Question 1

Asset turnover measures a company's profitability.

Accepted Answer

Asset turnover measures how efficiently a company uses its assets to generate sales, not its profitability.

Question 2

Ratios provide one way to compare companies in the same industry regardless of their size.

Accepted Answer

Ratios standardize financial information, allowing for comparisons between companies of different sizes within the same industry by focusing on relative metrics rather than absolute values.

Question 3

All things equal, the higher a company's inventory turnover rate, the better.

Accepted Answer

A higher inventory turnover rate indicates that a company is selling and replenishing its stock efficiently, suggesting good management and demand for its products.

Question 4

Return on assets can be disaggregated into profit margin and return on common stockholders' equity ratio.

Accepted Answer

Return on assets (ROA) can be disaggregated into profit margin and asset turnover ratio, not return on common stockholders' equity ratio.

Question 5

Solvency ratios measure a company's ability to meet its debt obligations.

Accepted Answer

Solvency ratios are financial metrics used to evaluate a company's ability to meet its long-term debt obligations and financial liabilities, indicating its financial health and stability.

Question 6

A common size balance sheet expresses the balance sheet items as a percentage of total assets.

Accepted Answer

A common size balance sheet represents each item on the balance sheet as a percentage of total assets, allowing for easier comparison across companies or periods.

Question 7

Gains and losses related to the disposal of a segment of a business, and any related income tax effects, are reported in the discontinued operations section of the income statement.

Accepted Answer

Gains and losses from the disposal of a segment of a business, along with any related income tax effects, are indeed reported in the discontinued operations section of the income statement, as they are not part of the company's ongoing operations.

Question 8

Which one of the following ratios does not involve assets?
A) Account receivable turnover
B) Current ratio
C) Profit margin
D) Inventory turnover

Accepted Answer

Profit margin is a profitability ratio that measures net income earned relative to sales, and does not directly involve assets in its calculation. It is calculated by dividing net income by net sales.

Question 9

Liquidity analysis of a company includes the following useful measures: (select all that apply)
A) Current ratio
B) Quick ratio
C) Times-interest-earned ratio
D) Debt-to-equity ratio
E) Working capital

Accepted Answer

Current ratio, quick ratio, and working capital are measures of liquidity, assessing a company's ability to meet short-term obligations.

Question 10

Return on assets is computed as:
A) Net income / Average stockholders' equity
B)Net income / Average total assets
C) Net Sales / Average total assets
D) Net income / Net sales

Accepted Answer

Return on assets (ROA) is calculated by dividing net income by average total assets. This measures how efficiently a company uses its assets to generate profit.

Question 11

Big K Grocer's balance sheet shows average stockholders' equity of $5,000 million, net operating profit after tax of $57 million, net income of $190 million, and common shares issued of $958 million. The company has no preferred shares issued.
Big K Grocer's return on common stockholders' equity for the year is:
A) 1.10%
B) 3.80%
C) 72.90%
D) 7.30%
E) There is not enough information to calculate the ratio.

Accepted Answer

The answer of Big K Grocer's balance sheet shows average...

Question 12

Big K Grocer's financial statements show average shareholders' equity of $5,103 million, net income of $700 million, and average total assets of $23,175 million.
How much is Big K Grocer's return on assets for the year?
A) 21.42%
B) 3.02%
C) 21.24%
D) 4.77%
E) There is not enough information to calculate the ratio.

Accepted Answer

Return on Assets (ROA) is calculated as Net Income divided by Average Total Assets. So, ROA = $700 million / $23,175 million = 0.0302 or 3.02%.

Question 13

Big K Grocer's financial statements show net income of $700 million, sales of $76,733 million, and average total assets of $23,175 million.
How much is Big K Grocer's profit margin for the year?
A) 4.71%
B) 0.91%
C) 30.20%
D) 6.42%
E) There is not enough information to calculate the ratio.

Accepted Answer

Profit margin is calculated as (Net Income / Sales) * 100. For Big K Grocer, it is ($700 million / $76,733 million) * 100 = 0.91%.

Question 14

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute the gross profit percentage to the nearest hundredth of a percent. 
A) 5.16%
B) 17.30%
C) 16.17%
D) 61.96%

Accepted Answer

The answer of Use the following selected balance sheet and...

