Question 1

The Miller Company reported gross sales of $850,000, sales returns and allowances of $15,000 and sales discounts of $5,000. The company has total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?
A) 3.32 times
B) 1.67 times
C) 1.66 times
D) 1.7 times

Accepted Answer

The answer of The Miller Company reported gross sales of...

Question 2

The following balance sheet information is provided for Gaynor Company: $\begin{array}{|l|r|r|}
\hline \text { Assets } &  2014  & 2013 \
\hline \text { Cash } & \$  4,000 & \$  2,000 \
\hline \text { Accounts receivable } &  15,000 &  12,000 \
\hline \text { Inventory } & \$  35,000 & \$  38,000 \
\hline
\end{array}$ Assuming 2014 cost of goods sold is $153,300, what is the company's inventory turnover?
A) 4.0 times
B) 4.4 times
C) 4.2 times
D) None of these answers is correct.

Accepted Answer

The answer of The following balance sheet information is provided...

Question 3

The Fortune Company reported the following income for 2014: $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 130,000 \
\hline \text { Cost of goods sold } & 80,000 \
\hline \text { Gross margin } & \$ 50,000 \
\hline \text { Selling and administrative expense } & 15,000 \
\hline \text { Operating income } & \$ 35,000 \
\hline \text { Interest expense } & 5,000 \
\hline \text { Income before taxes } & \$ 30,000 \
\hline \text { Income tax expense } & 10,000 \
\hline \text { Net income } & \$ 20,000 \
\hline & \
\hline
\end{array}$$ What is the company's number of times interest is earned ratio?
A) 7 times
B) 6 times
C) 4 times
D) None of these answers is correct.

Accepted Answer

The number of times interest is earned ratio is calculated by dividing the income before taxes by the interest expense. In this case, the income before taxes is $30,000 and the interest expense is $5,000. Therefore, the number of times interest is earned ratio is $30,000 / $5,000 = 6 times.

Question 4

The Martin Company reported net income of $15,000 on gross sales of $80,000. The company has total assets of $135,000, of which $102,000 is property, plant and equipment. What is the company's return on investment?
A) 18.8%
B) 11.1%
C) 14.7%
D) 12.5%

Accepted Answer

The answer of The Martin Company reported net income of...

Question 5

You are considering an investment in Frontier Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except:
A) Return on equity.
B) Asset turnover.
C) Return on investment.
D) Times interest earned.

Accepted Answer

Times interest earned is a measure of a company's ability to meet its debt obligations, not a measure of profitability.

Question 6

The following balance sheet information is provided for Patton Company: $\begin{array}{|l|r|r|}
\hline \text { Assets } &  2014  & 2013 \
\hline \text { Cash } & \$  4,000 & \$  2,000 \
\hline \text { Accounts receivable } &  15,000 &  12,000 \
\hline \text { Inventory } & \$  35,000 & \$  38,000 \
\hline
\end{array}$ Assuming 2014 cost of goods sold is $730,000, what is the company's average days to sell inventory? (Use 365 days in a year. Do not round your intermediate calculations.)
A) 17.5 days
B) 18.25 days
C) 19 days
D) 20.86 days

Accepted Answer

The answer of The following balance sheet information is provided...

Question 7

The following balance sheet information is provided for Duke Company for 2014:  What is the company's current ratio?
A) 1.16
B) 1.31
C) 2.53
D) 3.79

Accepted Answer

The answer of The following balance sheet information is provided...

Question 8

Solvency ratios are used to assess a company's:
A) Long-term debt paying ability.
B) Profitability.
C) Short-term debt paying ability.
D) Efficiency in use of its assets.

Accepted Answer

Solvency ratios are used to evaluate a company's ability to meet its long-term debt obligations. These ratios assess the company's ability to generate sufficient cash flow to cover its debt service payments over an extended period of time. Some of the commonly used solvency ratios include debt to equity ratio, debt to total assets ratio, and interest coverage ratio.

Question 9

The following balance sheet information is provided for Santana Company for 2014:  What is the company's debt to equity ratio?
A) 42%
B) 130%
C) 43%
D) 77%

Accepted Answer

The answer of The following balance sheet information is provided...

Question 10

The following balance sheet information is provided for Apex Company for 2014:  What is the company's working capital?
A) $20,300
B) $4,900
C) $22,900
D) $24,500

Accepted Answer

The answer of The following balance sheet information is provided...

Question 11

The following balance sheet information is provided for Greene Company for 2014:  What is the company's quick (acid-test) ratio?
A) 0.7
B) 1.4
C) 1.3
D) 3.8

Accepted Answer

The quick (acid-test) ratio is calculated as (Cash and equivalents + Short-term investments + Accounts receivable) / Current liabilities. Plugging in the numbers from the balance sheet, the calculation is as follows: (40,000 + 20,000 + 60,000) / 90,000 = 1.3. Therefore, the company's quick ratio is 1.3.

Question 12

The Poole Company reported the following income for 2014:  What is the company's net margin?
A) 73%
B) 40%
C) 18%
D) 27%

Accepted Answer

Net margin is calculated by dividing net income by total revenue. Without knowing the total revenue, we cannot calculate the exact net margin. Therefore, the answer has to be chosen based on the options given. Option C is the only option that is less than 50%, and hence it is the best choice for net margin.

Question 13

The following balance sheet information was provided by Western Company: $\begin{array}{|l|r|r|}
\hline \text { Assets } &  2014  & 2013 \
\hline \text { Cash } & \$  4,000 & \$  2,000 \
\hline \text { Accounts receivable } &  15,000 &  12,000 \
\hline \text { Inventory } & \$  35,000 & \$  38,000 \
\hline
\end{array}$ Assuming 2014 net credit sales totaled $270,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations.)
A) 18.25 days
B) 47.31 days
C) 16.22 days
D) 20.28 days

Accepted Answer

Average days to collect receivables = (365 days * Average accounts receivable) / Net credit salesAverage accounts receivable = ($15,000 + $12,000) / 2 = $13,500Average days to collect receivables = (365 days * $13,500) / $270,000 = 18.25 days

Question 14

You are considering an investment in Apple stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:
A) Debt to equity ratio.
B) Inventory turnover.
C) Quick ratio.
D) Accounts receivable turnover.

Accepted Answer

The debt to equity ratio is a measure of long-term solvency, not short-term liquidity. The other ratios listed (inventory turnover, quick ratio, and accounts receivable turnover) are all commonly used to assess liquidity.

Question 15

The following balance sheet information was provided by O'Connor Company: $\begin{array}{|l|r|r|}
\hline \text { Assets } &  2014  & 2013 \
\hline \text { Cash } & \$  4,000 & \$  2,000 \
\hline \text { Accounts receivable } &  15,000 &  12,000 \
\hline \text { Inventory } & \$  35,000 & \$  38,000 \
\hline
\end{array}$ Assuming that net credit sales for the year 2014 totaled $270,000, what is the company's most recent accounts receivable turnover?
A) 18 times
B) 20 times
C) 22.5 times
D) 7.7 times

Accepted Answer

The answer of The following balance sheet information was provided...

Question 16

Alpha Company provided the following balance sheet for 2014:  What is the company's plant assets to long-term liabilities ratio?
A) 2.5
B) 4.5
C) 1.7
D) None of these answers is correct.

Accepted Answer

The answer of Alpha Company provided the following balance sheet...

Question 17

Select the incorrect statement regarding the return on equity (ROE) measure.
A) ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
B) ROE equals net income divided by average total stockholders' equity.
C) ROE is affected by a company's use of leverage.
D) A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt.

Accepted Answer

This statement is incorrect because ROE takes into account the portion of the business that is financed by debt through the use of average total stockholders' equity in its calculation. ROE is not affected by a company's use of leverage, but the amount of leverage a company employs can impact its return on equity.

Question 18

The following partial balance sheet is provided for Groome Company: $$\begin{array}{l}
\text { Liabilities and Stockholders' Equity }\
\begin{array} { | l | r | r | } 
\hline \text { Accounts payable } & \$ 9,000 \
\hline \text { Salaries payable } & 12,000 \
\hline \text { Bonds payable (Due in 2020) } & 20,000 \
\hline \text { Common stock, no par } & 30,000 \
\hline \text { Retained earnings } & \underline{54,000} \
\hline \text { Total liabilities and stockholder' equity } & \$ \quad \underline{125,000} \
\hline
\end{array}
\end{array}$$ What is the company's debt to assets ratio?
A) 49%
B) 16%
C) 33%
D) Cannot be determined with the information given.

Accepted Answer

The debt to assets ratio is calculated by dividing total liabilities by total assets. In this case, total liabilities are $100,000 and total assets are $300,000, resulting in a ratio of 33% ($100,000/$300,000). Therefore, the best choice is C.

Question 19

Select the incorrect statement regarding net margin.
A) Net margin refers to the average amount of each sales dollar remaining after all expenses are subtracted.
B) Net margin may be calculated in several ways.
C) The amount of net margin is affected by a company's choices of accounting principles.
D) The smaller the net margin the better.

Accepted Answer

The statement "the smaller the net margin the better" is incorrect. A higher net margin is generally considered better as it indicates that a company is able to generate more profit from each sales dollar after all expenses are subtracted.

Question 20

You are considering an investment in IBM stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:
A) Number of times interest is earned.
B) Debt to assets ratio.
C) Debt to equity ratio.
D) Net margin.

Accepted Answer

Number of times interest is earned, debt to assets ratio, and debt to equity ratio are all ratios that can be used to assess a firm's solvency and debt-paying ability. Net margin, on the other hand, is a profitability ratio and is not directly related to assessing solvency.

Quiz 9: Financial Statement Analysis

The Miller Company reported gross sales of $850,000, sales returns and allowances of $15,000 and sales discounts of $5,000. The company has total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?

The Martin Company reported net income of $15,000 on gross sales of $80,000. The company has total assets of $135,000, of which $102,000 is property, plant and equipment. What is the company's return on investment?

You are considering an investment in Frontier Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except:

The following balance sheet information is provided for Duke Company for 2014: What is the company's current ratio?

Solvency ratios are used to assess a company's:

The following balance sheet information is provided for Santana Company for 2014: What is the company's debt to equity ratio?

The following balance sheet information is provided for Apex Company for 2014: What is the company's working capital?

The following balance sheet information is provided for Greene Company for 2014: What is the company's quick (acid-test) ratio?

The Poole Company reported the following income for 2014: What is the company's net margin?

You are considering an investment in Apple stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:

Alpha Company provided the following balance sheet for 2014: What is the company's plant assets to long-term liabilities ratio?

Select the incorrect statement regarding the return on equity (ROE) measure.

Select the incorrect statement regarding net margin.

You are considering an investment in IBM stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except: