Deck 13: How Do Managers Use Financial and Nonfinancial Performance Measures

Question 1

Times interest earned indicates the company's ability to cover its interest expense related to long-term debt with current period earnings..

Answer 1

True

Question 2

A trend percentage is calculated as the current year divided by the base year.

Answer 2

True

Question 3

In general,managers prefer expenses as a percent of net sales to increase over time.

Answer 3

True

Question 4

In general,managers prefer the profit margin ratio to decrease over time.

Question 5

The quick ratio is a short-term liquidity ratio.

Question 6

The current ratio is the same as the quick ratio.

Question 7

The price-earnings ratio measures the premium investors are willing to pay for a company's stock relative to its earnings.

Question 8

Most public companies present trend information in their annual reports.

Question 9

If a company's return on assets is higher than its return on shareholders' equity,then it has positive financial leverage.

Question 10

Companies with higher inventory turnover ratios tend to have lower inventory costs,including lower inventory storage and insurance costs,than companies with lower inventory turnover ratios.

Question 11

Return on assets is a market valuation measure.

Question 12

Belden Company has a profit margin ratio of 10%.This means that for every dollar of net sales the company makes,it generates ten dollars in net income.

Question 13

A common-size analysis converts each line of financial statement data to an easily comparable amount measured in percent form.

Question 14

The total assets dollar amount is typically used as the base for a common-size balance sheet analysis.

Question 15

Most accounting computer programs,such as QuickBooks,provide common-size analysis reports.

Question 16

The debt to assets ratio is calculated as total assets divided by total liabilities.

Question 17

If Company A had earnings per share of $4 and Company B had earnings per share of $3,then it is accurate to conclude that Company A was more profitable.

Question 18

Return on assets is calculated as average total assets divided by net income.

Question 19

A relatively high price-earnings ratio indicates investors expect favorable future earnings.

Question 20

A current ratio of greater than 1.0 would indicate that current assets exceed current liabilities.

Question 21

On a common-size income statement,net income should be stated as a percentage of:

A)gross margin.
B)total assets.
C)net sales.
D)current assets.
E)None of the answer choices is correct.

Question 22

On a common-size balance sheet,current liabilities should be stated as a percentage of:

A)net sales.
B)total assets.
C)total liabilities.
D)total long term liabilities.
E)None of the answer choices is correct.

Question 23

Savanah Company reported the following amounts of net income.

Which of the following is the percentage change in net income from Year 2 to Year 3?

A)25.0%
B)(30.0%)
C)20.0%
D)(20.0%)
E)None of the answer choices is correct.

Question 24

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the debt to equity ratio for 2013 (rounded to two decimal places)?

A)0.11
B)0.30
C)0.42
D)0.31
E)None of the answer choices is correct.

Question 25

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the price-earnings ratio at the end of 2013 (rounded to two decimal places)?

A)18.00
B)0.06
C)6.67
D)36.00
E)None of the answer choices is correct.

Question 26

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the profit margin ratio for 2013 (rounded to the nearest tenth of a percent)?

A)10.6%
B)1.1%
C)27.3%
D)38.8%
E)None of the answer choices is correct.

Question 27

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the debt to assets ratio for 2012 (rounded to two decimal places)?

A)0.30
B)0.50
C)2.00
D)2.05
E)None of the answer choices is correct.

Question 28

Which of the following types of analyses would show whether sales increased by $160,000 from one year to the next?

A)A receivables turnover analysis.
B)A common-size analysis.
C)A trend analysis.
D)A profit margin ratio analysis.
E)None of the answer choices is correct.

Question 29

Filmore Inc.has the following information available for 2012 and 2013:

If you were performing a trend analysis on this information,you would say that current liabilities have:

A)increased by 37.5%.
B)increased by 60%.
C)increased by 62.5%.
D)increased by 60%.
E)None of the answer choices is correct.

Question 30

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the debt to equity ratio for 2012 (rounded to two decimal places)?

A)0.50
B)0.13
C)0.88
D)1.00
E)None of the answer choices is correct.

Question 31

Which of the following is the best reason to use a common-size analysis?

A)To change financial information in different currencies into a common currency.
B)To evaluate a company relative to its competitors.
C)To calculate trend percentages.
D)To assess nonfinancial measures of performance.
E)None of the answer choices is correct.

