Ch. 4 FIN MGMT WINTERS
Ortny Industries has an accounts receivable turnover ratio of 4.3. If Ortny has an accounts receivable balance of $90,000, what is Ortny's average daily credit sales? You may use a 360-day year. A) $387,000 B) $1,548 C) $1,075 D) $3,521
$1,075
Lorna Dome, Inc. has an annual interest expense of $30,000. Lorna Dome's times-interest-earned ratio is 4.2. What is Lorna Dome's operating income? A) $96,000 B) $57,000 C) $126,000 D) $57,600
$126,000
If Challenge Corporation has sales of $2 million per year (all credit) and an average collection period of 35 days, what is its average amount of accounts receivable (assume a 360-day year)? A) $194,444 B) $57,143 C) $5,556 D) $97,222
$194,444
A firm has a return on equity of 20% and a total asset turnover of 4. Assuming a debt ratio of 50% and sales of $1,000,000, calculate net income. A) $25,000 B) $50,000 C) $75,000 D) $100,000
$25,000
Spinnit, Limited has a debt ratio of .57, current liabilities of $14,000, and total assets of $70,000. What is the level of Spinnit, Limited's total liabilities? A) $25,900 B) $24,600 C) $39,900 D) $53,900
$39,900
Sputter Motors has sales of $3,450,000, total assets of $1,240,000, cost of goods sold of $2,550,000, and an inventory turnover of 6.38. What is the amount of Sputter's inventory? A) $421,054 B) $638,112 C) $543,000 D) $399,687
$399,687
Sharky's Loan Co. has an annual interest expense of $30,000. If Sharky's times-interest-earned ratio is 2.9, what is Sharky's Earnings Before Taxes (EBT)? A) $87,000 B) $57,000 C) $117,000 D) $60,000
$57,000
Snort and Smiley Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000, and total assets of $70,000. What is Snort and Smiley's level of current liabilities? A) $8,400 B) $9,400 C) $12,340 D) $10,600
$9,400
In 1996, Snout and Smith, Inc. had a gross profit of $27,000 on sales of $110,000. S & S's operating expenses for 1996 were $13,000, and its net profit margin was .0585. Snout and Smith had no interest expense in 1996. Using the information in Table 2, what was S & S's operating profit margin for 1996? A) 0.245 B) 0.118 C) 0.127 D) 0.157
0.127
Water Works, Inc. has a current ratio of 1.33, current liabilities of $540,000, and inventory of $400,000. What is Water Works, Inc.'s quick ratio? A) 1.11 B) 0.86 C) 1.90 D) 0.59
0.59
Kingsbury Associates has current assets as follows: Cash $3,000 Accounts receivable $4,500 Inventories $8,000 If Kingsbury has a current ratio of 3.2, what is its quick ratio? A) 2.07 B) 1.55 C) 0.48 D) 0.96
1.55
Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith's acid test ratio? A) 1.69 B) 0.54 C) 0.74 D) 1.35
1.69
Billing's Pit Corporation has an accounts receivable turnover ratio of 3.4. What is Billing's Pit Corporation's average collection period? You may use a 360-day year. A) 106 days B) 102 days C) 73 days D) 55 days
106 days
Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity. A) 17.5% B) 19.5% C) 21.5% D) 23.5%
17.5%
Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of $275,000, which consist strictly of notes payable. The firm's operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable. How much is the firm's times-interest-earned? A) 15.6 B) 45.3 C) 20.2 D) 3.0
20.2
Dew Point Dynamite, Inc. generated a 1.23 total asset turnover in its latest fiscal year on assets of $2,112,077. The firm has total liabilities of $950,997. The firm's net profit margin was 10.3%. What is Dew Point's return on equity? Round to the nearest 0.1%. A) 23.1% B) 12.6% C) 5.5% D) 18.2%
23.1%
GAAP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of $1,855,062, and a net profit margin of 2.9%. What is GAAP's return on equity? Round to the nearest 0.1%. A) 8.6% B) 24.0% C) 16.4% D) 4.4%
24.0%
Skrit Corporation has a net profit margin of 15% and a total asset turnover of 1.7. What is Skrit's return on total assets? A) 12.3% B) 25.5% C) 8.8% D) 11.1%
25.5%
Storm King Associates has a total asset turnover ratio of 1.90 and a return on total assets of 7.20%. What is Storm King's net profit margin? A) 3.79 B) 13.68 C) 9.10 D) None of the above
3.79
Wireless Communications has a total asset turnover of 2.66, total liabilities of $1,004,162, and sales revenues of $7,025,000. What is Wireless's debt ratio? A) 38.0% B) 14.3% C) 26.7% D) 81.1%
38.0%
Smart and Smiley Incorporated has an average collection period of 74 days. What is the accounts receivable turnover ratio for Smart and Smiley? You may use a 360-day year. A) 4.86 B) 2.47 C) 2.66 D) 1.68
4.86
Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is: A) 90 days. B) 45 days. C) 75 days. D) 60 days.
45 days.
Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall's debt ratio. A) 30% B) 40% C) 50% D) 60%
50%
A firm's average collection period has decreased significantly from the previous year. Which of the following could possibly explain the results? A) Customers are paying off their accounts quicker. B) Customers are taking longer to pay for purchases. C) The firm has a strict collection policy. D) Both A and C.
Both A and C
If you were given the components of current assets and of current liabilities, what ratio(s) could you compute? A) Quick ratio B) Average collection period C) Current ratio D) Both A and C E) All of the above
Both A and C
Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management? A) Current ratio B) Gross profit margin C) Quick ratio D) Return on investment
Return on investment
Snype, Inc. has an accounts receivable turnover ratio of 7.3. Stork Company has an accounts receivable turnover ratio of 5.0. Which of the following statements is correct? A) Snype's average collection period is less than Stork's. B) Stork's average collection period is less than Snype's. C) Snype has a lower accounts receivable account on average than does Stork Company. D) Stork Company has (on average) a lower accounts receivable account than does Snype
Snype's average collection period is less than Stork's.
By using common size income statements, firms can determine how various expenses as a percentage of total sales changed from period to period
TRUE
Differences in accounting practices limit the use of ratio analysis
TRUE
On a common size balance sheet, total assets are equal to 100%.
TRUE
Which of the following is NOT a component of operating income return on investment? A) Total assets B) Cost of goods sold C) Sales D) Taxes
Taxes
Which of the following is NOT a driving force of the operating profit margin? A) The average selling price for each product B) The ability to control all of the firm's expenses C) The ability to control general and administrative expenses D) The number of units of product sold
The ability to control all of the firm's expenses
Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations? A) The quick ratio (acid test) B) Return on equity C) Total asset turnover D) Operating profit margin
The quick ratio (acid test)
Which of the following financial ratios is the best measure of how effectively a firm's management is serving its stockholders? A) Current ratio B) Debt ratio C) ACP D) Return on equity
Return on equity
Which of the following ratios indicates how rapidly the firm's credit accounts are being collected? A) Debt ratio B) Gross profit margin C) Accounts receivable turnover ratio D) Fixed asset turnover
Accounts receivable turnover ratio
Which of the following will increase return on equity? A) An increase in sales with a proportionate increase in costs and expenses B) An increase in sales relative to the asset base C) A decrease in leverage D) Both A and C
An increase in sales relative to the asset base
Which of the following statements is true? A) As a general rule, management would want to reduce the firm's average collection period. B) As a general rule, management would want to reduce the firm's accounts receivable turnover ratio. C) As a general rule, management would want to increase the firm's average collection period. D) As a general rule, a firm is not financially affected by the amount of time required to collect its accounts receivable.
As a general rule, management would want to reduce the firm's average collection period
Which of the following transactions does NOT affect the quick ratio? A) Land held for investment is sold for cash. B) Equipment is purchased and is financed by a long-term debt issue. C) Inventories are sold for cash. D) Inventories are sold on a credit basis
Equipment is purchased and is financed by a long-term debt issue
On a common size income statement, EBIT is equal to 100%.
FALSE
Which of the following is included in the denominator of the times-interest-earned ratio? A) Lease payments B) Principal payments C) Interest expense D) Gross profit
Interest expense
Why is the quick ratio a more refined measure of liquidity than the current ratio? A) It measures how quickly cash and other liquid assets flow through the company. B) Inventories are omitted from the numerator of the ratio because they are generally the least liquid of the firm's current assets. C) It is a quicker calculation to make. D) Cash is the most liquid current asset.
Inventories are omitted from the numerator of the ratio because they are generally the least liquid of the firm's current assets.
Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In addition, this firm's current ratio and fixed asset turnover ratio also meet industry standards. Based on this information, we can conclude that this firm must have excessive: A) accounts receivable. B) fixed assets. C) debt. D) inventory.
Inventory
A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio? A) Liquidity B) Leverage C) Efficiency D) Profitability
Liquidity
Which of the following is the best indicator of management's effectiveness at generating profits relative to the firm's assets? A) Quick ratio B) Fixed assets turnover C) Operating income return on investment D) Accounts receivable turnover
Operating income return on investment
________ indicates management's effectiveness in managing the firm's income statement. A) Gross profit margin B) Operating profit margin C) Net profit margin D) Return on assets
Operating profit margin
Which of the following is NOT a reason why financial analysts use ratio analysis? A) Ratios help to pinpoint a firm's strengths. B) Ratios restate accounting data in relative terms. C) Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices. D) Some of a firm's weaknesses can be identified through the usage of ratios
Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.
Which of the following is NOT a limitation related to the usage of ratios when reviewing a firm's performance? A) Many firms experience seasonality in their operations. B) Ratios cannot be used to compare firms that are in the same industry if one firm's sales are higher than another firm's. C) Some firms operate in a variety of business lines, which makes it difficult to make comparisons. D) Accounting practices differ widely among firms.
Ratios cannot be used to compare firms that are in the same industry if one firm's sales are higher than another firm's
Which of the following statements is true? A) Current assets consist of cash, accounts receivable, inventory, and net plant, property, and equipment. B) The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio. C) For the average firm, inventory is considered to be more "liquid" than accounts receivable. D) A successful firm's current liabilities should always be greater than its current assets
The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio
Which of the following will help an analyst determine how well a firm is able to meet its debt obligations? A) Total liability turnover B) Times-interest-earned C) Return on debt D) Asset ratio
Times-interest-earned
Which of the following is the best indicator of management's effectiveness at managing the firm's balance sheet? A) Debt ratio B) Total asset turnover C) Times-interest-earned D) Operating profit margin
Total asset turnover
Holding all other variables constant, which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in: A) inventory B) long-term debt C) accounts receivable D) accounts payable
accounts payable
Other things held constant, an increase in ________ will decrease the current ratio. Assume an initial current ratio greater than 1.0. A) accruals B) common stock C) average collection period D) cash
accruals
If a company's average collection period is higher than the industry average, then the company might be: A) enforcing credit conditions upon its customers which are too stringent. B) allowing its customers too much time to pay their bills. C) too tough in collecting its accounts. D) too liquid.
allowing its customers too much time to pay their bills.
A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined. This may be due to: A) an increase in sales. B) an increase in cost of goods sold. C) an increase in inventory purchases. D) a decrease in inventory purchases
an increase in inventory purchases
An increase in ________ will increase common equity. A) paid in capital B) retained earnings C) dividends paid D) both A and C E) all of the above
both A and C
A decrease in the operating income return on investments could be caused by an increase in: A) tax rate. B) cost of goods sold. C) total assets. D) both B and C. E) all of the above.
both B and C
A decrease in ________ will increase gross profit margin. A) cost of goods sold B) depreciation expense C) interest expense D) both A and B
cost of goods sold
If the total asset turnover decreases, then the return on equity will: A) decrease. B) increase. C) not change. D) change, but in an indeterminate way
decrease
Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In addition, this firm's current ratio and acid test ratio also meet industry standards. Based on this information, we can conclude that this firm must have excessive: A) accounts receivable. B) fixed assets. C) debt. D) inventory.
fixed assets
An increase in ________ will decrease the times-interest-earned ratio. A) the tax rate B) gross profit C) interest expense D) common stock
interest expense
The debt ratio is a measure of a firm's: A) leverage. B) profitability. C) liquidity. D) efficiency.
leverage
An increase in the current ratio would indicate an increase in: A) leverage. B) liquidity. C) return on investment. D) operating income.
liquidity
In the times-interest-earned ratio, lease expense is included in: A) the numerator. B) the denominator. C) both the numerator and the denominator. D) neither the numerator nor the denominator
neither the numerator nor the denominator
The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of: A) liquidity ratios. B) profitability ratios. C) coverage ratios. D) leverage ratios.
profitability ratios
An example of a liquidity ratio is the: A) quick ratio. B) debt ratio. C) times-interest-earned. D) return on assets.
quick ratio
Another name for the acid test ratio is the: A) current ratio. B) quick ratio. C) inventory turnover ratio. D) average collection period.
quick ratio
The accounting rate of return on stockholders' investments is measured by: A) return on assets. B) return on equity. C) operating income return on investment. D) realized rate of inflation.
return on equity
The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of: A) cash. B) work in process inventory. C) marketable securities. D) accruals.
work in process inventory