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CHAPTER 3Working with Financial Statements

I. DEFINITIONS............................................................................................................1II. CONCEPTS.................................................................................................................8III. PROBLEMS.........................................................................................................16

I. DEFINITIONS

SOURCES OF CASHa 1. Activities of the firm that generate cash are known as:

a. sources of cash.b. uses of cash.c. cash payments.d. cash receipts.e. cash on hand.

USES OF CASHb 2. Activities of the firm in which cash is spent are known as:

a. sources of cash.b. uses of cash.c. cash payments.d. cash receipts.e. cash on hand.

STATEMENT OF CASH FLOWSd 3. The financial statement that summarizes the sources and uses of cash over a specified

period of time is the:a. income statement.b. balance sheet.c. tax reconciliation statement.d. statement of cash flows.e. statement of operating position.

COMMON-SIZE STATEMENTSe 4. A _____ standardizes items on the income statement and balance sheet as a percentage

of total sales and total assets, respectively.a. tax reconciliation statementb. statement of standardizationc. statement of cash flowsd. common-base year statemente. common-size statement

COMMON-BASE YEAR STATEMENTSc 5. A _____ standardizes items on the income statement and balance sheet relative to their

values as of a common point in time.a. statement of standardizationb. statement of cash flowsc. common-base year statement

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d. common-size statemente. tax reconciliation statement

FINANCIAL RATIOSa 6. Relationships determined from a firm’s financial information and used for comparison

purposes are known as:a. financial ratios.b. comparison statements.c. dimensional analysis.d. scenario analysis.e. solvency analysis.

SHORT-TERM SOLVENCY RATIOSc 7. Financial ratios that measure a firm’s ability to pay its bills over the short run without

undue stress are known as _____ ratios.a. asset managementb. long-term solvencyc. short-term solvencyd. profitabilitye. market value

CURRENT RATIOb 8. The current ratio is measured as:

a. current assets minus current liabilities.b. current assets divided by current liabilities.c. current liabilities minus inventory, divided by current assets.d. cash on hand divided by current liabilities.e. current liabilities divided by current assets.

QUICK RATIOd 9. The quick ratio is measured as:

a. current assets divided by current liabilities.b. cash on hand plus current liabilities, divided by current assets.c. current liabilities divided by current assets, plus inventory.d. current assets minus inventory, divided by current liabilities.e. current assets minus inventory minus current liabilities.

CASH RATIOe 10. The cash ratio is measured as:

a. current assets divided by current liabilities.b. current assets minus cash on hand, divided by current liabilities.c. current liabilities plus current assets, divided by cash on hand.d. cash on hand plus inventory, divided by current liabilities.e. cash on hand divided by current liabilities.

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INTERVAL MEASUREd 11. The financial ratio measured as current assets divided by average daily operating costs

is the:a. cash ratio.b. net working capital to total assets ratio.c. acid-test ratio.d. interval measure.e. operating measure.

LONG-TERM SOLVENCY RATIOSb 12. Ratios that measure a firm’s financial leverage are known as _____ ratios.

a. asset managementb. long-term solvencyc. short-term solvencyd. profitabilitye. market value

TOTAL DEBT RATIOa 13. The financial ratio measured as total assets minus total equity, divided by total assets, is

the:a. total debt ratio.b. equity multiplier.c. debt-equity ratio.d. current ratio.e. times interest earned ratio.

DEBT-EQUITY RATIOc 14. The debt-equity ratio is measured as total:

a. equity minus total debt.b. equity divided by total debt.c. debt divided by total equity.d. debt plus total equity.e. debt minus total assets, divided by total equity.

EQUITY MULTIPLIERe 15. The equity multiplier ratio is measured as total:

a. equity divided by total assets.b. equity plus total debt.c. assets minus total equity, divided by total assets.d. assets plus total equity, divided by total debt.e. assets divided by total equity.

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TOTAL CAPITALIZATIONb 16. The total long-term debt and equity of the firm is frequently called:

a. total assets.b. total capitalization.c. total financing.d. debt-equity consolidation.e. debt-equity reconciliation.

LONG-TERM DEBT RATIOd 17. The financial ratio measured as the firm’s long-term debt divided by its total

capitalization is the:a. interval measure.b. equity multiplier.c. total debt ratio.d. long-term debt ratio.e. debt-equity ratio.

TIMES INTEREST EARNED RATIOc 18. The financial ratio measured as earnings before interest and taxes, divided by interest

expense is the:a. cash coverage ratio.b. debt-equity ratio.c. times interest earned ratio.d. gross margin.e. total debt ratio.

CASH COVERAGE RATIOa 19. The financial ratio measured as earnings before interest and taxes, plus depreciation,

divided by interest expense, is the:a. cash coverage ratio.b. debt-equity ratio.c. times interest earned ratio.d. gross margin.e. total debt ratio.

ASSET MANAGEMENT RATIOSa 20. Ratios that measure how efficiently a firm uses its assets to generate sales are known as

_____ ratios.a. asset managementb. long-term solvencyc. short-term solvencyd. profitabilitye. market value

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INVENTORY TURNOVERc 21. The inventory turnover ratio is measured as:

a. total sales minus inventory.b. inventory times total sales.c. cost of goods sold divided by inventory.d. inventory times cost of goods sold.e. inventory plus cost of goods sold.

DAYS’ SALES IN INVENTORYe 22. The financial ratio days’ sales in inventory is measured as:

a. inventory turnover plus 365 days.b. inventory times 365 days.c. inventory plus cost of goods sold, divided by 365 days.d. 365 days divided by the inventory.e. 365 days divided by the inventory turnover.

RECEIVABLES TURNOVERb 23. The receivables turnover ratio is measured as:

a. sales plus accounts receivable.b. sales divided by accounts receivable.c. sales minus accounts receivable, divided by sales.d. accounts receivable times sales.e. accounts receivable divided by sales.

DAYS’ SALES IN RECEIVABLESd 24. The financial ratio days’ sales in receivables is measured as:

a. receivables turnover plus 365 days.b. accounts receivable times 365 days.c. accounts receivable plus sales, divided by 365 days.d. 365 days divided by the receivables turnover.e. 365 days divided by the accounts receivable.

NET WORKING CAPITAL TURNOVERa 25. The net working capital turnover ratio is measured as:

a. sales divided by net working capital.b. sales minus net working capital.c. sales times net working capital.d. net working capital divided by sales.e. net working capital plus sales.

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FIXED ASSET TURNOVERc 26. The fixed asset turnover ratio is measured as:

a. sales minus net fixed assets.b. sales times net fixed assets.c. sales divided by net fixed assets.d. net fixed assets divided by sales.e. net fixed assets plus sales.

TOTAL ASSET TURNOVERb 27. The total asset turnover ratio is measured as:

a. sales minus total assets.b. sales divided by total assets.c. sales times total assets.d. total assets divided by sales.e. total assets plus sales.

PROFITABILITY RATIOSd 28. Ratios that measure how efficiently a firm’s management uses its assets and equity to

generate bottom line net income are known as _____ ratios.a. asset managementb. long-term solvencyc. short-term solvencyd. profitabilitye. market value

PROFIT MARGINa 29. The financial ratio measured as net income divided by sales is known as the firm’s:

a. profit margin.b. return on assets.c. return on equity.d. asset turnover.e. earnings before interest and taxes.

RETURN ON ASSETSb 30. The financial ratio measured as net income divided by total assets is known as the

firm’s:a. profit margin.b. return on assets.c. return on equity.d. asset turnover.e. earnings before interest and taxes.

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RETURN ON EQUITYc 31. The financial ratio measured as net income divided by total equity is known as the

firm’s:a. profit margin.b. return on assets.c. return on equity.d. asset turnover.e. earnings before interest and taxes.

PRICE-EARNINGS RATIOd 32. The financial ratio measured as the price per share of stock divided by earnings per

share is known as the:a. return on assets.b. return on equity.c. debt-equity ratio.d. price-earnings ratio.e. Du Pont identity.

MARKET-TO-BOOK RATIOe 33. The market-to-book ratio is measured as:

a. total equity divided by total assets.b. net income times market price per share of stock.c. net income divided by market price per share of stock.d. market price per share of stock divided by earnings per share.e. market value of equity per share divided by book value of equity per share.

DU PONT IDENTITYa 34. The _____ breaks down return on equity into three component parts.

a. Du Pont identityb. return on assetsc. statement of cash flowsd. asset turnover ratioe. equity multiplier

SIC CODESc 35. The U.S. government coding system that classifies firms by their specific type of

business operations is known as the:a. NASDAQ 100.b. Standard & Poor’s 500.c. Standard Industrial Classification system.d. governmental ID system.e. Government Engineering Enterprise system.

