Deck 3: Working with Financial Statements

Question 1

Which one of the following is a use of cash?

A) Decrease in fixed assets
B) Decrease in inventory
C) Increase in long-term debt
D) Decrease in accounts receivables
E) Decrease in accounts payable

Answer 1

Decrease in accounts payable

Question 2

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:

A) sales for the period.
B) the base year sales.
C) total equity for the base year.
D) total assets for the current year.
E) total assets for the base year.

Answer 2

total assets for the current year.

Question 3

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

A) Accounts payable
B) Cash
C) Inventory
D) Accounts receivable
E) Fixed assets

Answer 3

Accounts receivable

Question 4

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

A) total assets.
B) total equity.
C) net income.
D) taxable income.
E) sales.

Question 5

Ratios that measure a firm's liquidity are known as ________ ratios.

A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) book value 

Question 6

Activities of a firm that require the spending of cash are known as:

A) sources of cash.
B) uses of cash.
C) cash collections.
D) cash receipts.
E) cash on hand.

Question 7

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?

A) Current
B) Cash
C) Debt-equity
D) Quick
E) Total debt

Question 8

Which one of the following ratios is a measure of a firm's liquidity?

A) Cash coverage ratio
B) Profit margin
C) Debt-equity ratio
D) Quick ratio
E) NWC turnover

Question 9

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?

A) Pay all of its debts that are due within the next 48 hours
B) Pay all of its debts that are due within the next 48 days
C) Cover its operating costs for the next 48 hours
D) Cover its operating costs for the next 48 days
E) Meet the demands of its customers for the next 48 hours

Question 10

According to the statement of cash flows, an increase in interest expense will ________ the cash flow from ________ activities.

A) decrease; operating
B) decrease; financing
C) increase; operating
D) increase; financing
E) Increase; investment

Question 11

On the statement of cash flows, which one of the following is considered a financing activity?

A) Increase in inventory
B) Decrease in accounts payable
C) Increase in net working capital
D) Dividends paid
E) Decrease in fixed assets

Question 12

The sources and uses of cash over a stated period of time are reflected on the:

A) income statement.
B) balance sheet.
C) tax reconciliation statement.
D) statement of cash flows.
E) statement of operating position.

Question 13

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?

A) Statement of standardization
B) Statement of cash flows
C) Common-base year statement
D) Common-size statement
E) Base reconciliation statement

Question 14

According to the statement of cash flows, an increase in inventory will ________ the cash flow from ________ activities.

A) increase; operating
B) decrease; financing
C) decrease; operating
D) increase; financing
E) increase; investment

Question 15

On the statement of cash flows, which one of the following is considered an operating activity?

A) Increase in net fixed assets
B) Decrease in accounts payable
C) Purchase of equipment
D) Dividends paid
E) Repayment of long-term debt

Question 16

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

A) Increase in the cash ratio
B) Increase in the net working capital to total assets ratio
C) Decrease in the quick ratio
D) Decrease in the cash coverage ratio
E) Increase in the current ratio

Question 17

Which one of the following is a source of cash?

A) Repurchase of common stock
B) Acquisition of debt
C) Purchase of inventory
D) Payment to a supplier
E) Granting credit to a customer

Question 18

Which one of the following is a source of cash?

A) Increase in accounts receivable
B) Decrease in common stock
C) Increase in fixed assets
D) Decrease in accounts payable
E) Decrease in inventory

Question 19

Which one of the following is a source of cash for a tax-exempt firm?

A) Increase in accounts receivable
B) Increase in depreciation
C) Decrease in accounts payable
D) Increase in common stock
E) Increase in inventory

Question 20

On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?

A) Current year sales
B) Current year total assets
C) Base-year sales
D) Base-year total assets
E) Base-year accounts receivables

Question 21

The price-sales ratio is especially useful when analyzing firms that have:

A) volatile market prices.
B) negative earnings.
C) positive PEG ratios.
D) a high Tobin's Q.
E) increasing sales.

