: $\begin{array}{lr}\text { Liabilities and stockholders' Equity }\\\\\text { Accounts payable } & \$ 15,300 \\\text { Salaries payable } & 13,000 \\\text { Bonds payable (due in ten years) } & 11,800 \\\text { Common stock, no par } & 27,700 \\\text { Retained earnings } &\underline{ 91,500} \\\text { Total liabilities and stockholders' equity } &\underline{ \$ 159,300}\end{array}$ What is the company's debt to assets ratio? (Rounded to nearest whole percent.)

A) 7%
B) 34%
C) 25%
D) Cannot be determined with the information given.

Question 66

Which of the following statements regarding net margin is incorrect?

A) Net margin refers to the average amount of each sales dollar remaining after all expenses are subtracted.
B) Net margin may be calculated in several ways.
C) The amount of net margin is affected by a company's choices of accounting principles.
D) The smaller the net margin the better.

Question 67

Alpha Company provided the following balance sheet for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 5,400 \\\text { Accounts receivable } & 15,500 \\\text { Inventory } & 18,000 \\\text { Prepaid expenses } & 1,600 \\\text { Plant and equipment, net of depreciation } & 25,000 \\\text { Land } & \underline{ 19,950 }\\\text { Total assets } &\underline{ \$ 85,450}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 4,500 \\\text { Salaries payable } & 11,500 \\\text { Bonds payable (Due in ten years) } & 10,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } &\underline{ 29,450} \\\text { Total liabilities and stockholders' equity }& \$ 85,450\end{array}$
What is the company's plant assets to long-term liabilities ratio?

A) 2.5
B) 4.5
C) 1.7
D) None of these answers are correct.

Question 68

The Martin Company reported net income of $15,000 on gross sales of $80,000. The company has average total assets of $135,000, of which $102,000 is property, plant, and equipment. What is the company's return on investment? (Round your final answer to 1 decimal place.)

A) 18.8%
B) 11.1%
C) 14.7%
D) 12.5%

Question 69

The return on investment measure is also referred to as:

A) Net margin.
B) Return on equity.
C) Return on debt.
D) Return on assets.

Question 70

The Poole Company reported the following income for Year 2: $\begin{array}{lr}\text {Sales}&\$30,000\\\text {Cost of goods sold}&\underline{8,000}\\\text {Gross margin}&\$22,000\\\text {Selling and administrative expense}&\underline{10,000}\\\text { Operating income } & \$ 12,000 \\\text { Interest expense } & \underline{4,000} \\ \text {Income before taxes } & \$8,000 \\\text { Income tax expense } & \underline{ 2,500} \\\text { Net income } & \underline{\$ 5,500}\end{array}$
What is the company's net margin? (Round your answers to the nearest whole percent.)

A) 73%
B) 40%
C) 18%
D) 27%

Question 71

The Martin Company reported net income of $15,700 on gross sales of $86,500. The company has average total assets of $121,700, of which $106,500 is property, plant and equipment. What is the company's return on investment? (Round your final answer to 1 decimal place.)

A) 71.1%
B) 12.9%
C) 18.1%
D) 14.7%

Question 72

You are considering an investment in Frontier Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except:

A) Average days to collect receivables.
B) Asset turnover.
C) Return on investment.
D) Net margin.

Question 73

The Poole Company reported the following income for Year 2: $\begin{array}{lr}\text {Sales}&\$38,000\\\text {Cost of goods sold}&\underline{9,600}\\\text {Gross margin}&\$28,400\\\text {Selling and administrative expense}&\underline{16,600}\\\text { Operating income } & \$ 16,800\\\text { Interest expense } & \underline{5,600} \\ \text {Income before taxes } & \$11,200 \\\text { Income tax expense } & \underline{ 3,360} \\\text { Net income } & \underline{\$ 7,840}\end{array}$
What is the company's net margin? (Round your answer to 2 decimal places.)

A) 44.21%
B) 29.47%
C) 20.63%
D) 74.74%

Question 74

You are considering an investment in Facebook stock and wish to assess the company's position in the stock market. All of the following ratios can be used except:

A) Dividend yield.
B) Earnings per share.
C) Working capital.
D) Price-earnings ratio.

Question 75

The following partial balance sheet is provided for Groome Company: $\begin{array}{lr}\text { Liabilities and stockholders' Equity }\\\\\text { Accounts payable } & \$ 9,000 \\\text { Salaries payable } & 12,000 \\\text { Bonds payable (due in ten years) } & 20,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } &\underline{ 54,000} \\\text { Total liabilities and stockholders' equity } &\underline{ \$ 125,000}\end{array}$ What is the company's debt to assets ratio? (Round your answers to the nearest whole percent.)

A) 49%
B) 16%
C) 33%
D) Cannot be determined with the information given.

Question 76

The Fortune Company reported the following income for Year 2: $\begin{array}{lr}\text {Sales}&\$130,000\\\text {Cost of goods sold}&\underline{80,000}\\\text {Gross margin}&\$50,000\\\text {Selling and administrative expense}&\underline{15,000}\\\text { Operating income } & \$ 35,000 \\\text { Interest expense } & \underline{5,000} \\ \text {Income before taxes } & \$30,000 \\\text { Income tax expense } & \underline{ 10,000} \\\text { Net income } & \underline{\$ 20,000}\end{array}$ What is the company's number of times interest is earned ratio?

A) 7 times
B) 6 times
C) 4 times
D) None of these answers are correct.

Question 77

Which of the following statements regarding the return on equity (ROE) measure is incorrect?

A) ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
B) ROE equals net income divided by average total stockholders' equity.
C) ROE is affected by a company's use of leverage.
D) A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt.

Question 78

Alpha Company provided the following balance sheet for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 4,800 \\\text { Accounts receivable } & 6,950 \\\text { Inventory } & 10,750 \\\text { Prepaid expenses } & 1,800 \\\text { Plant and equipment, net of depreciation } &30,400 \\\text { Land } & \underline{ 23,000 }\\\text { Total assets } &\underline{ \$77,700}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 3,100 \\\text { Salaries payable } & 6,900 \\\text { Bonds payable (Due in ten years) } & 13,000 \\\text { Common stock, no par } &17,000 \\\text { Retained earnings } &\underline{ 37,700} \\\text { Total liabilities and stockholders' equity }& \$77,700\end{array}$

What is the company's plant assets to long-term liabilities ratio?

A) 1.31
B) 2.34
C) 2.85
D) None of these answers are correct.

Question 79

The Dennis Company reported net income of $50,000 on sales of $300,000. The company has average total assets of $500,000 and average total liabilities of $100,000. What is the company's return on equity ratio?

A) 10.0%
B) 16.7%
C) 12.5%
D) 50.0%

Question 80

The Miller Company reported gross sales of $850,000, sales returns and allowances of $5,000 and sales discounts of $5,000. The company has average total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio? (Round your answer to 2 decimal places.)

A) 0.60 times
B) 1.70 times
C) 1.72 times
D) 1.68 times