Question 1

Asset turnover measures a company's profitability.

Accepted Answer

Asset turnover is a productivity concept. It indicates the amount of sales revenue a company generates from using its asset investment.

Question 2

NOPAT is equivalent to income from operating activities.

Accepted Answer

NOPAT is net operating income after taxes. It excludes nonoperating amounts and focuses on operating activities.

Question 3

If Company A is more profitable than Company B, then Company A will have a higher RNOA than Company B.

Accepted Answer

RNOA depends on profitability but also depends on asset productivity. If Company B has a much higher asset productivity, its RNOA could be higher despite the lower profitability.

Question 4

Highly leveraged firms have higher ROE than lower leveraged firms.

Accepted Answer

Financial leverage does not affect the ROE computation because it is based on operating profit. Return on financial leverage is ROE less ROA, so the higher the ROE, the higher the financial leverage.

Question 5

All else being equal, a higher financial leverage will increase a company's debt rating and decrease the interest rate it must pay.

Accepted Answer

Higher levels of financial leverage increase the probability of bankruptcy and resulting lower credit ratings and higher costs for borrowed funds.

Question 6

Return on assets can be disaggregated into profit margin and an expense-to-sales ratio.

Accepted Answer

Return on assets can be disaggregated into profit margin and asset turnover. The expense-to-sales ratio measures the percentage of each sales dollar that goes to cover a specific expense item.

Question 7

The times interest earned ratio reflects the number of times that the company earned interest during the year.

Accepted Answer

Times interest earned ratio reflects the operating income available to pay interest expense during the year.

Question 8

Charlie Plumbing Supplies has a return on assets (ROA) of 24%, while the industry average of similar companies is 13%. This means that Charlie Plumbing Supplies' asset turnover is higher than the industry average.

Accepted Answer

This is not necessarily the case, since ROA is made up of two components, profit margin times asset turnover. Without any more information, we cannot determine if it is the asset turnover or the profit margin, or both, that is driving the higher ROA .

Question 9

When determining forecasted revenues for proforma purposes, managers should consider economic conditions, potential company changes, and changes in the company's competitive environment.

Accepted Answer

A company can use publicly available information from competitors, suppliers, customers, industry organizations, and governmental agencies.

Question 10

All things equal, increasing turnover, increases:

Accepted Answer

All things equal, increasing turnover rates increases ROE which also increases shareholder value.

Question 11

Which one of the following ratios does not involve assets?

Accepted Answer

Profit margin measures net income against sales revenue, both components of which are income statement amounts and not assets.

Question 12

Which ratio provides an indication of the salability of the company's products?

Accepted Answer

Inventory turnover measures the number of times during a period a company sells its inventory. Trends in this metric can provide an indication of the salability of the company's products.

Question 13

What does the current ratio measure?

Accepted Answer

The current ratio is a measure of short-term debt paying ability. It measures a company's ability to pay its current obligations as they become due.

Question 14

Liquidity analysis of a company includes the following useful measures: (select all that apply)

Accepted Answer

Times interest earned ratio measures solvency. Solvency is a company's ability to meets its debt obligations, both principal and interest, on a timely basis.

Question 15

Which one of the following is removed from net income when determining NOPAT?

Accepted Answer

NOPAT is net operating profit after tax. Amounts removed are investment income and interest expense.

Question 16

K Grocers' 2016 balance sheet shows average shareholders' equity of $9,264 million, net income of $1,505 million, and common shares issued of $1,918 million.
The company has no preferred shares issued. K Grocers' return on common equity for the year is:

Accepted Answer

ROE = Net income/Average shareholders' equity = $1,505 million / $9,264 million = 16.245%

Question 17

K Grocers' 2016 financial statements show average shareholders' equity of $9,264 million, net income of $1,505 million, interest expense of $870 million, and average total assets of $ 46,982 million.
How much is K Grocers' return on assets for the year? Assume that the statutory tax rate is 35%.

Accepted Answer

ROA = EWI / Average total assets = $1,505 + [$870 x (1 - 0.035)] / $46,982 million = 4.4%

Question 18

K Grocers' 2016 financial statements show total operating assets of $45,004 million, total operating liabilities of $22,690 million, and net income totaling $1,505 million.
How much are K Grocers' net operating assets (NOA) for the year?

Accepted Answer

NOA = Total operating assets - Total operating liabilities
= $45,004 - $22,690 = $22,314

Question 19

Into what two measures can return on net operating assets be disaggregated?

Accepted Answer

RNOA is disaggregated into net operating profit margin and net operating asset turnover.

Question 20

Which one of the following is not true concerning return on net operating assets?

Accepted Answer

A higher profit margin in one industry compared with another industry is not necessarily the result of better management and should not be used blindly across industries.

Quiz 5: Analyzing and Interpreting Financial Statements