Question 1

Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations?
A) The quick ratio (acid test)
B) Return on equity
C) Total asset turnover
D) Operating profit margin

Accepted Answer

The quick ratio (acid test) is a liquidity ratio that evaluates a firm's ability to meet its short-term obligations using only the most liquid assets. This ratio is more useful for short-term evaluation than return on equity, total asset turnover, or operating profit margin.

Question 2

Paper Clip Office Supply had $24,000,000 in sales last year. Its total asset turnover was 3.0. Interest expense was $100,000 (5% on its $2,000,000 of debt). The company is financed entirely with debt and common equity. What is Paper Clip's debt ratio?
A) 20%
B) 30%
C) 25%
D) 60%
E) 16%

Accepted Answer

The debt ratio is calculated as debt / (debt + equity). We know that the company is financed entirely with debt and common equity, so the debt ratio is equal to debt / (debt + equity). We also know that the company has $2,000,000 of debt and $24,000,000 in sales. The total asset turnover is calculated as sales / assets, so the company's assets are equal to sales / total asset turnover. Therefore, the company's assets are equal to $24,000,000 / 3.0 = $8,000,000. The company's equity is equal to assets - debt, so the company's equity is equal to $8,000,000 - $2,000,000 = $6,000,000. Therefore, the company's debt ratio is equal to $2,000,000 / ($2,000,000 + $6,000,000) = 25%.

Question 3

Holding all other variables constant, which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in
A) inventory
B) long-term debt
C) accounts receivable
D) accounts payable

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. An increase in accounts payable, a current liability, would increase the denominator, thus decreasing the current ratio if all other factors remain constant.

Question 4

Which of the following is NOT a driving force of the operating profit margin?
A) The amount of leverage a firm uses.
B) Cost of goods sold
C) General and administrative expenses
D) The unit price of product sold

Accepted Answer

The amount of leverage a firm uses is not a direct driving force of the operating profit margin. Operating profit margin is primarily influenced by factors related to the company's operational efficiency and pricing strategy, such as cost of goods sold, general and administrative expenses, and the unit price of the product sold. Leverage, on the other hand, affects the financial structure of a company and its net income rather than its operating profit margin directly.

Question 5

Consolidated Industries has total interest charges of $20,000 per year. Sales of $2 million generated an operating income of $220,000 and an after-tax profit of 6% of sales. The firm has a marginal tax rate of 39%. What is the firm's times-interest-earned ratio?
A) 10
B) 11
C) 12
D) 13

Accepted Answer

The times-interest-earned ratio is calculated as operating income divided by interest charges. Operating income is given as $220,000, and interest charges are $20,000. Therefore, the times-interest-earned ratio is $220,000 / $20,000 = 11.

Question 6

Which of the following will increase return on equity?
A) An increase in sales with a proportionate increase in costs and expenses
B) An increase in sales relative to the asset base
C) A decrease in leverage
D) Both A and C

Accepted Answer

Return on equity is calculated as net income divided by shareholders' equity. Therefore, increasing sales relative to the asset base will increase net income without increasing equity, resulting in a higher return on equity. A and C are incorrect because an increase in costs and expenses (A) or a decrease in leverage (C) could potentially decrease net income and therefore decrease return on equity.

Question 7

An increase in the current ratio would indicate an increase in
A) leverage.
B) liquidity.
C) return on investment.
D) operating income.

Accepted Answer

The current ratio is a measure of a company's ability to pay its short-term obligations using its current assets. An increase in the current ratio means that the company has a higher proportion of current assets relative to its current liabilities, indicating improved liquidity. It does not necessarily indicate an increase in leverage, return on investment, or operating income.

Question 8

Since 2015, ABC's inventory management has
A) improved.
B) deteriorated.
C) remained the same.
D) changed but in an indeterminate manner.

Accepted Answer

The statement suggests that ABC's inventory management has worsened since 2015, indicating a deterioration.

Question 9

Which of the following is NOT a component of return on assets (ROA)?
A) Total assets
B) Cost of goods sold
C) Sales
D) Leverage

Accepted Answer

The components of return on assets (ROA) are net income and total assets. Leverage is not a component of ROA, but it does affect return on equity (ROE).

Question 10

If Challenge Corporation has sales of $2 million per year (all credit) and an average collection period of 35 days, what is its average amount of accounts receivable?
A) $191,781
B) $57,143
C) $5,556
D) $97,222

Accepted Answer

The average amount of accounts receivable can be calculated by dividing the annual sales by 365 days to find the daily sales and then multiplying by the average collection period. For Challenge Corporation, this is ($2,000,000 / 365) * 35 = $191,780.82, which rounds to $191,781.

Question 11

A firm has a return on equity of 20% and a total asset turnover of 4. Assuming a debt ratio of 50% and sales of $1,000,000, calculate net income.
A) $25,000
B) $50,000
C) $75,000
D) $100,000

Accepted Answer

Net income = Return on equity * Equity = Return on equity * (Sales / Total asset turnover) * (1 - Debt ratio)= 0.20 * (1,000,000 / 4) * (1 - 0.50) = $25,000

Question 12

Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 2016. In addition, the firm's total assets were $2,500,000, and its capital structure is comprised of 40% debt and 60% equity. What was Corbin's return on equity in 2016?
A) 15%
B) 2.5%
C) 10%
D) Return on equity cannot be determined with the information provided.

Accepted Answer

Return on equity (ROE) = Net Income / Average Shareholders' Equity

To find average shareholders' equity, we need to know the beginning and ending shareholders' equity. Unfortunately, this information is not provided in the question. However, we can use the balance sheet equation:

Total Assets = Total Liabilities + Shareholders' equity

We know that total assets were $2,500,000 and the capital structure is 40% debt and 60% equity. This means that total liabilities were 40% of $2,500,000, or $1,000,000, and shareholders' equity was 60% of $2,500,000, or $1,500,000.

Assuming there were no major changes in the capital structure during the year, we can estimate that average shareholders' equity was ($1,500,000 + Beginning Shareholders' Equity) / 2.

Using this estimate, we can calculate ROE:

ROE = $150,000 / (($1,500,000 + Beginning Shareholders' Equity) / 2)

ROE = $150,000 / ($750,000 + 0.5*Beginning Shareholders' Equity)

We do not know what the beginning shareholders' equity was, but we can still choose the closest option based on the information we have:

A) 15% - This is the most likely answer based on the information provided.
B) 2.5% - This is too low based on the amount of net income and shareholders' equity.
C) 10% - This is a possibility, but it assumes that the beginning shareholders' equity was $1,500,000 (no change during the year).
D) Return on equity cannot be determined with the information provided. - This option is not correct because we can estimate the ROE using the information provided.

Question 13

Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an after-tax profit margin of 11.04% and sales of $2.5 million. What is Hi Sky's return on equity?
A) 15%
B) 35%
C) 27%
D) 13%

Accepted Answer

The answer of Hi Sky Enterprises has total assets of...

Question 14

Colton Corp. has current assets of $4.5 million. The current ratio is 1.25 and the quick ratio is 0.75. What is the amount of Colton's current liabilities (in millions)?
A) $4.5
B) $1.8
C) $2.4
D) $2.9
E) $3.6

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Given that Colton Corp. has a current ratio of 1.25 and current assets of $4.5 million, we can set up the equation 1.25 = $4.5 million / current liabilities. Solving for current liabilities gives us $4.5 million / 1.25 = $3.6 million.

Question 15

Which of the following financial ratios is the best measure of how effectively a firm's management is serving its stockholders?
A) Current ratio
B) Debt ratio
C) ACP
D) Return on equity

Accepted Answer

Return on equity measures the profitability of a company in relation to the amount of shareholder equity. It is an important indicator of how effectively a firm's management is using shareholders' investments to generate profits. The other three ratios do not directly measure the effectiveness of management in serving stockholders. Current ratio measures a firm's ability to pay off short-term liabilities, debt ratio measures the proportion of debt to total assets, and ACP measures the efficiency of a firm's collection of accounts receivable.

Question 16

________ indicates management's effectiveness in managing the firm's income statement.
A) Gross profit margin
B) Operating profit margin
C) Net profit margin
D) Return on assets

Accepted Answer

The answer of ________ indicates management's effectiveness in managing the...

Question 17

The current ratio and the acid test ratio are both measures of financial leverage.

Accepted Answer

Both the current ratio and the acid test ratio are measures of liquidity, not financial leverage. The current ratio measures a company's ability to pay its short-term liabilities with its short-term assets, while the acid test ratio measures a company's ability to pay its short-term liabilities with its most liquid assets. Leverage refers to a company's use of debt financing to generate greater returns for its shareholders.

Question 18

Kiosk Corp. has current assets of $4.5 million and current liabilities of $3.6 million. The current ratio is 1.25, and the quick ratio is 0.75. How much does Kiosk have invested in inventory (in millions)?
A) $0.8
B) $1.8
C) $2.4
D) $2.9
E) $3.6

Accepted Answer

Current ratio = Current assets / Current liabilities
1.25 = 4.5 million / Current liabilities
Current liabilities = 3.6 million

Quick ratio = (Current assets - Inventory) / Current liabilities
0.75 = (4.5 million - Inventory) / 3.6 million
4.5 million - Inventory = 2.7 million
Inventory = 1.8 million

Therefore, Kiosk Corp. has invested $1.8 million in inventory. The correct answer is B.

Question 19

Champion Company has sales of $20 million, total debt of $1.5 million, and a debt ratio of 40%. What is Champion's total asset turnover?
A) 13.33
B) 9.11
C) 6.55
D) 5.33

Accepted Answer

The total asset turnover is calculated as Sales / Total Assets. Given a debt ratio of 40%, this means that 40% of the company's assets are financed through debt. The debt ratio is calculated as Total Debt / Total Assets, so Total Assets = Total Debt / Debt Ratio = $1.5 million / 0.4 = $3.75 million. Therefore, the total asset turnover is $20 million / $3.75 million = 5.33.

Question 20

The focus of DuPont Analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments.

Accepted Answer

The statement is true. DuPont Analysis is a financial ratio analysis technique that breaks down the return on equity (ROE) into three components: profit margin, asset turnover, and leverage. This technique helps management understand how efficiently the firm is using its resources to generate profits and maximize returns for owners' investments.

Quiz 4: Financial Analysis-Sizing up Firm Performance

Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations?

Paper Clip Office Supply had $24,000,000 in sales last year. Its total asset turnover was 3.0. Interest expense was $100,000 (5% on its $2,000,000 of debt) . The company is financed entirely with debt and common equity. What is Paper Clip's debt ratio?

Holding all other variables constant, which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in

Which of the following is NOT a driving force of the operating profit margin?

Consolidated Industries has total interest charges of $20,000 per year. Sales of $2 million generated an operating income of $220,000 and an after-tax profit of 6% of sales. The firm has a marginal tax rate of 39%. What is the firm's times-interest-earned ratio?

Which of the following will increase return on equity?

An increase in the current ratio would indicate an increase in

Since 2015, ABC's inventory management has

Which of the following is NOT a component of return on assets (ROA) ?

If Challenge Corporation has sales of $2 million per year (all credit) and an average collection period of 35 days, what is its average amount of accounts receivable?

A firm has a return on equity of 20% and a total asset turnover of 4. Assuming a debt ratio of 50% and sales of $1,000,000, calculate net income.

Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 2016. In addition, the firm's total assets were $2,500,000, and its capital structure is comprised of 40% debt and 60% equity. What was Corbin's return on equity in 2016?

Hi Sky Enterprises has total assets of $3 million, a debt ratio of 30%, and an after-tax profit margin of 11.04% and sales of $2.5 million. What is Hi Sky's return on equity?

Colton Corp. has current assets of $4.5 million. The current ratio is 1.25 and the quick ratio is 0.75. What is the amount of Colton's current liabilities (in millions) ?

Which of the following financial ratios is the best measure of how effectively a firm's management is serving its stockholders?

________ indicates management's effectiveness in managing the firm's income statement.

The current ratio and the acid test ratio are both measures of financial leverage.

Kiosk Corp. has current assets of $4.5 million and current liabilities of $3.6 million. The current ratio is 1.25, and the quick ratio is 0.75. How much does Kiosk have invested in inventory (in millions) ?

Champion Company has sales of $20 million, total debt of $1.5 million, and a debt ratio of 40%. What is Champion's total asset turnover?

The focus of DuPont Analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments.