Question 1

A measure of asset utilization is

Accepted Answer

The return on total assets measures how efficiently the firm is utilizing assets to generate returns.

Question 2

The financial statements of Black Barn Company are given below.
A. 8.88.
B. 7.63.
C. 7.88.
D. 7.32.

Accepted Answer

The answer of The financial statements of Black Barn Company...

Question 3

Which of the following ratios gives information on the amount of profits reinvested in the firm over the years?

Accepted Answer

Only retained earnings reflect profits reinvested over the years.

Question 4

Ferris Corp. wants to increase its current ratio from the present level of 1.5 when it closes the books next week. The action of __________ will have the desired effect.

Accepted Answer

Example: CA = $150; CL = $100; current ratio = 1.5; Pay $50 of CL with cash; CA = $100; CL = $50; current ratio = 2. B has no effect on ratio (CA remain same); C does not affect current account; D would decrease ratio.

Question 5

Return on total assets is the product of

Accepted Answer

ROA = Net profit margin × total asset turnover.

Question 6

A firm's current ratio is above the industry average. However, the firm's quick ratio is below the industry average. These ratios suggest that the firm

Accepted Answer

Total current assets are high, and inventory is a very large portion of total current assets, relative to other firms in the industry.

Question 7

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm

Accepted Answer

Total debt includes both current and long term debt; the above relationships could occur only if FOX Company has a higher than average level of current liabilities.

Question 8

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's asset turnover ratio for 2009 is

Accepted Answer

The asset turnover ratio is calculated as Sales divided by Total Assets. For 2009, it is $8,000,000 / $6,440,000 = 1.24. However, none of the given options match this calculation, so the closest option is 1.34.

Question 9

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's market-to-book value for 2009 is

Accepted Answer

The answer of The financial statements of Black Barn Company...

Question 10

During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes

Accepted Answer

In inflationary periods, the use of FIFO causes overstated earnings, which result in higher taxes.

Question 11

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on equity ratio for 2009 is

Accepted Answer

Return on equity (ROE) is calculated as Net Income divided by Shareholder's Equity. For 2009, Net Income is $660,000 and Shareholder's Equity is $4,140,000 ($6,440,000 total assets - $2,300,000 total liabilities). ROE = $660,000 / $4,140,000 = 15.94%, which is closest to 16.88%.

Question 12

A firm has an ROE of 2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is

Accepted Answer

2% = (1)[ROA + (ROA - 10%) 1] = 4%.

Question 13

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's average collection period for 2009 is

Accepted Answer

The answer of The financial statements of Black Barn Company...

Question 14

A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is

Accepted Answer

ROE = 0.6 × 0.6 × 4% × 2.5 × 2 = 7.2%.

Question 15

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {\$ 440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's times interest earned ratio for 2009 is

Accepted Answer

The times interest earned ratio is calculated as Operating Profit divided by Interest Expense. For 2009, it is $1,240,000 / $140,000 = 8.86.

Question 16

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's inventory turnover ratio for 2009 is

Accepted Answer

Inventory turnover ratio = Cost of goods sold / Average inventoryAverage inventory = (Beginning inventory + Ending inventory) / 2Beginning inventory = $1,500,000Ending inventory = $1,840,000Average inventory = ($1,500,000 + $1,840,000) / 2 = $1,670,000Inventory turnover ratio = $5,260,000 / $1,670,000 = 3.15

Question 17

A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%. The firm's ROE is

Accepted Answer

ROE = (1- 0.35)[14% + (14% - 10%)0.8] = 11.18%.

Question 18

A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is

Accepted Answer

17.82% = 0.625 × 0.9 × 8% × asset turnover × 1.2; asset turnover = 3.3.

Question 19

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on sales ratio for 2009 is

Accepted Answer

Return on sales = Net income / Sales= 660,000 / 8,000,000= 15.5%

Question 20

The financial statements of Black Barn Company are given below. $\begin{array}{c}
 
\text { Black Barn Company } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$ 8,000,000 \
\text { Cost of goods sold } &   \underline {5,260,000} \
\text { Gross profit } & 2,740,000 \
\text { Selling \& administrative expenses } &  \underline {1,500,000} \
\text { Operating profit } & 1,240,000 \
\text { Interest expense } &  \underline {140,000 }\
\text { Income before tax } & 1,100,000 \
\text { Tax expense } &  \underline {440,000} \
 \text { Net income } &  \underline {\$ 660,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 200,000 \
 \text {  Accounts receivable } & 1,200,000 \
 \text {   Inventory } &  \underline {1,840,000} \
 \text {Total current assets  } &\$ 3,240,000 \
 \text {Fixed assets  } &  \underline {3,200,000} \
 \text { Total assets } &  \underline {\$  6,440,000} \
\
 \text { Accounts Payable } &\$ 800,000 \
 \text { Bank loan } & \underline {600,000} \
 \text { Total current liabilities } & \$ 1,400,000 \
 \text {Bond payable  } & \underline { 900,000} \
 \text {  Total liabilities } & \underline {\$  2,300,000 }\
 \text { Common stock ( 130,000 shares) } & \$ 300,000 \
 \text {Retained earnings  } & \underline {3,840,000}\
 \text { Total liabilities \& equity } &  \underline {\$ 6,440,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
 950,000 \
 \underline { 1,500,000 }\
 \$  2,500,000 \
 \underline { 3,000,000} \
 \underline { \$ 5,500,000 }\
\

\$ 720,000 \
 \underline { 100,000} \
 \$  820,000 \
 \underline {1,000,000} \
 \underline {\$  1,820,000 }\
\$ 300,000\
 \underline { 3,380,000} \
 \underline { \$ 5,500,000} \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's fixed asset turnover ratio for 2009 is

Accepted Answer

The answer of The financial statements of Black Barn Company...

Quiz 19: Financial Statement Analysis

A measure of asset utilization is

The financial statements of Black Barn Company are given below. A. 8.88. B. 7.63. C. 7.88. D. 7.32.

Which of the following ratios gives information on the amount of profits reinvested in the firm over the years?

Ferris Corp. wants to increase its current ratio from the present level of 1.5 when it closes the books next week. The action of __________ will have the desired effect.

Return on total assets is the product of

A firm's current ratio is above the industry average. However, the firm's quick ratio is below the industry average. These ratios suggest that the firm

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm

During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes

A firm has an ROE of 2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is

A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is

A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%. The firm's ROE is

A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is