Question 1

How is the debt-to-owners'-equity ratio used?
A) To describe the extent to which the firm is financed through borrowed money
B) To determine how much net income the business earns for each dollar invested
C) To determine how readily the firm can meet unexpected demands for cash
D) To indicate the percentage of revenue which will be profit
E) To determine the percentage of profits paid out to debtholders

Accepted Answer

The debt-to-owners' equity ratio is used to describe the extent to which the firm is financed through borrowed money. This ratio compares the amount of debt the company has incurred to its equity, and indicates the proportion of financing that comes from debt versus equity. A high debt-to-owners' equity ratio indicates a greater reliance on borrowed funds, which may carry higher risk and increased costs in the form of interest payments. A low ratio, on the other hand, suggests a lower level of risk and greater financial strength.

Question 2

What is the purpose of computing the current ratio?
A) To provide investors with some measurement of the returns they can expect from their investment
B) To measure the extent to which a firm is financed through borrowed money
C) To measure how much cash the firm has
D) To measure the firm's ability to meet emergency demands for cash
E) To measure the firm's ability to meet its current obligations out of its current assets

Accepted Answer

The current ratio is used to measure a firm's ability to meet its current obligations out of its current assets. It indicates the extent to which a firm can cover its short-term liabilities with its current assets. A high current ratio indicates that the firm has enough current assets to meet its short-term obligations, while a low current ratio indicates that the firm may have difficulty in meeting its short-term obligations. This is important information for investors or creditors who want to assess the company's financial health and solvency.

Question 3

The current ratio measures a firm's ability to meet
A) interest payments.
B) long-term liabilities.
C) short-term liabilities.
D) all liabilities.
E) dividend payments.

Accepted Answer

The current ratio is a liquidity ratio that measures a firm's ability to meet its short-term liabilities. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates a greater ability to meet short-term obligations. The other options mentioned, such as interest payments, long-term liabilities, all liabilities, and dividend payments are not directly related to the current ratio.

Question 4

Don wants to compute the earnings per share for SFX Ltd. How does he do it?
A) Divide sales by the number of common shares outstanding
B) Divide cost of goods sold by the number of common shares
C) Divide net income by the number of common shares outstanding
D) Divide cost of goods sold by average inventory
E) Divide net income by sales

Accepted Answer

Earnings per share (EPS) is calculated by dividing net income by the number of common shares outstanding. Therefore, the correct choice is C. A is incorrect because sales is not a measure of profitability. B is incorrect because cost of goods sold does not represent the earnings of the company. D is incorrect because it calculates the inventory turnover, which is different from EPS. E is incorrect because net income divided by sales ratio gives the profit margin, not EPS.

Question 5

A company ends the year with a net income of $7.5 million and earnings per share of $1.50. What is the number of common shares outstanding for this company?
A) 3 million
B) 4.5 million
C) 5 million
D) 6.5 million
E) 11.25 million

Accepted Answer

To find the number of common shares outstanding, we can use the formula:
Earnings per share = Net income / Number of common shares outstanding
Plugging in the given values, we get:
1.50 = 7.5 million / Number of common shares outstanding
Solving for Number of common shares outstanding, we get:
Number of common shares outstanding = 5 million

Question 6

What is the purpose of computing profitability ratios?
A) To determine liquidity
B) To determine the most efficient use of resources
C) To determine the liquidity of the firm
D) To determine the potential risk of business activity
E) To determine the potential returns investors can expect

Accepted Answer

The purpose of computing profitability ratios is to determine the potential returns investors can expect. Profitability ratios measure a company's ability to generate earnings in relation to its revenue, assets, and equity. These ratios are important for investors when analyzing a company's financial performance and deciding whether or not to invest in the company.

Question 7

Suppose a company unexpectedly receives a huge order for its main product. To cope with this, the owner borrows money to rent an additional facility to fill the orders and to pay the temporary workers who will produce the large order. The owner does this hoping that the additional costs will be more than covered by the revenue from selling the additional units of the product. Which ratio will be most affected by these decisions?
A) The short-term solvency ratio
B) The long-term solvency ratio
C) The profitability ratio
D) The activity ratio
E) The equity ratio

Accepted Answer

The short-term solvency ratio will be most affected because borrowing money to rent an additional facility and to pay temporary workers increases the company's short-term liabilities, directly impacting its ability to meet short-term obligations.

Question 8

The inventory turnover ratio is calculated by
A) dividing cost of goods sold by revenues.
B) dividing average inventory by cost of goods sold.
C) dividing revenues by cost of goods sold.
D) dividing cost of goods sold by average inventory.
E) dividing revenues by average inventory.

Accepted Answer

The inventory turnover ratio measures how quickly a company can sell its inventory and is calculated by dividing the cost of goods sold by the average inventory. Therefore, choice D is the correct answer.

Question 9

________ ratios give investors an idea of what returns they can expect on their investment; dividing ________ by total owners' equity is one such ratio.
A) Profitability; earnings per share
B) Long-term liquidity; net income
C) Activity; average inventory
D) Short-term liquidity; earnings per share
E) Profitability; net income

Accepted Answer

The question is asking for a ratio that gives investors an idea of what returns they can expect on their investment, which is a measure of profitability. Dividing net income by total owners' equity gives us the return on equity (ROE) ratio, which measures the amount of profit a company generates relative to the amount of shareholder equity. Therefore, the correct answer is E) Profitability; net income.

Question 10

The debt-to-owners' equity ratio measures a firm's ability to meet
A) dividend payments.
B) long-term liabilities.
C) interest payments.
D) short-term liabilities.
E) all liabilities.

Accepted Answer

The answer of The debt-to-owners' equity ratio measures a firm's...

Question 11

What does return on equity measure?
A) The amount of pre-tax profit earned for each dollar invested
B) The amount of profit earned for each share of stock
C) The amount of profit earned for each dollar of previous profit retained in the business
D) The amount of profit earned for each dollar invested
E) The amount of pre-tax profit earned for each share of stock

Accepted Answer

Return on equity measures the amount of profit earned for each dollar of shareholders' equity (essentially, each dollar invested in the company).

Question 12

Which of the following calculates the debt-to-owners' equity ratio?
A) Long-term liabilities divided by owners' equity
B) Current liabilities divided by owners' equity
C) Long-term liabilities divided by retained earnings
D) Total liabilities divided by retained earnings
E) Total liabilities divided by owners' equity

Accepted Answer

The debt-to-owners' equity ratio is calculated by dividing the total liabilities of a company by its owners' equity. Option E is the only one that uses the correct formula. Option A calculates the long-term debt-to-owners' equity ratio, while option B calculates the current debt-to-owners' equity ratio. Option C calculates the long-term debt to retained earnings ratio, while option D calculates the total liability to retained earnings ratio.

Question 13

With fixed assets of $4 billion and current assets of $1.7 billion, Realm Company has long-term liabilities of $2 billion and current liabilities of $0.34 billion. What is Realm's current ratio?
A) 0.85
B) 2
C) 2 .44
D) 5
E) 11.76

Accepted Answer

D)The current ratio = current assets/current liabilities; in this scenario, $1.7/.34 = 5.

Question 14

Delavan Company has fixed assets of $5 billion, current assets of $2 billion, long-term liabilities of $2 billion, current liabilities of $1 billion, and owners' equity of $2 billion. What is Delavan's debt-to-equity ratio?
A) 1.5
B) 0.9
C) 1.2
D) 0.4
E) 0.8

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by owners' equity. Total liabilities are $3 billion ($2 billion long-term + $1 billion current), and owners' equity is $2 billion. Thus, the ratio is $3 billion / $2 billion = 1.5.

Question 15

What is the purpose of computing the earnings per share ratio?
A) To determine which firm gets the most out of its resources
B) To determine the net profit margin
C) To measure a firm's ability to meet its current liabilities
D) To attract investors
E) To measure the net income earned by a business for each dollar invested

Accepted Answer

The purpose of computing the earnings per share ratio is to measure the net income earned by a business for each dollar invested. This ratio is commonly used to provide information to potential investors about the profitability of a company and their potential return on investment. It can also be helpful for existing shareholders to evaluate the company's performance and make informed decisions about holding, buying, or selling shares.

Question 16

An activity ratio measures a firm's
A) sales per employee.
B) frequency of purchases.
C) level of inventory.
D) efficiency in using its assets.
E) sales per selling expense dollar.

Accepted Answer

An activity ratio measures how efficiently a firm is using its assets to generate revenue. Examples of activity ratios include inventory turnover, accounts receivable turnover, and asset turnover. These ratios provide insights into how quickly a company is selling its products, collecting payment, and using its assets to generate revenue. Sales per employee, frequency of purchases, and sales per selling expense dollar are all examples of other ratios that focus on different aspects of a company's operations.

Question 17

Executives at Belize Inc. want to see the company's short-term solvency ratios. What question do they most likely want to have answered?
A) Can immediate debts be paid without obtaining more loans?
B) Is there enough inventory to fulfill sales demands?
C) How much inventory does the company have on hand?
D) How much debt is the company carrying?
E) Are the company's products priced correctly to maximize revenue?

Accepted Answer

Short-term solvency ratios indicate a company's ability to meet its immediate financial obligations, i.e. paying off debts due in the near future. Therefore, executives at Belize Inc. would be interested in knowing if the company has enough funds to pay off its immediate debts without needing to obtain more loans.

Question 18

Historically, it was thought that the current ratio should be ________, but more recently, many firms that are financially strong operate with current ratios of ________.
A) at least 10:1; less than 5:0
B) more than 7:1; 2.0
C) less than 5:1; more than 10:1
D) 2:1; less than 2:1
E) 3:1; less than 5:1

Accepted Answer

Historically, it was believed that a current ratio of 2:1 was a good indicator of financial health, indicating that a company had twice as many current assets as current liabilities. However, in more recent times, many financially strong companies operate successfully with current ratios of less than 2:1, reflecting more efficient asset management or different industry standards.

Question 19

How is the return on equity ratio calculated?
A) Operation income divided by retained earnings
B) Net income divided by retained earnings
C) Net income divided by total owners' equity
D) Operating income divided by total owners' equity
E) Net income divided by common stock

Accepted Answer

The return on equity ratio is calculated by dividing net income by total owners' equity. This formula shows how much profit a company is making for every dollar of shareholder investment. Therefore, Option C is the best choice.

Question 20

Which of the following will calculate the current ratio?
A) Current liabilities divided by current assets
B) Current assets divided by current liabilities
C) Current assets minus current liabilities
D) Current assets divided by total liabilities
E) Current liabilities minus current assets

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Option B is the only one that correctly calculates this ratio. Option A calculates the inverse, which is the quick ratio. Option C calculates the net working capital. Option D calculates the debt ratio. Option E is a nonsensical calculation.

Quiz 11: Understanding Accounting

How is the debt-to-owners'-equity ratio used?

What is the purpose of computing the current ratio?

The current ratio measures a firm's ability to meet

Don wants to compute the earnings per share for SFX Ltd. How does he do it?

A company ends the year with a net income of $7.5 million and earnings per share of $1.50. What is the number of common shares outstanding for this company?

What is the purpose of computing profitability ratios?

The inventory turnover ratio is calculated by

ratios give investors an idea of what returns they can expect on their investment; dividing by total owners' equity is one such ratio.

The debt-to-owners' equity ratio measures a firm's ability to meet

What does return on equity measure?

Which of the following calculates the debt-to-owners' equity ratio?

With fixed assets of $4 billion and current assets of $1.7 billion, Realm Company has long-term liabilities of $2 billion and current liabilities of $0.34 billion. What is Realm's current ratio?

Delavan Company has fixed assets of $5 billion, current assets of $2 billion, long-term liabilities of $2 billion, current liabilities of $1 billion, and owners' equity of $2 billion. What is Delavan's debt-to-equity ratio?

What is the purpose of computing the earnings per share ratio?

An activity ratio measures a firm's

Executives at Belize Inc. want to see the company's short-term solvency ratios. What question do they most likely want to have answered?

Historically, it was thought that the current ratio should be , but more recently, many firms that are financially strong operate with current ratios of .

How is the return on equity ratio calculated?

Which of the following will calculate the current ratio?