Chap 003

Chapter 03 - Working with Financial Statements
Chapter 03 Working with Financial Statements

Multiple Choice Questions
1. Activities of a firm which require the spen ing of cash are known as! A. sources of cash. ". uses of cash. C. cash collections. #. cash receipts. $. cash on han .
%. &he sources an uses of cash over a state perio of time are reflecte on the! A. income statement. ". 'alance sheet. C. ta( reconciliation statement. #. statement of cash flows. $. statement of operating position.
3. A common-si)e income statement is an accounting statement that e(presses all of a firm*s e(penses as percentage of! A. total assets. ". total equit+. C. net income. #. ta(a'le income. $. sales.
,. Which one of the following stan ar i)es items on the income statement an 'alance sheet relative to their values as of a common point in timeA. statement of stan ar i)ation ". statement of cash flows C. common-'ase +ear statement #. common-si)e statement $. 'ase reconciliation statement
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.. /elationships etermine from a firm*s financial information an use for comparison purposes are known as! A. financial ratios. ". i entities. C. imensional anal+sis. #. scenario anal+sis. $. solvenc+ anal+sis.
0. &he formula which 'reaks own the return on equit+ into three component parts is referre to as which one of the followingA. equit+ equation ". profita'ilit+ eterminant C. S1C formula #. #u 2ont i entit+ $. equit+ performance formula
3. &he 4.S. government co ing s+stem that classifies a firm '+ the nature of its 'usiness operations is known as the! A. 5AS#A6 100. ". Stan ar 7 2oor*s .00. C. Stan ar 1n ustrial Classification co e. #. 8overnmental 1# co e. $. 8overnment $ngineere Co ing S+stem.
9. Which one of the following is a source of cashA. increase in accounts receiva'le ". ecrease in notes pa+a'le C. ecrease in common stock #. increase in accounts pa+a'le $. increase in inventor+
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:. Which one of the following is a use of cashA. increase in notes pa+a'le ". ecrease in inventor+ C. increase in long-term e't #. ecrease in accounts receiva'les $. ecrease in common stock
10. Which one of the following is a source of cashA. repurchase of common stock ". acquisition of e't C. purchase of inventor+ #. pa+ment to a supplier $. granting cre it to a customer
11. Which one of the following is a source of cashA. increase in accounts receiva'le ". ecrease in common stock C. ecrease in long-term e't #. ecrease in accounts pa+a'le $. ecrease in inventor+
1%. ;n the Statement of Cash Flows< which of the following are consi ere financing activities1. increase in long-term e't 11. ecrease in accounts pa+a'le 111. interest pai 1=. ivi en s pai A. 1 an 1= onl+ ". 111 an 1= onl+ C. 11 an 111 onl+ #. 1< 111< an 1= onl+ $. 1< 11< 111< an 1=
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13. ;n the Statement of Cash Flows< which of the following are consi ere operating activities1. costs of goo s sol 11. ecrease in accounts pa+a'le 111. interest pai 1=. ivi en s pai A. 1 an 111 onl+ ". 111 an 1= onl+ C. 1< 11< an 111 onl+ #. 1< 111< an 1= onl+ $. 1< 11< 111< an 1=
1,. Accor ing to the Statement of Cash Flows< a ecrease in accounts receiva'le will >>>>> the cash flow from >>>>> activities. A. ecrease? operating ". ecrease? financing C. increase? operating #. increase? financing $. increase? investment
1.. Accor ing to the Statement of Cash Flows< an increase in interest e(pense will >>>>> the cash flow from >>>>> activities. A. ecrease? operating ". ecrease? financing C. increase? operating #. increase? financing $. increase? investment
10. ;n a common-si)e 'alance sheet all accounts are e(presse as a percentage of! A. sales for the perio . ". the 'ase +ear sales. C. total equit+ for the 'ase +ear. #. total assets for the current +ear. $. total assets for the 'ase +ear.
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13. ;n a common-'ase +ear financial statement< accounts receiva'les will 'e e(presse relative to which one of the followingA. current +ear sales ". current +ear total assets C. 'ase-+ear sales #. 'ase-+ear total assets $. 'ase-+ear accounts receiva'les
19. A firm uses %009 as the 'ase +ear for its financial statements. &he common-si)e< 'ase+ear statement for %00: has an inventor+ value of 1.09. &his is interprete to mean that the %00: inventor+ is equal to 109 percent of which one of the followingA. %009 inventor+ ". %009 total assets C. %00: total assets #. %009 inventor+ e(presse as a percent of %009 total assets $. %00: inventor+ e(presse as a percent of %00: total assets
1:. Which of the following ratios are measures of a firm*s liqui it+1. cash coverage ratio 11. interval measure 111. e't-equit+ ratio 1=. quick ratio A. 1 an 111 onl+ ". 11 an 1= onl+ C. 1< 111< an 1= onl+ #. 1< 11< an 111 onl+ $. 1< 11< 111< an 1=
%0. An increase in current lia'ilities will have which one of the following effects< all else hel constant- Assume all ratios have positive values. A. increase in the cash ratio ". increase in the net working capital to total assets ratio C. ecrease in the quick ratio #. ecrease in the cash coverage ratio $. increase in the current ratio
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%1. An increase in which one of the following will increase a firm*s quick ratio without affecting its cash ratioA. accounts pa+a'le ". cash C. inventor+ #. accounts receiva'le $. fi(e assets
%%. A supplier< who requires pa+ment within ten a+s< shoul 'e most concerne with which one of the following ratios when granting cre itA. current ". cash C. e't-equit+ #. quick $. total e't
%3. A firm has an interval measure of ,9. &his means that the firm has sufficient liqui assets to o which one of the followingA. pa+ all of its e'ts that are ue within the ne(t ,9 hours ". pa+ all of its e'ts that are ue within the ne(t ,9 a+s C. cover its operating costs for the ne(t ,9 hours #. cover its operating costs for the ne(t ,9 a+s $. meet the eman s of its customers for the ne(t ,9 hours
%,. ;ver the past +ear< the quick ratio for a firm increase while the current ratio remaine constant. 8iven this information< which one of the following must have occurre - Assume all ratios have positive values. A. current assets increase ". current assets ecrease C. inventor+ increase #. inventor+ ecrease $. accounts pa+a'le increase
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%.. /atios that measure a firm*s financial leverage are known as >>>>> ratios. A. asset management ". long-term solvenc+ C. short-term solvenc+ #. profita'ilit+ $. 'ook value
%0. Which one of the following statements is correctA. 1f the total e't ratio is greater than ..0< then the e't-equit+ ratio must 'e less than 1.0. ". @ong-term cre itors woul prefer the times interest earne ratio 'e 1., rather than 1... C. &he e't-equit+ ratio can 'e compute as 1 plus the equit+ multiplier. #. An equit+ multiplier of 1.% means a firm has A1.%0 in sales for ever+ A1 in equit+. $. An increase in the epreciation e(pense will not affect the cash coverage ratio.
%3. 1f a firm has a e't-equit+ ratio of 1.0< then its total e't ratio must 'e which one of the followingA. 0.0 ". 0.. C. 1.0 #. 1.. $. %.0
%9. &he cash coverage ratio irectl+ measures the a'ilit+ of a firm*s revenues to meet which one of its following o'ligationsA. pa+ment to supplier ". pa+ment to emplo+ee C. pa+ment of interest to a len er #. pa+ment of principle to a len er $. pa+ment of a ivi en to a sharehol er
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%:. Basper 4nite ha sales of A%1<000 in %009 an A%,<000 in %00:. &he firm*s current accounts remaine constant. 8iven this information< which one of the following statements must 'e trueA. &he total asset turnover rate increase . ". &he a+s* sales in receiva'les increase . C. &he net working capital turnover rate increase . #. &he fi(e asset turnover ecrease . $. &he receiva'les turnover rate ecrease .
30. &he Corner Car ware has succee e in increasing the amount of goo s it sells while hol ing the amount of inventor+ on han at a constant level. Assume that 'oth the cost per unit an the selling price per unit also remaine constant. &his accomplishment will 'e reflecte in the firm*s financial ratios in which one of the following wa+sA. ecrease in the inventor+ turnover rate ". ecrease in the net working capital turnover rate C. no change in the fi(e asset turnover rate #. ecrease in the a+*s sales in inventor+ $. no change in the total asset turnover rate
31. #ee*s has a fi(e asset turnover rate of 1.1% an a total asset turnover rate of 0.:1. Sam*s has a fi(e asset turnover rate of 1.1. an a total asset turnover rate of 0.99. "oth companies have similar operations. "ase on this information< #ee*s must 'e oing which one of the followingA. utili)ing its fi(e assets more efficientl+ than Sam*s ". utili)ing its total assets more efficientl+ than Sam*s C. generating A1 in sales for ever+ A1.1% in net fi(e assets #. generating A1.1% in net income for ever+ A1 in net fi(e assets $. maintaining the same level of current assets as Sam*s
3%. /atios that measure how efficientl+ a firm manages its assets an operations to generate net income are referre to as >>>>> ratios. A. asset management ". long-term solvenc+ C. short-term solvenc+ #. profita'ilit+ $. turnover
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33. 1f a firm pro uces a twelve percent return on assets an also a twelve percent return on equit+< then the firm! A. ma+ have short-term< 'ut not long-term e't. ". is using its assets as efficientl+ as possi'le. C. has no net working capital. #. has a e't-equit+ ratio of 1.0. $. has an equit+ multiplier of 1.0.
3,. Which one of the following will ecrease if a firm can ecrease its operating costs< all else constantA. return on equit+ ". return on assets C. profit margin #. equit+ multiplier $. price-earnings ratio
3.. Al*s has a price-earnings ratio of 19... "en*s also has a price-earnings ratio of 19... Which one of the following statements must 'e true if Al*s has a higher 2$8 ratio than "en*sA. Al*s has more net income than "en*s. ". "en*s is increasing its earnings at a faster rate than the Al*s. C. Al*s has a higher market value per share than oes "en*s. #. "en*s has a lower market-to-'ook ratio than Al*s. $. Al*s has a higher net income than "en*s.
30. &o'in*s 6 relates the market value of a firm*s assets to which one of the followingA. initial cost of creating the firm ". current 'ook value of the firm C. average asset value of similar firms #. average market value of similar firms $. to a+*s cost to uplicate those assets
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33. &he price-sales ratio is especiall+ useful when anal+)ing firms that have which one of the followingA. volatile market prices ". negative earnings C. positive 2$8 ratios #. a negative &o'in*s 6 $. increasing sales
39. Sharehol ers pro'a'l+ have the most interest in which one of the following sets of ratiosA. return on assets an profit margin ". long-term e't an times interest earne C. price-earnings an e't-equit+ #. market-to-'ook an times interest earne $. return on equit+ an price-earnings
3:. Which one of the following accuratel+ escri'es the three parts of the #u 2ont i entit+A. operating efficienc+< equit+ multiplier< an profita'ilit+ ratio ". financial leverage< operating efficienc+< an profita'ilit+ ratio C. equit+ multiplier< profit margin< an total asset turnover #. e't-equit+ ratio< capital intensit+ ratio< an profit margin $. return on assets< profit margin< an equit+ multiplier
,0. An increase in which of the following will increase the return on equit+< all else constant1. sales 11. net income 111. epreciation 1=. total equit+ A. 1 onl+ ". 1 an 11 onl+ C. 11 an 1= onl+ #. 11 an 111 onl+ $. 1< 11< an 111 onl+
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,1. Which of the following can 'e use to compute the return on equit+1. 2rofit margin /eturn on assets 11. /eturn on assets $quit+ multiplier 111. 5et incomeD&otal equit+ 1=. /eturn on assets &otal asset turnover A. 1 an 111 onl+ ". 11 an 111 onl+ C. 11 an 1= onl+ #. 1< 11< an 111 onl+ $. 1< 11< 111< an 1=
,%. &he #u 2ont i entit+ can 'e use to help managers answer which of the following questions relate to a firm*s operations1. Cow man+ sales ollars has the firm generate per each ollar of assets11. Cow man+ ollars of assets has a firm acquire per each ollar in sharehol ers* equit+111. Cow much net profit is a firm generating per ollar of sales1=. #oes the firm have the a'ilit+ to meet its e't o'ligations in a timel+ mannerA. 1 an 111 onl+ ". 11 an 1= onl+ C. 1< 11< an 111 onl+ #. 11< 111 an 1= onl+ $. 1< 11< 111< an 1=
,3. A firm currentl+ has A000 in e't for ever+ A1<000 in equit+. Assume the firm uses some of its cash to ecrease its e't while maintaining its current equit+ an net income. Which one of the following will ecrease as a result of this actionA. equit+ multiplier ". total asset turnover C. profit margin #. return on assets $. return on equit+
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,,. Which one of the following statements is correctA. "ook values shoul alwa+s 'e given prece ence over market values. ". Financial statements are frequentl+ use as the 'asis for performance evaluations. C. Cistorical information provi es no value to someone who is pre icting future performance. #. 2otential len ers place little value on financial statement information. $. /eviewing financial information over time has ver+ limite value.
,.. 1t is easier to evaluate a firm using financial statements when the firm! A. is a conglomerate. ". has recentl+ merge with its largest competitor. C. uses the same accounting proce ures as other firms in the in ustr+. #. has a ifferent fiscal +ear than other firms in the in ustr+. $. ten s to have man+ one-time events such as asset sales an propert+ acquisitions.
,0. &he most accepta'le metho of evaluating the financial statements of a firm is to compare the firm*s current! A. financial ratios to the firm*s historical ratios. ". financial statements to the financial statements of similar firms operating in other C. countries. #. financial ratios to the average ratios of all firms locate within the same geographic area. $. financial statements to those of larger firms in unrelate in ustries. F. financial statements to the proEections that were create 'ase on &o'in*s 6.
,3. Which of the following represent pro'lems encountere when comparing the financial statements of two separate entities1. $ither one< or 'oth< of the firms ma+ 'e conglomerates an thus have unrelate lines of 'usiness. 11. &he operations of the two firms ma+ var+ geographicall+. 111. &he firms ma+ use iffering accounting metho s. 1=. &he two firms ma+ 'e seasonal in nature an have ifferent fiscal +ear en s. A. 1 an 11 onl+ ". 11 an 111 onl+ C. 1< 111< an 1= onl+ #. 1< 11< an 111 onl+ $. 1< 11< 111< an 1=
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,9. Wise*s Corner 8rocer ha the following current account values. What effect i the change in net working capital have on the firm*s cash flows for %00:-
A. net use of cash of A33 ". net use of cash of A93 C. net source of cash of A93 #. net source of cash of A111 $. net source of cash of A13.
,:. #uring the +ear< Fitchen Suppl+ increase its accounts receiva'le '+ A130< ecrease its inventor+ '+ A3.< an ecrease its accounts pa+a'le '+ A,0. Cow i these three accounts affect the firm*s cash flows for the +earA. A%,. use of cash ". A10. use of cash C. A:. use of cash #. A:. source of cash $. A10. source of cash
.0. A firm generate net income of A939. &he epreciation e(pense was A,3 an ivi en s were pai in the amount of A%.. Accounts pa+a'les ecrease '+ A13< accounts receiva'les increase '+ A%%< inventor+ ecrease '+ A1,< an net fi(e assets ecrease '+ A9. &here was no interest e(pense. What was the net cash flow from operating activit+A. A930 ". A:0% C. A:0, #. A:%% $. A:30
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.1. A firm has sales of A%<1:0< net income of A13,< net fi(e assets of A1<000< an current assets of A3%0. &he firm has A310 in inventor+. What is the common-si)e statement value of inventor+A. 13.30 percent ". 1,.10 percent C. 1:.39 percent #. 30.,% percent $. ,3.00 percent
.%. A firm has sales of A3<,00< net income of A3:0< total assets of A,<.00< an total equit+ of A%<3.0. 1nterest e(pense is A,0. What is the common-si)e statement value of the interest e(penseA. 0.9: percent ". 1.19 percent C. 3.0: percent #. 10.%0 percent $. 1,... percent
.3. @ast +ear< which is use as the 'ase +ear< a firm ha cash of A.%< accounts receiva'le of A%19< inventor+ of A.0:< an net fi(e assets of A1<103. &his +ear< the firm has cash of A01< accounts receiva'le of A1:9< inventor+ of A.%3< an net fi(e assets of A1<%10. What is the common-'ase +ear value of accounts receiva'leA. 0.09 ". 0.10 C. 0.99 #. 0.:1 $. 1.19
.,. /ussell*s #eli has cash of A130< accounts receiva'le of A93< accounts pa+a'le of A%1.< an inventor+ of A,0:. What is the value of the quick ratioA. 0.31 ". 0..3 C. 0.31 #. 1.0, $. 1.03
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... 4ptown Gen*s Wear has accounts pa+a'le of A%<%1,< inventor+ of A3<:.0< cash of A1<%03< fi(e assets of A9<,00< accounts receiva'le of A3<:03< an long-term e't of A,<%00. What is the value of the net working capital to total assets ratioA. 0.31 ". 0.,% C. 0.,3 #. 0..1 $. 0..0
.0. A firm has total assets of A311<330 an net fi(e assets of A103<.3%. &he average ail+ operating costs are A%<:90. What is the value of the interval measureA. 31.,3 a+s ". ,9.,0 a+s C. .0.%% a+s #. 09.0. a+s $. 10,.0% a+s
.3. A firm has a e't-equit+ ratio of 0.,%. What is the total e't ratioA. 0.30 ". 0.30 C. 0.,, #. 1..9 $. %.39
.9. A firm has total e't of A,<0%0 an a e't-equit+ ratio of 0..3. What is the value of the total assetsA. A0<1%9.0. ". A3<%.3.,0 C. A:<.31.:. #. A11<03,.00 $. A1%<3%..%0
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.:. A firm has sales of A09<,00< costs of A,%<:00< interest pai of A%<100< an epreciation of A0<.00. &he ta( rate is 3, percent. What is the value of the cash coverage ratioA. 1%.1, ". 1..%, C. 13.%3 #. %3.,1 $. %,..0
00. &he "ike Shop pai A%<310 in interest an A1<9.0 in ivi en s last +ear. &he times interest earne ratio is %.% an the epreciation e(pense is A,00. What is the value of the cash coverage ratioA. 1.03 ". 1.90 C. %.%1 #. %.,0 $. %..%
01. Al*s Sport Store has sales of A9:3<,00< costs of goo s sol of A0%9<300< inventor+ of A%09<,00< an accounts receiva'le of A3,<100. Cow man+ a+s< on average< oes it take the firm to sell its inventor+ assuming that all sales are on cre itA. 3,.1: a+s ". 9,.30 a+s C. 1%1.03 a+s #. 139.,0 a+s $. 1.1.%1 a+s
0%. &he Flower Shoppe has accounts receiva'le of A3<30:< inventor+ of A,<,03< sales of A%19<0,0< an cost of goo s sol of A103<300. Cow man+ a+s oes it take the firm to 'oth sell its inventor+ an collect the pa+ment on the sale assuming that all sales are on cre itA. 1,.03 a+s ". 1..91 a+s C. 10.%3 a+s #. 13.19 a+s $. 13.,3 a+s
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03. A firm has net working capital of A%<31.< net fi(e assets of A%%<,03< sales of A31<3.0< an current lia'ilities of A3<:09. Cow man+ ollars worth of sales are generate from ever+ A1 in total assetsA. A1.09 ". A1.1, C. A1.1: #. A1.%0 $. A1.30
0,. &he 2urple Gartin has annual sales of A093<,00< total e't of A%10<000< total equit+ of A30.<000< an a profit margin of ..%0 percent. What is the return on assetsA. 0.%% percent ". 0.,9 percent C. 3.0% percent #. 3.39 percent $. :.3: percent
0.. /elia'le Cars has sales of A903<%00< total assets of A1<10.<100< an a profit margin of :.09 percent. &he firm has a total e't ratio of 39 percent. What is the return on equit+A. 13.0: percent ". 10.03 percent C. 13.09 percent #. %9..0 percent $. 3%.1, percent
00. &he Geat Garket has A3,3<000 in sales. &he profit margin is ,.1 percent an the firm has 3<.00 shares of stock outstan ing. &he market price per share is A%3. What is the priceearnings ratioA. 0.01 ". 9.:9 C. 11.,% #. 13.1. $. 1,.%3
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03. "ig 8u+ Su's has net income of A1.0<:90< a price-earnings ratio of 1%.9< an earnings per share of A0.93. Cow man+ shares of stock are outstan ingA. 13<..9 ". 1,<,03 C. 10.<.%3 #. 131<000 $. 133<.,0
09. A firm has 100<000 shares of stock outstan ing< sales of A1.:, million< net income of A1%0<,00< a price-earnings ratio of 19.3< an a 'ook value per share of A:.1%. What is the market-to-'ook ratioA. 1.0% ". 1.9, C. %.%3 #. %.,. $. %..3
0:. ;scar*s #og Couse has a profit margin of ..0 percent< a return on assets of 1%.. percent< an an equit+ multiplier of 1.,:. What is the return on equit+A. 13.1, percent ". 19.03 percent C. 1:.03 percent #. %1.0: percent $. %%.30 percent
30. &a+lor*s Gen*s Wear has a e't-equit+ ratio of ,% percent< sales of A3,:<000< net income of A,1<300< an total e't of A1:9<,00. What is the return on equit+A. 3.3: percent ". 9.,1 percent C. 9.3, percent #. :.0: percent $. :.10 percent
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31. A firm has a e't-equit+ ratio of .3 percent< a total asset turnover of 1.1%< an a profit margin of ,.: percent. &he total equit+ is A.11<0,0. What is the amount of the net incomeA. A%9<03: ". A3.<1,3 C. A,,<09, #. A,3<001 $. A.%<,19
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3%. What is the quick ratio for %00:A. 0..0 ". 0.00 C. 1.3% #. 1.03 $. 1.3:
33. Cow man+ a+s of sales are in receiva'les- H4se %00: valuesI A. 13.09 a+s ". %3.33 a+s C. %0.,: a+s #. %:.,1 a+s $. 3%.:3 a+s
3,. What is the price-sales ratio for %00: if the market price is A19.,: per shareA. %.,3 ". 3.%: C. 3.03 #. ,.1% $. ,.39
3.. What is e't-equit+ ratio- H4se %00: valuesI A. 0..% ". 0.93 C. 0.:, #. 1.01 $. 1.00
30. What is the cash coverage ratio for %00:A. :.,3 ". 10..3 C. 11.0, #. 11.9% $. 1%.31
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33. What is the return on equit+- H4se %00: valuesI A. 10.%0 percent ". 10.39 percent C. %0.09 percent #. %:.:0 percent $. ,0.1, percent
39. What is the amount of the ivi en s pai for %00:A. A11<100 ". A1.<000 C. A3%<000 #. A,1<%00 $. A,.<100
3:. What is the amount of the cash flow from investment activit+ for %00:A. A19<100 ". A%,<900 C. A%:<300 #. A3%<000 $. A3:<,00
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90. What is the net working capital to total assets ratio for %00:A. %,.19 percent ". 30.9% percent C. ,..,: percent #. .1.,3 percent $. 0..93 percent
91. Cow man+ a+s on average oes it take 2recision &ool to sell its inventor+- H4se %00: valuesI A. 10,.30 a+s ". 193.33 a+s C. %1:.03 a+s #. %,3.,0 a+s $. %93.31 a+s
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9%. Cow man+ ollars of sales are 'eing generate from ever+ ollar of net fi(e assets- H4se %00: values.I A. A0.99 ". A1.93 C. A%.33 #. A%..: $. A3.0:
93. What is the equit+ multiplier for %00:A. 1.03 ". 1.3% C. 1.99 #. 1.:3 $. %.03
9,. What is the times interest earne ratio for %00:A. :.03 ". 10.1% C. 1%..: #. 1,.:3 $. 10.0.
9.. What is the return on equit+ for %00:- H4se %00: valuesI A. 1..%: percent ". 10.,0 percent C. 13.39 percent #. 19.0% percent $. 19.1% percent
90. What is the net cash flow from investment activit+ for %00:A. -A1<9,0 ". -A1<090 C. -A90 #. A90 $. A1<9,0
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93. Cow oes accounts receiva'le affect the statement of cash flows for %00:A. a use of A,<%19 of cash as an investment activit+ ". a source of A903 of cash as an operating activit+ C. a use of A,<%19 of cash as a financing activit+ #. a source of A903 of cash as an investment activit+ $. a use of A903 of cash as an operating activit+
99. "@ @um'er has earnings per share of A1.%1. &he firm*s earnings have 'een increasing at an average rate of 3.1 percent annuall+ an are e(pecte to continue oing so. &he firm has %1<.00 shares of stock outstan ing at a price per share of A19.30. What is the firm*s 2$8 ratioA. 0.,9 ". 1.%, C. %.9. #. 3.:3 $. ,.::
9:. &ownsen $nterprises has a 2$8 ratio of ..3< net income of A,:<%00< a price-earnings ratio of 13.0< an a profit margin of 3.1 percent. What is the earnings growth rateA. 0.33 percent ". 1.00 percent C. 3.3% percent #. ..30 percent $. 10.00 percent
:0. A firm has total assets with a current 'ook value of A09<300< a current market value of A3,<300< an a current replacement cost of A3.<000. What is the value of &o'in*s 6A. .9. ". .93 C. .:% #. .:. $. .:9
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:1. #i(ie Suppl+ has total assets with a current 'ook value of A309<:00 an a current replacement cost of A,90<%00. &he market value of these assets is A,0,<900. What is the value of &o'in*s 6A. .90 ". .:% C. .:0 #. 1.01 $. 1.00
:%. #an elion Fiel s has a &o'in*s 6 of .:0. &he replacement cost of the firm*s assets is A%%.<000 an the market value of the firm*s e't is A10:<000. &he firm has %0<000 shares of stock outstan ing an a 'ook value per share of A%.0:. What is the market to 'ook ratioA. %..0 times ". 3.19 times C. 3.., times #. ,.01 times $. ,.%0 times
:3. A firm has annual sales of A3%0<000< a price-earnings ratio of %,< an a profit margin of ,.% percent. &here are 1,<000 shares of stock outstan ing. What is the price-sales ratioA. 0.:3 ". 1.01 C. 1.09 #. 1.1. $. 1.%%
:,. @assiter 1n ustries has annual sales of A%%0<000 with 10<000 shares of stock outstan ing. &he firm has a profit margin of 3.. percent an a price-sales ratio of 1.%0. What is the firm*s price-earnings ratioA. 1, ". 10 C. 19 #. %0 $. %%
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Essay Questions
:.. Assume a firm has a positive cash 'alance which is increasing annuall+. Wh+ then is it important to anal+)e a statement of cash flows-
:0. Jou nee to anal+)e a firm*s performance in relation to its peers. Jou can o this either '+ comparing the firms* 'alance sheets an income statements or '+ comparing the firms* ratios. 1f +ou onl+ ha time to use one means of comparison which metho woul +ou use an wh+-
:3. 1n general< what oes a high &o'in*s 6 value in icate an how relia'le oes that value ten to 'e-
:9. What value oes the 2$8 ratio provi e to financial anal+sts-
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::. What value can the price-sales ratio provi e to financial managers that the price-earnings ratio cannot-
100. 1t is commonl+ recommen e that the managers of a firm compare the performance of their firm to that of its peers. 1ncreasingl+< this is 'ecoming a more ifficult task. $(plain some of the reasons wh+ comparisons of this t+pe can frequentl+ 'e either ifficult to perform or pro uce mislea ing results.
101. &he "urger Cut has sales of A%: million< total assets of A,3 million< an total e't of A13 million. &he profit margin is 11 percent. What is the return on equit+A. 3.,% percent ". 10.03 percent C. 11.09 percent #. 13.31 percent $. 1,.%9 percent
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10%. &he Come Suppl+ Co. has a current accounts receiva'le 'alance of A300<000. Cre it sales for the +ear Eust en e were A1<930<000. Cow man+ a+s on average i it take for cre it customers to pa+ off their accounts uring this past +earA. .,.%: a+s ". .0.01 a+s C. .3..0 a+s #. .:.9, a+s $. 01.00 a+s
103. "@ 1n ustries has en ing inventor+ of A300<000< an cost of goo s sol for the +ear Eust en e was A1<,10<000. ;n average< how long oes a unit of inventor+ sit on the shelf 'efore it is sol A. 13.10 a+s ". %1.,3 a+s C. 33.00 a+s #. 39.%: a+s $. 93.13 a+s
10,. Coulter Suppl+ has a total e't ratio of 0.,3. What is the equit+ multiplierA. 0.9: ". 1.13 C. 1.,3 #. 1.9: $. %.13
10.. Cigh Gountain Foo s has an equit+ multiplier of 1...< a total asset turnover of 1.3< an a profit margin of 3.. percent. What is the return on equit+A. 9.:, percent ". 10.93 percent C. 1%.0: percent #. 1,.39 percent $. 1..11 percent
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100. @ancaster &o+s has a profit margin of :.0 percent< a total asset turnover of 1.31< an a return on equit+ of %1.01 percent. What is the e't-equit+ ratioA. 0.%% ". 0.%9 C. 0.,0 #. 0.3% $. 0.39
103. Charlie*s Chicken has a e't-equit+ ratio of %.0.. /eturn on assets is :.% percent< an total equit+ is A.00<000. What is the net incomeA. A10.<010 ". A1,9<30: C. A1.3<130 #. A101<009 $. A10,<:0:
109. Canine Suppl+ has sales of A%<%00< total assets of A1<,00< an a e't-equit+ ratio of 0.3. 1ts return on equit+ is 1. percent. What is the net incomeA. A139.10 ". A1,1.,1 C. A1.%.0: #. A1.0.03 $. A101..,
10:. "illings< 1nc. has net income of A101<000< a profit margin of 3.0 percent< an an accounts receiva'le 'alance of A1%3<100. Assume that 00 percent of sales are on cre it. What is the a+s* sales in receiva'lesA. %1.:0 a+s ". %3..0 a+s C. 33.19 a+s #. 3..0, a+s $. 30.1: a+s
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110. 8la stone 2avers has a long-term e't ratio of 0.0 an a current ratio of 1.3. Current lia'ilities are A300< sales are A,<,,0< the profit margin is :.. percent< an the return on equit+ is 1:.. percent. Cow much oes the firm have in net fi(e assetsA. A,<990.19 ". A.<1:3.0: C. A.<000.03 #. A.<9,9.1. $. A0<103.30
111. A firm has a e't-total asset ratio of 3, percent an a return on total assets of 13 percent. What is the return on equit+A. %0 percent ". .0 percent C. 0. percent #. 9, percent $. 13. percent
11%. &he #ocksi e 1nn has net income for the most recent +ear of A9<,.0. &he ta( rate was 39 percent. &he firm pai A1<300 in total interest e(pense an e ucte A1<:00 in epreciation e(pense. What was the cash coverage ratio for the +earA. 10.,9 times ". 11.,9 times C. 1%.3: times #. 1%.:. times $. 13.03 times
113. "each Wear has current lia'ilities of A3.0<000< a quick ratio of 1.0.< inventor+ turnover of 3.%< an a current ratio of %.:. What is the cost of goo s sol A. A:90<000 ". A1<000<000 C. A1<%00<000 #. A1<,00<000 $. A1<.00<000
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Chapter 03 Working with Financial Statements Answer Fe+
1. Activities of a firm which require the spen ing of cash are known as! A. sources of cash. B. uses of cash. C. cash collections. #. cash receipts. $. cash on han . /efer to section 3.1
AACSB: N/A Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: #ses of cas$
%. &he sources an uses of cash over a state perio of time are reflecte on the! A. income statement. ". 'alance sheet. C. ta( reconciliation statement. D. statement of cash flows. $. statement of operating position. /efer to section 3.1
AACSB: N/A Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: State%ent of cas$ flo&s
3-31
3. A common-si)e income statement is an accounting statement that e(presses all of a firm*s e(penses as percentage of! A. total assets. ". total equit+. C. net income. #. ta(a'le income. E. sales. /efer to section 3.%
AACSB: N/A Difficulty: Basic Learning Objective: 3-1 Section: 3 ' !o"ic: Co%%on-si(e state%ent
,. Which one of the following stan ar i)es items on the income statement an 'alance sheet relative to their values as of a common point in timeA. statement of stan ar i)ation ". statement of cash flows C. common-'ase +ear statement #. common-si)e statement $. 'ase reconciliation statement /efer to section 3.%
AACSB: N/A Difficulty: Basic Learning Objective: 3-1 Section: 3 ' !o"ic: Co%%on-base year state%ent
3-3%
.. /elationships etermine from a firm*s financial information an use for comparison purposes are known as! . financial ratios. ". i entities. C. imensional anal+sis. #. scenario anal+sis. $. solvenc+ anal+sis. /efer to section 3.3
AACSB: N/A Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: )inancial ratios
0. &he formula which 'reaks own the return on equit+ into three component parts is referre to as which one of the followingA. equit+ equation ". profita'ilit+ eterminant C. S1C formula D. #u 2ont i entit+ $. equit+ performance formula /efer to section 3.,
AACSB: N/A Difficulty: Basic Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
3-33
3. &he 4.S. government co ing s+stem that classifies a firm '+ the nature of its 'usiness operations is known as the! A. 5AS#A6 100. ". Stan ar 7 2oor*s .00. C. Stan ar 1n ustrial Classification co e. #. 8overnmental 1# co e. $. 8overnment $ngineere Co ing S+stem. /efer to section 3..
AACSB: N/A Difficulty: Basic Learning Objective: 3-* Section: 3 !o"ic: S.C co,es
9. Which one of the following is a source of cashA. increase in accounts receiva'le ". ecrease in notes pa+a'le C. ecrease in common stock D. increase in accounts pa+a'le $. increase in inventor+ /efer to section 3.1
AACSB: N/A Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: Source of cas$
3-3,
:. Which one of the following is a use of cashA. increase in notes pa+a'le ". ecrease in inventor+ C. increase in long-term e't #. ecrease in accounts receiva'les E. ecrease in common stock /efer to section 3.1
AACSB: N/A Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: #se of cas$
10. Which one of the following is a source of cashA. repurchase of common stock B. acquisition of e't C. purchase of inventor+ #. pa+ment to a supplier $. granting cre it to a customer /efer to section 3.1
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11. Which one of the following is a source of cashA. increase in accounts receiva'le ". ecrease in common stock C. ecrease in long-term e't #. ecrease in accounts pa+a'le E. ecrease in inventor+ /efer to section 3.1
1%. ;n the Statement of Cash Flows< which of the following are consi ere financing activities1. increase in long-term e't 11. ecrease in accounts pa+a'le 111. interest pai 1=. ivi en s pai . 1 an 1= onl+ ". 111 an 1= onl+ C. 11 an 111 onl+ #. 1< 111< an 1= onl+ $. 1< 11< 111< an 1= /efer to section 3.1
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13. ;n the Statement of Cash Flows< which of the following are consi ere operating activities1. costs of goo s sol 11. ecrease in accounts pa+a'le 111. interest pai 1=. ivi en s pai A. 1 an 111 onl+ ". 111 an 1= onl+ C. 1< 11< an 111 onl+ #. 1< 111< an 1= onl+ $. 1< 11< 111< an 1= /efer to section 3.1
1,. Accor ing to the Statement of Cash Flows< a ecrease in accounts receiva'le will >>>>> the cash flow from >>>>> activities. A. ecrease? operating ". ecrease? financing C. increase? operating #. increase? financing $. increase? investment /efer to section 3.1
3-33
1.. Accor ing to the Statement of Cash Flows< an increase in interest e(pense will >>>>> the cash flow from >>>>> activities. . ecrease? operating ". ecrease? financing C. increase? operating #. increase? financing $. increase? investment /efer to section 3.1
10. ;n a common-si)e 'alance sheet all accounts are e(presse as a percentage of! A. sales for the perio . ". the 'ase +ear sales. C. total equit+ for the 'ase +ear. D. total assets for the current +ear. $. total assets for the 'ase +ear. /efer to section 3.%
AACSB: N/A Difficulty: Basic Learning Objective: 3-1 Section: 3 ' !o"ic: Co%%on-si(e balance s$eet
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13. ;n a common-'ase +ear financial statement< accounts receiva'les will 'e e(presse relative to which one of the followingA. current +ear sales ". current +ear total assets C. 'ase-+ear sales #. 'ase-+ear total assets E. 'ase-+ear accounts receiva'les /efer to section 3.%
19. A firm uses %009 as the 'ase +ear for its financial statements. &he common-si)e< 'ase+ear statement for %00: has an inventor+ value of 1.09. &his is interprete to mean that the %00: inventor+ is equal to 109 percent of which one of the followingA. %009 inventor+ ". %009 total assets C. %00: total assets D. %009 inventor+ e(presse as a percent of %009 total assets $. %00: inventor+ e(presse as a percent of %00: total assets /efer to section 3.%
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1:. Which of the following ratios are measures of a firm*s liqui it+1. cash coverage ratio 11. interval measure 111. e't-equit+ ratio 1=. quick ratio A. 1 an 111 onl+ B. 11 an 1= onl+ C. 1< 111< an 1= onl+ #. 1< 11< an 111 onl+ $. 1< 11< 111< an 1= /efer to section 3.3
AACSB: N/A Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: Li/ui,ity ratios
%0. An increase in current lia'ilities will have which one of the following effects< all else hel constant- Assume all ratios have positive values. A. increase in the cash ratio ". increase in the net working capital to total assets ratio C. ecrease in the quick ratio #. ecrease in the cash coverage ratio $. increase in the current ratio /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: 0atio analysis
3-,0
%1. An increase in which one of the following will increase a firm*s quick ratio without affecting its cash ratioA. accounts pa+a'le ". cash C. inventor+ D. accounts receiva'le $. fi(e assets /efer to section 3.3
%%. A supplier< who requires pa+ment within ten a+s< shoul 'e most concerne with which one of the following ratios when granting cre itA. current B. cash C. e't-equit+ #. quick $. total e't /efer to section 3.3
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%3. A firm has an interval measure of ,9. &his means that the firm has sufficient liqui assets to o which one of the followingA. pa+ all of its e'ts that are ue within the ne(t ,9 hours ". pa+ all of its e'ts that are ue within the ne(t ,9 a+s C. cover its operating costs for the ne(t ,9 hours D. cover its operating costs for the ne(t ,9 a+s $. meet the eman s of its customers for the ne(t ,9 hours /efer to section 3.3
AACSB: N/A Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: .nterval %easure
%,. ;ver the past +ear< the quick ratio for a firm increase while the current ratio remaine constant. 8iven this information< which one of the following must have occurre - Assume all ratios have positive values. A. current assets increase ". current assets ecrease C. inventor+ increase D. inventor+ ecrease $. accounts pa+a'le increase /efer to section 3.3
AACSB: N/A Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: 1uic2 ratio
3-,%
%.. /atios that measure a firm*s financial leverage are known as >>>>> ratios. A. asset management B. long-term solvenc+ C. short-term solvenc+ #. profita'ilit+ $. 'ook value /efer to section 3.3
AACSB: N/A Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: Long-ter% solvency ratios
%0. Which one of the following statements is correctA. 1f the total e't ratio is greater than ..0< then the e't-equit+ ratio must 'e less than 1.0. ". @ong-term cre itors woul prefer the times interest earne ratio 'e 1., rather than 1... C. &he e't-equit+ ratio can 'e compute as 1 plus the equit+ multiplier. #. An equit+ multiplier of 1.% means a firm has A1.%0 in sales for ever+ A1 in equit+. E. An increase in the epreciation e(pense will not affect the cash coverage ratio. /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: )inancial leverage ratios
3-,3
%3. 1f a firm has a e't-equit+ ratio of 1.0< then its total e't ratio must 'e which one of the followingA. 0.0 B. 0.. C. 1.0 #. 1.. $. %.0 /efer to section 3.3
%9. &he cash coverage ratio irectl+ measures the a'ilit+ of a firm*s revenues to meet which one of its following o'ligationsA. pa+ment to supplier ". pa+ment to emplo+ee C. pa+ment of interest to a len er #. pa+ment of principle to a len er $. pa+ment of a ivi en to a sharehol er /efer to section 3.3
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%:. Basper 4nite ha sales of A%1<000 in %009 an A%,<000 in %00:. &he firm*s current accounts remaine constant. 8iven this information< which one of the following statements must 'e trueA. &he total asset turnover rate increase . ". &he a+s* sales in receiva'les increase . C. &he net working capital turnover rate increase . #. &he fi(e asset turnover ecrease . $. &he receiva'les turnover rate ecrease . /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: !urnover ratios
30. &he Corner Car ware has succee e in increasing the amount of goo s it sells while hol ing the amount of inventor+ on han at a constant level. Assume that 'oth the cost per unit an the selling price per unit also remaine constant. &his accomplishment will 'e reflecte in the firm*s financial ratios in which one of the following wa+sA. ecrease in the inventor+ turnover rate ". ecrease in the net working capital turnover rate C. no change in the fi(e asset turnover rate D. ecrease in the a+*s sales in inventor+ $. no change in the total asset turnover rate /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: !urnover ratios
3-,.
31. #ee*s has a fi(e asset turnover rate of 1.1% an a total asset turnover rate of 0.:1. Sam*s has a fi(e asset turnover rate of 1.1. an a total asset turnover rate of 0.99. "oth companies have similar operations. "ase on this information< #ee*s must 'e oing which one of the followingA. utili)ing its fi(e assets more efficientl+ than Sam*s B. utili)ing its total assets more efficientl+ than Sam*s C. generating A1 in sales for ever+ A1.1% in net fi(e assets #. generating A1.1% in net income for ever+ A1 in net fi(e assets $. maintaining the same level of current assets as Sam*s /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: Asset utili(ation ratios
3%. /atios that measure how efficientl+ a firm manages its assets an operations to generate net income are referre to as >>>>> ratios. A. asset management ". long-term solvenc+ C. short-term solvenc+ D. profita'ilit+ $. turnover /efer to section 3.3
AACSB: N/A Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: +rofitability ratios
3-,0
33. 1f a firm pro uces a twelve percent return on assets an also a twelve percent return on equit+< then the firm! A. ma+ have short-term< 'ut not long-term e't. ". is using its assets as efficientl+ as possi'le. C. has no net working capital. #. has a e't-equit+ ratio of 1.0. E. has an equit+ multiplier of 1.0. /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: +rofitability ratios
3,. Which one of the following will ecrease if a firm can ecrease its operating costs< all else constantA. return on equit+ ". return on assets C. profit margin #. equit+ multiplier E. price-earnings ratio /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: +rofitability ratios
3-,3
3.. Al*s has a price-earnings ratio of 19... "en*s also has a price-earnings ratio of 19... Which one of the following statements must 'e true if Al*s has a higher 2$8 ratio than "en*sA. Al*s has more net income than "en*s. B. "en*s is increasing its earnings at a faster rate than the Al*s. C. Al*s has a higher market value per share than oes "en*s. #. "en*s has a lower market-to-'ook ratio than Al*s. $. Al*s has a higher net income than "en*s. /efer to section 3.3
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: 3ar2et value ratios
30. &o'in*s 6 relates the market value of a firm*s assets to which one of the followingA. initial cost of creating the firm ". current 'ook value of the firm C. average asset value of similar firms #. average market value of similar firms E. to a+*s cost to uplicate those assets /efer to section 3.3
AACSB: N/A Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: 3ar2et value ratios
3-,9
33. &he price-sales ratio is especiall+ useful when anal+)ing firms that have which one of the followingA. volatile market prices B. negative earnings C. positive 2$8 ratios #. a negative &o'in*s 6 $. increasing sales /efer to section 3.3
39. Sharehol ers pro'a'l+ have the most interest in which one of the following sets of ratiosA. return on assets an profit margin ". long-term e't an times interest earne C. price-earnings an e't-equit+ #. market-to-'ook an times interest earne E. return on equit+ an price-earnings /efer to section 3.3
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3:. Which one of the following accuratel+ escri'es the three parts of the #u 2ont i entit+A. operating efficienc+< equit+ multiplier< an profita'ilit+ ratio ". financial leverage< operating efficienc+< an profita'ilit+ ratio C. equit+ multiplier< profit margin< an total asset turnover #. e't-equit+ ratio< capital intensit+ ratio< an profit margin $. return on assets< profit margin< an equit+ multiplier /efer to section 3.,
,0. An increase in which of the following will increase the return on equit+< all else constant1. sales 11. net income 111. epreciation 1=. total equit+ A. 1 onl+ B. 1 an 11 onl+ C. 11 an 1= onl+ #. 11 an 111 onl+ $. 1< 11< an 111 onl+ /efer to section 3.,
3-.0
,1. Which of the following can 'e use to compute the return on equit+1. 2rofit margin /eturn on assets 11. /eturn on assets $quit+ multiplier 111. 5et incomeD&otal equit+ 1=. /eturn on assets &otal asset turnover A. 1 an 111 onl+ B. 11 an 111 onl+ C. 11 an 1= onl+ #. 1< 11< an 111 onl+ $. 1< 11< 111< an 1= /efer to section 3.,
,%. &he #u 2ont i entit+ can 'e use to help managers answer which of the following questions relate to a firm*s operations1. Cow man+ sales ollars has the firm generate per each ollar of assets11. Cow man+ ollars of assets has a firm acquire per each ollar in sharehol ers* equit+111. Cow much net profit is a firm generating per ollar of sales1=. #oes the firm have the a'ilit+ to meet its e't o'ligations in a timel+ mannerA. 1 an 111 onl+ ". 11 an 1= onl+ C. 1< 11< an 111 onl+ #. 11< 111 an 1= onl+ $. 1< 11< 111< an 1= /efer to section 3.,
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,3. A firm currentl+ has A000 in e't for ever+ A1<000 in equit+. Assume the firm uses some of its cash to ecrease its e't while maintaining its current equit+ an net income. Which one of the following will ecrease as a result of this action. equit+ multiplier ". total asset turnover C. profit margin #. return on assets $. return on equit+ /efer to section 3.,
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
,,. Which one of the following statements is correctA. "ook values shoul alwa+s 'e given prece ence over market values. B. Financial statements are frequentl+ use as the 'asis for performance evaluations. C. Cistorical information provi es no value to someone who is pre icting future performance. #. 2otential len ers place little value on financial statement information. $. /eviewing financial information over time has ver+ limite value. /efer to section 3..
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-* Section: 3 !o"ic: 4valuating financial state%ents
3-.%
,.. 1t is easier to evaluate a firm using financial statements when the firm! A. is a conglomerate. ". has recentl+ merge with its largest competitor. C. uses the same accounting proce ures as other firms in the in ustr+. #. has a ifferent fiscal +ear than other firms in the in ustr+. $. ten s to have man+ one-time events such as asset sales an propert+ acquisitions. /efer to section 3..
AACSB: N/A Difficulty: Basic Learning Objective: 3-* Section: 3 !o"ic: 4valuating financial state%ents
,0. &he most accepta'le metho of evaluating the financial statements of a firm is to compare the firm*s current! . financial ratios to the firm*s historical ratios. ". financial statements to the financial statements of similar firms operating in other C. countries. #. financial ratios to the average ratios of all firms locate within the same geographic area. $. financial statements to those of larger firms in unrelate in ustries. F. financial statements to the proEections that were create 'ase on &o'in*s 6. /efer to section 3..
AACSB: N/A Difficulty: .nter%e,iate Learning Objective: 3-* Section: 3 !o"ic: 4valuating financial state%ents
3-.3
,3. Which of the following represent pro'lems encountere when comparing the financial statements of two separate entities1. $ither one< or 'oth< of the firms ma+ 'e conglomerates an thus have unrelate lines of 'usiness. 11. &he operations of the two firms ma+ var+ geographicall+. 111. &he firms ma+ use iffering accounting metho s. 1=. &he two firms ma+ 'e seasonal in nature an have ifferent fiscal +ear en s. A. 1 an 11 onl+ ". 11 an 111 onl+ C. 1< 111< an 1= onl+ #. 1< 11< an 111 onl+ E. 1< 11< 111< an 1= /efer to section 3..
AACSB: N/A Difficulty: Basic Learning Objective: 3-* Section: 3 !o"ic: 4valuating financial state%ents
3-.,
,9. Wise*s Corner 8rocer ha the following current account values. What effect i the change in net working capital have on the firm*s cash flows for %00:-
A. net use of cash of A33 ". net use of cash of A93 C. net source of cash of A93 D. net source of cash of A111 $. net source of cash of A13.
AACSB: Analytic Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: Sources an, uses of cas$
3-..
,:. #uring the +ear< Fitchen Suppl+ increase its accounts receiva'le '+ A130< ecrease its inventor+ '+ A3.< an ecrease its accounts pa+a'le '+ A,0. Cow i these three accounts affect the firm*s cash flows for the +earA. A%,. use of cash ". A10. use of cash C. A:. use of cash #. A:. source of cash $. A10. source of cash
AACSB: Analytic Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: Sources an, uses of cas$
.0. A firm generate net income of A939. &he epreciation e(pense was A,3 an ivi en s were pai in the amount of A%.. Accounts pa+a'les ecrease '+ A13< accounts receiva'les increase '+ A%%< inventor+ ecrease '+ A1,< an net fi(e assets ecrease '+ A9. &here was no interest e(pense. What was the net cash flow from operating activit+A. A930 ". A:0% C. A:0, #. A:%% $. A:30 5et cash from operating activities K A939 L A,3 - A13 - A%% L A1, K A:0,
AACSB: Analytic Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: O"erating cas$ flo&s
3-.0
.1. A firm has sales of A%<1:0< net income of A13,< net fi(e assets of A1<000< an current assets of A3%0. &he firm has A310 in inventor+. What is the common-si)e statement value of inventor+. 13.30 percent ". 1,.10 percent C. 1:.39 percent #. 30.,% percent $. ,3.00 percent Common-si)e inventor+ K A310DHA1<000 L A3%0I K 13.30 percent
AACSB: Analytic Difficulty: Basic Learning Objective: 3-1 Section: 3 ' !o"ic: Co%%on-si(e state%ents
.%. A firm has sales of A3<,00< net income of A3:0< total assets of A,<.00< an total equit+ of A%<3.0. 1nterest e(pense is A,0. What is the common-si)e statement value of the interest e(penseA. 0.9: percent B. 1.19 percent C. 3.0: percent #. 10.%0 percent $. 1,... percent Common-si)e interest K A,0DA3<,00 K 1.19 percent
AACSB: Analytic Difficulty: Basic Learning Objective: 3-1 Section: 3 ' !o"ic: Co%%on-si(e state%ents
3-.3
.3. @ast +ear< which is use as the 'ase +ear< a firm ha cash of A.%< accounts receiva'le of A%19< inventor+ of A.0:< an net fi(e assets of A1<103. &his +ear< the firm has cash of A01< accounts receiva'le of A1:9< inventor+ of A.%3< an net fi(e assets of A1<%10. What is the common-'ase +ear value of accounts receiva'leA. 0.09 ". 0.10 C. 0.99 D. 0.:1 $. 1.19 Common-'ase +ear accounts receiva'le K A1:9DA%19 K 0.:1
AACSB: Analytic Difficulty: Basic Learning Objective: 3-1 Section: 3 ' !o"ic: Co%%on-base year state%ents
.,. /ussell*s #eli has cash of A130< accounts receiva'le of A93< accounts pa+a'le of A%1.< an inventor+ of A,0:. What is the value of the quick ratioA. 0.31 ". 0..3 C. 0.31 D. 1.0, $. 1.03 6uick ratio K HA130 L A93IDA%1. K 1.0,
AACSB: Analytic Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: Li/ui,ity ratios
3-.9
... 4ptown Gen*s Wear has accounts pa+a'le of A%<%1,< inventor+ of A3<:.0< cash of A1<%03< fi(e assets of A9<,00< accounts receiva'le of A3<:03< an long-term e't of A,<%00. What is the value of the net working capital to total assets ratioA. 0.31 ". 0.,% C. 0.,3 D. 0..1 $. 0..0 5et working capital to total assets K HA1<%03 L A3<:03 L A3<:.0 - A%<%1,IDHA1<%03 L A3<:03 L A3<:.0 L A9<,00I K 0..1
.0. A firm has total assets of A311<330 an net fi(e assets of A103<.3%. &he average ail+ operating costs are A%<:90. What is the value of the interval measureA. 31.,3 a+s B. ,9.,0 a+s C. .0.%% a+s #. 09.0. a+s $. 10,.0% a+s 1nterval measure K HA311<330 - A103<.3%IDA%<:90 K ,9.,0 a+s
3-.:
.3. A firm has a e't-equit+ ratio of 0.,%. What is the total e't ratio. 0.30 ". 0.30 C. 0.,, #. 1..9 $. %.39 &he e't-equit+ ratio is 0.,%. 1f total e't is A,% an total equit+ is A100< then total assets are A1,%. &otal e't ratio K A,%DA1,% K 0.30.
AACSB: Analytic Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: Long-ter% solvency ratios
.9. A firm has total e't of A,<0%0 an a e't-equit+ ratio of 0..3. What is the value of the total assetsA. A0<1%9.0. ". A3<%.3.,0 C. A:<.31.:. #. A11<03,.00 E. A1%<3%..%0 &otal equit+ K A,<0%0D0..3 K A9<10..%0 &otal assets K A,<0%0 L A9<10..%0 K A1%<3%..%0
3-00
.:. A firm has sales of A09<,00< costs of A,%<:00< interest pai of A%<100< an epreciation of A0<.00. &he ta( rate is 3, percent. What is the value of the cash coverage ratio. 1%.1, ". 1..%, C. 13.%3 #. %3.,1 $. %,..0 Cash coverage ratio K HA09<,00 - A,%<:00IDA%<100 K 1%.1,
00. &he "ike Shop pai A%<310 in interest an A1<9.0 in ivi en s last +ear. &he times interest earne ratio is %.% an the epreciation e(pense is A,00. What is the value of the cash coverage ratioA. 1.03 ". 1.90 C. %.%1 D. %.,0 $. %..% $"1& K %.% A%<310 K A.<09%? Cash coverage ratio K HA.<09% L A,00IDA%<310 K %.,0
AACSB: Analytic Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: Long-ter% solvency ratios
3-01
01. Al*s Sport Store has sales of A9:3<,00< costs of goo s sol of A0%9<300< inventor+ of A%09<,00< an accounts receiva'le of A3,<100. Cow man+ a+s< on average< oes it take the firm to sell its inventor+ assuming that all sales are on cre itA. 3,.1: a+s ". 9,.30 a+s C. 1%1.03 a+s #. 139.,0 a+s $. 1.1.%1 a+s 1nventor+ turnover K A0%9<300DA%09<,00 K 3.01,93. #a+s in inventor+ K 30.D3.01,93. K 1%1.03 a+s
AACSB: Analytic Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: Asset utili(ation ratios
0%. &he Flower Shoppe has accounts receiva'le of A3<30:< inventor+ of A,<,03< sales of A%19<0,0< an cost of goo s sol of A103<300. Cow man+ a+s oes it take the firm to 'oth sell its inventor+ an collect the pa+ment on the sale assuming that all sales are on cre itA. 1,.03 a+s B. 1..91 a+s C. 10.%3 a+s #. 13.19 a+s $. 13.,3 a+s #a+s in inventor+ K 30.DHA103<300DA,<,03I K :.01, a+s #a+s* sales in receiva'les K 30.DHA%19<0,0DA3<30:I K 0.1:% a+s &otal a+s in inventor+ an receiva'les K :.01, L 0.1:% K 1..91 a+s
3-0%
03. A firm has net working capital of A%<31.< net fi(e assets of A%%<,03< sales of A31<3.0< an current lia'ilities of A3<:09. Cow man+ ollars worth of sales are generate from ever+ A1 in total assets. A1.09 ". A1.1, C. A1.1: #. A1.%0 $. A1.30 &otal asset turnover K A31<3.0DHA%<31. L A%%<,03 L A3<:09I K 1.09 $ver+ A1 in total assets generates A1.09 in sales.
0,. &he 2urple Gartin has annual sales of A093<,00< total e't of A%10<000< total equit+ of A30.<000< an a profit margin of ..%0 percent. What is the return on assets. 0.%% percent ". 0.,9 percent C. 3.0% percent #. 3.39 percent $. :.3: percent /eturn on assets K H.0.%0 A093<,00IDHA%10<000 L A30.<000I K 0.%% percent
AACSB: Analytic Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: +rofitability ratios
3-03
0.. /elia'le Cars has sales of A903<%00< total assets of A1<10.<100< an a profit margin of :.09 percent. &he firm has a total e't ratio of 39 percent. What is the return on equit+A. 13.0: percent ". 10.03 percent C. 13.09 percent #. %9..0 percent E. 3%.1, percent /eturn on equit+ K H.0:09 A903<%00IDMA1<10.<100 H1 - .39IN K 3%.1, percent
AACSB: Analytic Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: +rofitability ratios
00. &he Geat Garket has A3,3<000 in sales. &he profit margin is ,.1 percent an the firm has 3<.00 shares of stock outstan ing. &he market price per share is A%3. What is the priceearnings ratio. 0.01 ". 9.:9 C. 11.,% #. 13.1. $. 1,.%3 $arnings per share K H.0,1 A3,3<000ID3<.00 K ,.0930 2rice-earnings ratio K A%3D,.0930 K 0.01
AACSB: Analytic Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: 3ar2et value ratios
3-0,
03. "ig 8u+ Su's has net income of A1.0<:90< a price-earnings ratio of 1%.9< an earnings per share of A0.93. Cow man+ shares of stock are outstan ingA. 13<..9 ". 1,<,03 C. 10.<.%3 #. 131<000 E. 133<.,0 5um'er of shares K A1.0<:90DA0.93 K 133<.,0
09. A firm has 100<000 shares of stock outstan ing< sales of A1.:, million< net income of A1%0<,00< a price-earnings ratio of 19.3< an a 'ook value per share of A:.1%. What is the market-to-'ook ratio. 1.0% ". 1.9, C. %.%3 #. %.,. $. %..3 $arnings per share K A1%0<,00D100<000 K A0.3: 2rice per share K A0.3: 19.3 K A1,.333 Garket-to-'ook ratio K A1,.333DA:.1% K 1.0%
AACSB: Analytic Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: 3ar2et value ratios
3-0.
0:. ;scar*s #og Couse has a profit margin of ..0 percent< a return on assets of 1%.. percent< an an equit+ multiplier of 1.,:. What is the return on equit+A. 13.1, percent B. 19.03 percent C. 1:.03 percent #. %1.0: percent $. %%.30 percent /eturn on equit+ K 1%.. percent 1.,: K 19.03 percent< using the #u 2ont 1 entit+
AACSB: Analytic Difficulty: Basic Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
30. &a+lor*s Gen*s Wear has a e't-equit+ ratio of ,% percent< sales of A3,:<000< net income of A,1<300< an total e't of A1:9<,00. What is the return on equit+A. 3.3: percent ". 9.,1 percent C. 9.3, percent #. :.0: percent $. :.10 percent /eturn on equit+ K A,1<300DHA1:9<,00D0.,%I K 9.3, percent
AACSB: Analytic Difficulty: Basic Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
3-00
31. A firm has a e't-equit+ ratio of .3 percent< a total asset turnover of 1.1%< an a profit margin of ,.: percent. &he total equit+ is A.11<0,0. What is the amount of the net incomeA. A%9<03: ". A3.<1,3 C. A,,<09, #. A,3<001 $. A.%<,19 /eturn on equit+ K .0,: 1.1% H1 L 0..3I K .0901010 5et income K A.11<0,0 .0901010 K A,,<09,
AACSB: Analytic Difficulty: .nter%e,iate Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
3-03
3%. What is the quick ratio for %00:A. 0..0 B. 0.00 C. 1.3% #. 1.03 $. 1.3: 6uick ratio for %00: K HA%09<100 - A190<300IDA13,<300 K 0.00
3-09
33. Cow man+ a+s of sales are in receiva'les- H4se %00: valuesI A. 13.09 a+s ". %3.33 a+s C. %0.,: a+s #. %:.,1 a+s E. 3%.:3 a+s Accounts receiva'le turnover for %00: K A0%3<900DA.0<300 K 11.03 #a+s* sales in receiva'les for %00: K 30.D11.03 K 3%.:3
3,. What is the price-sales ratio for %00: if the market price is A19.,: per shareA. %.,3 ". 3.%: C. 3.03 D. ,.1% $. ,.39 2rice-sales ratio K A19.,:DMA0%3<900DHA1,0<000DA1IN K ,.1%
3-0:
3.. What is e't-equit+ ratio- H4se %00: valuesI A. 0..% ". 0.93 C. 0.:, D. 1.01 $. 1.00 #e't-equit+ ratio K HA13,<300 L A1,1<000IDHA1,0<000 L A131<900I K 1.01
AACSB: Analytic Difficulty: Basic Learning Objective: 3-' Section: 3 3 !o"ic: )inancial leverage ratios
30. What is the cash coverage ratio for %00:A. :.,3 B. 10..3 C. 11.0, #. 11.9% $. 1%.31 Cash coverage ratio K HA:.<%00 L A11<%00IDA10<100 K 10..3
3-30
33. What is the return on equit+- H4se %00: valuesI A. 10.%0 percent ". 10.39 percent C. %0.09 percent #. %:.:0 percent $. ,0.1, percent /eturn on equit+ K A.0<%00DHA1,0<000 L A131<900I K %0.09 percent
39. What is the amount of the ivi en s pai for %00:A. A11<100 ". A1.<000 C. A3%<000 #. A,1<%00 E. A,.<100 #ivi en s pai K A.0<%00 - HA131<900 - A1%0<300I K A,.<100
AACSB: Analytic Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: State%ent of cas$ flo&s
3-31
3:. What is the amount of the cash flow from investment activit+ for %00:A. A19<100 ". A%,<900 C. A%:<300 #. A3%<000 $. A3:<,00 Cash flow from investment activit+ K A%3:<,00 - A%01<300 L A11<%00 K A%:<300
3-3%
90. What is the net working capital to total assets ratio for %00:A. %,.19 percent ". 30.9% percent C. ,..,: percent #. .1.,3 percent $. 0..93 percent 5et working capital to total assets for %00: K HA%3<1%: - A9<39,IDA,1<%0: K ,..,: percent
91. Cow man+ a+s on average oes it take 2recision &ool to sell its inventor+- H4se %00: valuesI A. 10,.30 a+s ". 193.33 a+s C. %1:.03 a+s #. %,3.,0 a+s E. %93.31 a+s #a+s* sales in inventor+ K 30.DHA%9<%%.DA%1<:09I K %93.31 a+s
3-33
9%. Cow man+ ollars of sales are 'eing generate from ever+ ollar of net fi(e assets- H4se %00: values.I A. A0.99 ". A1.93 C. A%.33 D. A%..: $. A3.0: Fi(e asset turnover for %00: K A30<,09DA1,<090 K %..: For ever+ A1 in net fi(e assets< the firm generates A%..: in sales.
93. What is the equit+ multiplier for %00:A. 1.03 ". 1.3% C. 1.99 D. 1.:3 $. %.03 $quit+ multiplier for %00: K A,1<%0:DHA13<.00 L A3<9%.I K 1.:3
3-3,
9,. What is the times interest earne ratio for %00:A. :.03 ". 10.1% C. 1%..: #. 1,.:3 $. 10.0. &imes interest earne for %00: K A0<,%3DA.10 K 1%..:
9.. What is the return on equit+ for %00:- H4se %00: valuesI A. 1..%: percent ". 10.,0 percent C. 13.39 percent D. 19.0% percent $. 19.1% percent /eturn on equit+ for %00: K A3<9,3DHA13<.00 L A3<9%.I K 19.0% percent
3-3.
90. What is the net cash flow from investment activit+ for %00:A. -A1<9,0 B. -A1<090 C. -A90 #. A90 $. A1<9,0 5et cash flow from investment activit+ for %00: K -A1<090 A ition to net fi(e assets K A1,<090 - A1,<100 L A1<300 K A1<090
93. Cow oes accounts receiva'le affect the statement of cash flows for %00:A. a use of A,<%19 of cash as an investment activit+ ". a source of A903 of cash as an operating activit+ C. a use of A,<%19 of cash as a financing activit+ #. a source of A903 of cash as an investment activit+ E. a use of A903 of cash as an operating activit+ Change in accounts receiva'le for %00: K A,<%19 - A3<,11 K A903 An increase in accounts receiva'le is a use of cash as an operating activit+.
3-30
99. "@ @um'er has earnings per share of A1.%1. &he firm*s earnings have 'een increasing at an average rate of 3.1 percent annuall+ an are e(pecte to continue oing so. &he firm has %1<.00 shares of stock outstan ing at a price per share of A19.30. What is the firm*s 2$8 ratioA. 0.,9 ". 1.%, C. %.9. #. 3.:3 E. ,.:: 2$8 ratio K HA19.30DA1.%1IDH.031 100I K ,.::
9:. &ownsen $nterprises has a 2$8 ratio of ..3< net income of A,:<%00< a price-earnings ratio of 13.0< an a profit margin of 3.1 percent. What is the earnings growth rateA. 0.33 percent ". 1.00 percent C. 3.3% percent #. ..30 percent $. 10.00 percent ..3 K 13.0DH$arnings growth rate 100I? $arnings growth rate K 3.3% percent
3-33
:0. A firm has total assets with a current 'ook value of A09<300< a current market value of A3,<300< an a current replacement cost of A3.<000. What is the value of &o'in*s 6A. .9. ". .93 C. .:% #. .:. E. .:9 &o'in*s 6 K A3,<300DA3.<000 K .:9
:1. #i(ie Suppl+ has total assets with a current 'ook value of A309<:00 an a current replacement cost of A,90<%00. &he market value of these assets is A,0,<900. What is the value of &o'in*s 6A. .90 ". .:% C. .:0 #. 1.01 $. 1.00 &o'in*s 6 K A,0,<900DA,90<%00 K .:0
3-39
:%. #an elion Fiel s has a &o'in*s 6 of .:0. &he replacement cost of the firm*s assets is A%%.<000 an the market value of the firm*s e't is A10:<000. &he firm has %0<000 shares of stock outstan ing an a 'ook value per share of A%.0:. What is the market to 'ook ratio. %..0 times ". 3.19 times C. 3.., times #. ,.01 times $. ,.%0 times Garket value of assets K .:0 A%%.<000 K A%10<000 Garket value of equit+ K A%10<000 - A10:<000 K A103<000 Garket value per share A103<000D%0<000 K A..3. Garket-to-'ook ratio K A..3.DA%.0: K %..0 times
:3. A firm has annual sales of A3%0<000< a price-earnings ratio of %,< an a profit margin of ,.% percent. &here are 1,<000 shares of stock outstan ing. What is the price-sales ratioA. 0.:3 B. 1.01 C. 1.09 #. 1.1. $. 1.%% $arnings per share K HA3%0<000 .0,%ID1,<000 K A0.:0 2rice-sales ratio K H%, A0.:0IDHA3%0<000D1,<000I K 1.01
3-3:
:,. @assiter 1n ustries has annual sales of A%%0<000 with 10<000 shares of stock outstan ing. &he firm has a profit margin of 3.. percent an a price-sales ratio of 1.%0. What is the firm*s price-earnings ratioA. 1, B. 10 C. 19 #. %0 $. %% 2rice per share K 1.%0 HA%%0<000D10<000I K A%0.,0 $arnings per share K HA%%0<000 .03.ID10<000 K A1.0. 2rice-earnings ratio K A%0.,0DA1.0. K 10
Essay Questions
:.. Assume a firm has a positive cash 'alance which is increasing annuall+. Wh+ then is it important to anal+)e a statement of cash flows1t is possi'le that the increase in the cash 'alance is a result of issuing more equit+ or assuming more e't an not the result of generating cash from operations. 1f a firm cannot generate positive cash flows internall+< the firm will eventuall+ encounter ifficulties in raising e(ternal fun s an coul possi'l+ face 'ankruptc+. Fee 'ack! /efer to section 3.1
AACSB: 0eflective t$in2ing Difficulty: Basic Learning Objective: 3-1 Section: 3 1 !o"ic: State%ent of cas$ flo&s
3-90
:0. Jou nee to anal+)e a firm*s performance in relation to its peers. Jou can o this either '+ comparing the firms* 'alance sheets an income statements or '+ comparing the firms* ratios. 1f +ou onl+ ha time to use one means of comparison which metho woul +ou use an wh+Firms generall+ are si)e ifferentl+ making it ifficult to o comparisons on a ollar 'asis. "+ using ratios< the relationships 'etween varia'les can 'e seen without 'eing influence '+ firm si)e. 1n a ition< ratios allow +ou to anal+)e performance an see relationships that are ifficult to see when looking onl+ at ollar amounts. &hus< the logical choice woul 'e to compare the firms using ratio anal+sis. Fee 'ack! /efer to section 3..
AACSB: 0eflective t$in2ing Difficulty: .nter%e,iate Learning Objective: 3-* Section: 3 !o"ic: 0atio analysis
:3. 1n general< what oes a high &o'in*s 6 value in icate an how relia'le oes that value ten to 'eA high &o'in*s 6 in icates that the current market value of a firm*s assets represents a high percentage of the firm*s replacement cost. Cigher 6 values ten to in icate that a firm has a significant competitive a vantage an Dor has attractive investment opportunities. &he pro'lem with &o'in*s 6 is that the information use in the computation of the 6 value is often questiona'le. Fee 'ack! /efer to section 3.3
AACSB: 0eflective t$in2ing Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: !obin5s 1
3-91
:9. What value oes the 2$8 ratio provi e to financial anal+sts&he 2$8 ratio ivi es the 2$ ratio '+ the e(pecte future earnings growth rate H&he growth rate is multiplie '+ 100I. A high 2$8 value ten s to in icate that the firm*s 2$ ratio< an thus the stock price< is too high relative to the e(pecte growth rate of the firm*s earnings. &his is particularl+ true when a firm*s 2$8 an 2$ ratios are noticea'l+ greater than those of its peers. Fee 'ack! /efer to section 3.3
AACSB: 0eflective t$in2ing Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: +46 an, +4 ratios
::. What value can the price-sales ratio provi e to financial managers that the price-earnings ratio cannot&he price-earnings ratio loses its value when a firm has either )ero or negative earnings. &his pro'lem is avoi e '+ using the price-sales ratio as sales shoul alwa+s 'e a positive value. 1n a ition< the price-sales ratio is not affecte '+ a firm*s e(penses or ta(es whereas the priceearnings ratio is. 1f earnings are positive< 'oth ratios can 'e use to ascertain if there is an+ maEor change in the relationship 'etween a firm*s costs an its sales from one time perio to another. Fee 'ack! /efer to section 3.3
AACSB: 0eflective t$in2ing Difficulty: .nter%e,iate Learning Objective: 3-' Section: 3 3 !o"ic: +rice-sales ratio
3-9%
100. 1t is commonl+ recommen e that the managers of a firm compare the performance of their firm to that of its peers. 1ncreasingl+< this is 'ecoming a more ifficult task. $(plain some of the reasons wh+ comparisons of this t+pe can frequentl+ 'e either ifficult to perform or pro uce mislea ing results. Gan+ firms are involve in multiple areas of 'usiness over iverse geographical locations there'+ making it ifficult< if not impossi'le to i entif+ a peer that has trul+ similar operations. Firms operating in ifferent areas ma+ 'e su'Eecte to various regulations which might affect also their operations. 1n a ition< man+ firms are c+clical in nature an have var+ing fiscal +ears which complicates the comparison of financial statements. &he financial results for a firm are also affecte '+ various accounting practices an one-time events< such as a merger< acquisition< or ivestiture. 1f each of these ifferences 'etween firms is not han le properl+< an+ resulting comparisons or conclusions can 'e fault+. So< while it is recommen e that peer anal+sis 'e con ucte < oing so in a meaningful manner can present quite a challenge. Fee 'ack! /efer to section 3..
AACSB: 0eflective t$in2ing Difficulty: .nter%e,iate Learning Objective: 3-* Section: 3 !o"ic: +eer analysis
101. &he "urger Cut has sales of A%: million< total assets of A,3 million< an total e't of A13 million. &he profit margin is 11 percent. What is the return on equit+A. 3.,% percent B. 10.03 percent C. 11.09 percent #. 13.31 percent $. 1,.%9 percent /eturn on equit+ K H.11 A%:mIDHA,3m - A13mI K 10.03 percent
AACSB: Analytic Difficulty: Basic 4OC 7: 3-' Learning Objective: 3-' Section: 3 3 !o"ic: 0eturn on e/uity
3-93
10%. &he Come Suppl+ Co. has a current accounts receiva'le 'alance of A300<000. Cre it sales for the +ear Eust en e were A1<930<000. Cow man+ a+s on average i it take for cre it customers to pa+ off their accounts uring this past +earA. .,.%: a+s ". .0.01 a+s C. .3..0 a+s D. .:.9, a+s $. 01.00 a+s /eceiva'les turnover K A1<930<000DA300<000 K 0.1 times #a+s* sales in receiva'les K 30.D0.1 K .:.9, a+s
AACSB: Analytic Difficulty: Basic 4OC 7: 3-3 Learning Objective: 3-' Section: 3 3 !o"ic: Average collection "erio,
103. "@ 1n ustries has en ing inventor+ of A300<000< an cost of goo s sol for the +ear Eust en e was A1<,10<000. ;n average< how long oes a unit of inventor+ sit on the shelf 'efore it is sol A. 13.10 a+s ". %1.,3 a+s C. 33.00 a+s #. 39.%: a+s $. 93.13 a+s 1nventor+ turnover K A1<,10<000DA300<000 K ,.3 times #a+*s sales in inventor+ K 30.D,.3 K 33.00 a+s
AACSB: Analytic Difficulty: Basic 4OC 7: 3-* Learning Objective: 3-' Section: 3 3 !o"ic: .nventory turnover
3-9,
10,. Coulter Suppl+ has a total e't ratio of 0.,3. What is the equit+ multiplierA. 0.9: ". 1.13 C. 1.,3 D. 1.9: $. %.13 #e't-equit+ ratio K .,3DH1 - 0.,3I K 0.9: $quit+ multiplier K 1 L 0.9: K 1.9:
AACSB: Analytic Difficulty: Basic 4OC 7: 3-Learning Objective: 3-' Section: 3 3 !o"ic: 4/uity %ulti"lier
10.. Cigh Gountain Foo s has an equit+ multiplier of 1...< a total asset turnover of 1.3< an a profit margin of 3.. percent. What is the return on equit+A. 9.:, percent ". 10.93 percent C. 1%.0: percent #. 1,.39 percent E. 1..11 percent /eturn on equit+ K .03. 1.3 1... K 1..11 percent
AACSB: Analytic Difficulty: Basic 4OC 7: 3-8 Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
3-9.
100. @ancaster &o+s has a profit margin of :.0 percent< a total asset turnover of 1.31< an a return on equit+ of %1.01 percent. What is the e't-equit+ ratioA. 0.%% B. 0.%9 C. 0.,0 #. 0.3% $. 0.39 $quit+ multiplier K .%101DH.0:0 1.31I K 1.%9 #e't-equit+ ratio K 1.%9 - 1 K 0.%9
AACSB: Analytic Difficulty: Basic 4OC 7: 3-9 Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
103. Charlie*s Chicken has a e't-equit+ ratio of %.0.. /eturn on assets is :.% percent< an total equit+ is A.00<000. What is the net incomeA. A10.<010 ". A1,9<30: C. A1.3<130 #. A101<009 $. A10,<:0: $quit+ multiplier K 1 L %.0. K 3.0. /eturn on equit+ K .0:% 3.0. K .%900 5et income K .%900 A.00<000 K A1.3<130
AACSB: Analytic Difficulty: Basic 4OC 7: 3-1' Learning Objective: 3-' Section: 3 3 !o"ic: 4/uity %ulti"lier an, return on e/uity
3-90
109. Canine Suppl+ has sales of A%<%00< total assets of A1<,00< an a e't-equit+ ratio of 0.3. 1ts return on equit+ is 1. percent. What is the net incomeA. A139.10 ". A1,1.,1 C. A1.%.0: #. A1.0.03 E. A101.., /eturn on equit+ K .1. K H5et incomeDA%<%00I HA%<%00DA1<,00I H1 L 0.30I 5et income K A101..,
AACSB: Analytic Difficulty: .nter%e,iate 4OC 7: 3-19 Learning Objective: 3-3 Section: 3 * !o"ic: Du +ont i,entity
10:. "illings< 1nc. has net income of A101<000< a profit margin of 3.0 percent< an an accounts receiva'le 'alance of A1%3<100. Assume that 00 percent of sales are on cre it. What is the a+s* sales in receiva'lesA. %1.:0 a+s ". %3..0 a+s C. 33.19 a+s #. 3..0, a+s $. 30.1: a+s Sales K A101<000D.030 K A%<119<,%1 Cre it sales K A%<119<,%1 .00 K A1<3:9<1.9 Accounts receiva'le turnover K A1<3:9<1.9DA1%3<100 K 11 times #a+s* sales in receiva'les K 30.D11 K 33.19 a+s
AACSB: Analytic Difficulty: .nter%e,iate 4OC 7: 3-1: Learning Objective: 3-' Section: 3 3 !o"ic: Days5 sales in receivables
3-93
110. 8la stone 2avers has a long-term e't ratio of 0.0 an a current ratio of 1.3. Current lia'ilities are A300< sales are A,<,,0< the profit margin is :.. percent< an the return on equit+ is 1:.. percent. Cow much oes the firm have in net fi(e assetsA. A,<990.19 B. A.<1:3.0: C. A.<000.03 #. A.<9,9.1. $. A0<103.30 Current assets K 1.3 A300 K A:10 5et income K .0:. A,<,,0 K A,%1.90 &otal equit+ K A,%1.90D.1:. K A%<103.030: 0.0 K @ong term e'tDH@ong-term e't L A%<103.030:I? @ong-term e't K A3<%,,.01.3 &otal e't K A300 L A3<%,,.01.3 K A3<:,,.01.3 &otal assets K A3<:,,.01.3 L A%<103.030: K A0<103.0:%% 5et fi(e assets K A0<103.0:%% - A:10 K A.<1:3.0:
AACSB: Analytic Difficulty: .nter%e,iate 4OC 7: 3-'; Learning Objective: 3-' Section: 3 3 !o"ic: 0atios an, fi<e, assets
111. A firm has a e't-total asset ratio of 3, percent an a return on total assets of 13 percent. What is the return on equit+A. %0 percent B. .0 percent C. 0. percent #. 9, percent $. 13. percent H&otal assets - &otal equit+ID&otal assets K .3,? &otal equit+ K .%0 &otal assets 5et income K .13 &otal assets /eturn on equit+ K .13 &otal assetsD.%0 &otal assets K .0 percent
AACSB: Analytic Difficulty: .nter%e,iate 4OC 7: 3-'' Learning Objective: 3-' Section: 3 3 !o"ic: 0eturn on e/uity
3-99
11%. &he #ocksi e 1nn has net income for the most recent +ear of A9<,.0. &he ta( rate was 39 percent. &he firm pai A1<300 in total interest e(pense an e ucte A1<:00 in epreciation e(pense. What was the cash coverage ratio for the +earA. 10.,9 times ". 11.,9 times C. 1%.3: times D. 1%.:. times $. 13.03 times $arnings 'efore ta(es K A9<,.0DH1 - .39I K A13<0%:.03 $arnings 'efore interest< ta(es< an epreciation K A13<0%:.03 L A1<300 L A1<:00 K A10<9%:.03 Cash coverage ratio K A10<9%:.03DA1<300 K 1%.:. times
AACSB: Analytic Difficulty: .nter%e,iate 4OC 7: 3-'3 Learning Objective: 3-' Section: 3 3 !o"ic: Cas$ coverage ratio
113. "each Wear has current lia'ilities of A3.0<000< a quick ratio of 1.0.< inventor+ turnover of 3.%< an a current ratio of %.:. What is the cost of goo s sol A. A:90<000 ". A1<000<000 C. A1<%00<000 D. A1<,00<000 $. A1<.00<000 Current assets K %.: A3.0<000 K A1<01.<000 HA1<01.<000 - 1nventor+IDA3.0<000 K 1.0.? 1nventor+ K A,33<.00 Costs of goo s sol K 3.% A,33<.00 K A1<,00<000
AACSB: Analytic Difficulty: .nter%e,iate 4OC 7: 3-'* Learning Objective: 3-' Section: 3 3 !o"ic: Cost of goo,s sol,
3-9:

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Chapter 03 - Working with Financial Statements

Chapter 03 Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Multiple Choice Questions

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 Working with Financial Statements Answer Fe+

Multiple Choice Questions

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements

Chapter 03 - Working with Financial Statements