Question 32

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the gross margin ratio for 2013 (rounded to the nearest tenth of a percent)?

A)10.6
B)63.5%
C)27.3%
D)38.8 %
E)None of the answer choices is correct.

Question 33

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the debt to assets ratio for 2013 (rounded to two decimal places)?

A)0.30
B)0.50
C)2.00
D)1.00
E)None of the answer choices is correct.

Question 34

On a common-size balance sheet,equipment should be stated as a percentage of:

A)net sales.
B)total assets.
C)total liabilities.
D)total long-term assets.
E)None of the answer choices is correct.

Question 35

Pilot Company has the following information available for 2012 and 2013:

If you were performing a trend analysis on this information,you would say that property,plant,and equipment has:

A)decreased by 20%.
B)decreased by 25%.
C)decreased by 11.1%.
D)decreased by 80%.
E)None of the answer choices is correct.

Question 36

All of the following ratios are used to evaluate short-term liquidity except:

A)the receivable turnover ratio.
B)the current ratio.
C)the inventory turnover ratio.
D)the gross margin ratio.
E)None of the answer choices is correct.

Question 37

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the market capitalization at the end of 2013?

A)$654,000
B)$324,000
C)$18,000
D)$930,000
E)None of the answer choices is correct.

Question 38

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the return on assets for 2013 (rounded to the nearest tenth of a percent)?

A)19.4%
B)51.7%
C)19.8%
D)197.8%
E)None of the answer choices is correct.

Question 39

Declan Inc.calculated its accounts receivable turnover for 2013 to be 20.0.Both years prior to 2013 showed accounts receivable turnovers to be 12.0.Based on this information,what is the best explanation for the change?

A)The company had fewer accounts receivable in 2013 than the prior two years.
B)The company had more sales in 2013 than in the prior two years.
C)The company had fewer sales in 2013 than in the prior two years.
D)The company took longer to collect their accounts receivable in 2013 than the prior two years.
E)None of the answer choices is correct.

Question 40

Exhibit 13-1
Xavier Company reported the following income statement and balance sheet amounts on December 31,2013.
Inventory and prepaid expenses account for $50,000 of the 2013 current assets.
Average inventory for 2013 is $36,000.
Average net accounts receivable for 2013 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the end of 2013.
The market price per share of common stock is $27 at the end of 2013.
The EPS for 2013 is equal to $1.50 per share.
Refer to Exhibit 13-1.What is the current ratio for 2013 (rounded to two decimal places)?

A)1.80
B)0.72
C)1.44
D)1.39
E)None of the answer choices is correct.

Question 41

All of the following measures focus on long-term solvency except:

A)inventory turnover ratio.
B)times interest earned.
C)debt to assets.
D)debt to equity.
E)None of the answer choices is correct.

Question 42

The following condensed income statement is for Boston Inc.

Prepare a common-size analysis of the income statements for 2012 and 2013.(Round percent computations to one decimal place. )

Question 43

All of the following measures focus on short-term liquidity except:

A)current ratio.
B)debt to assets ratio.
C)quick ratio.
D)receivables turnover ratio.
E)None of the answer choices is correct.

Question 44

All of the following account balances would typically be used to calculate a current ratio except:

A)sales.
B)accounts receivable.
C)accounts payable.
D)cash.
E)None of the answer choices is correct.

Question 45

The following debt to equity ratio is for two companies in the same industry.

Which of the following statements is always true?

A)Company A is more profitable than Company B.
B)Company B is more profitable than Company A.
C)Company A is more highly leveraged than Company B.
D)Company B is more highly leveraged than Company A.
E)None of the answer choices is correct.

Question 46

Which of the following types of measures focuses primarily on income statement information?

A)long-term solvency measures.
B)short-term liquidity measures.
C)market valuation measures.
D)profitability measures.
E)None of the answer choices is correct.

Question 47

Which of the following is the best explanation of a company's inventory turnover of 12.0 for the year 2013?

A)the company averages about 12 months' sales in inventory.
B)The company averages about 12 days' sales in inventory.
C)The company averages about one month's sales in inventory.
D)The company averages about 12 days from the time an item is sold until the cash is collected.
E)None of the answer choices is correct.

Question 48

Which of the following types of companies would have the highest inventory turnover ratios?

A)A company that sells grand pianos.
B)An automobile dealer.
C)A custom home builder.
D)A grocery store.
E)None of the answer choices is correct.

Question 49

All of the following are nonfinancial measures that might be used by transportation companies such as FedEx except:

A)percentage of damage-free goods.
B)percentage of on-time deliveries.
C)average collection period.
D)hours of employee training.
E)None of the answer choices is correct.

Question 50

Assume that Crimson Company's market price per share remains at $20 over a two-year period.Over the same two-year period,Crimson sells an additional 100,000 shares of stock to investors.Net income was the same for both years.The issuance of additional shares will have the following effect for the company over the two-year period:

A)Market capitalization will decrease.
B)Market capitalization will increase.
C)Market capitalization will stay the same.
D)Earnings per share will increase.
E)None of the answer choices is correct.

Question 51

All of the following are measures used in the balanced scorecard except:

A)external business process.
B)customer.
C)learning and growth.
D)internal business process.
E)None of the answer choices is correct.

Question 52

During 2013,Victory Inc.had beginning accounts receivable of $42,000 and ending accounts receivable of $48,000.Its net sales of $450,000 are composed of 20% cash sales and 80% credit sales.Based on this information,what is Victory's receivables turnover ratio?

A)7.5 times
B)8.0 times
C)10.0 times
D)2.0 times
E)None of the answer choices is correct.

Question 53

If net sales is growing at a greater rate than cost of goods sold,which of the following will always be true?

A)The gross margin ratio will decrease.
B)The gross margin ratio will increase.
C)Net income will increase.
D)Net income will decrease.
E)None of the answer choices is correct.

Question 54

Dresden Inc.has net sales of $1,200,000,cost of goods sold of $900,000,operating expenses of $200,000,interest expense of $30,000,and income tax expense of $10,000.The company's gross margin ratio is (round to the nearest tenth of a percent):

A)8.3%
B)5.0%
C)10.0%
D)25.0%
E)None of the answer choices is correct.

Question 55

All of the following measures evaluate profitability except:

A)profit margin ratio.
B)return on assets.
C)market capitalization.
D)gross margin ratio.
E)None of the answer choices is correct.

Question 56

The following condensed income statement is for Boston Inc.

Prepare a trend analysis of the income statements from 2012 to 2013.(Round percent computations to one decimal place. )

Question 57

Albany Company has net income before taxes of $90,000,interest expense of $36,000 and an income tax rate of 20%.Based on this information,the company's times interest earned ratio is:

A)12.5 times
B)2.5 times
C)3.5 times
D)4.0 times
E)None of the answer choices is correct.

Question 58

All of the following accounts would typically be used to calculate the quick ratio except:

A)cash.
B)equipment.
C)accounts payable.
D)accounts receivable.
E)None of the answer choices is correct.

Question 59

The following condensed income statement is for Mason Inc.


Compute the following ratios for 2013,and provide a brief explanation after each ratio (round percentage computations to one decimal place and earnings per share to two decimal places):
(1)Gross margin ratio
(2)Profit margin ratio
(3)Return on assets
(4)Return on common shareholders' equity
(5)Earnings per share (assume weighted average shares outstanding totaled 2,900,000 shares)
(6)Market capitalization (assume 3,000,000 shares were issued and outstanding at December 31,2013,and the market price was $9.00 per share)
(7)Price-earnings ratio

Question 60

During 2013,Columbia Inc.had beginning accounts receivable of $680,000 and ending accounts receivable of $760,000.Its net sales of $4,500,000 are composed of 20% cash sales and 80% credit sales.Based on this information,what is Columbia's average collection period?

A)58.4 days
B)292.0 days
C)73.0 days
D)5.0 days
E)None of the answer choices is correct.

Question 61

The following condensed income statement is for Mason Inc.


Compute the following long-term solvency ratios for 2013,and provide a brief explanation after each ratio (round computations to two decimal places):
(1)Debt to assets
(2)Debt to equity
(3)Times interest earned

Question 62

The following condensed income statement is for Mason Inc.


Compute the following ratios for 2013,and provide a brief explanation after each ratio (round computations to two decimal places):
(1)Current ratio
(2)Quick ratio
(3)Receivables turnover ratio
(4)Average collection period
(5)Inventory turnover ratio
(6)Average sale period