ACC-240 Chapter 3: Fundamental Interpretations Made from Financial Statement Data
Which of the following would represent a correct calculation of interest earned on a six month, $100 investment?
$100 principal x 10% rate x 6/12 = $5 interest
Which of the following statements are true regarding the acid-test ratio? Choose every correct answer.)
- 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 is sometimes called the quick ratio.
Which of the following statements are true regarding the acid-test ratio? (Choose every correct answer.)
- The acid-test ratio excludes merchandise inventory from the numerator. - The acid-test ratio uses the same denominator as does the current ratio. - The acid-test ratio is a more conservative measure of liquidity than the current ratio.
Calculate the acid-test ratio, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, noncurrent assets = $40,000, current liabilities = $20,000, noncurrent liabilities = $50,000, and stockholders' equity = $30,000. (Round your answer to one decimal place, if necessary.)
2.5 Reason: $50,000 / $20,000 = 2.5
Calculate working capital, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, noncurrent assets = $40,000, current liabilities = $20,000, noncurrent liabilities = $50,000, and stockholders' equity $30,000.
$40,000 Reason: Current assets - Current liabilities $50,000 + $10,000 - $20,000 = $40,000
What are reasons why a well-managed company sometimes attempts to reduce its current ratio? (Choose every correct answer.)
- A high current ratio may be a sign that the company has not made the most productive use of its assets. - Assets like accounts receivable and merchandise inventory do not earn a high ROI. - Funds freed up by reducing the current ratio can be invested in new production equipment or marketing efforts.
Which of the following statements are true regarding the working capital calculation? (Choose every correct answer.)
- Accounts receivable are included in current assets. - Accounts payable are included in current liabilities.
Which of the following statements are true regarding the working capital calculation? (Choose every correct answer.)
- Cash is part of current assets. - Merchandise inventory is part of current assets.
Which of the following statements are true regarding a semilogarithmic graph? (Choose every correct answer.)
- 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 are normally included in a credit application? (Choose every correct answer.)
- Information about bank accounts - Information about employment - Information about salary
Which of the following are normally included in a credit application?
- Information about bank accounts - Information about other credit relationships - Information about liabilities
Which statements correctly describe liquidity?
- It is measured by relating current assets and current liabilities as reported on the balance sheet. - It is a firm's ability to meet its current obligations as they become due.
Which statements correctly describe return on investment (ROI)? (Choose every correct answer.)
- It is sometimes referred to as return on assets (ROA). - It is normally calculated using average total assets as the measure of the investment. - It is normally calculated using net income as the measure of the return.
Which statements about working capital are correct? (Choose every correct answer.)
- It is the excess of a firm's current assets over its current liabilities. - It is expressed as a dollar amount, rather than as a financial ratio.
Which of the following statements are true regarding arithmetic vertical scales? (Choose every correct answer.)
- It may be helpful to truncate the non relevant portion of the vertical scale to highlight the key data ranges being depicted. - The distance between values shown on the vertical axis will always be uniform.
Which statements about turnover are correct? (Choose every correct answer.)
- It relates to the efficiency with which a firm's assets are used in the revenue-generating process. - It is calculated by dividing sales by average total assets.
Common expressions of return on investment (ROI) calculation include which of the following? (Choose every correct answer.)
- Operating income / Average operating assets - Net income / Average total assets
Which of the following statements are true regarding the relationship between the current ratio and the acid-test ratio? (Choose every correct answer.)
- 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 are true regarding the current ratio and the acid-test ratio? (Choose every correct answer.
- The acid-test ratio is a more conservative measure of a firm's liquidity. - Both the current ratio and the acid-test ratio use current liabilities as the denominator.
What do you need to know to calculate the amount of interest earned on an investment? (Choose every correct answer.
- The length of time the funds are invested - The interest rate per year - The principal amount invested
Calculate the acid-test ratio, 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. (Round your answer to one decimal place, if necessary.)
1.7 Reason: ($6,000 + $19,000) / $15,000 = 1.7
If margin is 9 percent and turnover is 2.0 times per year, then ROI is ____ percent.
18 Reason: 9% x 2.0 = 18%
The annual rate of return on a six-month investment of $1,000 that earns a return of $100 is ____.
