Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%

Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall's debt ratio.

A) 30%

B) 40%

C) 50%

D) 60%

The DuPont method decomposes return on equity into

A) return on assets and the debt ratio.

B) return on assets and the equity multiplier.

C) operating income and inventory turnover.

D) net profit margin and fixed asset turnover.

A firm's average collection period has decreased significantly from the previous year. Which of the following could possibly explain the results?

A) Customers are paying off their accounts quicker.

B) Customers are taking longer to pay for purchases.

C) The firm has a stricter collection policy.

D) Both A and C.

An increase in ________ will increase common equity.

A) paid in capital

B) retained earnings

C) dividends paid

D) both A and 

Another name for the acid test ratio is the

A) current ratio.

B) quick ratio.

C) inventory turnover ratio.

D) average collection period.

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

A) Current ratio

B) Gross profit margin

C) Quick ratio

D) Return on investment

Which of the following is included in the denominator of the times-interest-earned ratio?

A) Lease payments

B) Principal payments

C) Interest expense

D) Gross profit

The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of

A) cash.

B) inventory.

C) marketable securities.

D) accruals.

Smith Company Balance Sheet and selected Income Statement data

                                                         Table 1

Smith Company Balance Sheet and selected Income Statement data

Assets:

Cash and marketable securities                                                  $300,000

Accounts receivable                                                                       2,215,000

Inventories                                                                                        1,837,500

Prepaid expenses                                                                                 24,000

Total current assets                                                                      $3,286,500

Fixed assets                                                                                      2,700,000

Less: accumulated depreciation                                                1,087,500

Net fixed assets                                                                             $1,612,500

Total assets                                                                                     $4,899,000

Liabilities:

Accounts payable                                                                            $240,000

Notes payable                                                                                     825,000

Accrued taxes                                                                                        42,500

Total current liabilities                                                               $1,107,000

Long-term debt                                                                                   975,000

Owner's equity                                                                                2,817,000

Total liabilities and owner's equity                                        $4,899,000

Net sales (all credit)                                                                     $6,375,000

Less: Cost of goods sold                                                                4,312,500

Selling and administrative expense                                         1,387,500

Depreciation expense                                                                       135,000

Interest expense                                                                                  127,000

Earnings before taxes                                                                     $412,500

Income taxes                                                                                        225,000

Net income                                                                                        $187,500

Common stock dividends                                                               $97,500

Change in retained earnings                                                          $90,000

Based on the information in Table 1, the current ratio is

A) 2.97.

B) 1.46.

C) 2.11.

D) 2.23.

Based on the information in Table 1, the average collection period is

A) 71 days.

B) 84 days.

C) 64 days.

D) 127 days.

Based on the information in Table 1, the debt ratio is

A) 0.70.

B) 0.20.

C) 0.74.

D) 0.42.

Based on the information in Table 1, the net profit margin is

A) 4.61%.

B) 2.94%.

C) 1.97%.

D) 5.33%.

Based on the information in Table 1, the inventory turnover ratio is

A) 0.29 times.

B) 2.35 times.

C) 0.43 times.

D) 3.47 times.

Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is

Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is

A) 90 days.

B) 45 days.

C) 75 days.

D) 60 days.

If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?

A) Acid test or quick ratio

B) Average collection period

C) Current ratio

D) Both A and C

E) All of the above

The debt ratio is a measure of a firm's

A) leverage.

B) profitability.

C) liquidity.

D) efficiency.

Which of the following statements is true?

A) Current assets consist of cash, accounts receivable, inventory, and net plant, property, and equipment.

B) The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.

C) For the average firm, inventory is considered to be more "liquid" than accounts receivable.

D) A successful firm's current liabilities should always be greater than its current assets.

Which of the following transactions does NOT affect the quick ratio?

A) Land held for investment is sold for cash.

B) Equipment is purchased and is financed by a long-term debt issue.

C) Inventories are sold for cash.

D) Inventories are sold on a credit basis.

