Question 1

Which of the following is the best explanation of a company's inventory turnover of 12.0 for the year 2017?
A)the company averages about 12 months' sales in inventory.
B)The company averages about 12 days' sales in inventory.
C)The company averages about one month's sales in inventory.
D)The company averages about 12 days from the time an item is sold until the cash is collected.
E)None of the answer choices is correct.

Accepted Answer

A high inventory turnover ratio indicates that a company is selling its inventory quickly, which means that it is not accumulating inventory, but rather replenishing it regularly. An inventory turnover of 12.0 indicates that the company sells its entire inventory an average of 12 times per year, or about once per month.

Question 2

The following condensed income statement is for Boston Inc.
$\begin{array}{c}
 \text {Boston Inc.}\
 \text {Income Statement}\
 \text {Years ended December 31, 2017 and 2016}\
 \text {(in thousands)}\
\begin{array}{lcc}
&2017&2016\
 \text { Net sales } & \$ 20,000 & \$ 13,000 \
 \text { Cost of goods sold } & 13,000 & 9,000 \
 \text { Gross margin } & 7,000 & 4,000 \
 \text { Selling and administrative expenses } & 3,000 & 2,000 \
 \text { Operating income } & 4,000 & 2,000 \
 \text { Other expense, net } & 300 & 200 \
 \text { Income before taxes } & 3,700 & 1,800 \
 \text { Income tax expense } & 800 & 400 \
 \text { Net income } & \$ 2.900 & \$ 1.400 \
\end{array}\end{array}$ 
Prepare a common-size analysis of the income statements for 2016 and 2017.(Round percent computations to one decimal place. )

Accepted Answer

The answer of The following condensed income statement is for...

Question 3

During 2017,Columbia Inc.had beginning accounts receivable of $680,000 and ending accounts receivable of $760,000.Its net sales of $4,500,000 are composed of 20% cash sales and 80% credit sales.Based on this information,what is Columbia's average collection period?
A)58.4 days
B)292.0 days
C)73.0 days
D)5.0 days
E)None of the answer choices is correct.

Accepted Answer

First, we need to calculate the total credit sales:

Credit Sales = Net Sales x (1 - % Cash Sales)
Credit Sales = $4,500,000 x (1 - 0.20) = $3,600,000

Next, we can use the formula for average collection period:

Avg. Collection Period = (Ending AR - Beginning AR) / Credit Sales x 365

Avg. Collection Period = ($760,000 - $680,000) / $3,600,000 x 365 = 73.0 days

Therefore, the answer is choice C, 73.0 days.

Question 4

All of the following account balances would typically be used to calculate a current ratio except:
A)sales.
B)accounts receivable.
C)accounts payable.
D)cash.
E)None of the answer choices is correct.

Accepted Answer

Sales is not a balance sheet account and therefore would not be used to calculate a current ratio. The current ratio is calculated by dividing current assets by current liabilities. Current assets include accounts receivable, cash, and other assets that can be converted into cash within a year. Current liabilities include accounts payable and other short-term liabilities that are due within a year.

Question 5

If net sales is growing at a greater rate than cost of goods sold,which of the following will always be true?
A)The gross margin ratio will decrease.
B)The gross margin ratio will increase.
C)Net income will increase.
D)Net income will decrease.
E)None of the answer choices is correct.

Accepted Answer

If net sales are growing at a greater rate than cost of goods sold, then the gross margin ratio (gross profit divided by net sales) will increase. This means that the company is generating more profit per dollar of sales, which can lead to an increase in net income. However, this does not necessarily mean that net income will always increase, as there could be other expenses that offset the increase in gross margin.

Question 6

The following condensed income statement is for Mason Inc.
 $\begin{array}{c}
 \text { Mason Inc. }\
 \text { Income Statement}\
 \text {  Years ended December 31, 2017 and 2016}\
 \text {  (in thousands)}\\begin{array}{lcc}
&2017&2016\
 \text { Net sales ( } 80 \% \text { are credit sales) } & \$ 60,000 & \$ 46,000 \
 \text { Cost of goods sold } & 26,000 & 20,000 \
 \text { Gross margin } & 34,000 & 26,000 \
 \text { Selling and administrative expenses } & 6,000 & 4,000 \
 \text { Operating income } & 28,000 & 22,000 \
\text { Interest expense } & 1,000 & 1,000 \
\text { Income before taxes } & 27,000 & 21,000 \
 \text { Income tax expense } & 2,000 & 1,000 \
 \text { Net income } & \$ 25,000 &\$ 20,000 \
\end{array}
\end{array}$  
  
Compute the following ratios for 2017,and provide a brief explanation after each ratio (round percentage computations to one decimal place and earnings per share to two decimal places):
(1)Gross margin ratio
(2)Profit margin ratio
(3)Return on assets
(4)Return on common shareholders' equity
(5)Earnings per share (assume weighted average shares outstanding totaled 2,900,000 shares)
(6)Market capitalization (assume 3,000,000 shares were issued and outstanding at December 31,2017,and the market price was $9.00 per share)
(7)Price-earnings ratio

Accepted Answer

The answer of The following condensed income statement is for...

Question 7

Albany Company has net income before taxes of $90,000,interest expense of $36,000 and an income tax rate of 20%.Based on this information,the company's times interest earned ratio is:
A)12.5 times
B)2.5 times
C)3.5 times
D)4.0 times
E)None of the answer choices is correct.

Accepted Answer

The times interest earned ratio is calculated as (Net Income before Taxes + Interest Expense) / Interest Expense. Here, it is ($90,000 + $36,000) / $36,000 = 3.5 times.

Question 8

Which of the following types of measures focuses primarily on income statement information?
A)long-term solvency measures.
B)short-term liquidity measures.
C)market valuation measures.
D)profitability measures.
E)None of the answer choices is correct.

Accepted Answer

Profitability measures, such as return on equity or gross profit margin, focus primarily on income statement information as they assess a company's ability to generate profits from its operations. Long-term solvency measures, short-term liquidity measures, and market valuation measures involve a combination of balance sheet and income statement data.

Question 9

The following condensed income statement is for Boston Inc.
 $\begin{array}{c}
 \text { Boston Inc.}\
 \text { Income Statement}\
 \text { Years ended December 31, 2017 and 2016}\
 \text { (in thousands)}\\
\begin{array}{lcc}
&2017&2016\
 \text { Net sales } & \$ 20,000 & \$ 13,000 \
 \text { Cost of goods sold } & 13,000 & 9,000 \
 \text { Gross margin } & 7,000 & 4,000 \
\text { Selling and administrative expenses } & 3,000 & 2,000 \
 \text { Operating income } & 4,000 & 2,000 \
 \text { Other expense, net } & 300 & 200 \
 \text { Income before taxes } & 3,700 & 1,800 \
 \text { Income tax expense } & 800 & 400 \
 \text { Net income } & \$ 2.900 & \$ 1.400 \
\end{array}\end{array}$  
Prepare a trend analysis of the income statements from 2016 to 2017.(Round percent computations to one decimal place. )

Accepted Answer

The answer of The following condensed income statement is for...

Question 10

Which of the following types of companies would have the highest inventory turnover ratios?
A)A company that sells grand pianos.
B)An automobile dealer.
C)A custom home builder.
D)A grocery store.
E)None of the answer choices is correct.

Accepted Answer

The answer of Which of the following types of companies...

Question 11

All of the following measures evaluate profitability except:
A)profit margin ratio.
B)return on assets.
C)market capitalization.
D)gross margin ratio.
E)None of the answer choices is correct.

Accepted Answer

Market capitalization is a measure of a company's total market value or market price. It does not evaluate profitability directly, unlike the other measures listed which are all profitability ratios.

Question 12

All of the following are nonfinancial measures that might be used by transportation companies such as FedEx except:
A)percentage of damage-free goods.
B)percentage of on-time deliveries.
C)average collection period.
D)hours of employee training.
E)None of the answer choices is correct.

Accepted Answer

The other choices are nonfinancial measures that would be relevant to transportation companies such as FedEx, but the average collection period is a financial measure that relates to accounts receivable and cash flow, rather than operational performance.

Question 13

Assume that Crimson Company's market price per share remains at $20 over a two-year period.Over the same two-year period,Crimson sells an additional 100,000 shares of stock to investors.Net income was the same for both years.The issuance of additional shares will have the following effect for the company over the two-year period:
A)Market capitalization will decrease.
B)Market capitalization will increase.
C)Market capitalization will stay the same.
D)Earnings per share will increase.
E)None of the answer choices is correct.

Accepted Answer

Market capitalization is calculated as the market price per share multiplied by the total number of outstanding shares. By issuing an additional 100,000 shares, Crimson Company increases its total number of outstanding shares, thus increasing its market capitalization, assuming the market price per share remains constant at $20.

Question 14

All of the following accounts would typically be used to calculate the quick ratio except:
A)cash.
B)equipment.
C)accounts payable.
D)accounts receivable.
E)None of the answer choices is correct.

Accepted Answer

Equipment is a long-term asset and not considered in the quick ratio calculation, which only includes current assets. Cash, accounts receivable, and accounts payable are all current assets and liabilities, respectively, and are included in the quick ratio calculation.

Question 15

Dresden Inc.has net sales of $1,200,000,cost of goods sold of $900,000,operating expenses of $200,000,interest expense of $30,000,and income tax expense of $10,000.The company's gross margin ratio is (round to the nearest tenth of a percent):
A)8.3%
B)5.0%
C)10.0%
D)25.0%
E)None of the answer choices is correct.

Accepted Answer

The gross margin ratio is calculated as (Net Sales - Cost of Goods Sold) / Net Sales. For Dresden Inc., this is ($1,200,000 - $900,000) / $1,200,000 = $300,000 / $1,200,000 = 0.25 or 25%.

Question 16

All of the following are measures used in the balanced scorecard except:
A)external business process.
B)customer.
C)learning and growth.
D)internal business process.
E)None of the answer choices is correct.

Accepted Answer

The balanced scorecard includes measures for customer, learning and growth, and internal business process perspectives. "External business process" is not a standard category in the balanced scorecard framework.

Question 17

All of the following measures focus on short-term liquidity except:
A)current ratio.
B)debt to assets ratio.
C)quick ratio.
D)receivables turnover ratio.
E)None of the answer choices is correct.

Accepted Answer

The debt to assets ratio focuses on the long-term solvency of a company, while the other measures listed focus on short-term liquidity.

Question 18

The following debt to equity ratio is for two companies in the same industry.
$$\begin{array} { l c c } 
&  { \text { Company A} } & \text { Campany B } \
\hline\text { Debt to equity ratio } & 4.5 \text { to } 1& 13.6\text { to } 1
\end{array}$$
Which of the following statements is always true?
A)Company A is more profitable than Company B.
B)Company B is more profitable than Company A.
C)Company A is more highly leveraged than Company B.
D)Company B is more highly leveraged than Company A.
E)None of the answer choices is correct.

Accepted Answer

The debt to equity ratio measures the amount of debt financing a company uses to fund its operations in comparison to shareholder equity. A higher debt to equity ratio indicates that a company is more highly leveraged and has a greater reliance on debt financing. Therefore, Company B is more highly leveraged than Company A. The debt to equity ratio does not directly indicate profitability, so options A and B cannot be definitively determined based on this ratio alone. Therefore, options C and E are incorrect.

Question 19

During 2017,Victory Inc.had beginning accounts receivable of $42,000 and ending accounts receivable of $48,000.Its net sales of $450,000 are composed of 20% cash sales and 80% credit sales.Based on this information,what is Victory's receivables turnover ratio?
A)7.5 times
B)8.0 times
C)10.0 times
D)2.0 times
E)None of the answer choices is correct.

Accepted Answer

Receivables turnover ratio = Net credit sales / Average accounts receivable

First, we need to calculate the net credit sales:
Net sales = $450,000
Cash sales = 20% of $450,000 = $90,000
Credit sales = $450,000 - $90,000 = $360,000

Next, we need to calculate the average accounts receivable:
Beginning accounts receivable = $42,000
Ending accounts receivable = $48,000
Average accounts receivable = ($42,000 + $48,000) / 2 = $45,000

Finally, we can calculate the receivables turnover ratio:
Receivables turnover ratio = $360,000 / $45,000 = 8.0 times

Question 20

All of the following measures focus on long-term solvency except:
A)inventory turnover ratio.
B)times interest earned.
C)debt to assets.
D)debt to equity.
E)None of the answer choices is correct.

Accepted Answer

Inventory turnover ratio is a measure of short-term liquidity, not long-term solvency. The other options focus on long-term solvency by assessing the company's ability to meet its long-term debt obligations and the extent to which it is funding its assets through debt versus equity.

Quiz 13: How Do Managers Use Financial and Nonfinancial Performance Measures

Which of the following is the best explanation of a company's inventory turnover of 12.0 for the year 2017?

During 2017,Columbia Inc.had beginning accounts receivable of $680,000 and ending accounts receivable of $760,000.Its net sales of $4,500,000 are composed of 20% cash sales and 80% credit sales.Based on this information,what is Columbia's average collection period?

All of the following account balances would typically be used to calculate a current ratio except:

If net sales is growing at a greater rate than cost of goods sold,which of the following will always be true?

Albany Company has net income before taxes of $90,000,interest expense of $36,000 and an income tax rate of 20%.Based on this information,the company's times interest earned ratio is:

Which of the following types of measures focuses primarily on income statement information?

Which of the following types of companies would have the highest inventory turnover ratios?

All of the following measures evaluate profitability except:

All of the following are nonfinancial measures that might be used by transportation companies such as FedEx except:

All of the following accounts would typically be used to calculate the quick ratio except:

Dresden Inc.has net sales of $1,200,000,cost of goods sold of $900,000,operating expenses of $200,000,interest expense of $30,000,and income tax expense of $10,000.The company's gross margin ratio is (round to the nearest tenth of a percent) :

All of the following are measures used in the balanced scorecard except:

All of the following measures focus on short-term liquidity except:

The following debt to equity ratio is for two companies in the same industry. $\begin{array} { l c c } & { \text { Company A} } & \text { Campany B } \\\hline\text { Debt to equity ratio } & 4.5 \text { to } 1& 13.6\text { to } 1\end{array}$ Which of the following statements is always true?

During 2017,Victory Inc.had beginning accounts receivable of $42,000 and ending accounts receivable of $48,000.Its net sales of $450,000 are composed of 20% cash sales and 80% credit sales.Based on this information,what is Victory's receivables turnover ratio?

All of the following measures focus on long-term solvency except: