Test bank with answers for financial accounting 6e by libby chapter 14

A company that has a high level of inventory and other assets above their investment in property, plant and equipment, should calculate the total asset turnover ratio in addition to the

True / False Questions

1 A primary objective of financial statements is to provide information to current and

potential investors and creditors

4 Time series analysis is where we compare information for a specific company over a period

of time to determine changes in operations

5 Finding comparable companies in order to compare performance is often difficult since no two companies have identical products, markets and operating strategies

9 A company that has a high level of inventory and other assets above their investment in property, plant and equipment, should calculate the total asset turnover ratio in addition to the fixed asset turnover ratio

13 A very high current ratio and low quick ratio may indicate the company is not collecting its accounts receivables in a timely manner

18 Many companies use high levels of debt to finance their assets because of financial

leverage benefits provided to investors when return on assets (ROA) exceeds the after tax cost

B compared with historical ratios of the same company

C compared with ratios for other companies of the same size

D compared with ratios of other companies in the same locations

22 There are several fundamental purposes decision makers consider when they use financial data Which of the following statements is not one of those fundamental purposes?

A Measurement of the current condition of the business

B Measurement of past performance of the business

C Measurement of the book value of the assets of the business to predict future dividends

D Prediction of future potential of the business

A Financial analysts' reports

B Economy wide factors

24 Which of the following statements is false?

A A company implementing a cost advantage strategy is attempting to reduce investment in assets thereby improving the asset turnover ratio

B A company implementing a product differentiation strategy is attempting to improve its profit margin through charging higher prices

C A company will attract a higher volume of customers and revenue by following a product

differentiation strategy versus a cost advantage strategy

D All of the other answers are false

25 Which of the following companies is most likely pursuing a product differentiation strategy?

27 Home Depot's operating strategy is to offer a broad assortment of high-quality

merchandise and services at competitive prices using highly knowledgeable service-oriented personnel and aggressive advertising Which of the following is not critical to achieving its strategy?

A Cost control

B Product differentiation

C High level of customer service

D High sales volume

28 Which of the following statements is false?

A When computing the component percentages for the income statement, net income is the

base figure

B Time series analysis examines a company's performance over time

C It is often useful to compare a company's performance with that of a competitor

D The North American Industry Classification System assigns industry codes based on business operations

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 2

29 Which of the following statements is true?

A It is usually not difficult to find similar companies for financial performance comparisons

B One of the advantages of ratio analysis is that it allows companies of different sizes to be

compared

C Ratios compare items from the same financial statement

D It is preferable to compare a company's performance to industry-wide ratios rather than to use a competitor's ratios

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 2

30 The base amount in preparing a common-size income statement is usually

A cost of goods sold

31 Which of the following statements is true?

A When cost of goods sold as a percentage of sales increases the gross margin percentage will increase

B It is possible for cost of goods sold in dollars to increase while cost of goods sold as a

percentage of sales decreases

C If gross margin percentage is the same for the current and past year, then sales and cost of goods sold in dollars did not change

D If gross margin percentage increases, then the net income percentage will also increase

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 3

32 Which of the following statements is false?

A If selling and administrative expenses as a percentage of sales increases, then gross margin

percentage will decrease

B If cost of goods sold percentage decreases, then profit margin will increase as a percentage

33 In 2010, Home Style's cost of goods sold percentage was 68.2% and its selling and store operating costs was 19.3% of sales In 2009, their cost of goods sold percentage was 68.9% while its selling and store operating costs was 19.2% of sales What effect would the change

in these percentages have on 2010's gross margin percentage and profit margin percentage?

A Cost of goods sold would increase gross margin and profit margin percentages but selling and store operating costs would decrease gross margin and profit margin percentages

B Cost of goods sold would decrease gross margin and profit margin percentages but selling and store operating costs would increase gross margin and profit margin percentages

C Cost of goods sold would increase gross margin and profit margin percentages but selling

and store operating costs would decrease the profit margin percentage

D Cost of goods sold would decrease gross margin and profit margin percentages but selling and store operating costs would increase profit margin percentage

36 Financial leverage will always be

A Positive

B Negative

C Either positive or negative

D Positive, negative, or zero

38 The records of Marshall Company include the following:

The return on assets is (round to the nearest tenth of a percent)

40 Trenton Company has outstanding shares as follows: common stock, no par, 150,000 shares and preferred stock, par $10, 25,000 shares The number of shares that should be used

in the denominator to compute earnings per share should be

41 Cecilia Company reported net income of $1,200,000 Their average total liabilities were

$4,300,000 and average total stockholders' equity was $5,200,000 Interest expense was

$100,000 and they are in a 30% tax bracket Their return on assets is

43 Negative financial leverage occurs when the

A average net (after tax) interest rate on borrowed funds is less than the return on assets

B return on assets is more than the return on equity

C return on equity is more than the return on assets

D two of the other answers are correct

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 4

44 A quality of income ratio higher than one is an indicator

A of a company's high debt position

B that fixed assets are the company's most important resources

C that a company has cash earnings generated by operations higher than the amount of net

46 If a company's return on equity (ROE) ratio increases from one year to the next, the most likely cause is

A an increase in net income

B a reduction in total expenses as a percentage of sales

C an increase in stockholders' equity

D an increase in net income and/or a reduction in total expenses as a percentage of sales

A an increase in the debt to equity ratio

B a decrease in net income

C an increase in total assets

D an increase in stockholders' equity

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 4

48 Which of the following statements is true?

A We add in the after tax cost of interest to net income when calculating return on equity (ROE)

B Return on assets (ROA) shows the return generated on the use of all the company's assets

but return on equity (ROE) shows the return generated on the financing provided by the common stockholders only

C Both return on assets (ROA) and return on equity (ROE) always use net income in the numerator

D Both A and B are true

49 Which of the following ratios is not an indicator of a company's liquidity?

A Price/earnings ratio

B Receivable turnover ratio

C Working capital ratio

C inventory turnover ratio

D gross inventory ratio

52 Agnes Company reported the following data:

The current ratio was

A increase the current ratio

B decrease the current ratio

C have no effect on the current ratio

D invalidate earnings per share

54 Which of the following transactions would increase the current ratio of a company if the ratio is currently more than 1 to 1?

A Paid the principal on a long-term note payable

B Borrowed cash on a short-term note

C Sold inventory for more than cost

D Purchased supplies with cash

57 If accounts receivable are collected quickly,

A the accounts receivable turnover is low

B the company's credit policies may be overly stringent

C credit is often granted to poor credit risks

60 Wildlife Co reported net income of $8.3 million, interest expense of $.5 million and they are in a 30% tax rate bracket Their average total assets are $65.8 million and average

stockholders' equity is $48.6 million What is Wildlife Co.'s financial leverage percentage?

61 Which of the following is false?

A The cash ratio is the most stringent and reliable test of liquidity

B A company with a high level of inventory will have a quick ratio significantly lower than its current ratio

C A current ratio that is too high could indicate funds tied up in inventory and other working capital assets

D Analysts consider a current ratio of 2 to be financially conservative

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 5

62 Which of the following is false?

A The major difference between the quick and current ratios is whether or not inventory is included

B Current liabilities are the denominator in the cash, quick, and current ratios

C Companies that sell expensive merchandise tend to have high inventory turnover ratios

D Some analysts do not use the cash ratio because it is very sensitive to small events

63 Which of the following companies is most likely to have the highest inventory turnover ratio?

A Taco Bell franchises

B Publix food supermarkets

64 Which of the following ratios is not a test of solvency?

A Debt to equity ratio

B Cash coverage ratio

C Times interest earned

D Earnings per share ratio

66 The following ratio would be used to evaluate the long-term risk and capital structure of a company:

C cash coverage ratio

D receivable turnover ratio

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 6

68 Which of the following is true?

A The times interest earned ratio is considered a better test of the ability to cover interest charges than the cash coverage ratio

