Deck 3: Fundamental Interpretations Made From Financial Statement Data

Question 1

When comparing entity financial ratios with industry ratios:

A) it should be assumed that the data result from the consistent application of alternative accounting methods.
B) relative values at a point in time may not be significant.
C) the trend of entity ratios should be compared to the current year's industry ratio.
D) entity ratios should not be compared with industry ratios.

Answer 1

B

Question 2

Which of the following is a universally accepted measure of profitability?

A) Return on investment.
B) Return on retained earnings.
C) Return on liabilities.
D) All of these.

Answer 2

A

Question 3

A firm's net income for the year was $200,000. Average assets totaled $1.5 million, and average liabilities totaled $0.3 million. Return on equity was:

A) 13.3%.
B) 16.7%.
C) 10%.
D) 20%.

Answer 3

B

Question 4

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

A) raises the current ratio.
B) lowers the current ratio.
C) doesn't affect the current ratio.
D) depends on the amount paid.

Question 5

Which of the following accounts is part of working capital?

A) Retained Earnings.
B) Sales.
C) Merchandise Inventory.
D) Common Stock.

Question 6

Financial statement ratios support informed judgments and decision making most effectively:

A) when viewed for a single year.
B) when viewed as a trend of entity data.
C) when compared to an industry average for the most recent year.
D) when the trend of entity data is compared to the trend of industry data.

Question 7

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:

A) Higher.
B) Lower.
C) The same.
D) Would depend on the amount borrowed.

Question 8

Presented below are the comparative balance sheets of Big Apple, Inc., at December 31, 2014, and 2013. Sales for the year ended December 31, 2014, totaled $890,000. Required:

A) Calculate ROI for 2014.
B) Calculate ROE for 2014.
C) Calculate working capital at December 31, 2014.
D) Calculate the current ratio at December 31, 2014.
E) Calculate the acid-test ratio at December 31, 2014.

Question 9

A firm's net income is $315,000 on sales of $31.5 million. Average assets for the period were $7 million. For the year:

A) margin was 5%, turnover was 1.2, and ROI was 6%.
B) margin was 6%, turnover was 1.5, and ROI was 6%.
C) margin was 4%, turnover was 1.2, and ROI was 4.8%.
D) margin was 1%, turnover was 4.5, and ROI was 4.5%.

Question 10

The return on investment measure of performance:

A) is relevant only to business enterprises.
B) is used by individuals to compare investment performance.
C) is calculated using sales as the amount of return.
D) is calculated using total assets at the beginning of the period as the amount of investment.

Question 11

A current ratio of 6.0 is usually an indication that the firm:

A) has a low degree of liquidity.
B) has a reasonable degree of liquidity.
C) has not made the most productive use of its assets.
D) has made the most productive use of its assets.

Question 12

Another term for return on investment is:

A) Return on equity.
B) Return on assets.
C) Return on retained earnings.
D) Return to sender.

Question 13

The return on investment measure of performance:

A) is never as important a measure of management effectiveness as the amount of net income.
B) relates dividends paid to the entity's assets.
C) is calculated using net income as the amount of return.
D) is calculated by dividing average assets for a period by the amount of net income for the period.

Question 14

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.

Question 15

An advantage of the DuPont model for calculating ROI is that:

A) it focuses on asset utilization as well as net income.
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 uses stockholders' equity.

Question 16

Another term for return on equity is:

A) return on investment.
B) return on assets.
C) return on retained earnings.
D) none of these.

Question 17

A firm has an ROI of 15%, turnover of 3, and sales of $6 million. The firm's margin is:

A) $900,00.
B) 5%.
C) 30%.
D) $300,000.

Question 18

Which of the following is not usually considered a measure of an entity's liquidity?

A) Current ratio.
B) Acid-test ratio.
C) Cash ratio.
D) Working capital.