Question 1

West Coast Kids had cost of goods sold of $3,000 million,ending inventory of $1,500 million,and average inventory of $1,000 million.The merchandise turnover is:
A) 2.
B) 3.
C) .33.
D) .42.
E) 12.

Accepted Answer

Merchandise Turnover = Cost of Goods Sold / Average Inventory
Merchandise Turnover = $3,000 million / $1,000 million
Merchandise Turnover = 3

Therefore, the answer is B, 3.

Question 2

FastForward had $3,000 of net income for October.Total revenues were $10,000.Calculate the profit margin.
A) 30%.
B) $7,000.
C) 15%.
D) $1,500.
E) 45%.

Accepted Answer

Profit margin is calculated as (Net Income / Total Revenues) * 100. For FastForward, it is ($3,000 / $10,000) * 100 = 30%.

Question 3

The gross profit ratio:
A) Measures the relationship between net sales and cost of goods sold.
B) Is a profitability measure.
C) Measures the amount of gross profit in each dollar of sales.
D) Measures the relationship between net sales and cost of goods sold and is a profitability measure.
E) All of these answers are correct.

Accepted Answer

The gross profit ratio measures the relationship between net sales and cost of goods sold, is a profitability measure, and indicates the amount of gross profit in each dollar of sales.

Question 4

Snow Sales Ltd's net sales were $856,600.Its cost of goods sold was $226,810.Its net income was $33,750.Its gross profit ratio was:
A) 73.5%.
B) 3.9%.
C) 14.9%.
D) 35%.
E) 285.7%.

Accepted Answer

The gross profit ratio is calculated as (Net Sales - Cost of Goods Sold) / Net Sales. Here, it is ($856,600 - $226,810) / $856,600 = 73.5%.

Question 5

The gross margin ratio:
A) Measures a merchandising firm's ability to earn a profit from the sale of inventory.
B) Is also called the profit margin ratio.
C) Is also called the gross profit ratio.
D) Measures a merchandising firm's ability to earn a profit from the sale of inventory and is also called profit margin ratio.
E) Is also called the gross profit ratio and measures a merchandising firm's ability to earn a profit from the sale of inventory

Accepted Answer

The gross margin ratio is also called the gross profit ratio and measures a merchandising firm's ability to earn a profit from the sale of inventory. Therefore, option E is the correct choice. Option A and B are incorrect because the gross margin ratio is not always synonymous with profit margin ratio. Option C is partly correct but does not include the information that it measures a firm's ability to earn a profit from the sale of inventory. Option D is incorrect as it duplicates the explanation given in option A.

Question 6

Macie's quick assets were $5 million.Its current assets were $11 million.Its current liabilities were $8 million.The acid-test ratio is:
A) .62.
B) .50.
C) 1.5.
D) .68.
E) 1.38.

Accepted Answer

The answer of Macie's quick assets were $5 million.Its current...

Question 7

The quick assets are:
A) Cash,short-term investments,prepaid expenses.
B) Cash,short-term investments,accounts receivable.
C) Cash,inventory,accounts receivable.
D) Cash,accounts receivable,prepaid expenses.
E) Accounts receivable,inventory,prepaid expenses.

Accepted Answer

Quick assets are assets that can be quickly converted into cash without losing value. These include cash, short-term investments, and accounts receivable, but not inventory or prepaid expenses, which are not as liquid or may not be directly convertible to cash in the short term.

Question 8

Chilliton's gross profit was $183,750.Its net sales were $247,800.Its gross profit ratio was:
A) $64,050.
B) 13.4%.
C) 74.1%.
D) $431,550.
E) 4.2%.

Accepted Answer

The gross profit ratio is calculated as (Gross Profit / Net Sales) * 100. Here, it is ($183,750 / $247,800) * 100 = 74.1%.

Question 9

The acid-test ratio differs from the current ratio:
A) Because it excludes prepaid expenses and inventory.
B) Because liabilities are divided by current assets.
C) Because it measures profitability.
D) Because it excludes short-term investments.
E) Because it excludes prepaid expenses and inventory and because it measures profitability.

Accepted Answer

The acid-test ratio, also known as the quick ratio, excludes prepaid expenses and inventory from the calculation whereas the current ratio includes them. This is because prepaid expenses and inventory may not be easily convertible to cash in a short period of time, and the acid-test ratio focuses on the company's ability to pay its current liabilities using its most liquid assets. The acid-test ratio does not measure profitability, and it may or may not include short-term investments, depending on the definition used.

Question 10

Days' sales in inventory:
A) Focuses on ending inventory.
B) Is a ratio that tells us how much inventory a firm has on hand in terms of days' sales.
C) Is the number of days we can sell from inventory if no new items are purchased.
D) Focuses on ending inventory and is a ratio that tells us how much inventory a firm has on hand in terms of days' sales.
E) All of these answers are correct.

Accepted Answer

Days' sales in inventory focuses on ending inventory and is a ratio that tells us how much inventory a firm has on hand in terms of days' sales.

Question 11

Days' sales in inventory is calculated by:
A) Ending inventory divided by cost of goods sold times 365.
B) Dividing cost of goods sold by merchandise inventory.
C) Dividing merchandise inventory by cost of goods sold.
D) Cost of goods sold divided by ending inventory times 365.
E) Ending inventory divided by cost of goods sold.

Accepted Answer

Days' sales in inventory is calculated by taking the ending inventory, dividing it by the cost of goods sold, and then multiplying by 365. This formula gives the average number of days it takes for a company to turn its inventory into sales.

Question 12

The merchandise turnover ratio:
A) Is cost of goods sold divided by ending inventory.
B) Is calculated by dividing merchandise inventory by cost of goods sold.
C) Is ending inventory divided by cost of goods sold.
D) Is calculated by dividing cost of goods sold by average merchandise inventory.
E) Is cost of goods sold divided by ending inventory times 365.

Accepted Answer

The merchandise turnover ratio is calculated by dividing the cost of goods sold by the average merchandise inventory. This ratio indicates how many times a company sells and replaces its inventory in a given period. Option A is the formula for inventory turnover ratio, Option B is the inverse of merchandise turnover ratio, Option C is the reciprocal of inventory turnover ratio, and Option E is the formula for days inventory outstanding.

Question 13

The current ratio:
A) Is used to measure a company's profitability.
B) Is used to measure the relationship between assets and long-term debt.
C) Measures the effect of operating income on profit.
D) Is used to evaluate a company's ability to pay its short-term obligations.
E) Is used to measure a company's profitability and to evaluate a company's ability to pay its short-term obligations.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations. It is calculated by dividing current assets by current liabilities. It is not used to measure profitability or the relationship between assets and long-term debt.

Question 14

Targot's current assets were $16,825.Its quick assets were $11,220.Its current liabilities were $13,190.The quick ratio is:
A) 0.65.
B) 0.78.
C) 0.85.
D) 1.18.
E) 1.28.

Accepted Answer

Quick ratio = Quick assets / Current liabilities
= $11,220 / $13,190
= 0.85

Question 15

The current ratio:
A) Is current assets divided by current liabilities.
B) Helps to assess a company's ability to pay its debts in the near future.
C) Reveals problems in a business if it is less than 1.
D) Is current assets divided by current liabilities and helps to assess a company's ability to pay its debts in the near future.
E) All of these answers are correct.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities, helps assess a company's short-term debt-paying ability, and a ratio less than 1 can indicate potential liquidity problems.

Question 16

The merchandise turnover ratio:
A) Is used to analyze profitability.
B) Is used to measure solvency.
C) Depends on the type of inventory valuation method.
D) Validates the acid-test ratio.
E) Measures how quickly a firm sells its merchandise inventory.

Accepted Answer

The merchandise turnover ratio measures how quickly a firm sells its merchandise inventory, so option E is correct. Option A is incorrect because profitability is measured by other ratios such as profit margin ratio. Option B is incorrect because solvency is measured by ratios such as debt to equity ratio. Option C is partially correct, but the merchandise turnover ratio can be calculated using different inventory valuation methods. Option D is incorrect because the acid-test ratio measures a company's ability to pay its current liabilities with its most liquid assets.

Question 17

The acid-test ratio:
A) Is also called the quick ratio.
B) Measures profitability.
C) Measures liquidity.
D) Is also called the quick ratio and measures liquidity.
E) All of these answers are correct.

Accepted Answer

The acid-test ratio is also called the quick ratio and it measures liquidity.

Question 18

Chapter's had net sales of $26,125 million.Its cost of goods sold was $16,022 million.Its net income was $997 million.Its gross profit ratio was:
A) 3.5%.
B) 67%.
C) 38.6%.
D) 5.2%.
E) 149.3%.

Accepted Answer

Gross Profit = Net Sales - Cost of Goods Sold = $26,125 million - $16,022 million = $10,103 million
Gross Profit Ratio = (Gross Profit/Net Sales) x 100% = ($10,103 million/$26,125 million) x 100% = 38.6%

Question 19

Liquidity problems are likely to exist for a company when its acid-test ratio:
A) Is less than the industry average.
B) Is lower than 1 to 1.
C) Is higher than 1 to 1.
D) Is 1 to 1.
E) Is both less than the industry average and lower than 1 to 1.

Accepted Answer

An acid-test ratio is a more stringent measure of liquidity compared to the current ratio since it considers only the most liquid assets (cash, marketable securities, and accounts receivables) to cover current liabilities. A ratio lower than 1 to 1 indicates that the company has more current liabilities than its readily available liquid assets, which can lead to liquidity problems. Therefore, choice B is correct since it indicates a low acid-test ratio, which is a sign of liquidity problems.

Question 20

Bobbytronics had $7,000,000 in net income for the year.Its sales were $11,200,000.Calculate the profit margin.
A) 17.5%.
B) 62.5%.
C) $34 million.
D) $4.2 million.
E) 28%.

Accepted Answer

Profit margin is calculated as (Net Income / Sales) * 100. For Bobbytronics, it is ($7,000,000 / $11,200,000) * 100 = 62.5%.

Quiz 18: Analyzing Financial Statements

West Coast Kids had cost of goods sold of $3,000 million,ending inventory of $1,500 million,and average inventory of $1,000 million.The merchandise turnover is:

FastForward had $3,000 of net income for October.Total revenues were $10,000.Calculate the profit margin.

The gross profit ratio:

Snow Sales Ltd's net sales were $856,600.Its cost of goods sold was $226,810.Its net income was $33,750.Its gross profit ratio was:

The gross margin ratio:

Macie's quick assets were $5 million.Its current assets were $11 million.Its current liabilities were $8 million.The acid-test ratio is:

The quick assets are:

Chilliton's gross profit was $183,750.Its net sales were $247,800.Its gross profit ratio was:

The acid-test ratio differs from the current ratio:

Days' sales in inventory:

Days' sales in inventory is calculated by:

The merchandise turnover ratio:

The current ratio:

Targot's current assets were $16,825.Its quick assets were $11,220.Its current liabilities were $13,190.The quick ratio is:

The current ratio:

The merchandise turnover ratio:

The acid-test ratio:

Chapter's had net sales of $26,125 million.Its cost of goods sold was $16,022 million.Its net income was $997 million.Its gross profit ratio was:

Liquidity problems are likely to exist for a company when its acid-test ratio:

Bobbytronics had $7,000,000 in net income for the year.Its sales were $11,200,000.Calculate the profit margin.