Deck 13: Measuring and Evaluating Financial Performance

Question 1

Which of the following measures would assist in assessing the profitability of a company?

A)Debt-to-assets ratio
B)Fixed asset turnover ratio
C)Receivables turnover ratio
D)Current ratio

Answer 1

Fixed asset turnover ratio

Question 2

If an analyst wanted to examine a company's long-run ability to survive,which of the following would best be considered?

A)Liquidity
B)Market share
C)Profitability
D)Solvency

Answer 2

Solvency

Question 3

Net income was $418,600 in 2011 and $364,000 in 2012.The year-to- year dollar change in net income is:

A)15%.
B)87%.
C)$54,600.
D)$418,600.

Answer 3

$54,600.

Question 4

Data from ratio analysis can be:

A)compared to particular competitors in the industry.
B)compared to the company ratio data in previous years.
C)compared to industry averages.
D)all of the above.

Question 5

During the current accounting period,revenue from credit sales is $671,000.The accounts receivable balance is $51,480 at the beginning of the period and $52,200 at the end of the period.Which of the following statements is true?

A)The receivables turnover ratio is 12.9.
B)On average,it takes 12.9 days to collect payment from credit customers.
C)The receivables turnover ratio is 28.3.
D)On average,the company sells its inventory every 28.3 days.

Question 6

If you wish to examine the relationships among various items reported in one or more of the financial statements,you are most likely to use:

A)time-series analysis.
B)ratio analysis.
C)horizontal analysis.
D)cross-sectional analysis.

Question 7

Which of the following measures would assist in assessing the profitability of a company?

A)Quality of income ratio
B)Times interest earned ratio
C)Inventory turnover ratio
D)Capital acquisitions ratio

Question 8

If an analyst wants to examine a company's current ability to generate income,which of the following would best be considered?

A)Liquidity
B)Market share
C)Profitability
D)Solvency

Question 9

Which of the following analysis techniques does not examines significant sustained changes over time?

A)Trend analyses
B)Horizontal analyses
C)Time-series analyses
D)Vertical analyses

Question 10

If an analyst wants to examine a company's short-run ability to survive,which of the following would best be considered?

A)Liquidity
B)Market share
C)Profitability
D)Solvency

Question 11

Which of the following measures would assist in assessing the liquidity of a company?

A)Price/earnings ratio
B)Fixed asset turnover ratio
C)Receivables turnover ratio
D)Times interest earned ratio

Question 12

Solvency ratio data are primarily concerned with the ability of a company to:

A)produce profits.
B)handle its debt.
C)manage its cash flow.
D)provide income for shareholders.

Question 13

Company X has net sales revenue of $1,250,000,cost of goods sold of $760,000,and all other expenses of $290,000.The beginning balance of shareholders' equity is $400,000 and the beginning balance of fixed assets is $361,000.The ending balance of shareholders' equity is $600,000 and the ending balance of fixed assets is $389,000.What is the fixed asset turnover ratio?

A)0.53
B)2.50
C)3.33
D)0.80

Question 14

Net income was $418,600 in 2010 and $364,000 in 2011.The year- to-year percent change in net income is:

A)15%.
B)$54,600.
C)87%.
D)13%.

Question 15

Consider the formula used to calculate each of the following financial performance ratios.From the list of financial statement items below,match their letters with the ratio it is used to calculate.Some financial statement items will be used more than once. ___ Net Profit Margin
___ Debt-to-Assets Ratio
___ EPS
___ ROE
___ Capital Acquisitions Ratio
___ Inventory Turnover Ratio
___ Times interest earned Ratio

A)Net Income
B)Interest Paid
C)Cost of Goods Sold
D)Net Sales Revenue
E)Net Cash Flows from Operating Activities
F)Total Assets
G)Average Shareholders' Equity
H)Total Liabilities
I)Average Shares Outstanding
J)Cash paid for Property,Plant,and Equipment
K)Average Inventory
L)Income Tax Expense

Question 16

Which of the following measures would assist in assessing the solvency of a company?

A)Debt-to-assets ratio
B)Fixed asset turnover ratio
C)Return on equity ratio
D)Quality of income ratio

Question 17

Company X has net sales revenue of $1,250,000,cost of goods sold of $760,000,and all other expenses of $290,000.The beginning balance of shareholders' equity is $400,000 and the beginning balance of fixed assets is $361,000.The ending balance of shareholders' equity is $600,000 and the ending balance of fixed assets is $389,000.What is the Return On Equity of the company?

A)0.53
B)2.50
C)3.33
D)0.40

Question 18

Company X has a capital acquisitions ratio of 0.8.Company Y has a capital acquisitions ratio of 1.2.Which of the following statements is true?

