Deck 3: Fundamental Interpretations Made From Financial Statement Data

Question 1

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.

Answer 1

D

Question 2

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.

Answer 2

C

Question 3

A firm's net income is $630,000 on sales of $63 million. Average assets for the period were $14 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%.

Answer 3

D

Question 4

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 5

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 6

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 7

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 8

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 9

A firm has an ROI of 15%, turnover of 3, and sales of $12 million. The firm's margin is:

A) $1,800,000
B) 5%
C) 30%
D)$600,000

Question 10

A firm's net income for the year was $800,000. Average assets totaled $6 million, and average liabilities totaled $1.2 million. Return on equity was:

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

Question 11

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.

Question 12

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.

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

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 15

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.

Question 16

Presented below are the comparative balance sheets of Big Apple, Inc., at December 31, 2017, and 2016. Sales for the year ended December 31, 2017, totaled $1,780,000.Required:

A) Calculate ROI for 2017.B) Calculate ROE for 2017.C) Calculate working capital at December 31, 2017.D) Calculate the current ratio at December 31, 2017.E) Calculate the acid-test ratio at December 31, 2017.

Question 17

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 18

Firm V has a current ratio of 1.9 and current assets of $136,800.Required:
Calculate Firm V's current liabilities and working capital.

Question 19

Which of the following accounts is part of working capital?

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

Question 20

Financial ratios:

A) help financial statement users to evaluate the financial characteristics of companies by putting the large dollar amounts reported in financial statements into relative terms for comparison purposes.
B) provide for a more meaningful analysis when the trends of financial ratios for a company are compared to the industry average trends over a period of time.
C) are required reporting disclosures in the notes to the consolidated financial statements of U.S. companies that are regulated by the SEC.
D)All of the above statements are true.
E) A and B are true, but C is not true.

Question 21

Firm Y has a margin of 7%, turnover of 1.2, and sales of $2,100,000.Required:
Calculate Firm Y's net income, average total assets, and return on investment (ROI).

Question 22

Firm X has net income of $18,000, sales of $300,000, and average total assets of $125,000.Required:
Calculate Firm X's margin, turnover, and return on investment (ROI).

Question 23

Firm W has accounts receivable of $4,100, cash of $3,500, property, plant, and equipment of $30,200, merchandise inventory of $2,200, accounts payable of $5,700, other accrued liabilities of $1,300, common stock of $10,000, and retained earnings of $23,000.Required:
Calculate Firm W's working capital and current ratio.

Question 24

Firm Z had net assets at the end of the year of $320,000. The only transactions affecting stockholders' equity during the year were net income of $51,000 and dividends of $11,000.Required:
Calculate Firm Z's average stockholders' equity and return on equity (ROE).