Question 22

Relationships determined from a company's financial information and used for comparison purposes are known as:

A) financial ratios.
B) identities.
C) dimensional analysis.
D) scenario analysis.
E) solvency analysis.

Question 23

Which one of the following will decrease if a firm can decrease its operating costs, all else constant?

A) Return on equity
B) Return on assets
C) Profit margin
D) Total asset turnover
E) Price-earnings ratio

Question 24

All-State Moving had sales of $899,000 in 2017 and $967,000 in 2018. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?

A) The total asset turnover rate increased.
B) The days' sales in receivables increased.
C) The net working capital turnover rate increased.
D) The fixed asset turnover decreased.
E) The receivables turnover rate decreased.

Question 25

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations?
I. How many sales dollars are being generated per each dollar of assets?
II. How many dollars of assets have been acquired per each dollar in shareholders' equity?
III. How much net profit is being generating per dollar of sales?
IV. Does the company have the ability to meet its debt obligations in a timely manner?

A) I and III only
B) II and IV only
C) I, II, and III only
D) II, III and IV only
E) I, II, III, and IV

Question 26

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

A) 0
B) 0.5
C) 1.0
D) 1.5
E) 2.0

Question 27

Tobin's Q relates the market value of a firm's assets to which one of the following?

A) Initial cost of creating the firm
B) Current book value of the firm
C) Average asset value of similar firms
D) Average market value of similar firms
E) Today's cost to duplicate those assets

Question 28

Which one of the following statements is correct?

A) If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.
B) Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C) The debt-equity ratio can be computed as 1 plus the equity multiplier.
D) An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E) An increase in the depreciation expense will not affect the cash coverage ratio.

Question 29

DL Farms currently has $600 in debt for every $1,000 in equity. Assume the company uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?

A) Equity multiplier
B) Total asset turnover
C) Profit margin
D) Return on assets
E) Return on equity

Question 30

An increase in which of the following must increase the return on equity, all else constant?

A) Total assets and sales
B) Net income and total equity
C) Total asset turnover and debt-equity ratio
D) Equity multiplier and total equity
E) Debt-equity ratio and total debt

Question 31

If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm:

A) may have short-term, but not long-term debt.
B) is using its assets as efficiently as possible.
C) has no net working capital.
D) has a debt-equity ratio of 1.0.
E) has an equity multiplier of 1.0.

Question 32

Which one of these identifies the relationship between the return on assets and the return on equity?

A) Profit margin
B) Profitability determinant
C) Balance sheet multiplier
D) DuPont identity
E) Debt-equity ratio

Question 33

Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?

A) Al's has more net income than Ben's.
B) Ben's is increasing its earnings at a faster rate than Al's.
C) Al's has a higher market value per share than does Ben's.
D) Ben's has a lower market-to-book ratio than Al's.
E) Al's has a higher earnings growth rate than Ben's.

Question 34

The cash coverage ratio directly measures the ability of a company to meet its obligation to pay:

A) an invoice to a supplier.
B) wages to an employee.
C) interest to a lender.
D) principal to a lender.
E) a dividend to a shareholder.

Question 35

RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?

A) Utilizing its fixed assets more efficiently than Sam's
B) Utilizing its total assets more efficiently than Sam's
C) Generating $1 in sales for every $1.26 in net fixed assets
D) Generating $1.26 in net income for every $1 in net fixed assets
E) Maintaining the same level of current assets as Sam's

Question 36

Which one of the following is a correct formula for computing the return on equity? 

A) Profit margin × ROA
B) ROA × Equity multiplier
C) Profit margin × Total asset turnover × Debt-equity ratio
D) Net income/Total assets
E) Debt-equity ratio × ROA

Question 37

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?

