Deck 3: Financial Statement Analysis

Question 1

To analyze the firm's financial performance, the following types of ratio analyses EXCEPT___________may be used.

A) marginal analysis
B) time-series analysis
C) cross-section analysis
D) combined analysis

Answer 1

marginal analysis

Question 2

As the financial leverage multiplier increases this may result in

A) an increase in the net profit margin and return on investment, due to the increase in interest expense as debt increases.
B) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases.
C) a decrease in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases.
D) an increase in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases.

Answer 2

a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases.

Question 3

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The debt ratio for Dana Dairy Products in 2002 is (See Figure 3.2)

A) 11 percent.
B) 44 percent.
C) 50 percent.
D) 55 percent.

Answer 3

55 percent.

Question 4

Over the last year, a firm's average collection period increased from 30 days to 45 days. Thisincrease could be the result of

A) a slowdown in the economy.
B) the deterioration of the product you sell.
C) a loss of the accounts receivable manager due to a heart attack.
D) all of the above.

Question 5

Balance Sheet
Cole Eagan Enterprises
December 31, 2002
$\begin{array}{llll}\text { Cash } & \$ 4,500 & \text { Accounts Payable } & \$ 10,000 \\\text { Accounts Receivable } && \text { Notes Payable } \\\text { Inventories } && \text { Accruals }&1,000 \\\text { Total Current Assets } && \text { Total Current Liab. } \\\text { Net Fixed Assets } && \text { Long-Term Debt } \\\text { Total Assets } && \text { Stockholders' Equity } \\&& \text { Total Liab. \& S.E. }\end{array}$

Information (2002 values)
1. Sales totaled $\$ 110,000$
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0 .
4. There are 360 days in the year.
5. The average collection period was 65 days
6. The current ratio was 2.40 .
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent

-Net fixed assets for CEE in 2002 were________

A) $45,484
B) $69,341
C) $48,975
D) $54,511

Question 6

The___________ ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.

A) return on total assets
B) times interest earned
C) debt
D) net profit margin

Question 7

__________is a term used to describe the magnification of risk and return introduced through the useof fixed cost financing such as preferred stock and long-term debt.

A) Financial leverage
B) The acid-test
C) Fixed-payment coverage
D) Operating leverage

Question 8

Balance Sheet
Cole Eagan Enterprises
December 31, 2002
$\begin{array}{llll}\text { Cash } & \$ 4,500 & \text { Accounts Payable } & \$ 10,000 \\\text { Accounts Receivable } && \text { Notes Payable } \\\text { Inventories } && \text { Accruals }&1,000 \\\text { Total Current Assets } && \text { Total Current Liab. } \\\text { Net Fixed Assets } && \text { Long-Term Debt } \\\text { Total Assets } && \text { Stockholders' Equity } \\&& \text { Total Liab. \& S.E. }\end{array}$

Information (2002 values)
1. Sales totaled $\$ 110,000$
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0 .
4. There are 360 days in the year.
5. The average collection period was 65 days
6. The current ratio was 2.40 .
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent

-Accounts receivable for CEE in 2002 was__________

A) $19,861
B) $14,056
C) $14,895
D) $18,333

Question 9

A firm with a substandard net profit margin can improve its return on total assets by

A) increasing its debt ratio.
B) increasing its total asset turnover.
C) decreasing its total asset turnover.
D) decreasing its fixed asset turnover.

Question 10

As a firm's cash flows become more predictable,

A) current liabilities will decrease.
B) the current ratio will expand.
C) the return on equity will increase.
D) current assets will decrease.

Question 11

Ratios provide a______________ measure of a company's performance and condition.

A) qualitative
B) gross
C) definitive
D) relative

Question 12

The __________of a business firm is measured by its ability to satisfy its short-term obligations as they come due.

A) activity
B) debt
C) liquidity
D) profitability

Question 13

In the DuPont system, the return on total assets (asset) is equal to

A) (net profit margin) × (fixed asset turnover).
B) (return on equity) × (financial leverage multiplier).
C) (return on equity) × (total asset turnover).
D) (net profit margin) × (total asset turnover).

Question 14

The ____________measures the overall effectiveness of management in generating profits with its available assets.

A) return on equity
B) return on total assets
C) price/earnings ratio
D) net profit margin

Question 15

A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might

A) improve its collection practices and pay accounts payable, thereby decreasing current liabilities and increasing the current and quick ratios.
B) increase inventory, thereby increasing current assets and the current and quick ratios.
C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios.
D) improve its collection practices, thereby increasing cash and increasing its current and quick ratios.

Question 16

The two categories of ratios that should be utilized to assess a firm's true liquidity are the

A) liquidity and profitability ratios.
B) liquidity and debt ratios.
C) current and quick ratios.
D) liquidity and activity ratios.

Question 17

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-Since 2001, the liquidity of Dana Dairy Products_________

A) remained the same
B) has improved
C) has deteriorated
D) cannot be determined

Question 18

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-Dana Dairy Products' gross profit margin is inferior to the industry standard.

A) excessive interest expense.
B) the high cost of goods sold.
C) excessive selling and administrative expenses.
D) a high sales price.

Question 19

The ___________measures the return on owners' (both preferred and common stockholders) investment in the firm.

A) net profit margin
B) return on equity
C) return on total assets
D) price/earnings ratio

Question 20

The analyst should be careful when evaluating a ratio analysis that

A) the dates of the financial statements being compared are from the same time.
B) pre-audited statements are used.
C) the overall performance of the firm may be judged on a single ratio.
D) all of the above.

Question 21

The ___________measures the percentage of each sales dollar remaining after ALL expenses,including taxes, have been deducted.

A) operating profit margin
B) gross profit margin
C) earnings available to common shareholders
D) net profit margin

Question 22

Present and prospective shareholders are mainly concerned with a firm's

A) risk and return.
B) leverage.
C) profitability.
D) liquidity.

Question 23

Inflation can distort

A) accumulated depreciation.
B) interest write-offs.
C) salaries and wages.
D) inventory costs.

Question 24

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The current ratio for Dana Dairy Products in 2002 is________

A) 0.91
B) 1.58
C) 1.10
D) 0.63

Question 25

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The average collection period for Dana Dairy Products in 2002 is

A) 11 days.
B) 25 days.
C) 35 days.
D) 32 days.

Question 26

In the DuPont system, the return on equity is equal to

A) (stockholders' equity) × (financial leverage multiplier).
B) (net profit margin) × (total asset turnover).
C) (return on total assets) × (financial leverage multiplier).
D) (return on total assets) × (total asset turnover).

Question 27

___________is used by financial managers as a structure for dissecting the firm's financial statementsto assess its financial condition.

A) A statement of cash flows
B) A cross-sectional analysis
C) The DuPont system of analysis
D) A common-size income statement

Question 28

Two frequently cited ratios of profitability that can be read directly from the common-size income statement are:

A) the gross profit margin and the net profit margin.
B) the gross profit margin and the earnings per share.
C) the gross profit margin and the return on total assets.
D) the earnings per share and the return on total assets.

Question 29

In ratio analysis, a comparison to a standard industry ratio is made to isolate__________ deviations from the norm.

A) standard
B) negative
C) positive
D) any

Question 30

Without adjustment, inflation may tend to cause_________ firms to appear more efficient andprofitable than _________ firms, all else being the same.

A) newer; older
B) older; newer
C) large; smaller
D) smaller; larger

Question 31

_________are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm.

A) Customers
B) Borrowers and buyers
C) Stockholders
D) Lenders and suppliers

Question 32

A firm with a total asset turnover lower than industry standard may have

A) excessive cost of goods sold.
B) insufficient fixed assets.
C) excessive debt.
D) insufficient sales.

Question 33

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The inventory management at Dana Dairy Products__________since 2001.

A) remained the same
B) has improved slightly
C) has deteriorated
D) cannot be determined

Question 34

An increase in financial leverage will result in________in the return on equity.

A) an increase
B) no change
C) a decrease
D) an undetermined change

Question 35

The DuPont system merges the income statement and balance sheet into two summary measures ofprofitability:

A) return on total assets and return on equity.
B) net profit margin and return on equity.
C) net profit margin and price/earning ratio.
D) net profit margin and return on total assets.

Question 36

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The net working capital for Dana Dairy Products in 2002 is__________

A) $1,425
B) -$1,425
C) $14,250
D) $10,325

Question 37

The higher the value of__________ratio, the better able the firm is to fulfill its interest obligations.

A) debt
B) times interest earned
C) average payment period
D) average collection period

Question 38

A firm with a total asset turnover lower than industry standard and a current ratio which meetsindustry standard must have excessive

A) fixed assets.
B) debt.
C) accounts receivable.
D) inventory.

Question 39

A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive

A) dividend payments.
B) principal payments.
C) cost of goods sold.
D) general and administrative expenses.

Question 40

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The return on equity for Dana Dairy Products for 2002 is

A) 0.6 percent.
B) 50 percent.
C) 5.6 percent.
D) 0.9 percent.

