Question 1

The reasons for changes in key rations must be analyzed before drawing conclusions.

Accepted Answer

Before drawing conclusions about changes in key ratios, it is important to understand the reasons behind those changes. For example, an increase in a company's debt-to-equity ratio may signal financial distress or aggressive growth strategy, and without analyzing the underlying factors, drawing a conclusion about the company's financial health may be premature.

Question 2

What is Jane's rate of return on total assets if total assets are $100,000, net income is $2,000, interest expense is $1,600, and income tax is $2,000?
A)4.6%
B)5.2%
C)5.6%
D)2.3%

Accepted Answer

The answer of What is Jane's rate of return on...

Question 3

A company has cash of $215,000; short-term investments of $35,000; net receivables of $75,000; and inventory of $150,000. Current liabilities total $90,000. The current ratio is:
A)5.28:1.
B)4.44:1.
C)3.61:1.
D)4.89:1.

Accepted Answer

The answer of A company has cash of $215,000; short-term...

Question 4

If current assets were $90,000, merchandise inventory was $60,000, and current liabilities were $15,000, the acid test ratio is:
A)6:1.
B)4:1.
C)2:1.
D)1:2.

Accepted Answer

The formula for the acid test ratio is (Current Assets - Inventory) / Current Liabilities. Thus, the calculation for this scenario would be: 
($90,000 - $60,000) / $15,000 = $30,000 / $15,000 = 2. Therefore, the acid test ratio is 2:1.

Question 5

Topiary's Unlimited has a cost of goods sold of $1,900,000. The beginning merchandise inventory was $125,000 and its ending merchandise inventory is $133,000. Topiary's merchandise inventory turnover ratio is:
A)65.5 times.
B)33.8 times.
C)14.7 times.
D)0.1 times.

Accepted Answer

Merchandise inventory turnover ratio = Cost of goods sold / Average merchandise inventory

Average merchandise inventory = (Beginning merchandise inventory + Ending merchandise inventory) / 2

Average merchandise inventory = ($125,000 + $133,000) / 2 = $129,000

Merchandise inventory turnover ratio = $1,900,000 / $129,000 = 14.7 times

Question 6

Accounts receivable turnover is calculated by dividing gross sales by the average gross amount of accounts receivable.

Accepted Answer

The answer of Accounts receivable turnover is calculated by dividing...

Question 7

What is George's gross profit rate if net sales are $100,000, operating expenses are $25,000, and cost of goods sold is $40,000?
A)40.00%
B)25.0%
C)35.0%
D)60.0%

Accepted Answer

The answer of What is George's gross profit rate if...

Question 8

Net income before taxes - preferred dividends divided by common stockholders' equity is the calculation for:
A)earnings per share.
B)rate of return on stockholders' equity.
C)rate of return on total assets.
D)return on sales.

Accepted Answer

The calculation given is the formula for rate of return on stockholders' equity, also known as return on equity (ROE).

Question 9

What is the rate of return on common stockholders' equity if net income is $22,700, sales are $100,000, and common stockholders' equity is $86,000?
A)22.7%
B)26.4%
C)86%
D)None of these answers are correct.

Accepted Answer

Rate of return on common stockholders' equity = (Net income / Common stockholders' equity) x 100
= (22,700 / 86,000) x 100
= 26.4%

Question 10

The net income for the year ended was $300,000. Equity for common stockholders' at the end of the year was $1,600,000 and $1,400,000 at the beginning of the year. The return on common stockholders' equity would be:
A)87.50%.
B)21.43%.
C)20.00%.
D)18.75%.

Accepted Answer

The answer of The net income for the year ended...

Question 11

Rick's Cars had a beginning account receivables balance of $325,000. The ending account receivables balance was $300,000. Net credit sales for the company were $4,200,000. The accounts receivable turnover for Rick's Cars is:
A)12.92.
B)14.
C)13.44.
D)None of the above are correct.

Accepted Answer

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Average Accounts Receivable = ($325,000 + $300,000) / 2
Average Accounts Receivable = $312,500

Accounts Receivable Turnover = $4,200,000 / $312,500
Accounts Receivable Turnover = 13.44

Question 12

To be meaningful, a small business should compare ratios with large companies.

Accepted Answer

The answer of To be meaningful, a small business should...

Question 13

Topiary's Unlimited has a cost of goods sold of $1,600,000. The beginning merchandise inventory was $195,000 and its ending merchandise inventory is $205,000. Topiary's merchandise inventory turnover ratio is:
A)8.21 times.
B)7.80 times.
C)8.00 times.
D)None of the above are correct.

Accepted Answer

Merchandise Inventory Turnover Ratio = Cost of Goods Sold / Average Merchandise Inventory
Average Merchandise Inventory = (Beginning Merchandise Inventory + Ending Merchandise Inventory) / 2
Average Merchandise Inventory = ($195,000 + $205,000) / 2 = $200,000
Merchandise Inventory Turnover Ratio = $1,600,000 / $200,000 = 8 times
Therefore, the answer is C) 8.00 times.

Question 14

The net sales for James, Inc. were $4,000,000; net income was $510,000; and gross profit was $1,300,000. The return on sales ratio would be:
A)12.75%.
B)32.50%.
C)45.25%.
D)39.23%.

Accepted Answer

To calculate the return on sales ratio, we divide net income by net sales and multiply by 100. Thus, the calculation would be:

($510,000 / $4,000,000) x 100 = 12.75%

Therefore, the answer is choice A, 12.75%.

Question 15

The liabilities of a company at the end of the year are $500,000 and the total stockholders' equity at the end of the year is $1,500,000. The debt to stockholders' equity ratio is:
A)0.50 to 1.
B)0.33 to 1.
C)0.67 to 1.
D)3.00 to 1.

Accepted Answer

Debt to Stockholders' Equity ratio = Total Liabilities / Total Stockholders' Equity

= $500,000 / $1,500,000

= 0.33 to 1

Question 16

The debt-to-equity ratio measures the extent of (or proportion of)borrowed capital to equity, with which a business operates.

Accepted Answer

This is the correct definition of the debt-to-equity ratio.

Question 17

Tom's Toys has a cash balance of $80,000; temporary investments of $20,000; net receivables of $60,000; and inventory of $450,000. Tom's current liabilities total $200,000. His quick (acid test)ratio is:
A)3.05 to 1.
B)2.25 to 1.
C)0.80 to 1.
D)0.54 to 1.

Accepted Answer

The answer of Tom's Toys has a cash balance of...

Question 18

The income before taxes and interest expense of Barry Builders for the year just ended is $230,000. Their interest expense is $20,000 and their income taxes are $80,500. The number of times interest would be earned is:
A)22.0.
B)10.5.
C)11.5.
D)0.5.

Accepted Answer

To calculate the times interest earned (TIE) ratio, we need to divide the income before taxes and interest expense by the interest expense.

TIE = Income before taxes and interest expense / Interest expense

TIE = $230,000 / $20,000

TIE = 11.5

Therefore, the number of times interest would be earned is 11.5. Option C is the correct answer.

Question 19

Isaiah Company has net income before interest and taxes of $720,000; beginning total assets of $2,100,000; and ending total assets of $2,300,000. Isaiah's return on total assets is:
A)32.7%.
B)11.2%.
C)3.1%.
D)31.3%.

Accepted Answer

Return on total assets (ROA) = (Net Income before interest and taxes / Total assets) x 100%
ROA = (720,000 / ((2,100,000 + 2,300,000)/2)) x 100%
ROA = (720,000 / 2,200,000) x 100%
ROA = 32.7%
Therefore, Isaiah Company's return on total assets is 31.3%.

Question 20

Merchandise inventory turnover measures the relationship between
A)cost of goods sold and merchandise inventory.
B)expenses and merchandise inventory.
C)merchandise inventory and current liabilities.
D)assets and current liabilities.

Accepted Answer

Merchandise inventory turnover measures how many times a company sells and replaces its merchandise inventory during a particular period. It is calculated by dividing the cost of goods sold by the average merchandise inventory during the period. Therefore, merchandise inventory turnover measures the relationship between cost of goods sold and merchandise inventory.

Quiz 22: Analyzing Financial Statements

The reasons for changes in key rations must be analyzed before drawing conclusions.

What is Jane's rate of return on total assets if total assets are $100,000, net income is $2,000, interest expense is $1,600, and income tax is $2,000?

A company has cash of $215,000; short-term investments of $35,000; net receivables of $75,000; and inventory of $150,000. Current liabilities total $90,000. The current ratio is:

If current assets were $90,000, merchandise inventory was $60,000, and current liabilities were $15,000, the acid test ratio is:

Topiary's Unlimited has a cost of goods sold of $1,900,000. The beginning merchandise inventory was $125,000 and its ending merchandise inventory is $133,000. Topiary's merchandise inventory turnover ratio is:

Accounts receivable turnover is calculated by dividing gross sales by the average gross amount of accounts receivable.

What is George's gross profit rate if net sales are $100,000, operating expenses are $25,000, and cost of goods sold is $40,000?

Net income before taxes - preferred dividends divided by common stockholders' equity is the calculation for:

What is the rate of return on common stockholders' equity if net income is $22,700, sales are $100,000, and common stockholders' equity is $86,000?

The net income for the year ended was $300,000. Equity for common stockholders' at the end of the year was $1,600,000 and $1,400,000 at the beginning of the year. The return on common stockholders' equity would be:

Rick's Cars had a beginning account receivables balance of $325,000. The ending account receivables balance was $300,000. Net credit sales for the company were $4,200,000. The accounts receivable turnover for Rick's Cars is:

To be meaningful, a small business should compare ratios with large companies.

Topiary's Unlimited has a cost of goods sold of $1,600,000. The beginning merchandise inventory was $195,000 and its ending merchandise inventory is $205,000. Topiary's merchandise inventory turnover ratio is:

The net sales for James, Inc. were $4,000,000; net income was $510,000; and gross profit was $1,300,000. The return on sales ratio would be:

The liabilities of a company at the end of the year are $500,000 and the total stockholders' equity at the end of the year is $1,500,000. The debt to stockholders' equity ratio is:

The debt-to-equity ratio measures the extent of (or proportion of)borrowed capital to equity, with which a business operates.

Tom's Toys has a cash balance of $80,000; temporary investments of $20,000; net receivables of $60,000; and inventory of $450,000. Tom's current liabilities total $200,000. His quick (acid test) ratio is:

The income before taxes and interest expense of Barry Builders for the year just ended is $230,000. Their interest expense is $20,000 and their income taxes are $80,500. The number of times interest would be earned is:

Isaiah Company has net income before interest and taxes of $720,000; beginning total assets of $2,100,000; and ending total assets of $2,300,000. Isaiah's return on total assets is:

Merchandise inventory turnover measures the relationship between