A) Decrease in the inventory turnover rate
B) Decrease in the net working capital turnover rate
C) Increase in the fixed asset turnover rate
D) Decrease in the day's sales in inventory
E) Decrease in the total asset turnover rate

Question 38

Which one of the following accurately describes the three parts of the DuPont identity?

A) Equity multiplier, profit margin, and total asset turnover
B) Debt-equity ratio, capital intensity ratio, and profit margin
C) Operating efficiency, equity multiplier, and profitability ratio
D) Return on assets, profit margin, and equity multiplier
E) Financial leverage, operating efficiency, and profitability ratio

Question 39

Mortgage lenders probably have the most interest in the ________ ratios.

A) return on assets and profit margin
B) long-term debt and times interest earned
C) price-earnings and debt-equity
D) market-to-book and times interest earned
E) return on equity and price-earnings

Question 40

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ________ ratios.

A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) turnover

Question 41

Which one of these is the least important factor to consider when comparing the financial situations of utility companies that generate electric power and have the same SIC code?

A) Type of ownership
B) Government regulations affecting the firm
C) Fiscal year end
D) Methods of power generation
E) Number of part-time employees

Question 42

Corner Books has a debt-equity ratio of .57. What is the total debt ratio?

A) 0.36
B) 0.30
C) 0.44
D) 2.27
E) 2.75

Question 43

Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?

A) 0.31
B) 0.42
C) 0.47
D) 0.51
E) 0.56

Question 44

The most acceptable method of evaluating the financial statements is to compare the company's current financial:

A) ratios to the company's historical ratios.
B) statements to the financial statements of similar companies operating in other countries.
C) ratios to the average ratios of all companies located within the same geographic area.
D) statements to those of larger companies in unrelated industries.
E) statements to the projections that were created based on Tobin's Q.

Question 45

Lani's generated net income of $911, depreciation expense was $47, and dividends paid were $25. Accounts payables increased by $15, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity?

A) $776
B) $865
C) $959
D) $922
E) $985

Question 46

The U.S. government coding system that classifies a company by the nature of its business operations is known as the:

A) Centralized Business Index.
B) Peer Grouping codes.
C) Standard Industrial Classification codes.
D) Governmental ID codes.
E) Government Engineered Coding System.

Question 47

During the year, Al's Tools decreased its accounts receivable by $160, increased its inventory by $115, and decreased its accounts payable by $70. How did these three accounts affect the sources of uses of cash by the firm?

A) Net source of cash of $120
B) Net source of cash of $205
C) Net source of cash of $45
D) Net use of cash of $115
E) Net use of cash of $25

Question 48

Oil Creek Auto has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory?

A) 12.22 percent
B) 44.16 percent
C) 16.54 percent
D) 13.36 percent
E) 46.74 percent

Question 49

SS Stores has total debt of $4,910 and a debt-equity ratio of 0.52. What is the value of the total assets?

A) $16,128.05
B) $7,253.40
C) $9,571.95
D) $11,034.00
E) $14,352.31

Question 50

Pittsburgh Motors has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950. Interest expense is $65. What is the common-size statement value of the interest expense?

A) 0.89 percent
B) 1.51 percent
C) 1.69 percent
D) 2.03 percent
E) 1.35 percent

Question 51

All of the following issues represent problems encountered when comparing the financial statements of two separate entities except the issue of the companies:

A) being conglomerates with unrelated lines of business.
B) having geographically varying operations.
C) using differing accounting methods.
D) differing seasonal peaks.
E) having the same fiscal year.

Question 52

The accounts payable of a company changed from $136,100 to $104,300 over the course of a year. This change represents a:

A) use of $31,800 of cash as investment activity.
B) source of $31,800 of cash as an operating activity.
C) source of $31,800 of cash as a financing activity.
D) source of $31,800 of cash as an investment activity.
E) use of $31,800 of cash as an operating activity.

Question 53

For the past year, Jenn's Floral Arrangements had taxable income of $198,600, beginning common stock of $68,000, beginning retained earnings of $318,750, ending common stock of $71,500, ending retained earnings of $316,940, interest expense of $11,300, and a tax rate of 21 percent. What is the amount of dividends paid during the year?

A) $157,280
B) $159,935
C) $163,200
D) $153,555
E) $158,704

Question 54

The Floor Store had interest expense of $38,400, depreciation of $28,100, and taxes of $19,600 for the year. At the start of the year, the firm had total assets of $879,400 and current assets of $289,600. By year's end total assets had increased to $911,900 while current assets decreased to $279,300. What is the amount of the cash flow from investment activity for the year?

A) −$51,150
B) $21,850
C) $29,300
D) −$70,900
E) −$89,400

Question 55

DJ's has total assets of $310,100 and net fixed assets of $168,500. The average daily operating costs are $2,980. What is the value of the interval measure?

A) 31.47 days
B) 47.52 days
C) 56.22 days
D) 68.05 days
E) 104.62 days

Question 56

Williamsburg Market is an all-equity firm that has net income of $96,200, depreciation expense of $6,300, and an increase in net working capital of $2,800. What is the amount of the net cash from operating activity?

A) $91,300
B) $99,700
C) $93,400
D) $105,300
E) $113,700

Question 57

Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio?

A) 2.25
B) 0.53
C) 0.71
D) 0.89
E) 1.35

Question 58

Which one of the following statements is correct?

A) Book values should always be given precedence over market values.
B) Financial statements are rarely used as the basis for performance evaluations.
C) Historical information is useful when projecting a company's future performance.
D) Potential lenders place little value on financial statement information.
E) Reviewing financial information over time has very limited value.

Question 59

At the beginning of the year, Brick Makers had cash of $183, accounts receivable of $392, accounts payable of $463, and inventory of $714. At year end, cash was $167, accounts payables was $447, inventory was $682, and accounts receivable was $409. What is the amount of the net source or use of cash by working capital accounts for the year?

A) Net use of $16 cash
B) Net use of $17 cash
C) Net source of $17 cash
D) Net source of $15 cash
E) Net use of $15 cash

Question 60

Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $223, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts receivable of $204, inventory of $527, and net fixed assets of $1,216. What is this year's common-base-year value of inventory?

A) 0.67
B) 0.91
C) 0.88
D) 1.04
E) 1.18

Question 61

TJ's has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and a profit margin of 5.78 percent. What is the return on assets?

A) 8.29 percent
B) 6.48 percent
C) 9.94 percent
D) 7.78 percent
E) 8.02 percent

Question 62

Green Yard Care has net income of $62,300, a tax rate of 21 percent, and a profit margin of 6.7 percent. Total assets are $1,100,500 and current assets are $328,200. How many dollars of sales are being generated from every dollar of net fixed assets?

A) $2.83
B) $1.37
C) $.84
D) $1.20
E) $1.23

Question 63

Bernice's has $823,000 in sales. The profit margin is 4.2 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $16.50. What is the price-earnings ratio?

A) 3.58
B) 3.98
C) 4.32
D) 3.51
E) 4.27

Question 64

Russell's has annual sales of $649,200, cost of goods sold of $389,400, interest of $23,650, depreciation of $121,000, and a tax rate of 21 percent. What is the cash coverage ratio for the year?

A) 8.43
B) 10.99
C) 11.64
D) 5.87
E) 18.22

Question 65

Hungry Lunch has net income of $73,402, a price-earnings ratio of 13.7, and earnings per share of $.43. How many shares of stock are outstanding?

A) 13,520
B) 12,460
C) 165,745
D) 171,308
E) 170,702

Question 66

Corner Books has sales of $687,400, cost of goods sold of $454,200, and a profit margin of 5.5 percent. The balance sheet shows common stock of $324,000 with a par value of $5 a share, and retained earnings of $689,500. What is the price-sales ratio if the market price is $43.20 per share?