B The debt to equity ratio shows the relative proportion of total assets financed by debt

C The higher the debt to equity ratio, the higher the potential return to the stockholders if

return on assets (ROA) exceeds the after tax cost of interest

D The cash coverage ratio compares the cash generated by a company to its cash obligations for the prior period

69 Which of the following statements is true?

A Tests of profitability focus on measuring the adequacy of income

B Liquidity focuses on the ability of a company to pay their long- and short-term debts

C The inventory turnover ratio is an important solvency test for retail companies

D Growth in total sales volume always indicates that a company is successful

B dividend yield ratio

C book value per share

D cash coverage ratio

72 Main Street Company paid out $2.30 in dividends per share during 2010 The market price of the stock on December 31, 2010 was $21.00 per share There were 15,000 shares of stock outstanding for the entire year The dividend yield as of December 31, 2010 was

73 MusicPod's earnings per share ratios were $2.47 and $2.07 respectively for 2010 and

2009 MusicPod's stock was trading at $53.00 and $41.50 per share in 2010 and 2009

respectively The company paid cash dividends per share of $.85 in 2010 and $.63 in 2009 Total stockholders' equity was $13,572 million and $11,896 million in 2010 and 2009

respectively The common shares outstanding were approximately 1,782,000 in both 2010 and

74 MusicPod's earnings per share ratios were $2.47 and $2.07 respectively for 2010 and

2009 MusicPod's stock was trading at $53.00 and $41.50 per share in 2010 and 2009

respectively The company paid cash dividends per share of $.85 in 2010 and $.63 in 2009 Total stockholders' equity was $13,572 million and $11,896 million in 2010 and 2009

respectively The common shares outstanding were 1,782,000 in both 2010 and 2009

Calculate MusicPod's dividend yield for 2010 and 2009 respectively

75 A new company with a high property, plant, and equipment balance would most likely be

A a cell phone retailer

B a hotel

C a pizza take-out company

D a hot dog vendor on an airport concourse

77 In 2010, Price's Pizzas return on owners' equity (ROE) was 32.3%, and return on assets (ROA) was 17.0% In 2010, Carlos' Calzones return on owners' equity (ROE) was 33.1% while return on assets (ROA) was 16.3% Which of the following statements is true?

A Price's Pizzas return on assets (ROA) indicates better performance than does Carlos' Calzones ROA

B Price's Pizzas ROE was 103% greater than their ROA while Carlos' Calzones ROE was

only 90% greater than their ROA This difference is caused by Price's Pizzas higher use of debt financing to leverage their assets

C Carlos' Calzones provided higher positive financial leverage for their stockholders

compared to Price's Pizzas

D None of the other answers are true

A Carlos' Calzones cost of goods sold was a lower percentage of sales than Price's Pizzas

B In 2010, Carlos' Calzones profit margin was 53% greater than Price's Pizzas which would contribute to a higher return on total investment

C The major reason for Price's Pizzas lower profit margin is that their selling, general and

administrative expenses were double the percentage of sales compared to Carlos' Calzones percentage

D All of these are false

79 In 2010, Carlos' Calzones accounts receivable turnover ratio and days' sales in receivables was 10.31 times and 35.4 days In 2010, Price's Pizzas accounts receivable turnover ratio and days' sales in receivables was 10.04 times and 36.4 days Which of the following statements is true?

A Both companies have a similar turnover ratio

B Price's Pizzas higher turnover ratio has a direct relationship to its days' sales tied up in receivables

C Price's Pizzas management has done a better job of managing their receivables

D All of the answers are true

82 List four categories of accounting ratios described in the text

1 Profitability; 2 Liquidity; 3.Solvency; 4 Market tests

83 Packers Corporation reported the following data for the year ended December 31, 2009:

Compute the following ratios:

G Financial leverage percentage

H Fixed asset turnover ratio