Multiple Choice Answers

Question 1
Ratio analysis can be useful for:
A. historical trend analysis within a firm.
B. comparison of ratios within a single industry.
C. measuring the effects of financing.
D. all of the above
 
Question 2
A short-term creditor would be most interested in:
A. profitability ratios.
B. asset utilization ratios.
C. liquidity ratios.
D. debt utilization ratios.
 
Question 3
Which two ratios are used in the DuPont system to create return on assets?
A. Return on assets and asset turnover
B. Profit margin and asset turnover
C. Return on total capital and the profit margin
D. Inventory turnover and return on fixed assets
 
Question 4
The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket, its after-tax profit margin is:
A. 5%
B. 12%
C. 20%
D. 25%
 
Question 5
ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,000,000. What is the balance in accounts receivable at year-end?
A. $50,000
B. $100,000
C. $500,000
D. $80,000
 
Question 6
Asset utilization ratios:
A. relate balance sheet assets to income statement sales.
B. measure how much cash is available for reinvestment into current assets.
C. are most important to stockholders.
D. measures the firm’s ability to generate a profit on sales.
 
Question 7
Total asset turnover indicates the firm’s:
A. liquidity.
B. debt position.
C. ability to use its assets to generate sales.
D. profitability.
 
Question 8
If accounts receivable stays the same and credit sales go up:
A. the average collection period will go up.
B. the average collection period will go down.
C. accounts receivable turnover will decrease.
D. B and C.
 
Question 9
A firm’s long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000. What are the current ratio and the quick ratio?
A. Current ratio = 0.5; quick ratio = 1.5
B. Current ratio = 1.0; quick ratio = 2.0
C. Current ratio = 1.5; quick ratio = 2.0
D. Current ratio = 2.5; quick ratio = 2.0
 
Question 10
Investors and financial analysts wanting to evaluate the operating efficiency of a firm’s managers would probably look primarily at the firm’s:
A. debt utilization ratios.
B. liquidity ratios.
C. asset utilization ratios.
D. profitability ratios.
 
Question 11
An increasing average collection period indicates:
A. the firm is generating more income.
B. accounts receivable are going down.
C. the company is becoming more efficient in its collection policy.
D. the company is becoming less efficient in its collection policy.
 
Question 12
In addition to comparison with industry ratios, it is also helpful to analyze ratios using:
A. trend analysis.
B. historical comparisons.
C. neither; only industry ratios provide valid comparisons.
D. both a and b.
 
Question 13
If a firm has both interest expense and lease payments:
A. times interest earned will be smaller than fixed charge coverage.
B. times interest earned will be greater than fixed charge coverage.
C. times interest earned will be the same as fixed charge coverage.
D. fixed charge coverage cannot be computed.
 
Question 14
Disinflation, as compared to inflation, would normally be good for investments in:
A. bonds.
B. gold.
C. collectible antiques.
D. textbooks.
 
Question 15
The __________ method of inventory costing is least likely to lead to inflation-induced profits.
A. FIFO
B. LIFO
C. Weighted average
D. Lower of cost or market
 
Question 16
A large extraordinary loss has what effect on cost of goods sold?
A. Raises it
B. Lowers it
C. Has no effect
D. Need more information
 
Question 17
Which of the following is a potential problem of utilizing ratio analysis?
A. Trends and industry averages are historical in nature.
B. Financial data may be distorted due to price-level changes.
C. Firms within an industry may not use similar accounting methods.
D. all of the above
 
Question 18
If government bonds pay 8.5% interest and insured savings accounts pay 5.5% interest, stockholders in a moderately risky firm would expect return-on-equity values of:
A. 5.5%.
B. 6.5%.
C. 12%.
D. above 8.5%, but the exact amount is uncertain.
 
Question 19
The most rigorous test of a firm’s ability to pay its short-term obligations is its:
A. current ratio.
B. quick ratio.
C. debt-to-assets ratio.
D. times-interest-earned ratio.
 
Question 20
If the company’s accounts receivable turnover is increasing, the average collection period:
A. is going up slightly.
B. is going down.
C. could be moving in either direction.
D. is going up by a significant amount.