Deck 8: Profitability

Question 1

Net earnings before deducting noncontrolling share of earnings is utilized in the following ratios,since noncontrolling interests are included in the base.Which ratio is an exception to this statement?

A)Net profit margin
B)Return on assets
C)Return on equity
D)Return on investment
E)None of the answers are correct.

Answer 1

C

Question 2

Net profit margin measures return on:

A)sales.
B)owners' equity.
C)productive assets.
D)total assets.
E)inventory.

Answer 2

A

Question 3

A reason that equity earnings create a problem in analyzing profitability is that equity earnings are:

A)usually greater than the related cash flow.
B)less than dividends declared.
C)more than dividends declared.
D)extraordinary.
E)nonrecurring.

Answer 3

A

Question 4

Which of the following ratios will usually have the lowest percent?

A)Return on investment
B)Return on total equity
C)Return on common equity
D)Return on total assets
E)There is not enough information to tell

Question 5

Which of the following is not a base against which profits are measured?

A)Owners' equity
B)Owners' and creditors' funds provided
C)Intangibles
D)Revenues
E)Productive assets

Question 6

Which suppliers of funds bear the greatest risk and should therefore earn the greatest return?

A)Bondholders
B)Suppliers
C)General creditors such as banks
D)Preferred shareholders
E)Common shareholders

Question 7

The DuPont method return on assets uses two component ratios.What are they?

A)Inventory turnover * gross profit margin
B)Times interest earned * debt ratio
C)Return on equity * dividend payout
D)Net profit margin * total asset turnover
E)Return on investment * total investment turnover

Question 8

Which of the following circumstances will cause sales to fixed assets to be abnormally high?

A)A recent purchase of land.
B)A labor-intensive industry.
C)A highly mechanized facility.
D)High direct labor costs from a new union contract.
E)The use of units-of-production depreciation.

Question 9

Which of the following is not a reporting requirement on interim reports?

A)Seasonal information
B)Major changes in income tax provision
C)Full balance sheet
D)Earnings per share
E)Significant changes in financial position

Question 10

Which of the following could cause return on assets to decline when net profit margin is increasing?

A)Sale of investments at year-end
B)Increased turnover of operating assets
C)Decline in book value
D)A stock split
E)Purchase of a new building at year-end

Question 11

Which of the following would most likely cause a rise in net profit margin?

A)Increased sales
B)Decreased preferred dividends
C)Increased cost of sales
D)Decreased operating expenses
E)Decreased earnings per share

Question 12

Total asset turnover measures the ability of a firm to:

A)generate profits on sales.
B)generate sales through the use of assets.
C)buy new assets.
D)move inventory.
E)cover long-term debt.

Question 13

Noncontrolling interest share of earnings is:

A)the total earnings of unconsolidated subsidiaries.
B)earnings based on the percent of holdings by parent company of unconsolidated subsidiaries.
C)the total earnings of consolidated subsidiaries.
D)earnings based on the percent of holdings by outside owners of consolidated subsidiaries.
E)none of the answers are correct.

Question 14

In the analysis of profitability,if equity earnings are substantial,it is advisable to:

A)consider them as extraordinary.
B)consider them as nonrecurring.
C)investigate the earning power of the parent outside of the related investing activities.
D)recompute the debt ratio and times interest earned to remove the impact of equity earnings.
E)use the DuPont method to lessen the impact of equity earnings.

Question 15

Income tax expense in interim reporting should:

A)be based on the quarterly income only.
B)contain a judgment estimation of the annual effective tax rate.
C)be based on the income year-to-date.
D)exclude extraordinary items in earlier quarters of the year.
E)disregard year-end adjustments.

Question 16

Gross profit margin is an important ratio of merchandising firms because:

A)their investments in real property are high.
B)cost of goods sold is usually the largest expense.
C)selling expenses,like advertising,are usually quite high.
D)it measures their ability to collect receivables.
E)it measures their ability to use total assets.

Question 17

Which of the following expresses DuPont analysis?

A)Net profit margin = total asset turnover times return on assets
B)Total asset turnover = operating asset turnover times financial leverage
C)Return on assets = net profit margin times total asset turnover
D)Return on investment = return on equity (1 - tax rate)
E)Dividend yield = dividend payout times earnings per share

Question 18

Operating income is:

A)net sales less cost of goods sold.
B)earnings before interest and tax.
C)earnings before tax and nonrecurring items.
D)gross profit less operating expenses.
E)net income plus interest.