Question 41

The___________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales.

A) retained earnings statement
B) common-size income statement
C) profit and loss statement
D) source and use statement

Question 42

An analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement is called

A) combined analysis.
B) time-series analysis.
C) benchmarking.
D) none of the above.

Question 43

The ___________indicates the percentage of each sales dollar remaining after the firm has paid for its goods.

A) operating profit margin
B) gross profit margin
C) earnings available to common shareholders
D) net profit margin

Question 44

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The return on total assets for Dana Dairy Products for 2002 is

A) 5.5 percent.
B) 25 percent.
C) 2.5 percent.
D) 0.9 percent.

Question 45

Time-series analysis is often used to

A) standardize results.
B) reflect performance relative to some norm.
C) assess developing trends.
D) correct errors of judgement.

Question 46

A decrease in total asset turnover will result in__________in the return on equity.

A) an increase
B) an undetermined change
C) a decrease
D) no change

Question 47

A firm with a substandard return on total assets can improve its return on equity, all else remainingthe same, by

A) decreasing its debt ratio.
B) increasing its total asset turnover.
C) increasing its debt ratio.
D) decreasing its total asset turnover.

Question 48

A firm with sales of $1,000,000, net income after taxes of $30,000, total assets of $1,500,000, and total liabilities of $750,000 has a return on equity of

A) 4 percent.
B) 15 percent.
C) 20 percent.
D) 3 percent.

Question 49

_________analysis involves comparison of current to past performance and the evaluation ofdeveloping trends.

A) Quantitative
B) Marginal
C) Time-series
D) Cross-sectional

Question 50

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The inventory turnover for Dana Dairy Products in 2002 is__________

A) 5
B) 25
C) 20
D) 43

Question 51

A firm with a total asset turnover lower than the industry standard may have

A) excessive debt.
B) insufficient sales.
C) excessive cost of goods sold.
D) insufficient fixed assets.

Question 52

If a project was financed with 50% equity and 50% debt costing 8%, the return on equity would be___________assuming the project pays a _________return.

A) 10%; 8%
B) 24%; 16%
C) 16%; 10%
D) 28%; 21%

Question 53

__________evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.

A) Complete
B) Definitive
C) Conclusive
D) Inconclusive

Question 54

When assessing the fixed-payment coverage ratio,

A) the higher its value, the higher is the firm's liquidity.
B) preferred stock dividend payments can be disregarded.
C) the lower its value the more risky is the firm.
D) the lower its value, the lower is the firm's financial leverage.

Question 55

A firm with a total asset turnover lower than the industry standard and a current ratio which meetsthe industry standard may have

A) excessive inventory.
B) excessive accounts receivable.
C) excessive debt.
D) excessive fixed assets.

Question 56

The following groups of ratios provide the information critical to the short-run operation of the firm:

A) liquidity, activity, and common stock.
B) liquidity, activity, and debt.
C) liquidity, activity, and profitability.
D) activity, debt, and profitability.

Question 57

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-If Dana Dairy Products has credit terms which specify that accounts receivable should be paid in 25 days, the average collection period__________since 2001.

A) has improved
B) has deteriorated
C) remained the same
D) cannot be determined

Question 58

Which of the following ratios is difficult for creditors of a firm to analyze because the data is usually not available in published financial statements?

A) quick ratio
B) average age of inventory
C) operating leverage
D) average payment period

Question 59

Which of the following firms would have the slowest inventory turnover ratio?

A) Mac's convenience stores
B) Canada Safeway
C) Prestons Jewellers
D) Walmart

Question 60

Balance Sheet
Cole Eagan Enterprises
December 31, 2002
$\begin{array}{llll}\text { Cash } & \$ 4,500 & \text { Accounts Payable } & \$ 10,000 \\\text { Accounts Receivable } && \text { Notes Payable } \\\text { Inventories } && \text { Accruals }&1,000 \\\text { Total Current Assets } && \text { Total Current Liab. } \\\text { Net Fixed Assets } && \text { Long-Term Debt } \\\text { Total Assets } && \text { Stockholders' Equity } \\&& \text { Total Liab. \& S.E. }\end{array}$

Information (2002 values)
1. Sales totaled $\$ 110,000$
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0 .
4. There are 360 days in the year.
5. The average collection period was 65 days
6. The current ratio was 2.40 .
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent

-Total assets for CEE in 2002 were_________

A) $58,603
B) $124,300
C) $45,895
D) $97,345

Question 61

The primary concern of creditors when assessing the strength of a firm is the firm's

A) profitability.
B) share price.
C) leverage.
D) short-term liquidity.

Question 62

The ___________measures the percentage of profit earned on each sales dollar before interest and taxes.

A) gross profit margin
B) operating profit margin
C) net profit margin
D) earnings available to common shareholders

Question 63

The financial leverage multiplier is an indicator of a corporation utilizing

A) current liabilities.
B) financial leverage.
C) long-term debt.
D) operating leverage.

Question 64

The analyst should be careful when evaluating ratios that

A) audited statements are used.
B) the dates of the financial statements being compared are the same.
C) the overall performance of the firm is not judged on a single ratio.
D) all of the above.

Question 65

__________ratios are a measure of the speed with which various accounts are converted into sales or cash.

A) Liquidity
B) Debt
C) Activity
D) Profitability

Question 66

The three summary ratios basic to the DuPont system of analysis are

A) net profit margin, total asset turnover, and return on equity.
B) net profit margin, total asset turnover, and equity multiplier.
C) net profit margin, financial leverage multiplier, and return on equity.
D) net profit margin, total asset turnover, and return on investment.

Question 67

One means to negate the effect of inflation on ratio analysis is to value the fixed assets at

A) replacement value.
B) liquidation value.
C) book value.
D) depreciation.

Question 68

ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would beconsidered poor if its average collection period was

A) 47 days.
B) 57 days.
C) 36 days.
D) 30 days.

Question 69

The two basic measures of liquidity are

A) inventory turnover and current ratio.
B) current ratio and total asset turnover.
C) current ratio and quick ratio.
D) gross profit margin and ROE.

Question 70

Balance Sheet
Cole Eagan Enterprises
December 31, 2002
$\begin{array}{llll}\text { Cash } & \$ 4,500 & \text { Accounts Payable } & \$ 10,000 \\\text { Accounts Receivable } && \text { Notes Payable } \\\text { Inventories } && \text { Accruals }&1,000 \\\text { Total Current Assets } && \text { Total Current Liab. } \\\text { Net Fixed Assets } && \text { Long-Term Debt } \\\text { Total Assets } && \text { Stockholders' Equity } \\&& \text { Total Liab. \& S.E. }\end{array}$

Information (2002 values)
1. Sales totaled $\$ 110,000$
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0 .
4. There are 360 days in the year.
5. The average collection period was 65 days
6. The current ratio was 2.40 .
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent

-Notes payable for CEE in 2002 were__________

A) $10,608
B) $52,372
C) $41,372
D) $113,466

Question 71

The following groups of ratios primarily measure risk:

A) activity, debt, and profitability.
B) liquidity, activity, and debt.
C) liquidity, activity, and profitability.
D) liquidity, activity, and common stock.

Question 72

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-Using the modified DuPont formula allows the analyst to break Dana Dairy Products return on equity into 3 components:. Which of the following mathematical expressions represents the modified DuPont formula relative to Dana Dairy Products' 2002 performance? (See Figure 3.2)

A) 5.6(ROE) = 2.5(ROA) × 2.24(Financial leverage multiplier)
B) 5.6(ROE) = 3.3(ROA) × 1.70(Financial leverage multiplier)
C) 2.5(ROE) = 5.6(ROA) × 0.44(Financial leverage multiplier)
D) 4.0(ROE) = 2.0(ROA) × 2.00(Financial leverage multiplier)

Question 73

__________analysis involves the comparison of different firms' financial ratios at the same point in time.

A) Cross-sectional
B) Quantitative
C) Time-series
D) Marginal

Question 74

Balance Sheet
Cole Eagan Enterprises
December 31, 2002
$\begin{array}{llll}\text { Cash } & \$ 4,500 & \text { Accounts Payable } & \$ 10,000 \\\text { Accounts Receivable } && \text { Notes Payable } \\\text { Inventories } && \text { Accruals }&1,000 \\\text { Total Current Assets } && \text { Total Current Liab. } \\\text { Net Fixed Assets } && \text { Long-Term Debt } \\\text { Total Assets } && \text { Stockholders' Equity } \\&& \text { Total Liab. \& S.E. }\end{array}$

Information (2002 values)
1. Sales totaled $\$ 110,000$
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0 .
4. There are 360 days in the year.
5. The average collection period was 65 days
6. The current ratio was 2.40 .
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent

-Inventories for CEE in 2002 were__________

A) $27,500
B) $36,667
C) $32,448
D) $ 9,167

Question 75

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-Dana Dairy Products has a___________ degree of financial leverage than the industry standard, resulting in___________ .

A) higher; higher return on total assets
B) higher; higher return on equity
C) lower; lower return on equity
D) lower; lower return on total assets

Question 76

Balance Sheet
Cole Eagan Enterprises
December 31, 2002
$\begin{array}{llll}\text { Cash } & \$ 4,500 & \text { Accounts Payable } & \$ 10,000 \\\text { Accounts Receivable } && \text { Notes Payable } \\\text { Inventories } && \text { Accruals }&1,000 \\\text { Total Current Assets } && \text { Total Current Liab. } \\\text { Net Fixed Assets } && \text { Long-Term Debt } \\\text { Total Assets } && \text { Stockholders' Equity } \\&& \text { Total Liab. \& S.E. }\end{array}$

Information (2002 values)
1. Sales totaled $\$ 110,000$
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0 .
4. There are 360 days in the year.
5. The average collection period was 65 days
6. The current ratio was 2.40 .
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent

-Long-term debt for CEE in 2002 was____________

A) $41,372
B) $10,608
C) $30,737
D) $52,372

Question 77

Cross-sectional ratio analysis is used to

A) isolate the causes of problems.
B) correct expected problems in operations.
C) provide conclusive evidence of the existence of a problem.
D) reflect the symptoms of a possible problem.

Question 78

The financial leverage multiplier is an indicator of a corporation utilizing

A) total debt.
B) operating leverage.
C) long-term debt.
D) total assets.

Question 79

$\text { Dana Dairy Products Key Ratio }$
$\begin{array}{lll}\hline&\text { Industry } & \text { Actual } & \text { Actual } \\&\text { Average } & 2001 & 2002\\\hline\text { Current Ratio } & 1.3 & 1.0 \\\text { Quick Ratio } & 0.8 & 0.75 \\\text { Average collection Period } & 23 \text { days } & 30 \text { days } \\\text { Inventory Turnover } & 21.7 & 19 \\\text { Debt Ratio } & 64.7 \% & 50 \% \\\text { Times Interest Earned } & 4.8 & 5.5 \\\text { Gross Profit Margin } & 13.6 \% & 12.0 \% \\\text { Net Profit Margin } & 1.0 \% & 0.5 \% \\\text { Return on total assets } & 2.9 \% & 2.0 \% \\\text { Return on Equity } & 8.2 \% & 4.0 \%\end{array}$
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
$$\begin{array} { l c } \hline \text { Sales Revenue } & \$ 100,000 \\\text { Less: Cost of Goods Sold } & 87,000 \\& - \cdots \\\text { Gross Profits } & \$ 13,000 \\\text { Less: Operating Expenses } & 11,000 \\& - \cdots \\\text { Operating Profits } & 2,000 \\\text { Less: Interest Expense } & 500 \\& - \cdots \\\text { Net Profits Before Taxes } & \$ 1,500 \\\text { Less: Taxes } ( 40 \% ) & 600\end{array}$$
Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
$\begin{array}{lr}\hline \text { Cash } & \$ 1,000 \\\text { Accounts Receivable } & 8,900 \\\text { Inventories } & 4,350\\&----\\\text { Total Current Assets } & \$ 14,250 \\\text { Gross Fixed Assets } & \$ 35,000 & \\\text { Less: Accumulated Depreciation } & 13,250 \\\text { Net Fixed Assets }&21,750\\&----\\\text { Total Assets }&\$36,000\\\\\text { Liabilities \& Stockholders' Equity }\\\hline\text { Accounts Payable } & \$ 9,000 \\\text { Accruals } & 6,675\\&----\\\text { Total Current Liabilities } & \$ 15,675 \\\text { Long-term Debts } & 4,125\\&----\\\text { Total Liabilities }&\$19,800\\\text { Common Stock } & 1,000 \\\text { Retained Earnings } & 15,200\\&----\\\text { Total Stockholders' Equity }&\$16,200\\&----\\\text { Total Liab. \& S.E. }&\$36,000\end{array}$

-The gross profit margin and net profit margin for Dana Dairy Products in 2002 are

A) 2 percent and 1.5 percent, respectively.
B) 2 percent and 0.9 percent, respectively.
C) 13 percent and 1.5 percent, respectively.
D) 13 percent and 0.9 percent, respectively.

Question 80

The modified DuPont formula relates the firm's return on total assets (ROA) to the

A) return on equity (ROE).
B) net profit margin.
C) total asset turnover.
D) financial leverage multiplier.