Question 1

In order to calculate the current ratio for your firm,you divide the total value of current assets by:

Accepted Answer

The current ratio is calculated by dividing the total value of current assets by the total value of current liabilities. Therefore, the best choice to complete this calculation is option B, the total value of current liabilities.

Question 2

Peak Performance Sporting Goods Company continues to perform well in spite of an economic recession.Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains.Last week Peak Performance reported basic EPS [earnings per share] = $.80/share.If the firm has 4,000,000 shares outstanding,net income after taxes for the same period = _____.

Accepted Answer

- Basic EPS = $0.80/share
- Number of shares outstanding = 4,000,000 shares
- Therefore, total earnings = Basic EPS x Number of shares outstanding
- Total earnings = $0.80/share x 4,000,000 shares = $3,200,000
- Net income after taxes is the same as total earnings, which is $3,200,000.

Therefore, the correct answer is choice C.

Question 3

Generally,a high ___________ ratio could lead investors and creditors to view the company as being very risky.

Accepted Answer

A high debt to owners' equity ratio indicates that there is significant reliance on debt financing compared to equity financing. This can lead investors and creditors to view the company as risky because high debt levels can result in financial instability and an inability to meet debt obligations.

Question 4

You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0].As a loan officer for the local bank,you are called into your boss's office to interpret the results of this ratio.Which of the following statements best reflects an understanding of these results?

Accepted Answer

An acid-test ratio of 1.0 means that the firm has $1.00 in current assets for every $1.00 in current liabilities. This indicates that the firm may represent a higher risk if it cannot maintain adequate inventory turnover. Therefore, option D is the best choice as it correctly interprets the results of the acid-test ratio for Peak Performance Sporting Goods.

Question 5

Peak Performance Sporting Goods Company has just applied for a bank loan in order to expand the business.Using the most recent Balance Sheet data provided by the company owner,you calculate that the company's current ratio is 2.5.In your presentation to the company boss,you remark:

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities, so a current ratio of 2.5 means that Peak Performance has $2.50 of current assets for every $1.00 of current liabilities. This indicates that the company should have enough current assets to cover its short-term obligations. Option A is incorrect because a current ratio of 2.5 suggests that the company is able to meet its short-term obligations. Option B is incorrect because it implies that the company owes $2.50 for every $1.00 of cash it is generating, which is not related to the current ratio. Option D is incorrect because even if most of the company's current assets are in inventory, it still needs enough cash to cover its current liabilities.

Question 6

As a bank loan officer,you are considering a loan application by Peak Performance Sporting Goods.The company has provided you with the following information from its Balance Sheet: Peak Performance's current ratio is:

Accepted Answer

The answer of As a bank loan officer,you are considering...

Question 7

In the current economic climate,banks are remaining very conservative in their lending practices.Peak Performance Sporting Goods is seeking a loan for expansion.As a loan officer for the local bank,you calculate the acid-test ratio for Peak Performance Sporting Goods.Using the information below,you determine Peak Performance's acid-test ratio = ____.

Accepted Answer

The acid-test ratio (also known as the quick ratio) measures a company's ability to pay its short-term obligations with its most liquid assets. It excludes inventory from the calculation as inventory may not be easily convertible to cash.

The formula for acid-test ratio is:

(Current Assets - Inventory) / Current Liabilities

Using the information given, we can calculate Peak Performance Sporting Goods' acid-test ratio as follows:

($65,000 + $12,000 + $8,000 - $45,000) / $40,000 = $40,000 / $40,000 = 1.0

Therefore, the best choice is A) 1.0 as it represents Peak Performance's acid-test ratio.

Question 8

Bob Stewart plans to visit his financial planner today to discuss investment strategy.As a young,"20 something" accountant,he knows he can afford to invest in a few riskier investments.Which of the following ratios will be an important measure of profitability for Bob?

Accepted Answer

Return on equity (ROE) measures a company's profitability by showing how much profit it generates with the money shareholders have invested. As an individual investor, Bob can use ROE to evaluate the profitability of his investments and make informed decisions on riskier investments. Return on sales (ROS) is a measure of a company's operating efficiency, inventory turnover measures the efficiency of a company's inventory management, and the acid test ratio measures a company's short-term liquidity. None of these ratios are as directly relevant to Bob's investment strategy as ROE.

Question 9

If a firm has a debt to owners' equity ratio of .54 (or 54%)we can conclude that:

Accepted Answer

The answer of If a firm has a debt to...

Question 10

Marshall McBride inherited $10,000 from his Great Aunt Martha.He invested $5,000 in a new,risky start-up venture,10^th Generation,Inc. ,and the other $5,000 in Major Chemicals,Inc,a well-known chemical company that's been around for years.Today,his financial planner called to inform him that the Return on Equity on 10^th Generation = 6.28%;and,Return on Equity on Major Chemicals = 10.50%.Which of the following facts is important information for Marshall McBride?

Accepted Answer

This question is testing the understanding of the relationship between risk and return. Option A is incorrect because it makes a blanket statement that is not necessarily true - the return on equity of new companies can be higher or lower than that of established firms. Option C is incorrect because return on equity is a profitability ratio, not a liquidity ratio. Option D is incorrect because leverage ratios are not necessarily the best measure of how well investments are performing. Therefore, the best choice is B - investors who take on more risk expect higher returns.

Question 11

Peak Performance Sporting Goods Company has collected the following information about itself and its competitors: Which of the following statements explains the importance of this information?

Accepted Answer

Return on Sales is an important indicator of how well Peak Performance is performing in generating income from sales when compared to its competitors. It shows the efficiency of the company in utilizing its resources to generate sales revenue.

Question 12

As a bank loan officer,you are considering a loan application by Peak Performance Sporting Goods.The company has provided you with the following information: Peak Performance's debt to owners equity ratio (rounded to the nearest tenth of a percent)is:

Accepted Answer

A debt to owners equity ratio of 45.4% would be considered relatively low, meaning that the company is relying more on equity (money invested by owners) than debt (money borrowed from lenders). This may be favorable for the company's financial stability, but it also means that they may not need or qualify for a large loan.

A ratio of 112.5% or 133.3% would mean that the company has a higher level of debt than equity, which puts them in a riskier position from a lender's perspective. They may struggle to make payments on existing debt or may have trouble obtaining additional loans.

A ratio of 66.7% puts the company in the middle range, where they have a moderate amount of debt relative to their equity. This may be a viable ratio for obtaining a loan, but other factors such as the company's cash flow, credit history, and ability to repay the loan will also need to be considered.

Question 13

Marshall McBride inherited $10,000 from his Great Aunt Martha.He invested $5,000 in a new start-up venture,10^th Generation,Inc. ,and the other $5,000 in Major Chemicals,Inc,a well-known chemical company that's been around for years.Yesterday,he gathered the following information from the financial statements of these companies At this time,Marshall's return on equity is:

Accepted Answer

The answer of Marshall McBride inherited $10,000 from his Great...

Question 14

Leverage ratios indicate the extent to which ________ has been used to fund a business's operations.

Accepted Answer

Leverage ratios specifically measure the amount of debt a business has used to finance its operations, therefore option A is the correct choice.

Question 15

Your firm is a supplier to a major chain of discount stores.You have heard rumors that this chain of discount stores is in financial difficulty.Which financial ratios would indicate the discount store's ability or inability to pay its short-term debts?

Accepted Answer

Liquidity ratios are used to measure a company's ability to pay its short-term debts. Examples of liquidity ratios include the current ratio, quick ratio, and cash ratio. By analyzing the discount store's liquidity ratios, one can determine if they have enough current assets to cover their current liabilities, which would indicate their ability to pay short-term debts.

Question 16

Peak Performance Sporting Goods Company has reported net income after taxes = $3,750,000,with 18,250,000 shares outstanding.Basic Earning per Share for Peak Performance = ________.

Accepted Answer

Basic Earnings per Share = Net income after taxes / Number of shares outstanding

= $3,750,000 / 18,250,000

= $0.205 or approximately $0.21/share (rounded to the nearest cent)

Therefore, the correct answer is choice A, approximately $0.21/share.

Question 17

In order to understand if the results of ratio calculations indicate a financially strong company,the results:

Accepted Answer

Ratio calculations are most useful when compared to other firms in the same industry. This allows for a more accurate comparison of financial strength and performance, as different industries may have varying financial metrics and benchmarks. Comparing to same size firms in the same geographic region or to the largest firms in the country may not provide as relevant or accurate insights. Norms established by generally accepted accounting principles may provide a basis for comparison, but may not take into account industry-specific factors or current market conditions.

Question 18

Backstreet Books,a small eclectic bookstore in a bustling college town wants to open another store at the west end of campus.Allison Robards,the store owner,plans to visit her banker in the hopes of obtaining additional financing.In preparation for her visit,the banker asks her for the following information: Calculate the debt to equity ratio for Backstreet Books.

Accepted Answer

The debt to equity ratio is calculated by dividing total debt by total equity. Without having access to Backstreet Books' financial statements, it's impossible to calculate the ratio accurately. However, the fact that the ratio is over 100% suggests that the company may have a large amount of debt relative to equity, which could make it harder to obtain additional financing from a bank. Option B is therefore the most likely choice.

Question 19

The top managers of Highbrow Bookstores want to indicate to the firm's shareholders how effectively they have managed the company.Perhaps the most meaningful way to do this would be by reporting strong:

Accepted Answer

The most meaningful way to indicate effective management to shareholders is through profitability ratios, such as return on assets, return on equity, gross profit margin, and net profit margin. These ratios show how well the company is utilizing its resources and generating profits for the shareholders. Liquidity ratios show the company's ability to meet short-term obligations, leverage ratios show the company's debt levels and financial risk, and activity ratios show how well the company is utilizing its assets, but none of these ratios directly indicate profitability or effective management.

Question 20

Peak Performance Sporting Goods Company competes with several other firms in the retail industry for important visibility and retail space in large stores.The company's chief financial officer knows that in order to attract investors,the company must demonstrate growth,and its management must outperform the competition.The CFO continuously watches __________________ because these are key to measuring growth.

Accepted Answer

The answer of Peak Performance Sporting Goods Company competes with...

Quiz 17: Understanding Accounting and Financial Information