Deck 4: Financial Analysis-Sizing up Firm Performance

Question 1

Marshall Networks,Inc.has a total asset turnover of 2.5 and a net profit margin of 3.5%.The firm has a return on equity of 17.5%.Calculate Marshall's debt ratio.

A)30%
B)40%
C)50%
D)60%

Answer 1

C

Question 2

A firm's average collection period has decreased significantly from the previous year.Which of the following could possibly explain the results?

A)Customers are paying off their accounts quicker.
B)Customers are taking longer to pay for purchases.
C)The firm has a strict collection policy.
D)Both A and C.

Answer 2

D

Question 3

Based on the information in Table 1,the inventory turnover ratio is:

A)0.29 times.
B)2.35 times.
C)0.43 times.
D)3.47 times.

Answer 3

B

Question 4

If you were given the components of current assets and of current liabilities,what ratio(s)could you compute?

A)Quick ratio
B)Average collection period
C)Current ratio
D)Both A and C
E)All of the above

Question 5

Which of the following transactions does NOT affect the quick ratio?

A)Land held for investment is sold for cash.
B)Equipment is purchased and is financed by a long-term debt issue.
C)Inventories are sold for cash.
D)Inventories are sold on a credit basis.

Question 6

Based on the information in Table 1,the current ratio is:

A)2.97.
B)1.46.
C)2.11.
D)2.23.

Question 7

Based on the information in Table 1,and using a 360-day year,the average collection period is:

A)71 days.
B)84 days.
C)64 days.
D)125 days.

Question 8

What is the purpose of using common size balance sheets and common size income statements?

Question 9

The accounting rate of return on stockholders' investments is measured by:

A)return on assets.
B)return on equity.
C)operating income return on investment.
D)realized rate of inflation.

Question 10

Given an accounts receivable turnover of 8 and annual credit sales of $362,000,the average collection period (360-day year)is:

A)90 days.
B)45 days.
C)75 days.
D)60 days.

Question 11

Based on the information in Table 1,the net profit margin is:

A)4.61%.
B)2.94%.
C)1.97%.
D)5.33%.

Question 12

Which of the following statements is true?

A)Current assets consist of cash,accounts receivable,inventory,and net plant,property,and equipment.
B)The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
C)For the average firm,inventory is considered to be more "liquid" than accounts receivable.
D)A successful firm's current liabilities should always be greater than its current assets.

Question 13

Another name for the acid test ratio is the:

A)current ratio.
B)quick ratio.
C)inventory turnover ratio.
D)average collection period.

Question 14

On a common size income statement,EBIT is equal to 100%.

Question 15

By using common size income statements,firms can determine how various expenses as a percentage of total sales changed from period to period.

Question 16

An increase in ________ will increase common equity.

A)paid in capital
B)retained earnings
C)dividends paid
D)both A and C
E)all of the above

Question 17

On a common size balance sheet,total assets are equal to 100%.

Question 18

The debt ratio is a measure of a firm's:

A)leverage.
B)profitability.
C)liquidity.
D)efficiency.

Question 19

Based on the information in Table 1,the debt ratio is:

A)0.70.
B)0.20.
C)0.74.
D)0.42.

Question 20

The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of:

A)liquidity ratios.
B)profitability ratios.
C)coverage ratios.
D)leverage ratios.

Question 21

If a company's average collection period is higher than the industry average,then the company might be:

A)enforcing credit conditions upon its customers which are too stringent.
B)allowing its customers too much time to pay their bills.
C)too tough in collecting its accounts.
D)too liquid.

Question 22

Using the information in Table 2,what was S & S's operating profit margin for 1996?

A)0.245
B)0.118
C)0.127
D)0.157

Question 23

Why is the quick ratio a more refined measure of liquidity than the current ratio?

A)It measures how quickly cash and other liquid assets flow through the company.
B)Inventories are omitted from the numerator of the ratio because they are generally the least liquid of the firm's current assets.
C)It is a quicker calculation to make.
D)Cash is the most liquid current asset.

Question 24

Water Works,Inc.has a current ratio of 1.33,current liabilities of $540,000,and inventory of $400,000.What is Water Works,Inc.'s quick ratio?

A)1.11
B)0.86
C)1.90
D)0.59

Question 25

Snype,Inc.has an accounts receivable turnover ratio of 7.3.Stork Company has an accounts receivable turnover ratio of 5.0.Which of the following statements is correct?

A)Snype's average collection period is less than Stork's.
B)Stork's average collection period is less than Snype's.
C)Snype has a lower accounts receivable account on average than does Stork Company.
D)Stork Company has (on average)a lower accounts receivable account than does Snype.

Question 26

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

A)Current ratio
B)Gross profit margin
C)Quick ratio
D)Return on investment

Question 27

Which of the following statements is true?

A)As a general rule,management would want to reduce the firm's average collection period.
B)As a general rule,management would want to reduce the firm's accounts receivable turnover ratio.
C)As a general rule,management would want to increase the firm's average collection period.
D)As a general rule,a firm is not financially affected by the amount of time required to collect its accounts receivable.

Question 28

Smith Corporation has current assets of $11,400,inventories of $4,000,and a current ratio of 2.6.What is Smith's acid test ratio?

A)1.69
B)0.54
C)0.74
D)1.35

Question 29

Snort and Smiley Incorporated has a debt ratio of .42,noncurrent liabilities of $20,000,and total assets of $70,000.What is Snort and Smiley's level of current liabilities?

A)$8,400
B)$9,400
C)$12,340
D)$10,600

Question 30

Lorna Dome,Inc.has an annual interest expense of $30,000.Lorna Dome's times-interest-earned ratio is 4.2.What is Lorna Dome's operating income?

A)$96,000
B)$57,000
C)$126,000
D)$57,600

Question 31

Kingsbury Associates has current assets as follows:
If Kingsbury has a current ratio of 3.2,what is its quick ratio?

A)2.07
B)1.55
C)0.48
D)0.96

Question 32

Which of the following is included in the denominator of the times-interest-earned ratio?

A)Lease payments
B)Principal payments
C)Interest expense
D)Gross profit

Question 33

The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of:

A)cash.
B)work in process inventory.
C)marketable securities.
D)accruals.

Question 34

A decrease in the operating income return on investments could be caused by an increase in:

A)tax rate.
B)cost of goods sold.
C)total assets.
D)both B and C.
E)all of the above.

Question 35

Smart and Smiley Incorporated has an average collection period of 74 days.What is the accounts receivable turnover ratio for Smart and Smiley? You may use a 360-day year.

A)4.86
B)2.47
C)2.66
D)1.68

Question 36

Spinnit,Limited has a debt ratio of .57,current liabilities of $14,000,and total assets of $70,000.What is the level of Spinnit,Limited's total liabilities?

A)$25,900
B)$24,600
C)$39,900
D)$53,900

Question 37

Billing's Pit Corporation has an accounts receivable turnover ratio of 3.4.What is Billing's Pit Corporation's average collection period? You may use a 360-day year.

A)106 days
B)102 days
C)73 days
D)55 days

Question 38

Which of the following ratios indicates how rapidly the firm's credit accounts are being collected?

A)Debt ratio
B)Gross profit margin
C)Accounts receivable turnover ratio
D)Fixed asset turnover

Question 39

Millers Metalworks,Inc.has a total asset turnover of 2.5 and a net profit margin of 3.5%.The total debt ratio for the firm is 50%.Calculate Millers's return on equity.

A)17.5%
B)19.5%
C)21.5%
D)23.5%

Question 40

Ortny Industries has an accounts receivable turnover ratio of 4.3.If Ortny has an accounts receivable balance of $90,000,what is Ortny's average daily credit sales? You may use a 360-day year.

A)$387,000
B)$1,548
C)$1,075
D)$3,521

Question 41

A decrease in ________ will increase gross profit margin.

A)cost of goods sold
B)depreciation expense
C)interest expense
D)both A and B

Question 42

Kannan Carpets,Inc.has asked you to calculate the company's current ratio for 2001.All you have is a partial balance sheet and some assumptions.Using the information provided,calculate Kannan's current ratio for 2001.
Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2001 sales = $3,000

A)0.3
B)0.8
C)1.6
D)2.2

Question 43

Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition,this firm's current ratio and fixed asset turnover ratio also meet industry standards.Based on this information,we can conclude that this firm must have excessive:

A)accounts receivable.
B)fixed assets.
C)debt.
D)inventory.

Question 44

Sharky's Loan Co.has an annual interest expense of $30,000.If Sharky's times-interest-earned ratio is 2.9,what is Sharky's Earnings Before Taxes (EBT)?

A)$87,000
B)$57,000
C)$117,000
D)$60,000

Question 45

Skrit Corporation has a net profit margin of 15% and a total asset turnover of 1.7.What is Skrit's return on total assets?

A)12.3%
B)25.5%
C)8.8%
D)11.1%

Question 46

Sputter Motors has sales of $3,450,000,total assets of $1,240,000,cost of goods sold of $2,550,000,and an inventory turnover of 6.38.What is the amount of Sputter's inventory?

A)$421,054
B)$638,112
C)$543,000
D)$399,687

Question 47

An example of a liquidity ratio is the:

A)quick ratio.
B)debt ratio.
C)times-interest-earned.
D)return on assets.

Question 48

Which of the following is the best indicator of management's effectiveness at generating profits relative to the firm's assets?

A)Quick ratio
B)Fixed assets turnover
C)Operating income return on investment
D)Accounts receivable turnover

Question 49

Wireless Communications has a total asset turnover of 2.66,total liabilities of $1,004,162,and sales revenues of $7,025,000.What is Wireless's debt ratio?

A)38.0%
B)14.3%
C)26.7%
D)81.1%

Question 50

Dew Point Dynamite,Inc.generated a 1.23 total asset turnover in its latest fiscal year on assets of $2,112,077.The firm has total liabilities of $950,997.The firm's net profit margin was 10.3%.What is Dew Point's return on equity? Round to the nearest 0.1%.

A)23.1%
B)12.6%
C)5.5%
D)18.2%

Question 51

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

A)Liquidity
B)Leverage
C)Efficiency
D)Profitability

Question 52

Other things held constant,an increase in ________ will decrease the current ratio.Assume an initial current ratio greater than 1.0.

A)accruals
B)common stock
C)average collection period
D)cash

Question 53

Which of the following is the best indicator of management's effectiveness at managing the firm's balance sheet?

A)Debt ratio
B)Total asset turnover
C)Times-interest-earned
D)Operating profit margin

Question 54

GAAP,Inc.has total assets of $2,575,000,sales of $5,950,000,total liabilities of $1,855,062,and a net profit margin of 2.9%.What is GAAP's return on equity? Round to the nearest 0.1%.

A)8.6%
B)24.0%
C)16.4%
D)4.4%

Question 55

An increase in ________ will decrease the times-interest-earned ratio.

A)the tax rate
B)gross profit
C)interest expense
D)common stock

Question 56

Kannan Carpets,Inc.has asked you to calculate the company's quick ratio for 2001.All you have is a partial balance sheet and some assumptions.Using the information provided,calculate Kannan's quick ratio for 2001.
Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2001 sales = $3,000

A)0.2
B)0.4
C)0.6
D)0.8

Question 57

Storm King Associates has a total asset turnover ratio of 1.90 and a return on total assets of 7.20%.What is Storm King's net profit margin?

A)3.79
B)13.68
C)9.10
D)None of the above

Question 58

In the times-interest-earned ratio,lease expense is included in:

A)the numerator.
B)the denominator.
C)both the numerator and the denominator.
D)neither the numerator nor the denominator.

Question 59

Heavy Load,Inc.has sales of $3,450,000,total assets of $1,240,000,and total liabilities of $275,000,which consist strictly of notes payable.The firm's operating profit margin is 16.1%,and it pays a 10% rate of interest on its notes payable.How much is the firm's times-interest-earned?

A)15.6
B)45.3
C)20.2
D)3.0

Question 60

Which of the following will help an analyst determine how well a firm is able to meet its debt obligations?

A)Total liability turnover
B)Times-interest-earned
C)Return on debt
D)Asset ratio

Question 61

A firm has a return on equity of 20% and a total asset turnover of 4.Assuming a debt ratio of 50% and sales of $1,000,000,calculate net income.

