Deck 13: Measuring and Evaluating Financial Performance

Question 1

The fixed asset turnover ratio is a measure of the efficiency of a company.Fixed asset turnover ratio = Net sales revenue/Average net fixed assets.This ratio is used to evaluate the efficient use of fixed assets to generate sales revenue.

Answer 1

True

Question 2

Liquidity measures the ability of a company to meet its current financial obligations.Liquidity relates to a company's ability to survive in the short term by converting assets to cash that can be used to pay current liabilities as they come due.Ratios used to measure liquidity include the receivable turnover,the inventory turnover,the current ratio,and the quick ratio.

Answer 2

True

Question 3

Trend data can be measured in dollar amounts or percentages.Trend data show changes over time.These changes can be measured in dollars or in percentages.

Answer 3

True

Question 4

The higher the accounts receivable turnover,the slower accounts receivable are being collected.The higher the accounts receivable turnover,the faster accounts receivable are being collected.

Question 5

Which of the following analysis techniques does not pertain to changes over time?

A)Trend analysis.
B)Horizontal analysis.
C)Time-series analysis.
D)Vertical analysis.

Question 6

If EPS (earnings per share)decreases,it must mean that the company's net income has fallen.A decrease in EPS could result from a decrease in net income,an increase in the average number of shares outstanding,or an increase in the average shares proportionally larger than an increase in net income.

Question 7

Horizontal analysis is the comparison of a company's financial information to a base amount.Horizontal analysis is a comparison of a company's financial information over time.

Question 8

In general,P/E ratios are fairly consistent across industries,regardless of the goods or services sold.Industry P/E ratios vary considerably.

Question 9

A company with a high inventory turnover requires a larger investment in inventory than another company of similar sales with a lower inventory turnover.A higher inventory turnover suggests a smaller investment in inventory is required.

Question 10

Which of the following statements regarding trend analysis is true?

A)Time-series analysis is an example of trend analysis.
B)Trend data are always in dollars.
C)Trend analysis is also known as vertical analysis.
D)Common-size analysis is an example of trend analysis.

Question 11

Trend analysis is a form of horizontal analysis.Horizontal analysis is a comparison of the trends in a company's financial information over time.

Question 12

Benchmarks are required to evaluate a company's performance.Benchmarks are necessary when interpreting a company's financial ratios.These benchmarks may be the company's own results for prior years,the results of competitors,or an average for the industry.

Question 13

Which of the following statements regarding the effects of a business decision on a financial ratio is true?

A)If a company is expanding its facilities,its fixed asset turnover ratio is likely to fall temporarily.
B)If a company extends its payment period for customers,its accounts receivable ratio is likely to rise.
C)If a company eases its credit granting policies,its days to collect ratio is likely to fall.
D)If a company builds up inventories,its days to sell ratio is likely to fall.

Question 14

If the debt-to-assets ratio is 0.63,it means that 37% of the company's financing has been provided by stockholders' equity.A debt-to-assets ratio of 0.63 indicates that creditors contributed 63% of the company's financing,while stockholders provided only 37%.

Question 15

The higher the times interest earned ratio,the greater the risk of nonpayment of interest.The higher the times interest earned ratio,the better able the company is to meet its interest obligations.

Question 16

Vertical analysis is the comparison of a company's financial information over time.Vertical analysis focuses on important relationships within the same financial statement.

Question 17

Common size financial statements are not useful in analyzing companies of different size.Common size analysis provides information by expressing each financial statement amount as a percent of another amount on the same statement.These percentages allow for the comparison of financial statement items between companies of different size.

Question 18

The asset turnover ratio is a profitability ratio.The asset turnover ratio is a profitability ratio that indicates the amount of sales revenue generated for each dollar invested in assets.

Question 19

Which of the following statements regarding the P/E ratio is not true?

A)The P/E ratio indicates how much investors are willing to pay for a share of a company's stock as a multiple of current earnings.
B)A high P/E ratio may mean that investors have pushed the price of the stock up in anticipation of higher future net income.
C)If EPS decreases and there is no change in the market price of the stock,the P/E ratio will decrease.
D)If the market price of the stock increases and there is no change in EPS,the P/E ratio will increase.

Question 20

Which of the following statements regarding liquidity and solvency ratios is true?

A)Unlike solvency ratios,liquidity ratios relate to the company's long-run survival.
B)Both liquidity ratios and solvency ratios measure a company's ability to meet its financial obligations.
C)Liquidity ratios include the return on equity ratio and the times interest earned ratio.
D)Solvency ratios include the current ratio and the net profit margin ratio.

Question 21

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)Quick ratio.

Question 22

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

A)Asset turnover.
B)Times interest earned ratio.
C)Inventory turnover ratio.
D)Debt to assets ratio.

Question 23

Which of the following is not a profitability ratio?

A)Return on equity (ROE).
B)Earnings per share.
C)Asset turnover.
D)Days to sell.

Question 24

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 stockholders' equity is $400,000 and the beginning balance of fixed assets is $361,000.The ending balance of stockholders' equity is $600,000 and the ending balance of fixed assets is $389,000.The fixed asset turnover ratio is closest to:

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

Question 25

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 26

Although the inventory turnover ratio is an important analytical tool for many companies,it would be most crucial for a company that:

A)provides legal services.
B)sells cell phones and notebook computers.
C)manufactures steel.
D)sells paint.

Question 27

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 stockholders' equity is $400,000 and the beginning balance of fixed assets is $361,000.The ending balance of stockholders' equity is $600,000 and the ending balance of fixed assets is $389,000.The return on equity (ROE)ratio is closest to:

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

Question 28

Net income was $418,600 in 2014 and $364,000 in 2013.The year-to-year percentage change in net income is closest to:

A)15%.
B)55%.
C)87%.
D)13%.

Question 29

When evaluating its net profit margin for 2015,Coca Cola would most likely use all of the following benchmarks except:

A)Anheuser Busch's net profit margin for 2015.
B)Coca Cola's net profit margin for 2014.
C)Pepsico's net profit margin for 2015.
D)The average net profit margin for the soft drink manufacturing industry for 2015.

Question 30

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 31

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 stockholders.

Question 32

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.

Question 33

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.

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 closest to:

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

Question 35

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

A)Return on equity.
B)Fixed asset turnover ratio.
C)Receivables turnover ratio.
D)Times interest earned ratio.

Question 36

Which of the following ratios is used to evaluate solvency?

A)Earnings per share.
B)Fixed asset turnover.
C)Debt-to-assets.
D)Quick ratio.

Question 37

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 closest to:

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

Question 38

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 39

If you wish to examine how one aspect of a business is doing relative to other aspects of the business at the current time,you are most likely to use:

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

Question 40

Which of the following is a liquidity ratio?

A)Inventory turnover.
B)Price earnings (P/E).
C)Net profit margin.
D)Times interest earneD.Liquidity ratios measure the company's ability to use current assets to pay its current obligations as they become due.Inventory turnover is one of the liquidity ratios.P/E and net profit margin are profitability ratios.

Question 41

Company X has net sales revenue of $436,000,cost of goods sold of $343,000,and all other expenses of $90,000.If interest expense is $10,000 and income tax expense is $1,000,the times interest earned ratio is closest to

A)1.4.
B).33.
C)1.3.
D).40.

Question 42

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 cash.

Question 43

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

A)Company A
B)Company B
C)Company C
D)Company D

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 to decision makers,especially investors and creditors.

Question 45

Which of the following statements is true regarding the relationship of the debt-to-assets ratio and the debt-to-equity ratio?

A)Debt to assets is usually greater than debt to equity.
B)Debt to assets is usually less than debt to equity
C)Debt to assets is usually equal to debt to equity.
D)There is no constant relationship between these two ratios.

Question 46

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 47

If net income is rising,but 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 48

A company's sales in 2013 are $200,000 and in 2014 sales are $285,000.The percentage change is:

A)42.5%.
B)70%.
C)29.8%.
D)130%.

Question 49

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 closest to:

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

Question 50

If cost of goods sold remains unchanged,an increase in the inventory turnover rate is indicative of:

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

Question 51

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

Question 52

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)high debt-to-equity ratio.

Question 53

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 stock were outstanding,and at the end of the year,537,000 shares of common stock were outstanding.The basic EPS for the company is:

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

Question 54

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 goods solD.Accounts receivable turnover = Net sales/Average accounts receivable.If the accounts receivable turnover decreases,this may be the result of a decrease in net sales or an increase in average accounts receivable.

Question 55

Which of the following factors would not necessarily contribute to a 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)Declining profit margins.

Question 56

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 57

Which of the following could explain why a company has a lower net profit margin ratio but a higher EPS than one of its competitors?

A)The company sells a higher percentage of goods on credit.
B)The company has fewer shares of outstanding common stock relative to its net income.
C)The company earns a higher percentage of net income from non-operating activities.
D)The company pays a higher dividenD.Net profit margin = net income/sales

Question 58

An increase in the 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.Gross profit percentage = Gross profit/net sales.If the gross profit % increases,it means that cost of goods sold has decreased as a % of sales.

Question 59

A trend analysis to determine a year-to-year dollar amount change is calculated by:

A)subtracting the previous period amount from the current amount.
B)subtracting the current period amount from the previous period amount.
C)subtracting the current period amount from the previous period amount and then dividing the result by the previous period amount.
D)subtracting the previous period amount from the current period amount and then dividing the result by the current period amount.

Question 60

The debt-to-assets ratio is the:

A)ratio of current liabilities to current assets.
B)ratio of long term liabilities to fixed assets.
C)ratio of total liabilities to total assets.
D)proportion of short-term liabilities to total liabilities.

Question 61

Which of the following ratios is calculated by dividing liquid assets by current liabilities?

A)Current ratio.
B)Quick ratio.
C)Turnover ratio.
D)Working capital ratio.

Question 62

Use the information above to answer the following question.If sales revenue for 2015 is $850,000,which of the following is closest to the asset turnover ratio for 2015?

A)0.68
B)0.63
C)0
D)0.74

Question 63

Which of the following is calculated by dividing cost of goods sold by average inventory and then dividing this result into 365 days?

A)Inventory turnover.
B)Current ratio.
C)Days to collect ratio.
D)Days to sell ratio.

Question 64

A ratio that may be used to evaluate solvency is the:

A)Asset turnover ratio.
B)Quick ratio.
C)Current ratio.
D)Times interest earned ratio.

Question 65

Which of the following ratios is a solvency ratio?

A)Net profit margin ratio.
B)Current ratio.
C)Asset turnover ratio.
D)Debt to assets ratio.

Question 66

Which of the following is closest to the company's debt-to-assets ratio for 2014?

A)0.39
B)0.61
C)0.35
D)0

Question 67

Which of the following ratios is used to evaluate a company's liquidity?

A)Debt to assets ratio.
B)Asset turnover ratio.
C)Return on equity ratio.
D)Current ratio.

Question 68

Which of the following ratios is used to evaluate a company's efficiency in using its assets?

A)Current ratio.
B)Debt to assets ratio.
C)Return on assets ratio.
D)Asset turnover ratio.

Question 69

Which of the following is calculated by dividing net sales by average accounts receivable?

A)Days to sell ratio.
B)Current ratio.
C)Profit margin.
D)Accounts receivable turnover ratio.

Question 70

Use the information above to answer the following question.Which of the following is closest to the company's current ratio for 2015?

A)2.22
B)2.26
C)2.57
D)6.0

Question 71

Which of the following is calculated by dividing net income by net sales?

A)Gross profit margin.
B)Current ratio.
C)Net profit margin.
D)Asset turnover.

Question 72

Which of the following is calculated by dividing net sales by average total assets?

A)Net profit margin.
B)Fixed asset turnover.
C)Asset turnover ratio.
D)Current ratio.

Question 73

A company provided the following information: There was no change in contributed capital this year and there were no dividends declared in the current year.The return on equity ratio for the current year is closest to:

A)20.7%.
B)75%.
C)3.8%.
D)1.33%.

Question 74

On December 31,2014 and 2015,a company had 10,000 shares of common stock outstanding.The following information is also available: Use the information above to answer the following question.The earnings per share at December 31,2015 is closest to:

A)$100.
B)$400.
C)$40.
D)$500.

Question 75

Which of the following is calculated by dividing net income by average total stockholders' equity?

A)Return on assets ratio.
B)Return on equity ratio.
C)Earnings per share.
D)Net profit margin ratio.

Question 76

A company has current assets of $450,000 and a current ratio is 2.5.Assume that the company prepays rent for 9 months in the amount of $20,000.The current ratio after this transaction is closest to

A)2.39.
B)2.61.
C)2.5.
D)2.81.

Question 77

A company has earnings per share of $1.20,it paid a dividend of $.50 per share,and the market price of the company's stock is $45 per share.The price/earnings ratio is closest to:

A)37.50.
B)64.29.
C)2.40.
D)2.0.

Question 78

On December 31,2014 and 2015,a company had 10,000 shares of common stock outstanding.The following information is also available: Use the information above to answer the following question.The price/earnings ratio at December 31,2015 is closest to:

A)0.35.
B)1.40.
C)0.28.
D)3.50.

Question 79

Which of the following ratios is calculated by dividing current assets by current liabilities?

A)Quick ratio.
B)Solvency ratio.
C)Debt ratio.
D)Current ratio.

Question 80

Use the information above to answer the following question.If net income for 2015 is $120,000,which of the following is closest to the company's return on equity for 2015?

A)20%
B)14.5%
C)15.7%
D)13.3%