Question 1

Return on equity:
A) will be the same as return on investment.
B) relates dividends and turnover.
C) relates dividends and stockholders' equity.
D)relates net income and stockholders' equity.

Accepted Answer

Return on equity (ROE) is a financial ratio that measures the amount of net income returned as a percentage of shareholders' equity. It is calculated by dividing net income by shareholders' equity. Therefore, it relates net income and stockholders' equity.

Question 2

A current ratio of 6.0 is usually an indication that the firm:
A) has a low degree of liquidity.
B) has a reasonable degree of liquidity.
C) has not made the most productive use of its assets.
D)has made the most productive use of its assets.

Accepted Answer

C

Question 3

A firm's net income is $630,000 on sales of $63 million. Average assets for the period were $14 million. For the year:
A) margin was 5%, turnover was 1.2, and ROI was 6%.
B) margin was 6%, turnover was 1.5, and ROI was 6%.
C) margin was 4%, turnover was 1.2, and ROI was 4.8%.
D)margin was 1%, turnover was 4.5, and ROI was 4.5%.

Accepted Answer

D

Question 4

Another term for return on investment is:
A) Return on equity.
B) Return on assets.
C) Return on retained earnings.
D)Return to sender.

Accepted Answer

Return on investment (ROI) refers to the ratio between net profit and the initial investment. Return on assets (ROA) is another term for ROI as it also measures the efficiency of an investment in generating profits. Return on equity (ROE) and return on retained earnings (RRE) focus on the profitability of the shareholders' equity and the amount of earnings reinvested in the company, respectively. "Return to sender" is not a financial term related to ROI.

Question 5

Financial statement ratios support informed judgments and decision making most effectively:
A) when viewed for a single year.
B) when viewed as a trend of entity data.
C) when compared to an industry average for the most recent year.
D)when the trend of entity data is compared to the trend of industry data.

Accepted Answer

The answer of Financial statement ratios support informed judgments and...

Question 6

Another term for return on equity is:
A) return on investment.
B) return on assets.
C) return on retained earnings.
D)none of these.

Accepted Answer

The answer of Another term for return on equity is:
A)...

Question 7

An advantage of the DuPont model for calculating ROI is that:
A) it focuses on asset utilization as well as net income.
B) it is easier to use than the straightforward ROI formula.
C) it uses average assets and the straightforward ROI formula does not.
D)it uses stockholders' equity.

Accepted Answer

The DuPont model focuses on both net income and the efficiency of asset utilization, providing a more comprehensive analysis of ROI.

Question 8

For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is that it:
A) raises the current ratio.
B) lowers the current ratio.
C) doesn't affect the current ratio.
D)depends on the amount paid.

Accepted Answer

The answer of For a firm that presently has a...

Question 9

A firm has an ROI of 15%, turnover of 3, and sales of $12 million. The firm's margin is:
A) $1,800,000
B) 5%
C) 30%
D)$600,000

Accepted Answer

The margin is calculated as ROI divided by turnover. Here, ROI is 15% and turnover is 3, so the margin is 15% / 3 = 5%.

Question 10

A firm's net income for the year was $800,000. Average assets totaled $6 million, and average liabilities totaled $1.2 million. Return on equity was:
A) 13.3%
B) 16.7%
C) 10%
D)20%

Accepted Answer

Return on equity = Net income / Average equity

Average equity = Average assets - Average liabilities

= $6 million - $1.2 million

= $4.8 million

Therefore, Return on equity = $800,000 / $4.8 million

= 16.7%

Hence, the answer is B) 16.7%.

Question 11

Which of the following is not usually considered a measure of an entity's liquidity?
A) Current ratio.
B) Acid-test ratio.
C) Cash ratio.
D)Working capital.

Accepted Answer

The answer of Which of the following is not usually...

Question 12

Which of the following is a universally accepted measure of profitability?
A) Return on investment.
B) Return on retained earnings.
C) Return on liabilities.
D)All of these.

Accepted Answer

Return on investment (ROI) is a universally accepted measure of profitability because it represents the efficiency of the investment in generating profit. ROI measures the amount of return realized on an investment relative to the amount invested. Return on retained earnings (RORE) and return on liabilities (ROL) are not universally accepted measures of profitability.

Question 13

The return on investment measure of performance: 
A) is never as important a measure of management effectiveness as the amount of net income.
B) relates dividends paid to the entity's assets.
C) is calculated using net income as the amount of return.
D)is calculated by dividing average assets for a period by the amount of net income for the period.

Accepted Answer

The answer of The return on investment measure of performance: 
A)...

Question 14

The return on investment measure of performance:
A) is relevant only to business enterprises.
B) is used by individuals to compare investment performance.
C) is calculated using sales as the amount of return.
D)is calculated using total assets at the beginning of the period as the amount of investment.

Accepted Answer

The return on investment measure of performance is used by individuals to compare investment performance. It measures the amount of return relative to the amount of investment, expressed as a percentage. It is not relevant only to business enterprises and is not calculated using sales as the amount of return. Total assets at the beginning of the period are used as the amount of investment, but this is not the only way to calculate ROI.

Question 15

When comparing entity financial ratios with industry ratios:
A) it should be assumed that the data result from the consistent application of alternative accounting methods.
B) relative values at a point in time may not be significant.
C) the trend of entity ratios should be compared to the current year's industry ratio.
D)entity ratios should not be compared with industry ratios.

Accepted Answer

When comparing entity financial ratios with industry ratios, it is important to note that relative values at a point in time may not be significant due to variations in accounting methods, company characteristics, and industry fluctuations. Therefore, it is important to analyze the trend of entity ratios over time and compare them to the industry's current year ratio to gain a more accurate understanding of the company's financial performance.

Question 16

Presented below are the comparative balance sheets of Big Apple, Inc., at December 31, 2017, and 2016. Sales for the year ended December 31, 2017, totaled $1,780,000.Required:
A) Calculate ROI for 2017.B) Calculate ROE for 2017.C) Calculate working capital at December 31, 2017.D) Calculate the current ratio at December 31, 2017.E) Calculate the acid-test ratio at December 31, 2017.

Accepted Answer

The answer of Presented below are the comparative balance sheets...

Question 17

If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be:
A) Higher.
B) Lower.
C) The same.
D)Would depend on the amount borrowed.

Accepted Answer

The answer of If a firm borrowed money on a...

Question 18

Firm V has a current ratio of 1.9 and current assets of $136,800.Required:
Calculate Firm V's current liabilities and working capital.

Accepted Answer

The answer of Firm V has a current ratio of...

Question 19

Which of the following accounts is part of working capital?
A) Retained Earnings
B) Sales
C) Merchandise Inventory
D)Common Stock

Accepted Answer

Merchandise Inventory is a current asset that is part of working capital, which is defined as the amount of funds a company has available to finance its day-to-day operations. Retained Earnings is not a current asset, but rather a component of stockholders' equity. Sales and Common Stock are not assets, but rather revenue and equity accounts, respectively.

Question 20

Financial ratios:
A) help financial statement users to evaluate the financial characteristics of companies by putting the large dollar amounts reported in financial statements into relative terms for comparison purposes.
B) provide for a more meaningful analysis when the trends of financial ratios for a company are compared to the industry average trends over a period of time.
C) are required reporting disclosures in the notes to the consolidated financial statements of U.S. companies that are regulated by the SEC.
D)All of the above statements are true.
E) A and B are true, but C is not true.

Accepted Answer

Financial ratios help in evaluating financial characteristics and are useful for comparison with industry averages, but they are not required disclosures in SEC-regulated financial statements.

Quiz 3: Fundamental Interpretations Made From Financial Statement Data

Return on equity:

A current ratio of 6.0 is usually an indication that the firm:

A firm's net income is $630,000 on sales of $63 million. Average assets for the period were $14 million. For the year:

Another term for return on investment is:

Financial statement ratios support informed judgments and decision making most effectively:

Another term for return on equity is:

An advantage of the DuPont model for calculating ROI is that:

For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is that it:

A firm has an ROI of 15%, turnover of 3, and sales of $12 million. The firm's margin is:

A firm's net income for the year was $800,000. Average assets totaled $6 million, and average liabilities totaled $1.2 million. Return on equity was:

Which of the following is not usually considered a measure of an entity's liquidity?

Which of the following is a universally accepted measure of profitability?

The return on investment measure of performance:

The return on investment measure of performance:

When comparing entity financial ratios with industry ratios:

If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be:

Firm V has a current ratio of 1.9 and current assets of $136,800.Required: Calculate Firm V's current liabilities and working capital.

Which of the following accounts is part of working capital?

Financial ratios:

The return on investment measure of performance: 