A)Company X is more likely to have a higher quality of income ratio than Company Y.
B)Company Y is less likely to need external financing than Company X.
C)Company X is more likely to have a higher times interest earned ratio than Company Y.
D)Company X is less likely to need external financing than Company Y.

Question 19

When using ratio data for comparison to other companies,analyst should:

A)not assume that all companies in the industry are in direct competition.
B)not interpret the data as a way of determining which companies will survive and outperform others.
C)only use data from one time period.
D)use industry averages,rather than individual companies,for the comparison.

Question 20

Which of the following are the constraints on how broadly accounting rules can be applied?

A)Industry practices constraint and cost-benefit constraint.
B)Disclosure principle constraint and cost-benefit constraint.
C)Industry practices constraint and disclosure principle constraint.
D)Cost-benefit constraint and disclosure principle constraint.

Question 21

An increase in the inventory turnover rate is indicative of:

A)a reduction in the cost of goods sold.
B)a decrease in the supply of inventory.
C)an increase in the supply of inventory.
D)an increase in sales revenue.

Question 22

A decrease in accounts receivable turnover ratio is indicative of:

A)an increase in sales revenue.
B)slower selling inventory.
C)an increase in accounts receivable.
D)a decline in cost of good sold.

Question 23

Company X has net sales revenue of $436,000,cost of goods sold of $343,000,and all other expenses of $157,000,if interest expense is $16,000 and income tax expense is zero,the times interest earned ratio is:

A)-3.0
B)+5.0
C)+6.8
D)-4.8

Question 24

How competitors calculate amortization is most likely to affect comparisons between competitors if property,plant,and equipment:

A)makes up a large percent of assets and average useful lives are fairly different.
B)makes up a small percent of assets and assets are financed in a different way.
C)makes up a small percent of assets and average useful lives are fairly similar.
D)is primarily leased in the industry,not purchased.

Question 25

The debt-to-assets ratio is the:

A)ratio of current liabilities to current assets.
B)same calculation as the current ratio,but with total assets instead of short-term assets.
C)ratio of total liabilities to total assets.
D)proportion of total liabilities financed by creditors.

Question 26

A company that has a current ratio less than one cannot cover:

A)current liabilities with its current cash flow.
B)current expenses with its current sales revenue.
C)expenses with its current revenues.
D)current liabilities with its current assets.

Question 27

A current ratio of 2.5 means that for every dollar of:

A)accounts payable,there is $2.50 of cash.
B)current liabilities,there is $2.50 of current assets.
C)current assets,there is $2.50 of current liabilities.
D)total liabilities,there is $2.50 of current liabilities.

Question 28

A company has $72,500 of inventory at the beginning of the year and $65,500 at the end of the year.Sales revenue is $986,400,cost of goods sold is $572,700,and net income is $124,200 for the year.The inventory turnover ratio is:

A)1.8.
B)8.3.
C)6.0.
D)14.3.

Question 29

A company has $72,500 in inventory at the beginning of the accounting period and $65,500 at the end of the accounting period.Sales revenue is $986,400,cost of goods sold is $572,700,and net income is $124,200 for the accounting period.On average,this company has inventory on hand for approximately:

A)203 days.
B)44 days.
C)61 days.
D)26 days.

Question 30

Company X has net sales revenue of $780,000,cost of goods sold of $343,200 and all other expenses of $327,600 for the current year.At the beginning of the year,503,000 shares of common shares were outstanding,and,at the end of the year,537,000 shares of common shares were outstanding.The basic EPS for the company is:

A)$1.50
B)$0.84
C)$0.21
D)$0.87

Question 31

A current ratio of less than one is not so much of a concern when the company has a:

A)low fixed asset turnover ratio.
B)high days to collect number.
C)high inventory turnover ratio.
D)all of the above.

Question 32

Judging only from the ratios below,which of the following clothing wholesalers is least likely to be having cash flow problems?

A)Option A
B)Option B
C)Option C
D)Option D

Question 33

Which of the following could not explain why a company has a lower quality of income ratio but a higher EPS than one of its competitors?

A)The company sells a higher percent of goods on credit.
B)The company has fewer shares of outstanding common shares relative to its net income.
C)The company earns a higher percent of net income from non-operating activities.
D)The company pays a higher dividend.

Question 34

Company X has net sales revenue of $780,000,cost of goods sold of $343,200,and all other expenses of $327,600.The net profit margin is:

A)0.32
B)0.56
C)0.86
D)0.14

Question 35

An increase in gross profit percentage indicates that:

A)cost of goods sold as a percentage of sales has decreased.
B)cost of goods sold as a percentage of sales has increased.
C)operating expenses as a percentage of sales have increased.
D)operating expenses as a percentage of sales have decreased.

Question 36

A times interest earned ratio of 11 means that the company's:

A)net income is large enough to pay interest and taxes 11 times.
B)net cash flow from operations before taxes and interest is large enough to pay interest 11 times.
C)net cash flow from operations is large enough to pay interest and taxes 11 times.
D)net income before taxes and interest is large enough to pay interest 11 times.

Question 37

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:

A)large percent of assets and inventory costs are stable.
B)large percent of assets and inventory costs are not stable.
C)small percent of assets and inventory costs are not stable.
D)small percent of assets and inventory costs are stable.

Question 38

If a company generates $3.15 in operating cash flows for every $1 of net income then the company's:

A)times interest earned ratio is 3.15.
B)net profit margin is 3.15.
C)return on equity is 3.15.
D)quality of income ratio is 3.15.

Question 39

If net income is rising,but both sales and the gross profit percentage remain the same,then:

A)operating expenses are falling.
B)operating expenses are rising.
C)cost of goods sold is falling.
D)cost of goods sold is rising.

Question 40

Company X has net sales revenue of $780,000,cost of goods sold of $343,200,and all other expenses of $327,600.The gross profit percentage is:

A)32%
B)56%
C)86%
D)14%

Question 41

A P/E ratio is calculated in the middle of the accounting year.For a given share price,the company could use the most recent annual EPS,or it could use the total of the most recent four quarterly EPS numbers.Which of the following statements is not true?

A)The ratio will be larger if the most recent annual EPS is used when earnings are falling.
B)The ratio will be smaller if the EPS for the last four quarters are used when earnings are rising.
C)The ratio will be smaller if the most recent annual EPS is used when earnings are falling.
D)The ratio will be larger if the EPS for the last four quarters are used when earnings are falling

Question 42

Calculate the company's accounts receivable turnover ratio for the current year?

A)10.62
B)4.0
C)4.3
D)6.31

Question 43

A company originally issues 180,000 shares at a price of $22; one year later the share price is $40 and the number of outstanding shares is unchanged.During the year,the company had net income of $230,400.The P/E ratio at the end of the year is:

A)0.0002.
B)24.22.
C)31.25.
D)0.0001.

Question 44

The primary objective of external financial reporting is:

A)to enhance the ability of the company to acquire financial capital from external sources.
B)to accurately provide financial results for tax purposes.
C)to comply with external regulations and requirements of government and professional associations.
D)to provide useful information for decision-making,especially investors and creditors.

Question 45

Calculate the company's inventory turnover ratio for the current year?

A)4.61
B)2.44
C)21.69
D)13.76

Question 46

Which financial factor in the following list is most likely to be a cause of a going-concern problem?

A)Excessive reliance on debt financing.
B)A high inventory turnover ratio.
C)A high current ratio.
D)Stable net income growth.

Question 47

Which non-financial factor in the following list is most likely to be a cause of a going-concern problem?

A)Hiring a new CEO.
B)Loss of a key patent.
C)Announcing a new share issue.
D)Replacing an old product line.

Question 48

A company has a current ratio of 2.0 and current assets of $550,000.It has cash of $50,000,short term investments of $150,000,accounts receivables of $50,000 and inventory of $300,000.What would be the quick ratio?

A)2.0
B)1.82
C)0.53
D).91

Question 49

If a company's P/E ratio is 24 and the company's EPS is $1.50 then the company's share price is:

A)$36.00.
B)$25.50.
C)$16.00.
D)$6.25.

Question 50

If a company's P/E ratio suddenly decreases:

A)you should sell the shares as soon as possible.
B)you should buy more of the shares to increase your average gain.
C)the company probably announced higher earnings forecasts.
D)the market must have reacted to some bad news that is expected to affect the company in the future.

Question 51

Calculate the company's days to sell ratio for the current year?

A)16.82
B)21.69
C)5.94
D)26.53

Question 52

Calculate the company's days to collect ratio for the current year?

A)91.25
B)84.88
C)57.84
D)34.37

Question 53

Which of the following statements is true?

A)Expenses and losses both represent decreases in assets or increases in liabilities; the terms can therefore be used interchangeably.
B)Expenses and revenues deal with peripheral activities,while losses and gains deal with operating activities.
C)Expenses and revenues deal with operating activities,while losses and gains deal with peripheral activities.
D)Revenues and gains both represent increases in assets or decreases in liabilities; the terms can therefore be used interchangeably.

Question 54

If a company's P/E ratio is 12.5 and the company's share price is $17.50 per share then the company's EPS is:

A)$0.71.
B)$1.40.
C)$5.00.
D)$0.40.

Question 55

Company X has a P/E ratio of 16 in year 2009 and 16.5 in 2010.In 2011 its P/E ratio is 24.The best way to interpret these data is to conclude that:

A)the shares are overpriced and should be sold.
B)the shares have great growth capacity and should be bought.
C)other financial results and news should be examined to determine the cause of the P/E ratio change.
D)the shares are under-priced and should be bought.

Question 56

A share sells for $20.The company has $64 million in earnings and 200 million outstanding shares.The P/E ratio for the company is:

A)62.5.
B)200.
C)0.31.
D)6.4.

Question 57

The cost benefit constraint recognizes that:

A)the costs of providing information to users should be less than the benefits.
B)the expenses of an operation should be less than the revenues.
C)the expenses and revenues associated with a transaction should be reported at the same time.
D)all of the above.

Question 58

The patent on a major drug produced by a pharmaceutical company will soon expire.Sales of the drug contribute 10% to the company's net income.Which of the following statements is most likely to be true in these circumstances?

A)The P/E ratio will probably fall when the patent ends.
B)The P/E ratio will probably rise because the share price will rise and the earnings will fall.
C)The P/E ratio will probably fall as investors factor in the future drop in net income.
D)The P/E ratio will probably rise because the share price will fall and the earnings will fall.

Question 59

The P/E ratio for the last 12 months for the company below is most likely to be calculated as which of the following?

A)26.6
B)31.25
C)0.01
D)25.0

Question 60

The going-concern assumption states that the:

A)company will always maximize the profit for shareholders.
B)company is not expected to go out of business in the near future.
C)company is a separate concern from the shareholders.
D)company's results will be reported in a consistent manner from period to period.

Question 61

Trend data are always in dollars while ratio data are always in percentages.
BT: Knowledge

Question 62

If a company is expanding its facilities,its fixed asset turnover ratio is likely to fall temporarily.
BT: Comprehension

Question 63

Nonrecurring items on the income statement are:

A)reported net of income tax.
B)reported before income tax expense.
C)not subject to income tax.
D)none of the above.

Question 64

Liquidity measures the ability of a company to meet its current financial obligations.
BT: Knowledge

Question 65

A company's comparative balance sheets show total assets for 2012 and 2011 as $990,000 and $900,000,respectively.What is the percentage change to be reported in the horizontal analysis?

A)Increase of 10%
B)Decrease of 10%
C)Increase of 9%
D)Decrease of 9%

Question 66

Trend data can be measured in dollar amounts or percentages.
BT: Knowledge

Question 67

For financial information to be useful it must possess the following characteristics:

A)Must be relevant and faithfully represent the underlying business.
B)Must be faithful and accurate.
C)Must be timely and verifiable.
D)Must be relevant and comparable

Question 68

Which of the following factor does not contribute to the going-concern problem?

A)excessive reliance on debt financing.
B)loss of key personnel without comparable replacement.
C)inadequate maintenance of long-lived assets.
D)company following accounting rule peculiar to its industry.

Question 69

Calculate the debt to equity ratio for the current year.

A)17
B)20
C)33
D)67

Question 70

Time-series analysis is an example of trend analysis.
BT: Knowledge

Question 71

Calculate the price to earnings ratio for the current year.

A)0.50
B)1.50
C)2.00
D)2.07

Question 72

Calculate the return on equity ratio for the current year.

A)66.66%
B)60.61%
C)50.42%
D)80.81%

Question 73

Industries differ greatly in terms of the percentage of sales made on credit.This means some measures of liquidity are less relevant to companies in some industries than in others.
BT: Comprehension

Question 74

The types of nonrecurring items that must be separately stated on an income statement include:

A)gains or losses on equipment sales.
B)gains or losses on discontinued operations.
C)changes in expenses associated with a tax change.
D)all of the above.

Question 75

Calculate the company's asset turnover ratio for the current year.

A)2.00
B)1.80
C)1.51
D)0.50

Question 76

Calculate the net profit margin for the current year.

A)32.22%
B)33.33%
C)43.33%
D)44.45%

Question 77

It is usually better to compare the ratio data from one company with the average of the industry rather than to compare the data with specific competitors.
BT: Comprehension

Question 78

Calculate the quality of income ratio for the current year.

A)0.73
B)0.97
C)1.03
D)1.38

Question 79

If a company extends its payment period for customers,its quality of income ratio is likely to rise.
BT: Comprehension

Question 80

Calculate the earnings per share for the current year.

A)$7.25
B)$7.50
C)$10.00
D)$20.00