The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of

A) liquidity ratios.

B) profitability ratios.

C) coverage ratios.

D) leverage ratios.

What is the purpose of using common size balance sheets and common size income statements?

What is the purpose of using common size balance sheets and common size income statements?

Answer:  The purpose is to allow a company to compare its performance with its own prior performance or with the performance of other firms. It is not helpful to just compare numbers, but with common size statements firms can compare percentages, so that they can answer questions about how their own performance changed, and how their performance compares to that of other firms.

 The principal reason for preparing common size statements is

A) to make meaningful comparisons between firms that are not the same size.

B) to make meaningful comparisons between different fiscal years.

C) to eliminate the effects of inflation.

D) to make meaningful comparisons between firms in different industries.

Common size financial statements represent all figures on the financial statements

A) in inflation adjusted dollars from a base year.

B) as if all companies being compared had the same total revenue.

C) as if all companies being compared had the same total assets.

D) as a percentage of either sales or total assets.

Common size income statements represent all figures on the income statement

A) as a percentage change from the previous year.

B) percentages of the current year's sales.

C) as a percentage of some benchmark figure.

D) as a percentage of total assets.

Common size balance sheets represent all figures on the balance sheet

A) as a percentage change from the previous year.

B) percentages of the current year's sales.

C) as a percentage of some benchmark figure.

D) as a percentage of total assets.

On a common size balance sheet, total assets are equal to 100%.

Answer:  TRUE

On a common size income statement, EBIT is equal to 100%.

Answer:  FALSE

By using common size income statements, firms can determine how various expenses as a percentage of total sales changed from period to period.

Answer:  TRUE

Which of the following parties would perform an external financial analysis?

Which of the following parties would perform an external financial analysis?

A) A firm's compensation committee

B) A financial analyst forecasting the next period's borrowing needs

C) A firm's creditors

D) A CFO comparing the performance of the firm's various divisions

Which of the following parties would perform an internal financial analysis?

A) A financial analyst forecasting the next period's borrowing needs

B) A firm's competitors

C) A firm's creditors

D) Analysts for investment companies

Which of the following parties would be interested in an analysis of the firm's financial statements?

A) Investors

B) Creditors

C) The firm's managers

D) all of the above

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Answer:  TRUE

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

Answer:  FALSE

Individuals who do not work for a company rarely have enough information to perform a detailed financial analysis of the company.

Answer:  FALSE

Which of the basic financial statements is best used to answer the questions "Where did the company's money

Which of the basic financial statements is best used to answer the questions "Where did the company's money come from and how was it spent over the preceding year?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Cash flow statement

Which of the basic financial statements is best used to answer questions about changes in owner's equity that are not explained by the income statement?

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Cash flow statement

The income statement shows a company's earnings since it has been in business.

Answer:  FALSE

The balance includes information about the company's assets and liabilities.

Answer:  TRUE

The cash flow statement shows amounts that the company has earned but for which it has not yet received cash.

Answer:  FALSE

The cash flow statement is an alternative term for the balance sheet.

Answer:  FALSE

Which of the basic financial statements is best used to answer the question, "How profitable is the business

Which of the basic financial statements is best used to answer the question, "How profitable is the business?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Accounts receivable aging schedule

Who owns the retained earnings of a public firm?

A) The IRS

B) Common stockholders

C) Bondholders

D) Preferred stockholders

Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period?

A) Balance sheet

B) Cash flow statement

C) Income statement

D) None of the above

Stock that is repurchased by the issuing company is called

A) paid in capital.

B) treasury stock.

C) retained capital.

D) par value stock.

Which of the basic financial statements is best used to answer the questions "What does the company own and how is it financed?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Cash flow statement

In a growing business, negative cash flow from investing activities is normal.

Answer:  TRUE

Reducing a firm's debt will increase its cash flow.

Answer:  FALSE 

Beginning cash balance + cash flow from operations + cash flow from investing activities + cash flow from financing activities = ending cash balance.

Answer:  TRUE