A) 4.28
B) 12.74
C) 6.12
D) 4.07
E) 14.51

Question 67

The Harrisburg Store has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars' worth of sales are generated from every $1 in total assets?

A) $1.08
B) $1.14
C) $1.19
D) $84
E) $93

Question 68

A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio?

A) 2.12
B) 1.84
C) 1.39
D) 2.45
E) 2.69

Question 69

Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working capital of $223,700, and long-term debt of $450,000. What is the debt-equity ratio?

A) 0.87
B) 0.94
C) 1.21
D) 1.15
E) 1.06

Question 70

JK Motors has sales of $96,400, costs of $53,800, interest paid of $2,800, and depreciation of $7,100. The tax rate is 21 percent. What is the value of the cash coverage ratio?

A) 15.21
B) 12.14
C) 17.27
D) 23.41
E) 12.68

Question 71

Frank's Welding has net fixed assets of $36,200, total assets of $51,300, long-term debt of $22,000, and total debt of $29,700. What is the net working capital to total assets ratio?

A) 12.18 percent
B) 16.82 percent
C) 14.42 percent
D) 17.79 percent
E) 9.90 percent

Question 72

Taylor's Men's Wear has a debt-equity ratio of 48 percent, sales of $829,000, net income of $47,300, and total debt of $206,300. What is the return on equity?

A) 19.29 percent
B) 11.01 percent
C) 15.74 percent
D) 18.57 percent
E) 14.16 percent

Question 73

Flo's Flowers has accounts receivable of $4,511, inventory of $1,810, sales of $138,609, and cost of goods sold of $64,003. How many days does it take the firm to sell its inventory and collect the payment on the sale assuming that all sales are on credit?

A) 11.88 days
B) 22.20 days
C) 16.23 days
D) 14.50 days
E) 18.67 days

Question 74

Frank's Used Cars has sales of $807,200, total assets of $768,100, and a profit margin of 6.68 percent. The firm has a total debt ratio of 54 percent. What is the return on equity?

A) 13.09 percent
B) 12.04 percent
C) 11.03 percent
D) 8.56 percent
E) 15.26 percent

Question 75

Terry's Pets paid $2,380 in interest and $2,200 in dividends last year. The times interest earned ratio is 2.6 and the depreciation expense is $680. What is the value of the cash coverage ratio?

A) 1.42
B) 2.72
C) 2.94
D) 2.89
E) 2.46

Question 76

The Up-Towner has sales of $913,400, costs of goods sold of $579,300, inventory of $123,900, and accounts receivable of $78,900. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?

A) 74.19 days
B) 84.69 days
C) 78.07 days
D) 96.46 days
E) 71.01 days

Question 77

Nielsen's has inventory of $29,406, accounts receivable of $46,215, net working capital of $4,507, and accounts payable of $48,919. What is the quick ratio?

A) 1.55
B) 0.49
C) 1.32
D) 0.94
E) 0.92

Question 78

Lawn Care, Inc., has sales of $367,400, costs of $183,600, depreciation of $48,600, interest of $39,200, and a tax rate of 25 percent. The firm has total assets of $422,100, long-term debt of $102,000, net fixed assets of $264,500, and net working capital of $22,300. What is the return on equity?

A) 24.26 percent
B) 15.38 percent
C) 38.96 percent
D) 29.96 percent
E) 17.06 percent

Question 79

The Strong Box has sales of $859,700, cost of goods sold of $648,200, net income of $93,100, and accounts receivable of $102,300. How many days of sales are in receivables?

A) 57.60 days
B) 40.32 days
C) 54.53 days
D) 29.41 days
E) 43.43 days

Question 80

The Green Fiddle has current liabilities of $28,000, sales of $156,900, and cost of goods sold of $62,400. The current ratio is 1.22 and the quick ratio is .71. How many days on average does it take to sell the inventory?

A) 128.13 days
B) 74.42 days
C) 199.81 days
D) 147.46 days
E) 83.53 days