Question 19

Return on assets cannot fall under which of the following circumstances?
$\begin{array} { l l } &\underline{\text { Net Profit Margin} } &\underline{ \text { Tatal Asset Tunover} } \\\text { I.}&\text { decline } & \text { rise } \\\text {II.} &\text { rise } & \text { decline } \\\text { III.}&\text { rise } & \text { rise } \\\text { IV.}&\text { decline } & \text { decline }\end{array}$

A)I
B)II
C)III
D)IV
E)The ratio could fall under all of the answers.

Question 20

Which of the following is not a type of operating asset?

A)Inventory
B)Cash
C)Land
D)Long-term investments
E)Equipment

Question 21

DuPont analysis breaks return on assets into net profit margin and borrowing capacity.

Question 22

Return on investment will typically be lower than return on equity.

Question 23

DuPont analysis can be done with net income or operating income figures as long as the related asset base is consistent.

Question 24

High fixed costs in a period of low activity can cause a low net profit margin.

Question 25

Return on investment measures:

A)return to all suppliers of funds.
B)return to all long-term creditors.
C)return to all long-term suppliers of funds.
D)return to stockholders.
E)return to all short-term suppliers of funds.

Question 26

In profitability analysis,absolute numbers are more meaningful than relative numbers because the analyst needs to know if one firm earned more dollars than the other.

Question 27

Net profit margin is net profit before noncontrolling share of earnings and nonrecurring items to total assets.

Question 28

The operating ratios may give significantly different results from net earnings ratios if a firm has large amounts of nonoperating assets generating income.

Question 29

Redeemable preferred stock is best considered as equity for ratio analysis.

Question 30

Return on investment measures the return on long-term suppliers of funds.

Question 31

Operating assets exclude investments,land,and intangibles from the asset base.

Question 32

The use of debt with high interest charges may cause the net profit margin to be low.

Question 33

Changes in the cost of goods sold can have a substantial impact on gross profit margin.

Question 34

Sales to fixed assets will have the least meaning if assets are relatively new.

Question 35

Profitability is the ability of the firm to generate earnings.

Question 36

Either a drop in net profit margin or a drop in total asset turnover,or both,can cause return on assets to fall.

Question 37

In order to compute gross profit margin,the income statement must be in single-step format.

Question 38

In the formula for return on investment,interest expense is multiplied by (1 - tax rate).Why is this adjustment made?

A)Interest is not tax deductible
B)Debt is excluded from the denominator
C)Net income in the formula is after tax
D)Dividends are not deductible for tax purposes
E)None of the answers are correct.

Question 39

Operating assets equals:

A)cash,accounts receivable,and equipment.
B)current assets plus tangible assets.
C)total assets minus intangible assets.
D)only long-term assets.
E)only current assets.

Question 40

Equity earnings are usually lower than the cash generated from the investment as dividends.

Question 41

Interim reporting recognizes that timeliness of data offsets lack of detail and requires only minimum data.

Question 42

An interim period is a fiscal period less than one year.

Question 43

Interim reports are usually audited.

Question 44

Ratios of profits to sales and to identifiable assets can help to analyze profitability by segment.

Question 45

Match each term to its best description or definition.
a.Full or partial statements expressed in percentages of a given base.
b.Requires full financial statements on a quarterly basis.
c.All statement figures are expressed as a percentage of a base figure from that year's statement.
d.A breakdown by major lines of business,only required in SEC reporting.
e.A breakdown by major lines of business.
f.All statement figures are expressed as a percentage of base-year figures.
g.Requires estimation of some expense items.
h.A comparison of financial data over time.
i.Visual aids to understanding financial data.
Trend analysis

Question 46

Match each term to its best description or definition.
a.Full or partial statements expressed in percentages of a given base.
b.Requires full financial statements on a quarterly basis.
c.All statement figures are expressed as a percentage of a base figure from that year's statement.
d.A breakdown by major lines of business,only required in SEC reporting.
e.A breakdown by major lines of business.
f.All statement figures are expressed as a percentage of base-year figures.
g.Requires estimation of some expense items.
h.A comparison of financial data over time.
i.Visual aids to understanding financial data.
Segment reporting

Question 47

Segment data contain information about geographic markets,including foreign countries.

Question 48

Match each term to its best description or definition.
a.Full or partial statements expressed in percentages of a given base.
b.Requires full financial statements on a quarterly basis.
c.All statement figures are expressed as a percentage of a base figure from that year's statement.
d.A breakdown by major lines of business,only required in SEC reporting.
e.A breakdown by major lines of business.
f.All statement figures are expressed as a percentage of base-year figures.
g.Requires estimation of some expense items.
h.A comparison of financial data over time.
i.Visual aids to understanding financial data.
Vertical,common-size statement

Question 49

Interim reports are useful in analyzing the impact of seasonality.

Question 50

Match each term to its best description or definition.
a.Full or partial statements expressed in percentages of a given base.
b.Requires full financial statements on a quarterly basis.
c.All statement figures are expressed as a percentage of a base figure from that year's statement.
d.A breakdown by major lines of business,only required in SEC reporting.
e.A breakdown by major lines of business.
f.All statement figures are expressed as a percentage of base-year figures.
g.Requires estimation of some expense items.
h.A comparison of financial data over time.
i.Visual aids to understanding financial data.
Interim reporting

Question 51

When used properly,pro forma financial information makes a positive contribution to financial reporting.

Question 52

The SEC requires interim financial data on Form 10-Q.

Question 53

Match each term to its best description or definition.
a.Full or partial statements expressed in percentages of a given base.
b.Requires full financial statements on a quarterly basis.
c.All statement figures are expressed as a percentage of a base figure from that year's statement.
d.A breakdown by major lines of business,only required in SEC reporting.
e.A breakdown by major lines of business.
f.All statement figures are expressed as a percentage of base-year figures.
g.Requires estimation of some expense items.
h.A comparison of financial data over time.
i.Visual aids to understanding financial data.
Common size

Question 54

Interim reports cover fiscal periods of less than one year.

Question 55

Match each term to its best description or definition.
a.Full or partial statements expressed in percentages of a given base.
b.Requires full financial statements on a quarterly basis.
c.All statement figures are expressed as a percentage of a base figure from that year's statement.
d.A breakdown by major lines of business,only required in SEC reporting.
e.A breakdown by major lines of business.
f.All statement figures are expressed as a percentage of base-year figures.
g.Requires estimation of some expense items.
h.A comparison of financial data over time.
i.Visual aids to understanding financial data.
Horizontal

Question 56

Match the ratio that goes with each formula.

- $\frac {\text {Net Income Before Nonrecurring ItemsPreferred Dividends }} { \text {Average Common Equity} }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 57

Match the ratio that goes with each formula.

- $\frac {\text { Net Income Before Noncontrolling Interest and Nonrecurring Items + [(Interest Expense \( ) \times(1-1 \) Tax Rate \( )] \) }} { \text {Average (Long-Term Liabilities + Equity)} }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 58

Match the ratio that goes with each formula.

- $\frac {\text { Net Income Before Noncontrolling Interest and Nonrecurring Items }} { \text {Net Sales} }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 59

Match the ratio that goes with each formula.

- $\frac {\text { Net Income Before Noncontrolling Interest and Nonrecurring Items }} { \text { Average Total Assets} }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 60

Match the ratio that goes with each formula.

- $\frac{\text { Operating Income }}{\text { Net Sales }}$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 61

Match the ratio that goes with each formula.

- $\frac {\text { Operating Income }} { \text {Average Operating Assets } }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 62

Match the ratio that goes with each formula.

- $\frac {\text { Net Sales }} { \text {Average net Fixed Assets} }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 63

Match the ratio that goes with each formula.

- $\frac {\text { Net Income Before Nonrecurring Items -Dividends on Redeemable preferred Stock }} { \text {Average Total Equity} }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 64

Match the ratio that goes with each formula.

- $\frac{\text { Gross Profit }}{\text { NetSales }}$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 66

Match the ratio that goes with each formula.

- $\frac { \text {Net Sales} } { \text { Average Operating Assets } }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin

Question 67

Match the ratio that goes with each formula.

- $\frac { \text { Net Sales} } { \text { Average Total Assets } }$

A)net profit margin
B)total asset turnover
C)return on assets
D)DuPont return on assets
E)operating income margin
F)operating asset turnover
G)return on operating assets
H)DuPont return on operating assets
I)sales to fixed assets
J)return on investment
K)return on total equity
L)return on common equity
M)gross profit margin