ACCT5312 - Chapter 3

The annual rate of return on a six-month investment of $1,000 that earns a return of $100 is:

($100/$1,000) / 6/12 = 20%

If margin is 4 percent and ROI is 12 percent, then turnover is

3 times per year.

If net income = $10,000, ROE = 20 percent, and stockholders' equity at the end of the year = $55,000, then:

Average stockholders' equity = $50,000 and stockholders' equity at the beginning of the year = $45,000. Reason: Average stockholders' equity = $10,000 / 20% = $50,000 Stockholders' equity at the beginning of the year = $50,000 x 2 = $100,000 - $55,000 = $45,000

If margin = 5 percent, average total assets = $600,000, and ROI = 25 percent, then:

Reason: Turnover = 25% / 5% = 5.0 Sales = $600,000 x 5.0 = $3,000,000 Net income = $3,000,000 x 5% = $150,000

Which of the following statements is true regarding the current ratio?

Rent payable is included in the denominator. The current ratio is calculated as current assets divided by current liabilities. Merchandise inventory is included in the numerator.

A firm's liquidity refers to:

its ability to meet its current obligations as they become due.

The numerator of the acid-test ratio includes most current assets but specifically excludes

merchandise inventory

To calculate the amount of interest earned on an investment, you would need to know:

the interest rate per year the length of time the funds are invested for the principal amount invested

ith a semilogarithmic graph, the ____ scale is logarithmic.

vertical

With a semilogarithmic graph, the ___ scale is arithmetic.

horizontal

Working capital refers to the excess of a firm's:

current assets over its current liabilities.

If stockholders' equity at the beginning of the year = $50,000, stockholders' equity at the end of the year = $70,000, and ROE = 25 percent, then:

Average stockholders' equity = $60,000 and net income = $15,000 Reason: Average stockholders' equity = ($50,000 + $70,000) / 2 = $60,000 Net income = $60,000 x 25% = $15,000

Which of the following statements are true regarding the current ratio and the acid-test ratio?

Both the current ratio and the acid-test ratio use current liabilities as the denominator. The acid-test ratio is a more conservative measure of a firm's liquidity. The acid-test ratio demonstrates the extent to which a firm can meet its current obligations even if none of its inventory can be sold. For any given company, the current ratio will generally be higher than the acid-test ratio.

Which of the following statements is true regarding the current ratio?

Cash is included in the numerator. Accounts payable are included in the denominator. Merchandise inventory is included in the numerator. The current ratio is calculated as current assets divided by current liabilities. Rent payable is included in the denominator.

Which of the following statements are true regarding a semilogarithmic graph?

If the data increases at a constant rate over the period of time shown on the horizontal scale, the plot will be a straight line. Semilogarithmic graphs are frequently used to plot data that is expected to change significantly over time, such as a company's sales data.

Which of the following statements are true regarding the acid-test ratio?

The acid-test ratio is sometimes called the quick ratio. Temporary cash investments are included in the numerator of the acid-test ratio. The acid-test ratio can be calculated as (Cash (including temporary cash investments) + accounts receivable) divided by current liabilities. The acid-test ratio uses the same denominator as does the current ratio. The acid-test ratio excludes merchandise inventory from the numerator. The acid-test ratio is a more conservative measure of liquidity than is the current ratio.

Calculate working capital, assuming that cash = $6,000, land = $105,000, accounts receivable = $19,000, merchandise inventory = $20,000, accounts payable = $15,000, long-term debt = $80,000, and retained earnings = $55,000.

$30,000 Reason: $6,000 + $19,000 + $20,000 - $15,000 = $30,000

The amount of interest earned on an investment is calculated as:

Principal ($) x Rate (%) x Time (in years)

Trend analysis:

for a company over several years generally leads to a more meaningful analysis than does the observation of a single year's ratio result. is a meaningful comparison despite the use of different financial accounting alternatives to develop the data used in the ratios.

Trend analysis of ratios:

is a meaningful comparison despite the use of different financial accounting alternatives to develop the data used in the ratios

Turnover:

is calculated by dividing sales by average total assets. relates to the efficiency with which a firm's assets are used in the revenue-generating process.

Working capital:

is expressed as a dollar amount, rather than as a financial ratio. is the excess of a firm's current assets over its current liabilities.

Liquidity:

is measured by relating current assets and current liabilities as reported on the balance sheet. refers to a firm's ability to meet its current obligations as they become due.

If sales = $100,000, turnover = 2.0, and ROI = 10 percent, then:

net income = $5,000 and margin = 5% Reason: margin = 10% / 2.0 = 5% net income = 5% x $100,000 = $5,000