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II. CONCEPTS

SOURCES OF CASHa 36. An increase in which one of the following is a source of cash?

a. accounts payableb. cashc. inventoryd. fixed assetse. accounts receivable

SOURCES OF CASHb 37. Which of the following is (are) sources of cash?

I. an increase in accounts receivableII. a decrease in common stockIII. an increase in long-term debtIV. a decrease in accounts payablea. I onlyb. III onlyc. II and IV onlyd. I and III onlye. I, II, and IV only

USES OF CASHe 38. Which one of the following is a use of cash?

a. payment received from a customer on their accountb. sale of inventoryc. decrease in the cash balanced. sale of common stocke. payment to a supplier

USES OF CASHe 39. Which of the following is (are) uses of cash?

I. payment of a note payableII. repurchase of common stockIII. granting of credit to a customerIV. sale of a fixed asseta. I onlyb. IV onlyc. II and III onlyd. I and III onlye. I, II, and III only

STATEMENT OF CASH FLOWSd 40. Which one of the following is found in the financing activity section of a statement of

cash flows?a. fixed asset acquisitionb. depreciationc. increase in accounts receivabled. dividends paide. net income

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STATEMENT OF CASH FLOWSa 41. According to the statement of cash flows, an increase in accounts receivable will _____

the cash flow from _____ activities.a. decrease; operatingb. decrease; financingc. increase; operatingd. decrease; financinge. decrease; investment

STATEMENT OF CASH FLOWSd 42. Which of the following are types of activities shown on a statement of cash flows?

I. investmentII. liquidatingIII. operatingIV. financinga. I and III onlyb. II and IV onlyc. II, III, and IV onlyd. I, III, and IV onlye. I, II, and III only

COMMON-SIZE BALANCE SHEETd 43. On a common-size balance sheet, all _____accounts are shown as a percentage of:

a. income; total assets.b. liability; net income.c. asset; sales.d. liability; total assets.e. equity; sales.

COMMON-BASE YEAR FINANCIAL STATEMENTa 44. On a common-base year financial statement, all accounts are expressed relative to the

base:a. year amount.b. amount of sales.c. amount of total assets.d. net income.e. net cash flow.

RATIO ANALYSISa 45. Which one of the following statements is correct concerning ratio analysis?

a. A single ratio is often computed differently by different individuals.b. Ratios do NOT address the problem of size differences among firms.c. There is only a very limited number of ratios which can be used for analytical purposes.d. Each ratio has a specific formula that is used consistently by all analysts.e. Ratios can NOT be used for comparison purposes over periods of time.

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LIQUIDITY RATIOSe 46. Which of the following are liquidity ratios?

I. interval measureII. current ratioIII. quick ratioIV. net working capital to total assetsa. II and III onlyb. I and II onlyc. II, III, and IV onlyd. I, III, and IV onlye. I, II, III, and IV

LIQUIDITY RATIOSc 47. An increase in which one of the following accounts increases a firm’s current ratio

without affecting its quick ratio?a. accounts payableb. cashc. inventoryd. accounts receivablee. fixed assets

LIQUIDITY RATIOSb 48. A supplier, who requires payment within ten days, is most concerned with which

one of the following ratios when granting credit?a. currentb. cashc. debt-equityd. quicke. total debt

LIQUIDITY RATIOSb 49. A firm has an interval measure of 83. This means that the firm must:

a. pay its creditors within the next 83 days or go bankrupt.b. get additional financing within the next 83 days or possibly face closing the firm.c. sell all of its common stock in the next 83 days or become privately owned.d. pay a dividend to its shareholders every 83 days.e. pay interest on its debt every 83 days.

LONG-TERM SOLVENCY RATIOSd 50. A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for

every:a. $1 in equity.b. $1 in total sales.c. $1 in current assets.d. $.53 in equity.e. $.53 in total assets.

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LONG-TERM SOLVENCY RATIOSd 51. The long-term debt ratio is probably of most interest to a firm’s:

a. credit customers.b. employees.c. suppliers.d. mortgage holder.e. shareholders.

LONG-TERM SOLVENCY RATIOSe 52. A banker considering loaning a firm money for ten years would most likely prefer the

firm have a debt ratio of _____ and a times interest earned ratio of_____:a. .75; .75.b. .50; 1.00.c. .45; 1.75.d. .40; 2.50.e. .35; 3.00.

LONG-TERM SOLVENCY RATIOSb 53. From a cash flow position, which one of the following ratios best measures a firm’s

ability to pay the interest on its debts?a. times interest earned ratiob. cash coverage ratioc. cash ratiod. quick ratioe. interval measure

ASSET MANAGEMENT RATIOSa 54. The higher the inventory turnover measure, the:

a. faster a firm sells its inventory.b. faster a firm collects payment on its sales.c. longer it takes a firm to sell its inventory.d. greater the amount of inventory held by a firm.e. lesser the amount of inventory held by a firm.

ASSET MANAGEMENT RATIOSd 55. Which one of the following statements is correct if a firm has a receivables turnover

measure of 10?a. It takes a firm 10 days to collect payment from its customers.b. It takes a firm 36.5 days to sell its inventory and collect the payment from the sale.c. It takes a firm 36.5 days to pay its creditors.d. The firm has an average collection period of 36.5 days.e. The firm has ten times more in accounts receivable than it does in cash.

ASSET MANAGEMENT RATIOSd 56. A total asset turnover measure of 1.03 means that a firm has $1.03 in:

a. total assets for every $1 in cash.b. total assets for every $1 in total debt.c. total assets for every $1 in equity.d. sales for every $1 in total assets.e. long-term assets for every $1 in short-term assets.

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ASSET MANAGEMENT RATIOSe 57. If a firm wishes to increase its net working capital turnover rate, it should _____, all

else constant.a. increase its current assetsb. increase its total assetsc. decrease its current liabilitiesd. decrease its total liabilitiese. increase its sales

ASSET MANAGEMENT RATIOSa 58. Bob’s Toys has a fixed asset turnover rate of 1.2 and a total asset turnover rate

of .84. Gerold’s Toys has a fixed asset turnover rate of 1.1 and a total asset turnover rate of .96. Both companies have similar operations. Bob’s Toys:

a. is using its fixed assets more efficiently than Gerold’s Toys.b. is using its total assets more efficiently than Gerold’s Toys.c. is generating $1 in sales for every $1.20 in net fixed assets.d. is generating $1.20 in net income for every $1 in net fixed assets.e. has $.84 in total assets for every $.96 Gerold’s has in total assets.

PROFITABILITY RATIOSc 59. Puffy’s Pastries generates five cents of net income for every $1 in sales. Thus,

Puffy’s has a _____ of 5 percent.a. return on assetsb. return on equityc. profit margind. Du Pont measuree. total asset turnover

PROFITABILITY RATIOSa 60. If a firm produces a 10 percent return on assets and also a 10 percent return on

equity, then the firm:a. has no debt of any kind.b. is using its assets as efficiently as possible.c. has no net working capital.d. also has a current ratio of 10.e. has an equity multiplier of 2.

PROFITABILITY RATIOSc 61. If shareholders want to know how much profit a firm is making on their entire

investment in the firm, the shareholders should look at the:a. profit margin.b. return on assets.c. return on equity.d. equity multiplier.e. earnings per share.

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PROFITABILITY RATIOSa 62. BGL Enterprises increases its operating efficiency such that costs decrease while sales

remain constant. As a result, given all else constant, the:a. return on equity will increase.b. return on assets will decrease.c. profit margin will decline.d. equity multiplier will decrease.e. price-earnings ratio will increase.

PROFITABILITY RATIOSd 63. The only difference between Joe’s and Moe’s is that Joe’s has old, fully depreciated

equipment. Moe’s just purchased all new equipment which will be depreciated over eight years. Assuming all else equal:

a. Joe’s will have a lower profit margin.b. Joe’s will have a lower return on equity.c. Moe’s will have a higher net income.d. Moe’s will have a lower profit margin.e. Moe’s will have a higher return on assets.

MARKET VALUE RATIOSe 64. Last year, Alfred’s Automotive had a price-earnings ratio of 15. This year, the price

earnings ratio is 18. Based on this information, it can be stated with certainty that:a. the price per share increased.b. the earnings per share decreased.c. investors are paying a higher price for each share of stock purchased.d. investors are receiving a higher rate of return this year.e. either the price per share, the earnings per share, or both changed.

MARKET VALUE RATIOb 65. Turner’s Inc. has a price-earnings ratio of 16. Alfred’s Co. has a price-earnings ratio of

19. Thus, you can state with certainty that one share of stock in Alfred’s:a. has a higher market price than one share of stock in Turner’s.b. has a higher market price per dollar of earnings than does one share of Turner’s.c. sells at a lower price per share than one share of Turner’s.d. represents a larger percentage of firm ownership than does one share of Turner’s stock.e. earns a greater profit per share than does one share of Turner’s stock.

MARKET VALUE RATIOSb 66. Which two of the following are most apt to cause a firm to have a higher price-earnings

ratio?I. slow industry outlookII. high prospect of firm growthIII. very low current earningsIV. investors with a low opinion of the firma. I and II onlyb. II and III onlyc. II and IV onlyd. I and III onlye. III and IV only

MARKET VALUE RATIOS

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d 67. Vinnie’s Motors has a market-to-book ratio of 3. The book value per share is $4.00.This means that a $1 increase in the book value per share will:

a. cause the accountants to increase the equity of the firm by an additional $2.b. increase the market price per share by $1.c. increase the market price per share by $12.d. tend to cause the market price per share to rise.e. only affect book values but not market values.

MARKET VALUE RATIOSd 68. Which one of the following sets of ratios applies most directly to shareholders?

a. return on assets and profit marginb. quick ratio and times interest earnedc. price-earnings ratio and debt-equity ratiod. market-to-book ratio and price-earnings ratioe. and times equity multiplier

DU PONT IDENTITYb 69. The three parts of the Du Pont identity can be generally described as:

I. operating efficiency, asset use efficiency and firm profitability.II. financial leverage, operating efficiency and asset use efficiency.III. the equity multiplier, the profit margin and the total asset turnover.IV. the debt-equity ratio, the capital intensity ratio and the profit margin.a. I and II onlyb. II and III onlyc. I and IV onlyd. I and III onlye. III and IV only

DU PONT IDENTITYe 70. If a firm decreases their operating costs, all else constant, then:

a. the profit margin increases while the equity multiplier decreases.b. the return on assets increases while the return on equity decreases.c. the total asset turnover rate decreases while the profit margin increases.d. both the profit margin and the equity multiplier increase.e. both the return on assets and the return on equity increase.

EVALUATING FINANCIAL STATEMENTSb 71. Which one of the following statements is correct?

a. Book values should always be given precedence over market values.b. Financial statements are frequently the basis used for performance evaluations.c. Historical information has no value when predicting the future.d. Potential lenders place little value on financial statement information.e. Reviewing financial information over time has very limited value.

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EVALUATING FINANCIAL STATEMENTSc 72. It is easier to evaluate a firm using their financial statements when the firm:

a. is a conglomerate.b. is global in nature.c. uses the same accounting procedures as other firms in their industry.d. has a different fiscal year than other firms in their industry.e. tends to have one-time events such as asset sales and property acquisitions.

EVALUATING FINANCIAL STATEMENTSa 73. Which two of the following represent the most effective methods of

directly evaluating the financial performance of a firm?I. comparing the current financial ratios to those of the same firm from prior time

periodsII. comparing a firm’s financial ratios to those of other firms in the firm’s peer

group who have similar operationsIII. comparing the financial statements of the firm to the financial statements of similar

firms operating in other countriesIV. comparing the financial ratios of the firm to the average ratios of all firms located in the

same geographic areaa. I and II onlyb. II and III onlyc. III and IV onlyd. I and IV onlye. I and III only

EVALUATING FINANCIAL STATEMENTSe 74. Which of the following represent problems encountered when comparing the financial

statements of one firm with those of another firm?I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of

business.II. The operations of the two firms may vary geographically.III. The firms may use differing accounting methods for inventory purposes.IV. The two firms may be seasonal in nature and have different fiscal year ends.a. I and II onlyb. II and III onlyc. I, III, and IV onlyd. I, II, and III onlye. I, II, III, and IV

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III. PROBLEMS75 and 77 are obligatorySOURCES AND USES OF CASHd 75. Last year Ty’s Grocery had inventory of $237,500 and fixed assets of $51,400. This

year, Ty’s has inventory of $231,900 and fixed assets of $48,700. Depreciation for this year is $6,300. Which one of the following statements is true given this information?

a. Both inventory and fixed assets are uses of cash in the amounts of $5,600 and $3,600, respectively.

b. Both inventory and fixed assets are uses of cash in the amounts of $5,600 and $2,700, respectively.

c. Inventory is a source of cash in the amount of $5,600 and fixed assets is a use of cash in the amount of $2,700.

d. Inventory is a source of cash in the amount of $5,600 and fixed assets is a use of cash in the amount of $3,600.

e. Both inventory and fixed assets are sources of cash in the amounts of $5,600 and $3,600 respectively.

SOURCES AND USES OF CASHb 76. During the year, Doug’s Bakery decreased their accounts receivable by $50, increased

their inventory by $100, and decreased their accounts payable by $50. For these three accounts, the firm has a net:

a. $200 use of cash.b. $100 use of cash.c. $0 use of cash.d. $100 source of cash.e. $200 source of cash.

SOURCES AND USES OF CASHc 77. A firm generates net income of $530. The depreciation expense is $60 and dividends

paid are $80. Accounts payable decrease by $40, accounts receivable decrease by $30, inventory increases by $20, and net fixed assets decrease by $40. What is the net cash from operating activity?

a. $480b. $530c. $560d. $580e. $600

COMMON-SIZE STATEMENTSb 78. A firm has sales of $1,200, net income of $200, net fixed assets of $500, and current

assets of $300. The firm has $100 in inventory. What is the common-size statement value of inventory?

a. 8.3 percentb. 12.5 percentc. 20.0 percentd. 33.3 percente. 50.0 percent

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COMMON-SIZE STATEMENTSa 79. A firm has sales of $1,500, net income of $100, total assets of $1,000, and total equity

of $700. Interest expense is $50. What is the common-size statement value of the interest expense?


COMMON-BASE YEAR STATEMENTSe 80. Last year, which is used as the base year, a firm had cash of $60, accounts receivable

of $100, inventory of $200, and fixed assets of $500. This year the firm has cash of $50, accounts receivable of $150, inventory of $250, and fixed assets of $550.

What is the common-base year value of accounts receivable?

a. .12b. .15c. .67d. 1.16e. 1.50

LIQUIDITY RATIOSb 81. Jessica’s Boutique has cash of $50, accounts receivable of $60, accounts payable of

$200, and inventory of $150. What is the value of the quick ratio?a. .30b. .55c. .77d. 1.30e. 1.82

LIQUIDITY RATIOSa 82. Sing Lee’s has accounts payable of $300, inventory of $250, cash of $50, fixed assets

of $500, accounts receivable of $200, and long-term debt of $400. What is the value of the net working capital to total assets ratio?

a. .20b. .33c. .40d. .50e. .67

LIQUIDITY RATIOSa 83. A firm has total assets of $2,640 and net fixed assets of $1,500. The average daily

operating costs are $170. What is the value of the interval measure?a. 6.71b. 8.82c. 11.03d. 13.33e. 15.53

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LONG-TERM SOLVENCY RATIOSa 84. A firm has a debt-equity ratio of .40. What is the total debt ratio?

a. .29b. .33c. .67d. 1.40e. 1.50

LONG-TERM SOLVENCY RATIOSe 85. A firm has total debt of $1,200 and a debt-equity ratio of .30. What is the value of the

total assets?a. $1,560b. $3,000c. $3,600d. $4,000e. $5,200

LONG-TERM SOLVENCY RATIOSd 86. A firm has sales of $3,600, costs of $2,800, interest paid of $100, and depreciation of

$400. The tax rate is 34 percent. What is the value of the cash coverage ratio?a. 2b. 4c. 6d. 8e. 10

LONG-TERM SOLVENCY RATIOSd 87. Rosita’s Resources paid $250 in interest and $130 in dividends last year. The times

interest earned ratio is 3.8 and the depreciation expense is $60. What is the value of the cash coverage ratio?

a. 2.40b. 3.52c. 3.80d. 4.04e. 4.28

ASSET MANAGEMENT RATIOSc 88. Mario’s Home Systems has sales of $2,800, costs of goods sold of $2,100, inventory of

$500, and accounts receivable of $400. How many days, on average, does it take Mario’s to sell their inventory?

a. 65.2 daysb. 85.2 daysc. 86.9 daysd. 96.9 dayse. 117.3 days

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ASSET MANAGEMENT RATIOSd 89. Syed’s Industries has accounts receivable of $700, inventory of $1,200, sales of

$4,200, and cost of goods sold of $3,400. How long does it take Syed’s to both sell their inventory and then collect the payment on the sale?

a. 128 daysb. 146 daysc. 163 daysd. 190 dayse. 211 days

ASSET MANAGEMENT RATIOSb 90. A firm has net working capital of $400, net fixed assets of $2,400, sales of $6,000, and

current liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets?

a. $1.33b. $1.67c. $1.88d. $2.33e. $2.50

ASSET MANAGEMENT RATIOSd 91. Freda’s, Inc. has sales of $3,200, current liabilities of $900, total assets of $3,000, and

net working capital of $500. How many dollars worth of sales are generated from every $1 in net fixed assets?

a. $.91b. $1.07c. $1.67d. $2.00e. $2.29

PROFITABILITY RATIOSb 92. Rosita’s Restaurante has sales of $4,500, total debt of $1,300, total equity of $2,400,

and a profit margin of 5 percent. What is the return on assets?a. 5.00 percentb. 6.08 percentc. 7.39 percentd. 9.38 percente. 17.31 percent

PROFITABILITY RATIOSc 93. Lee Sun’s has sales of $3,000, total assets of $2,500, and a profit margin of 5 percent.

The firm has a total debt ratio of 40 percent. What is the return on equity?a. 6 percentb. 8 percentc. 10 percentd. 12 percente. 15 percent

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MARKET VALUE RATIOSd 94. Jupiter Explorers has $6,400 in sales. The profit margin is 4 percent. There are 6,400

shares of stock outstanding. The market price per share is $1.20. What is the price-earnings ratio?

a. 13b. 14c. 21d. 30e. 48

MARKET VALUE RATIOSc 95. Patti’s has net income of $1,800, a price-earnings ratio of 12, and earnings per share of

$1.20. How many shares of stock are outstanding?a. 1,200b. 1,400c. 1,500d. 1,600e. 1,800

MARKET VALUE RATIOSd 96. A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a

price-earnings ratio of 10, and a book value per share of $.50. What is the market-to-book ratio?

a. 1.6b. 2.4c. 3.0d. 3.2e. 3.6

DU PONT IDENTITYc 97. Frederico’s has a profit margin of 6 percent, a return on assets of 8 percent, and an

equity multiplier of 1.4. What is the return on equity?a. 6.7 percentb. 8.4 percentc. 11.2 percentd. 14.6 percente. 19.6 percent

DU PONT IDENTITYd 98. Samuelson’s has a debt-equity ratio of 40 percent, sales of $8,000, net income of $600,

and total debt of $2,400. What is the return on equity?a. 6.25 percentb. 7.50 percentc. 9.75 percentd. 10.00 percente. 11.25 percent

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DU PONT IDENTITYa 99. A firm has a return on equity of 15 percent. The debt-equity ratio is 50 percent. The

total asset turnover is 1.25 and the profit margin is 8 percent. The total equity is $3,200. What is the amount of the net income?

a. $480b. $500c. $540d. $600e. $620

The following balance sheet and income statement should be used for questions #100 through #110:

Windswept, Inc.2005 Income Statement

($ in millions)

Net sales $8,450Less: Cost of goods sold 7,240Less: Depreciation 400Earnings before interest and taxes 810Less: Interest paid 70Taxable Income $ 740Less: Taxes 259Net income $ 481

Windswept, Inc.2004 and 2005 Balance Sheets

($ in millions)

2004 2005 2004 2005Cash $ 120 $ 140 Accounts payable $1,110 $1,120Accounts rec. 930 780 Long-term debt 840 1,210Inventory 1,480 1,520 Common stock 3,200 3,000Total $2,530 $2,440 Retained earnings 530 710Net fixed assets 3,150 3,600Total assets $5,680 $6,040 Total liabilities & equity $5,680 $6,040

LIQUIDITY RATIOSa 100. What is the quick ratio for 2005?

a. .82b. .95c. 1.36d. 2.18e. 2.28

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ASSET MANAGEMENT RATIOSb 101. What is the days’ sales in receivables? (use 2005 values)

a. 31.8 daysb. 33.7 daysc. 38.4 daysd. 41.9 dayse. 47.4 days

ASSET MANAGEMENT RATIOSd 102. What is the fixed asset turnover? (use 2005 values)

a. 1.4b. 1.7c. 2.1d. 2.3e. 2.6

FINANCIAL LEVERAGE RATIOSa 103. What is the equity multiplier for 2005?

a. 1.6b. 1.8c. 2.0d. 2.3e. 2.5

FINANCIAL LEVERAGE RATIOSd 104. What is the cash coverage ratio for 2005?

a. 11.6b. 12.8c. 13.7d. 17.3e. 18.8

PROFITABILITY RATIOSc 105. What is the return on equity for 2005?


PROFITABILITY RATIOSd 106. Windswept, Inc. has 90 million shares of stock outstanding. Their price-earnings ratio

for 2005 is 12. What is the market price per share of stock?a. $57.12b. $59.94c. $62.82d. $64.13e. $65.03

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STATEMENT OF CASH FLOWSb 107. What amount should be included in the financing section of the 2005 statement of cash

flows for dividends paid?a. $180 millionb. $301 millionc. $481 milliond. $530 millione. $710 million

STATEMENT OF CASH FLOWSe 108. What is the amount of the net cash from investment activity for 2005?

a. -$50 millionb. $250 millionc. $450 milliond. $700 millione. $850 million

STATEMENT OF CASH FLOWSd 109. What is the net change in cash during 2005?

a. -$40 millionb. -$20 millionc. $0 d. $20 millione. $40 million

STATEMENT OF CASH FLOWSa 110. How will accounts payable appear on the 2005 statement of cash flows?

a. increase of $10 million in cash from an operating activityb. decrease of $10 million in cash from an operating activityc. increase of $10 million in cash from an investment activityd. decrease of $10 million in cash from a financing activitye. increase of $10 million in cash from a financing activity

The following balance sheet and income statement should be used for questions #111 through #121:

Bayside Inc.2005 Income Statement

($ in thousands)

Net sales $5,680Less: Cost of goods sold 4,060Less: Depreciation 420Earnings before interest and taxes 1,200Less: Interest paid 30Taxable Income $1,170Less: Taxes 410Net income $ 760

Bayside, Inc.

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2004 and 2005 Balance Sheets($ in thousands)

2004 2005 2004 2005Cash $ 70 $ 180 Accounts payable $1,350 $1,170Accounts rec. 980 840 Long-term debt 720 500Inventory 1,560 1,990 Common stock 3,200 3,500Total $2,610 $3,010 Retained earnings 940 1,200Net fixed assets 3,600 3,360Total assets $6,210 $6,370 Total liabilities & equity $6,210 $6,370

LIQUIDITY RATIOSc 111. What is the net working capital to total assets ratio for 2005?


ASSET MANAGEMENT RATIOSe 112. How many days on average does it take Bayside to sell their inventory? (Use 2005

values)a. 126.1 daysb. 127.9 daysc. 153.8 daysd. 176.5 dayse. 178.9 days

ASSET MANAGEMENT RATIOSd 113. How many dollars of sales are being generated from every dollar of fixed assets? (use

2005 values)a. $.59b. $.89c. $1.02d. $1.69e. $1.76

FINANCIAL LEVERAGE RATIOSc 114. What is the debt-equity ratio for 2005?


CHAPTER 3

FINANCIAL LEVERAGE RATIOSc 115. What is the times interest earned ratio for 2005?

a. 30b. 36c. 40d. 50e. 54

FINANCIAL LEVERAGE RATIOSb 116. What is the equity multiplier for 2005?

a. 1.21b. 1.36c. 1.44d. 1.82e. 1.91

PROFITABILITY RATIOSa 117. What is the return on equity for 2005?


STATEMENT OF CASH FLOWSc 118. What is the net cash flow from investment activity for 2005?

a. -$320 thousandb. -$240 thousandc. $180 thousandd. $240 thousande. $660 thousand

STATEMENT OF CASH FLOWSe 119. How does inventory affect the statement of cash flows for 2005?

a. a use of $430 thousand of cash as an investment activityb. a source of $430 thousand of cash as an operating activityc. a use of $400 thousand of cash as a financing activityd. a source of $400 thousand of cash as an investment activitye. a use of $430 thousand of cash as an operating activity

STATEMENT OF CASH FLOWSc 120. How does the long-term debt affect the statement of cash flows for 2005?

a. a source of $500 thousand of cash as a financing activityb. a use of $500 thousand of cash as an operating activityc. a use of $220 thousand of cash as a financing activityd. a source of $220 thousand of cash as financing activitye. a source of $220 thousand of cash as an operating activity

CHAPTER 3

STATEMENT OF CASH FLOWSd 121. What is the net change in cash for 2005?

a. -$180 thousandb. -$110 thousandc. $70 thousandd. $110 thousande. $180 thousand

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