Question 1

Which of the following will not improve a company's gross profit percentage?
A)An increase in the sales price.
B)A decrease in the cost of inventory.
C)A decrease in the shipping cost for merchandise purchased.
D)Collecting cash from customers in advance.

Accepted Answer

Gross profit percentage = [(Net Sales − Cost of Goods Sold)÷ Net Sales] × 100
An increase in increase in the sales price,a decrease in the cost of inventory,and/or a decrease in the shipping cost for merchandise purchased would improve a company's gross profit percentage.It would not be impacted by the collection of cash from customers.

Question 2

Company A has a receivables turnover of 8.0.Company B has a receivables turnover of 10.0.Which of the following statements is correct?
A)Company A collects its receivables faster than Company B.
B)Company B collects its receivables faster than Company A.
C)Company A makes more sales on account than Company B.
D)Company B makes more sales on account than Company A.

Accepted Answer

The accounts receivable turnover measures how fast a company collects its receivables.Thus a higher turnover indicates the company is collecting its receivables faster.

Question 3

The debt-to-assets ratio is the:
A)ratio of current liabilities to current assets.
B)ratio of long term liabilities to fixed assets.
C)ratio of total liabilities to total assets.
D)proportion of short-term liabilities to total liabilities.

Accepted Answer

Debt-to-assets ratio = Total liabilities ÷ Total assets

Question 4

Listed below are the current ratios of four different companies.Based on these current ratios,which company is in the most liquid position?
A)2.0
B)1.8
C)2.5
D)2.1

Accepted Answer

The current ratio is a company's current assets divided by its current liabilities.The larger the number,the greater a company's liquidity.Therefore,for Company C,this means that for every dollar of current debt,the company has $2.50 in current assets with which to pay it off.

Question 5

Which of the following nonfinancial factors is most likely to be a cause of a going-concern problem?
A)Hiring a new CEO.
B)Loss of a key patent.
C)Announcing a new stock issue.
D)Replacing an old product line.

Accepted Answer

The going-concern (also called the continuity)assumption means that a business is assumed to be capable of continuing its operations long enough to meet its obligations.The loss of a key patent could raise the concern that a business may not be capable of continuing its operations and meeting its obligations.

Question 6

A times interest earned ratio of 11 means that the company's:
A)net income is large enough to pay interest and taxes 11 times.
B)net cash flow from operations before taxes and interest is large enough to pay interest and taxes 11 times.
C)net cash flow from operations is large enough to pay interest and taxes 11 times.
D)income before taxes and interest is large enough to pay interest 11 times.

Accepted Answer

Times interest earned = (Net income + Interest expense + Income tax expense)÷ Interest Expense
This ratio indicates how many times the company's interest expense was covered by its operating income.Or,in other words,the company's net income before interest expense and income tax expense is 11 times greater than its interest expense.

Question 7

A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%.If the company then issues additional shares of common stock for cash,which of the following is a correct statement?
A)The debt-to-assets ratio will decrease and the return on equity ratio will decrease.
B)The debt-to-assets ratio will increase and the return on equity ratio will increase.
C)The debt-to-assets ratio will not change and the return on equity ratio will not change.
D)The debt-to-assets ratio will decrease and the return on equity ratio will increase.

Accepted Answer

Debt-to-assets ratio = Total liabilities ÷ Total assets
Return on equity (ROE)= [(Net income − Preferred dividends)÷ Average common stockholders' equity] × 100
If the company issues additional shares of common stock for cash,both assets and stockholders' equity will increase as a result of this transaction.The debt-to-assets ratio will decrease since assets increase.The return on equity ratio will decrease since average common stockholders' equity increases.

Question 8

The ratio that measures the percentage of financing from creditors is the:
A)current ratio.
B)times interest earned ratio.
C)debt-to-assets ratio.
D)Price/Earnings ratio.

Accepted Answer

The debt-to-assets ratio indicates the proportion of total assets that creditors finance.The percent of equity financing can be inferred from that ratio.

Question 9

Which of the following would improve a current ratio that is now 1.2?
A)Selling long-term assets for cash.
B)Purchasing land for cash.
C)Buying equipment in exchange for a two-year note.
D)Purchasing inventory on account.

Accepted Answer

The current ratio measures the company's ability to pay its current liabilities.It is calculated by dividing current assets by current liabilities.Selling long-term assets for cash would increase the numerator and have no effect on the denominator;as such,it would improve the company's current ratio.

Question 10

Puffin Turnovers,Inc.'s fixed asset turnover was 0.9 while Muffin Tops,Inc.'s fixed asset turnover was 0.6.Which of the following statements about Puffin compared with Muffin is correct?
A)Puffin generated more sales per dollar of fixed assets.
B)Puffin has greater depreciation expense.
C)Puffin has more fixed assets.
D)Puffin has greater sales.

Accepted Answer

The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets,such as store buildings and the property they sit on.Since its fixed asset turnover ratio is higher,Puffin Turnovers generated more sales per dollar of fixed assets than Muffin Tops.

Question 11

A company that has a current ratio less than one cannot cover:
A)current liabilities with its current cash flow.
B)current expenses with its current sales revenue.
C)expenses with its current revenues.
D)current liabilities with its current assets.

Accepted Answer

Current ratio = Current assets ÷ Current liabilities
If this ratio is less than 1,current liabilities are greater than current assets.

Question 12

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:
A)large percentage of assets and inventory costs are stable.
B)large percentage of assets and inventory costs are not stable.
C)small percentage of assets and inventory costs are not stable.
D)small percentage of assets and inventory costs are stable.

Accepted Answer

Different accounting methods for inventory are least likely to affect the comparison of financial ratios among competitors if inventory is a small proportion of assets and inventory levels are stable.

Question 13

Company A uses the FIFO inventory method and Company B uses the LIFO method.If prices are rising and there are no other significant differences between the companies,which of the following is correct?
A)Company A will report a higher current ratio and lower earnings per share than Company B.
B)Company A will report a higher current ratio and higher earnings per share than Company B.
C)Company A will report a lower current ratio and higher earnings per share than Company B.
D)Company A will report a lower current ratio and lower earnings per shares than Company B.

Accepted Answer

Current ratio = Current assets ÷ Current Liabilities
Earnings per share = (Net income − preferred dividends)÷ Average number of common shares outstanding
During a period of rising prices,current assets (inventory)will be higher if FIFO is used,so the current ratio will be higher for Company A.Net income will also be higher when FIFO is used,so Company A's EPS will also be higher.

Question 14

How competitors calculate depreciation is most likely to affect comparisons between competitors if property,plant and equipment:
A)makes up a large percentage of assets and average useful lives are fairly different.
B)makes up a small percentage of assets and assets are financed in a different way.
C)makes up a small percentage of assets and average useful lives are fairly similar.
D)is primarily leased in the industry,not purchased.

Accepted Answer

Different accounting methods for depreciation are likely to have a major impact on the comparability of financial ratios among competitors if property,plant,and equipment make up a large portion of total assets and the companies use a varying range of estimated useful lives for buildings and equipment.

Question 15

Which of the following could indicate bad news?
A)An increase in fixed asset turnover ratio.
B)A decrease in days to sell.
C)A decrease in EPS.
D)A decrease in the debt-to-assets ratio.

Accepted Answer

Earnings per share (EPS)indicates the amount of earnings generated for each share of outstanding common stock;a decrease in EPS could indicate bad news.The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets;an increase in the fixed asset turnover ratio would be good news.The days to sell indicates how many days,on average,it takes a company to sell its inventory;a decrease in the days to sell would be good news.The debt-to-assets ratio indicates the proportion of total assets that creditors finance;a decreasing debt-to-assets ratio means that the company's financing strategy is less risky.

Question 16

The conceptual framework for financial accounting and reporting consists of which three main components?
A)Goals,Concepts,and Exceptions.
B)Objective,Codes,and Guidelines.
C)Objective,Elements,and Concepts.
D)Concepts,Principles,and Practices.

Accepted Answer

The conceptual framework for financial accounting and reporting has three main components: objective (of financial reporting),elements (to be measured and reported),and concepts (for measuring and reporting information).Each of these components has subparts specifying more detail.

Question 17

A current ratio of less than one is not so much of a concern when the company has a:
A)low fixed asset turnover ratio.
B)high days to collect number.
C)high inventory turnover ratio.
D)high debt-to-equity ratio.

Accepted Answer

A high inventory turnover ratio indicates that inventory moves quickly,so less money is tied up in inventory,and therefore,excess cash can be used to reduce borrowing.This situation would result in a low current ratio.

Question 18

A debt-to-assets ratio of 0.50 indicates that the company has:
A)more liabilities than stockholders' equity.
B)equal amounts of liabilities and stockholders' equity.
C)more stockholders' equity than liabilities.
D)no liabilities.

Accepted Answer

A debt-to-assets ratio of 0.50 indicates the proportion of total assets that creditors finance is 0.50;as such,an equal proportion is from equity financing.

Question 19

The going-concern assumption states that the:
A)company will always maximize the profit for stockholders.
B)company is not expected to go out of business in the near future.
C)company is a separate concern from the stockholders.
D)company's results will be reported in a consistent manner from period to period.

Accepted Answer

The going-concern (also called the continuity)assumption means that a business is assumed to be capable of continuing its operations long enough to meet its obligations.

Question 20

The ratio that measures the company's ability to meet required interest payments is the:
A)Debt-to-equity ratio.
B)Current ratio.
C)Price/Earnings ratio.
D)Times interest earned ratio.

Accepted Answer

The times interest earned ratio indicates how many times the company's interest expense was covered by the operating results.

Quiz 13: Measuring and Evaluating Financial Performance

Which of the following will not improve a company's gross profit percentage?

Company A has a receivables turnover of 8.0.Company B has a receivables turnover of 10.0.Which of the following statements is correct?

The debt-to-assets ratio is the:

Listed below are the current ratios of four different companies.Based on these current ratios,which company is in the most liquid position?

Which of the following nonfinancial factors is most likely to be a cause of a going-concern problem?

A times interest earned ratio of 11 means that the company's:

A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%.If the company then issues additional shares of common stock for cash,which of the following is a correct statement?

The ratio that measures the percentage of financing from creditors is the:

Which of the following would improve a current ratio that is now 1.2?

Puffin Turnovers,Inc.'s fixed asset turnover was 0.9 while Muffin Tops,Inc.'s fixed asset turnover was 0.6.Which of the following statements about Puffin compared with Muffin is correct?

A company that has a current ratio less than one cannot cover:

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:

Company A uses the FIFO inventory method and Company B uses the LIFO method.If prices are rising and there are no other significant differences between the companies,which of the following is correct?

How competitors calculate depreciation is most likely to affect comparisons between competitors if property,plant and equipment:

Which of the following could indicate bad news?

The conceptual framework for financial accounting and reporting consists of which three main components?

A current ratio of less than one is not so much of a concern when the company has a:

A debt-to-assets ratio of 0.50 indicates that the company has:

The going-concern assumption states that the:

The ratio that measures the company's ability to meet required interest payments is the: