Question 1

Perot Company had profit before interest and taxes of $120,000. Interest expense for the period was $17,000 and income taxes amounted to $28,500. The average shareholders' equity was $680,000. What is Perot's return on equity?
A) 10.96%
B) 13.46%
C) 15.15%
D) 17.65%

Accepted Answer

Calculation: ($120,000 - $17,000 - $28,500) ÷ $680,000 = 10.96%.

Question 2

Compared to an identical company that uses an operating lease, a company that uses a &#64257;nance lease will most likely produce a reported return on equity (ROE) that
A) starts lower but rises during the life of the lease
B) starts higher but declines during the life of the lease
C) is lower but does not change over the lease period.
D) starts higher and remains so during the life of the lease.

Accepted Answer

The answer of Compared to an identical company that uses...

Question 3

On a common size income statement, all items are shown as:
A) percentages of net income.
B) percentages of gross revenue.
C) percentages of gross profit.
D) percentages of total assets.

Accepted Answer

On a common size income statement, all items are expressed as percentages of gross revenue, allowing for easier comparison across time periods and companies by standardizing the size of the figures.

Question 4

Which of the following actions would be considered as contributing to low quality of ﬁnancial reporting?
A) A pharmaceutical company maintains research and development expenses even in a depressed economy.
B) A company reveals that a major customer may ﬁle for bankruptcy.
C) A company uses an accelerated depreciation method for delivery vehicles
D) A beverage company reduces advertising expense in order to meet earnings forecast for the quarter.

Accepted Answer

Reducing advertising expense to meet earnings forecasts can be considered as managing earnings, which contributes to lower quality of financial reporting. This action may not reflect the true economic condition of the company and can mislead investors and other stakeholders.

Question 5

The records of Twain Company include the following: $$\begin{array} { | l | r | } 
\hline \text { Average total assets } & \$ 60,000 \
\hline \text { Average total liabilities } & 25,000 \
\hline \text { Total revenue } & 107,600 \
\hline \text { Total expense (including income tax) } & 104,000 \
\hline \text { Interest expense (included in total expenses) } & 2,000 \
\hline \text { Income tax rate 40\% } & \
\hline
\end{array}$$ What is the financial leverage percentage (rounded to the nearest percent)?
A) 4%
B) 5%
C) 7%
D) 9%

Accepted Answer

The financial leverage percentage is calculated as follows:Financial leverage percentage = (Average total liabilities / Average total assets) x 100= (25,000 / 60,000) x 100= 41.67%= 42% (rounded to the nearest percent)

Question 6

Beta Limited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Beta's current ratio?
A) The ratio remained unchanged.
B) The ratio decreased.
C) The ratio increased.
D) Cannot be determined.

Accepted Answer

Borrowing $50,000 increases both current assets (cash) and current liabilities (notes payable), but because the current ratio was below 1 (0.8:1), the proportional increase in current assets has a greater positive impact on the numerator than the increase in current liabilities does on the denominator, thus increasing the current ratio.

Question 7

Net sales are $2,700,000, beginning total assets are $750,000, and the asset turnover is 3.0. What is the ending total asset balance?
A) $900,000.
B) $1,050,000.
C) $600,000.
D) $1,125,000.

Accepted Answer

The answer of Net sales are $2,700,000, beginning total assets...

Question 8

$\begin{array}{l}
\text { Consider the following statement of earnings data for Mandrake Mills Inc. }\
\begin{array} { | l | r | r | } 
\hline & \mathbf { 2 0X7 } & \mathbf { 2 0 X 6 } \
\hline \text { Sales revenue } & \$ 97,300 & \$ 86,200 \
\hline \text { Less: Cost of goods sold } & \underline { 45,600 } & \underline { 53,400 } \
\hline \text { Gross profit } & 51,700 & 32,800 \
\hline \text { Selling and administration expense } & \underline { 22,500 } & \underline { 18,300 } \
\hline \text { Income before income tax } & \$ 29,200 & \$ 14,500 \
\hline
\end{array}
\end{array}$
-Based on common size analysis, which of the following statements is correct
A) the increase in sales revenue in 20X7 was caused by higher selling and administrative expenses.
B) the increase in gross pro?t in 20X7 was due to increased sales.
C) income before income tax as a percent of sales declined in 20X1.
D) the company's cost to sales ratio improved in 20X7.

Accepted Answer

The company's cost to sales ratio improved in 20X7 as the cost of goods sold as a percentage of sales decreased from 61.9% in 20X6 to 46.9% in 20X7.

Question 9

May Company's return on equity was 21% and the financial leverage ratio was 13% (positive). What was the return on assets?
A) 8%
B) 13%
C) 21%
D) 34%

Accepted Answer

The return on assets (ROA) can be calculated using the relationship between return on equity (ROE), financial leverage (FL), and ROA itself, where ROE = ROA + (ROA * FL). Given ROE is 21% and FL is 13%, we can solve for ROA, which is approximately 8%.

Question 10

The records of ZZZZ Better Corporation include the following: $$\begin{array} { | l | r | } 
\hline \text { Average total assets } & \$ 60,000 \
\hline \text { Average total liabilities } & 45,000 \
\hline \text { Total revenue } & 107,600 \
\hline \text { Total expense (including income tax) } & 104,000 \
\hline
\end{array}$$ What is the return on equity?
A) 6%
B) 13%
C) 16%
D) 24%

Accepted Answer

The answer of The records of ZZZZ Better Corporation include...

Question 11

A common measure of profitability is the
A) current ratio.
B) cash current debt coverage ratio.
C) return on common shareholders' equity ratio.
D) debt to total assets ratio.

Accepted Answer

The return on common shareholders' equity ratio is a common measure of profitability, as it indicates how much profit a company generates with the money shareholders have invested.

Question 12

Which of the following ratios usually is not considered to be a test of proﬁtability?
A) Current ratio.
B) Net proﬁt margin.
C) Return on assets.
D) Earnings per share.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It is not a measure of profitability, unlike the net profit margin, return on assets, and earnings per share, which are all indicators of a company's financial performance and profitability.

Question 13

Financial leverage will always be which of the following?
A) Positive.
B) Negative.
C) Either positive or negative.
D) Positive, negative, or zero.

Accepted Answer

The answer of Financial leverage will always be which of...

Question 14

To see if a company's cost of sales is increasing proportionately with sales an analyst would use
A) raw ﬁnancial data.
B) trend analysis.
C) prospective analysis.
D) common sized analysis.

Accepted Answer

Common sized analysis involves expressing financial statement items as a percentage of a base figure, such as sales, which allows for comparison of cost of sales relative to sales over time.

Question 15

Which of the following events would likely result in a loss recognized on the write-down of inventories?
A) The additional costs resulting from an increase in oil prices caused by a hurricane destroying oil reﬁneries.
B) Purchasing another ﬁrm for more than the value of the fair market value of the assets.
C) The value of perished products for a produce company using the allowance method for inventory
D) A drop-in price of raw materials, once scarce, but now in ample supply.

Accepted Answer

The answer of Which of the following events would likely...

Question 16

A common- size analysis of the balance sheet is most likely to signal investors that the company
A) is using assets eﬃciently.
B) is becoming more liquid.
C) is becoming more leveraged.
D) has increased sale.

Accepted Answer

A common-size analysis of the balance sheet shows the relationship between different balance sheet items and the total assets of the company. This analysis can help investors to see how efficiently the company is using its assets.

Question 17

A quality of earnings ratio higher than one is an indicator of which of the following?
A) A company's high debt position.
B) That ﬁxed assets are the company's most important resources.
C) That a company has cash generated by operations higher than the amount of proﬁt.
D) That a company has too many ﬁxed assets.

Accepted Answer

A quality of earnings ratio higher than one indicates that a company has more cash generated from operations than its reported net income, suggesting high-quality earnings.

Question 18

$\begin{array}{l}
\text { Consider the following statement of earnings data for Mandrake Mills Inc. }\
\begin{array} { | l | r | r | } 
\hline & \mathbf { 2 0X7 } & \mathbf { 2 0 X 6 } \
\hline \text { Sales revenue } & \$ 97,300 & \$ 86,200 \
\hline \text { Less: Cost of goods sold } & \underline { 45,600 } & \underline { 53,400 } \
\hline \text { Gross profit } & 51,700 & 32,800 \
\hline \text { Selling and administration expense } & \underline { 22,500 } & \underline { 18,300 } \
\hline \text { Income before income tax } & \$ 29,200 & \$ 14,500 \
\hline
\end{array}
\end{array}$
-The common size percentage for selling and administration costs in 20X7 was
A) 43.5%
B) 21.2%
C) 23.1%
D) 33%

Accepted Answer

The common size percentage for selling and administration costs is calculated by dividing the selling and administration expense by the sales revenue and then multiplying by 100. For 20X7, it is $(22,500 / 97,300) \times 100 = 23.1%$.

Question 19

Which is an appropriate method of preparing a common - size cash flow statement?
A) Show each line item on the cash flow statement as a percentage of total assets.
B) Show each line item on the cash flow statement as a percentage of net revenue.
C) Show each cash inflow on the cash flow statement as a percentage of total cash outflows
D) Show each line item on the cash flow statement as a percentage of total liabilities

Accepted Answer

A common-size cash flow statement is typically prepared by expressing each line item as a percentage of net revenue, allowing for easier comparison across periods or companies.

Question 20

Which proﬁt measure is best for assessing how well a ﬁrm operates within their industry?
A) Earnings before tax
B) Gross proﬁt
C) Operating proﬁt
D) Net income after tax

Accepted Answer

Operating profit is the best measure for assessing how well a firm operates within their industry because it focuses on the profits from the firm's core business operations, excluding the effects of financing and taxes, which can vary greatly between different firms and industries.

Quiz 12: Statement Cash Flows

Perot Company had profit before interest and taxes of $120,000. Interest expense for the period was $17,000 and income taxes amounted to $28,500. The average shareholders' equity was $680,000. What is Perot's return on equity?

Compared to an identical company that uses an operating lease, a company that uses a ﬁnance lease will most likely produce a reported return on equity (ROE) that

On a common size income statement, all items are shown as:

Which of the following actions would be considered as contributing to low quality of ﬁnancial reporting?

Beta Limited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Beta's current ratio?

Net sales are $2,700,000, beginning total assets are $750,000, and the asset turnover is 3.0. What is the ending total asset balance?

May Company's return on equity was 21% and the financial leverage ratio was 13% (positive) . What was the return on assets?

A common measure of profitability is the

Which of the following ratios usually is not considered to be a test of proﬁtability?

Financial leverage will always be which of the following?

To see if a company's cost of sales is increasing proportionately with sales an analyst would use

Which of the following events would likely result in a loss recognized on the write-down of inventories?

A common- size analysis of the balance sheet is most likely to signal investors that the company

A quality of earnings ratio higher than one is an indicator of which of the following?

Which is an appropriate method of preparing a common - size cash flow statement?

Which proﬁt measure is best for assessing how well a ﬁrm operates within their industry?