A)$25,000
B)$50,000
C)$75,000
D)$100,000

Question 62

Use the following information to answer the following question(s).
ABC,Inc.Income Statement (in thousands)


In 1995,ABC's fixed asset turnover is:

A)2.78.
B)5.0.
C)4.6.
D)4.8.

Question 63

Which of the following is NOT a driving force of the operating profit margin?

A)The average selling price for each product
B)The ability to control all of the firm's expenses
C)The ability to control general and administrative expenses
D)The number of units of product sold

Question 64

Holding all other variables constant,which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in:

A)inventory
B)long-term debt
C)accounts receivable
D)accounts payable

Question 65

Use the following information to answer the following question(s).
ABC,Inc.Income Statement (in thousands)


In 1995,ABC's inventory turnover is:

A)23.9.
B)20.3.
C)15.5.
D)16.1.

Question 66

________ indicates management's effectiveness in managing the firm's income statement.

A)Gross profit margin
B)Operating profit margin
C)Net profit margin
D)Return on assets

Question 67

An increase in the current ratio would indicate an increase in:

A)leverage.
B)liquidity.
C)return on investment.
D)operating income.

Question 68

Use the following information to answer the following question(s).
ABC,Inc.Income Statement (in thousands)


Since 1994,ABC's liquidity has:

A)improved.
B)deteriorated.
C)remained the same.
D)been variable across components of the liquidity measures.

Question 69

If the total asset turnover decreases,then the return on equity will:

A)decrease.
B)increase.
C)not change.
D)change,but in an indeterminate way.

Question 70

Corbin,Inc.had net income of $150,000 on sales of $5,000,000 during 1995.In addition,the firm's total assets were $2,500,000,and its capital structure is comprised of 40% debt and 60% equity.What was Corbin's return on equity in 1995?

A)15%
B)2.5%
C)10%
D)Return on equity cannot be determined with the information provided.

Question 71

Use the following information to answer the following question(s).
ABC,Inc.Income Statement (in thousands)


Since 1994,ABC's inventory management has:

A)improved.
B)deteriorated.
C)remained the same.
D)changed but in an indeterminate manner.

Question 72

Use the following information to answer the following question(s).
ABC,Inc.Income Statement (in thousands)


In 1995,ABC's average collection period is:

A)30 days.
B)32.5 days.
C)25 days.
D)35 days.

Question 73

If Challenge Corporation has sales of $2 million per year (all credit)and an average collection period of 35 days,what is its average amount of accounts receivable (assume a 360-day year)?

A)$194,444
B)$57,143
C)$5,556
D)$97,222

Question 74

Which of the following will increase return on equity?

A)An increase in sales with a proportionate increase in costs and expenses
B)An increase in sales relative to the asset base
C)A decrease in leverage
D)Both A and C

Question 75

A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined.This may be due to:

A)an increase in sales.
B)an increase in cost of goods sold.
C)an increase in inventory purchases.
D)a decrease in inventory purchases.

Question 76

Use the following information to answer the following question(s).
ABC,Inc.Income Statement (in thousands)


Since 1994,ABC's efficiency at using its assets has:

A)improved.
B)deteriorated.
C)remained the same.
D)been variable across components of the efficiency measures.

Question 77

Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition,this firm's current ratio and acid test ratio also meet industry standards.Based on this information,we can conclude that this firm must have excessive:

A)accounts receivable.
B)fixed assets.
C)debt.
D)inventory.

Question 78

Use the following information to answer the following question(s).
ABC,Inc.Income Statement (in thousands)


In 1995,the improvement in ABC's return on equity occurred because:

A)ABC used more debt than in 1994.
B)ABC lowered its expenses in 1995 and was,therefore,more profitable.
C)ABC utilized its total assets more efficiently in 1995.
D)None of the above explain the improvement in ABC's return on equity.

Question 79

Which of the following is NOT a component of operating income return on investment?

A)Total assets
B)Cost of goods sold
C)Sales
D)Taxes

Question 80

Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations?

A)The quick ratio (acid test)
B)Return on equity
C)Total asset turnover
D)Operating profit margin