Question 15

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute the return on assets to the nearest hundredth. 
A) 17.30%
B) 5.16%
C) 5.52%
D) 21.71%

Accepted Answer

The answer of Use the following selected balance sheet and...

Question 16

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute asset turnover (AT) to the nearest hundredth of a percent. 
A) 0.32
B) 3.69
C) 17.30
D) 5.52

Accepted Answer

The answer of Use the following selected balance sheet and...

Question 17

Smith Enterprises reported sales revenue totaling $280,000, $335,000, and $354,000 in the years, 2018, 2019, and 2020, respectively.
Performing trend analysis, with 2018 serving as the base year, what is the percentage for 2020?
A) 123.58%
B) 19.08%
C) 126.43%
D) 28.21%

Accepted Answer

To calculate the trend percentage for 2020 with 2018 as the base year, divide the 2020 revenue by the 2018 revenue and multiply by 100. So, (354,000 / 280,000) * 100 = 126.43%.

Question 18

At December 31, Williams Company has total assets of $500,000, total liabilities of $300,000, and total owner's equity of $200,000.
At December 31, Williams Company's debt-to-equity ratio is:
A) 0.25
B) 5.00
C) 0.80
D) 1.50
E) None of the above

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by total owner's equity. For Williams Company, this is $300,000 / $200,000 = 1.50.

Question 19

At December 31, Mendez Company has total assets of $900,000, total liabilities of $200,000, and total owner's equity of $700,000.
At December 31, Mendez Company's debt-to-equity ratio is:
A) 0.29
B) 1.20
C) 5.00
D) 0.17
E) None of the above

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by total owner's equity. For Mendez Company, this is $200,000 / $700,000 = 0.2857, which rounds to 0.29.

Question 20

The operating-cash-flow-to-current-liabilities ratio is computed by dividing a firm's a net cash flow from operating activities by:
A) Current liabilities at the end of the period
B) Current liabilities at the beginning of the period
C) Total liabilities at the middle of the period
D) Average current liabilities for the period
E) None of the above

Accepted Answer

The operating-cash-flow-to-current-liabilities ratio is computed by dividing a firm's net cash flow from operating activities by the average current liabilities for the period. This approach provides a more accurate reflection of the firm's ability to cover its short-term obligations with cash generated from operations, accounting for any fluctuations in current liabilities throughout the period.

Quiz 12: Analysis and Interpretation of Financial Statements

Asset turnover measures a company's profitability.

Ratios provide one way to compare companies in the same industry regardless of their size.

All things equal, the higher a company's inventory turnover rate, the better.

Return on assets can be disaggregated into profit margin and return on common stockholders' equity ratio.

Solvency ratios measure a company's ability to meet its debt obligations.

A common size balance sheet expresses the balance sheet items as a percentage of total assets.

Gains and losses related to the disposal of a segment of a business, and any related income tax effects, are reported in the discontinued operations section of the income statement.

Which one of the following ratios does not involve assets?

Liquidity analysis of a company includes the following useful measures: (select all that apply)

Return on assets is computed as:

Big K Grocer's financial statements show average shareholders' equity of $5,103 million, net income of $700 million, and average total assets of $23,175 million. How much is Big K Grocer's return on assets for the year?

Big K Grocer's financial statements show net income of $700 million, sales of $76,733 million, and average total assets of $23,175 million. How much is Big K Grocer's profit margin for the year?

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute the gross profit percentage to the nearest hundredth of a percent.

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute the return on assets to the nearest hundredth.

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute asset turnover (AT) to the nearest hundredth of a percent.

Smith Enterprises reported sales revenue totaling $280,000, $335,000, and $354,000 in the years, 2018, 2019, and 2020, respectively. Performing trend analysis, with 2018 serving as the base year, what is the percentage for 2020?

At December 31, Williams Company has total assets of $500,000, total liabilities of $300,000, and total owner's equity of $200,000. At December 31, Williams Company's debt-to-equity ratio is:

At December 31, Mendez Company has total assets of $900,000, total liabilities of $200,000, and total owner's equity of $700,000. At December 31, Mendez Company's debt-to-equity ratio is:

The operating-cash-flow-to-current-liabilities ratio is computed by dividing a firm's a net cash flow from operating activities by: