ACCY 200 ch. 3

which of the following accounts is part of working capital? a. retained earnings b. sales c. merchandise inventory d. common stock e. long-term debt

c . merchandise inventory

which of the following would not decrease working capital: a. a decrease in cash b. an increase in accounts payable c. an increase in merchandise inventory d. a decrease in accounts receivable e. all of the above decrease working capital

c. an increase in merchandise inventory

rate

interest rate per year expressed as a percentage

ASSETS =

liabilities + stockholders equity

ROI =

margin x turnover

ROI

operating income/average operating assets

interest =

principal x rate x time

acid-test ratio (definition)

ratio of the sum of cash and accounts receivable to current liabilities. a primary measure of a firm's liquidity (also called "quick ratio")

liquidity

refers to a firm's ability to meet its current financial obligations

interest rate

the % amount used, together with principal and time to calculate interest

working capital

the difference between current assets and current liabilities. a measure of a firm's liquidity

interest

the income or expense from investing or borrowing $$

time

the length of time the refunds are invested or borrowed, expressed in years

return on equity

the percentage of net income divided by average SE for the fiscal period in which the net income was earned; frequently referred as ROE

margin

the percentage of net income to net sales; sometimes margin is calculated using operating income or other intermediate subtotals of the income statement. The term also can refer to the amount of gross profit, operating income, or net income.

asset turnover

the quotient of sales divided by average assets for the year or other fiscal period

return on investment (ROI)

the rate of return on investment; frequently referred to as ROI. Sometimes referred to as Return on Assets or ROA. a primary measure of a firm's profitability

current ratio (definition)

the ratio of current assets to current liabilities. a primary measure of firm's liquidity

return on investment (ROI) can be described or computed in each of the following ways except: a. amount invested/amount of return=ROI b. net income/average total assets=ROI c. (net income/sales)x(sales/average total assets)=ROI d. turnover x margin=ROI e. all of the above

a. amount invested/amount of return=ROI

an advantage of the DuPoint model for calculating ROI is that: a. focuses on asset utilization as well as net income b. is easier to use than straightforward ROI formula c. uses average total assets whereas straightforward ROI formula does not d. uses average total stockholders; equity e. breaks ROI into its margin and return components

a. focuses on asset utilization as well as net income

For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is: a. raises the current ratio b. lowers the current ratio c. doesn't affect the current ratio d. depends on the amount paid e. not determinable based on the facts given

a. raises the current ratio

principal

amount of $ invested or borrowed

Dupont model

an expansion of the return on investment calculation to margin x turnover

acid test ratio

(Cash + Accounts Receivable) / Current Liabilities

AVG ROI based on operating income

10-15%

AVG margin based on operating income

10-15%

AVG margin based on net income

5-10%

ROI based on net income normally ranges:

8-12%

semilogarithmic graph

A graph format in which the vertical axis is a logarithmic scale.

return on equity=

Net Income / Average Stockholders' Equity

rate of return

a % calculated by dividing the amount of return on an investment for a period of time by the average amount invested for the period. a primary measure of profitability

risk

a concept that describes the range of possible outcomes from an action. The greater the range of possible outcomes, the greater the risk

the return on investment measure of performance is: a. relevant only to business enterprises b. used by individuals to compete investment performance c. calculated using sales as the amount of return d. calculated using total assets at the beginning of the period as the amount of investment e. calculated using average stockholders; equity as the amount of investment

c. calculated using sales as the amount of return.

working capital includes all of the following accounts except: a. accounts payable b. cash c. retained earnings d. merchandise inventory e. accounts receivable

c. retained earnings

current ratio

current assets/current liabilities

return on equity: a. will be the same as return on investment b. relates dividends and turnover c. relates dividends and stockholders' equity d. relates net income and stockholders; equity e. uses net cash flows as the measure of return

d. relates net income and stockholders' equity

financial statement ratios support informed judgments and decision making most effectively when: a. viewed for a single year b. viewed as a trend of entity data c. compared to an industry average for the most recent year d. the trend of entity data is compared to the trend of industry data e. the trend of entity data is compared to industry data for the most recent year

d. the trend of entity data is compared to the trend of industry data.

assume that kelp company has a current ratio of 0.7. which of the following transactions would increase this ratio? a. paying off long-term debt with cash b. selling merchandise inventory at cost for cash c. collecting accounts receivable in cash d. paying off accounts payable with cash e. purchasing merchandise inventory on credit

e. purchasing merchandise inventory on credit

trend analysis

evaluation of the trend of data over time