CQ 11 - ACCY 200 Exam 2

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.

If management wanted to increase the financial leverage of the firm, it would: A. raise additional capital by selling common stock. B. use excess cash to purchase preferred stock for the treasury. C. raise additional capital by selling fixed interest rate long-term bonds. D. try to increase its ROI by increasing asset turnover. E. concentrate on improving the firm's working capital management.

C. raise additional capital by selling fixed interest rate long-term bonds.

If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is: A. Depleting its inventories. B. Having trouble collecting its receivables. C. Purchasing too much treasury stock. D. Paying "extra" dividends. E. Carrying excess inventories.

E. Carrying excess inventories.

Assume that Kulpa 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.

The comparison of activity measures (such as turnover ratios) of different companies is complicated by the fact that: A. dollar amounts of working capital may be significantly different. B. dollar amounts of assets may be significantly different. C. only one of the companies may have preferred stock outstanding. D. the number of shares of common stock issued may be significantly different. E. different inventory cost flow assumptions may be used.

E. different inventory cost flow assumptions may be used.

Return on Investment (ROI) is computed as:

Net income divided by average total assets.

Management's use of resources can best be evaluated by focusing on measures of: book value. activity. liquidity. leverage.

activity.

Financial leverage: usually has no bearing on the risk associated with a company. arises because most borrowed funds have a variable interest rate. arises because most borrowed funds have a fixed interest rate. is a concept that does not apply to individuals.

arises because most borrowed funds have a fixed interest rate.

For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is:

Raises the current ratio.

Working capital includes all of the following accounts except:

Retained Earnings

Another term for return on investment is: Return on retained earnings. Return to sender. Return on equity. Return on assets.

Return on assets.

The comparison of activity measures of different companies is complicated by the fact that: only one of the companies may have preferred stock outstanding. dollar amounts of assets may be significantly different. the number of shares of common stock issued may be significantly different. different inventory cost flow assumptions may be used.

different inventory cost flow assumptions may be used.

The price/earnings ratio: is a measure of the relative expensiveness of a firm's common stock. can be used to determine the cash dividend to be received during the year. does not usually change by more than 1.0 (e.g. 8.2 to 9.2) during the year. is calculated by dividing the earnings multiple by net income.

is a measure of the relative expensiveness of a firm's common stock.

The inventory turnover calculation: is an alternative way of expressing the number of days' sales in inventory. requires knowledge of the inventory cost flow assumption being used. is wrong unless cost of goods sold is used in the numerator. is wrong unless sales is used in the numerator.

is an alternative way of expressing the number of days' sales in inventory.

Another term for the price/earnings ratio is: sales multiple. cost ratio. earnings multiple. profit ratio.

earnings multiple.

A vertical common size income statement:

expresses all items within any given year's income statement as a *percentage of net sales* for that given year.

Asset turnover calculations: are made by dividing sales for the year by the asset balance at the end of the year. should be evaluated by observing the turnover trend over a period of time. are made by dividing the average asset balance during the year by the sales for the year. communicate information about how promptly the entity pays its bills.

should be evaluated by observing the turnover trend over a period of time.

A higher P/E ratio means that: investors are wary of the stock. earnings are expected to decrease. the stock is relatively expensive. the stock is more reasonably priced.

the stock is relatively expensive.

Return on equity: relates net income and stockholders' equity. relates dividends and turnover. will be the same as return on investment. relates dividends and stockholders' equity.

relates net income and stockholders' equity.

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

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

Return on Investment (ROI) can be described or computed in each of the following ways, except:

Amount Invested / Amount of Return = ROI.

The return on investment measure of performance is: A. relevant only to business enterprises. B. used by individuals to compare investment performance. C. calculated using sales as the amount of return. D.cal culated using total assets at the beginning of the period as the amount of investment. E. calculated using average owners' equity as the amount of investment.

B. used by individuals to compare investment performance.

Financial statement ratios support informed judgments and decision making most effectively when A. when viewed as a trend of entity data. B. when the trend of entity data is compared to the trend of industry data. C. when compared to an industry average for the most recent year. D. when viewed for a single year.

B. when the trend of entity data is compared to the trend of industry data.

Which of the following accounts is part of working capital?

Merchandise Inventory

CQ 11 QUIZ

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An individual interested in making a judgment about the profitability of a company should: A. review the trend of working capital for several years. B. calculate the company's ROE for the most recent year. C. review the trend of the company's ROI for several years. D. compare the company's price/earnings ratio trend the most recent year with the industry average price/earnings ratio trend for the most recent year. E. review the trend in the company's book value per share for several years.

C. review the trend of the company's ROI for several years.

The dividend payout ratio describes: A. the relationship of dividends per share to market price per share. B. the percentage change in dividends this year compared to last year. C. the proportion of earnings paid as dividends. D. dividends as a percentage of the price/earnings ratio

C. the proportion of earnings paid as dividends.

Many financial analysts substitute one amount for another in making ratio analysis comparisons in order to better achieve inter-company or company-to-industry data comparability. Which of the substitutions described below would not achieve better data comparability (for the ratio indicated) under any situation? A. Cost of goods sold for sales--in the numerator of the inventory turnover ratio. B. Cost of plant and equipment for net book value--in the numerator of the plant and equipment turnover ratio. C. Expected future earnings per share for current earnings per share--in the denominator of the price/earnings ratio. D. Average net assets for average total assets--in the denominator of the return on investment ratio. E. Number of working days in a year for 365--in the denominator of the number of days' sales in accounts receivable ratio.

D. Average net assets for average total assets--in the denominator of the return on investment ratio.

An advantage of the DuPont model for calculating ROI is that it: A. it uses stockholders' equity. B. it is easier to use than the straightforward ROI formula. C. it uses average assets and the straightforward ROI formula does not. D. it focuses on asset utilization as well as net income.

D. it focuses on asset utilization as well as net income.

A potential creditor's judgment about granting credit would be most influenced by the potential customer's A. current ratio at the end of the prior fiscal year. B. most recent acid-test ratio. C. trend of acid-test ratio over the past three years. D. practice with respect to taking cash discounts offered by current suppliers. E. price/earnings ratio.

D. practice with respect to taking cash discounts offered by current suppliers.

Which of the following is not a category of financial statement ratios? A. financial leverage B. liquidity C. profitability D. reliability E. activity

D. reliability

Which of the following is(are) an example of a measure of leverage? Debt payout ratio. Debt/equity ratio. Debt yield. Preferred dividend coverage ratio.

Debt/equity ratio.

If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be: Would depend on the amount borrowed. Lower. Higher. The same.

The same.