20% Reason: ($100/$1,000) / 6/12 = 20%
If margin is 4 percent and ROI is 12 percent, then turnover is ____ times per year.
3 Reason: 12% / 4% = 3
Calculate the current ratio 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. (Round your answer to one decimal place, if necessary.)
3.0 Reason: ($6,000 + $19,000 + $20,000) / $15,000 = 3.0
Calculate the current ratio, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, noncurrent assets = $40,000, current liabilities = $20,000, noncurrent liabilities = $50,000, and stockholders' equity $30,000. (Round your answer to one decimal place, if necessary.)
3.0 Reason: Current assets / Current liabilities ($50,000 + $10,000) / $20,000 = 3.0
The annual rate of return on a two-year investment of $1,000 that earns a total return of $100 is ____.
5% Reason: ($100/$1,000) / 2 = 5%
Working capital is calculated as current assets ____ (+ - × /) current liabilities.
Blank 1: -, OR minus
The current ratio is calculated as current assets ____ (+ - ×/) current liabilities.
Blank 1: /
If net income = $20,000 and average stockholders' equity = $80,000, then ROE = ____ percent.
Blank 1: 25
With a semilogarithmic graph, the ____ scale is arithmetic.
Blank 1: horizontal
Return on equity (ROE) is defined as net ____ divided by ____ stockholders' equity.
Blank 1: income Blank 2: average
Return on investment (ROI) is calculated by dividing net ____ by the average total ____ for the year.
Blank 1: income, profit, profits, earning, OR earnings Blank 2: assets
In general, the higher the expected ____ on an investment, the greater the ____ associated with the investment.
Blank 1: return Blank 2: risk
The wider the range of possible outcomes for an investment, the greater the ____.
Blank 1: risk
In the DuPont model for analyzing ROl, turnover is calculated as ____ divided by average total ____.
Blank 1: sales Blank 2: assets
Which statement about trend analysis is correct?
It generally leads to a more meaningful analysis when conducted over several years than does the observation of a single year's ratio result.
How is the amount of interest earned on an investment calculated?
Principal ($) x Rate (%) x Time (in vears)
Return on investment (ROI) is commonly expressed in each of the following ways, except ____.
ROI = Net income / Average stockholders' equity
True or false: The distance between values shown on the vertical axis will always be uniform with arithmetic vertical scale.
True
What is the impact of repayment of a short-term bank loan just before the balance sheet date?
Working capital would not change, but the current ratio would change.
Many well-managed companies attempt to reduce their current ratio because ____.
an overly high current ratio sometimes can be a sign that the company is not making the most productive use of its assets
If the rate of return on an investment was 10 percent ____.
and $500 was invested for one year, then the return on the investment would have been $50
If stockholders' equity at the beginning of the year = $480,000, stockholders' equity at the end of the year = $520,000, and net income = $80,000, then ____.
average stockholders' equity = $500,000, and ROE = 16% Reason: Average stockholders' equity = ($480,000 + $520,000) / 2 = $500,000 ROE = $80,000 / $500,000 = 16%
Working capital refers to the excess of a firm's ____.
current assets over its current liabilities
Trend analysis of ratios ____.
is a meaningful comparison despite the use of different financial accounting alternatives to develop the data used in the ratios
A firm's liquidity refers to ____.
its ability to meet its current obligations as they become due
Return on equity (ROE) is normally calculated using ____.
net income in the numerator and average stockholders' equity in the denominator
If a company had a current ratio of 2.0 and a short-term bank loan was to be repaid just before the balance sheet date, its ____.
working capital would not change, but the current ratio would increase
If margin = 5 percent, net income = $100,000, and turnover = 4.0, then ____.
ROI = 20%, average total assets = $500,000, and sales = $2,000,000 Reason: ROI = 5% x 4.0 = 20%, Sales = $100,000 / 5% = $2,000,000 Average total assets = $2,000,000 / 4 = $500,000
If sales = $500,000, turnover = 1.5, and net income = $75,000, then ____.
ROI = 22.5% and margin = 15% Reason: Margin = $75,000 / $500,000 = 15% ROI = 15% x 1.5 = 22.5%
