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.

Accepted Answer

Industry ratios may not be directly comparable to individual entity ratios due to differences in accounting methods or other factors. Therefore, it is important to consider the context and understand the limitations of such comparisons. Relative values at a point in time may not tell the full story and should be interpreted with caution.

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.

Accepted Answer

Return on investment (ROI) is universally accepted as a measure of profitability because it compares the profits generated by an investment to the initial cost of the investment, which provides a standardized way of measuring the profitability of different investments. Return on retained earnings and return on liabilities are not commonly used measures of profitability and are not universally accepted.

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%.

Accepted Answer

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.

Accepted Answer

The answer of For a firm that presently has a...

Question 5

Which of the following accounts is part of working capital?
A) Retained Earnings.
B) Sales.
C) Merchandise Inventory.
D) Common Stock.

Accepted Answer

Working capital is the difference between current assets and current liabilities, and merchandise inventory is a current asset that is part of working capital as it is used in current operations to generate sales. Retained earnings and common stock are both long-term accounts that do not directly impact working capital. Sales, while important to the operation of a business, is not an account but rather a revenue stream generated by the business.

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.

Accepted Answer

The answer of Financial statement ratios support informed judgments and...

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.

Accepted Answer

The answer of If a firm borrowed money on a...

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.

Accepted Answer

The answer of Presented below are the comparative balance sheets...

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%.

Accepted Answer

The answer of A firm's net income is $315,000 on...

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.

Accepted Answer

The return on investment measure of performance is used by individuals to compare investment performance. This measure allows investors to compare the return they have received from different investments, taking into account the amount of money they have invested in each. It is calculated by dividing the net income or profit generated by the investment by the initial investment amount.

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.

Accepted Answer

The answer of A current ratio of 6.0 is usually...

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.

Accepted Answer

Return on investment (ROI) is the ratio of net profit to the amount of investment. Another term for ROI is return on assets (ROA), which measures the profitability of a company relative to its total assets. Return on equity (ROE) measures the amount of net income returned as a percentage of shareholders' equity, while return on retained earnings (RORE) measures the return generated from reinvesting earnings back into the business. "Return to sender" is not a financial term and is not related to ROI.

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.

Accepted Answer

The answer of The return on investment measure of performance:
A)...

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.

Accepted Answer

Return on equity (ROE) is a financial metric that measures the profitability of a company by calculating how much profit a company generates with the money shareholders have invested. ROE relates net income (profit) earned by the company to the stockholders' equity (the amount of money invested by shareholders in the company). Therefore, Choice D is the correct answer.

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.

Accepted Answer

The DuPont model incorporates asset utilization in addition to net income, providing a more comprehensive analysis of ROI. This can be particularly useful for identifying areas where a company may be underutilizing its assets and where improvements can be made to increase ROI.

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.

Accepted Answer

The answer of Another term for return on equity is:
A)...

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.

Accepted Answer

The margin is calculated as ROI divided by turnover. Here, Margin = ROI / Turnover = 15% / 3 = 5%.

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.

Accepted Answer

The answer of Which of the following is not usually...

Quiz 3: Fundamental Interpretations Made From Financial Statement Data

When comparing entity financial ratios with industry ratios:

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

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:

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:

Which of the following accounts is part of working capital?

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

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

The return on investment measure of performance:

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

Another term for return on investment is:

The return on investment measure of performance:

Return on equity:

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

Another term for return on equity is:

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

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