Ch20 Company Performance Comprehensive Test Bank + Answers

Chapter 20

Company Performance: Comprehensive Evaluation

MATCHING

1. Match the following ratios with the descriptions below.

A. Accounts receivable turnover

B. Current ratio

C. Return on sales

D. Return on assets

E. Return on equity

F. Price earnings ratio

G. Days in payment period

H. Earnings per share

I. Dividend payout ratio

J. Times interest earned

_____ 1. Describes how much of each sale is profit

_____ 2. Describes how quickly accounts receivables are collected

_____ 3. Describes the percentage of net income that is returned to stockholders

_____ 4. Measures the short-term liquidity of the firm

_____ 5. A common size measure of the operating performance of the firm

_____ 6. Measures the ability of the firm to service its long-term debt

_____ 7. Measures how quickly a firm pays it current liabilities

_____ 8. Measures the performance of the firm’s stockholders

_____ 9. Measures the performance of the firm’s assets

_____10. Describes investors’ expectation of a firm’s future earnings.

2. Match the appropriate titles to the ratios listed below.

1. Current Ratio
2. Inventory Turnover
3. Quick Ratio
4. Times Interest Earned
5. Return on Assets
6. Return on Equity
7. Price Earnings Ratio

H. Earnings per Share

_____ 1 Cash + Temporary Investments + Receivables

Current Liabilities

_____ 2. Net Income________

Average Stockholders’ Equity

_____ 3 Income before interest and taxes___

Interest Expense

_____ 4. Current Market Price per Share (Common Stock)

Earnings per Share

_____ 5. Cost of Goods Sold

Average Inventory

Answers: 1. C; 2. F; 3. D; 4. G; 5. B Difficulty: Easy

1. Match each of the five ratio classifications with the ratios listed below.

A. Activity Ratio

B. Liquidity and Solvency Ratio

C. Debt-Paying Ability Ratio

D. Profitability Ratio

E. Market-Based Ratio

_____ 1. Asset Turnover

_____ 2. Days in the Collection Period

_____ 3. Times Interest Earned

_____ 4. Accounts Payable Turnover

_____ 5. Return on Sales

_____ 6. Price-Earnings

_____ 7. Earnings per share

_____ 8. Dividend Payout

_____ 9. Quick Ratio

_____10. Return on Common Equity

Answers: 1. D; 2. A; 3. C; 4. A; 5. D; 6. E; 7. D; 8. E; 9. B; 10. D

MULTIPLE CHOICE

4. The entire group of creditors and investors who provide capital to businesses to allow them to finance their investments is collectively referred to as a:

A) comparative market.

B) capital market.

C) stock market.

D) free market.

5. Terms of creditors’ lending agreements that restrict management’s behavior are called:

A) debt covenants.

B) comparative terms.

C) activity restrictions.

D) price earnings terms.

6. Consumer demand dictates the types of businesses that exist and how much of a given product or service is available in a:

A) monopolistic economy.

B) oligopolistic economy.

C) free market economy.

D) product economy.

7. When conducting an audit, the auditor can render one of the following. Which one indicates that the auditor was not able to complete the audit and the CPA cannot render an opinion?

A) Adverse opinion

B) Disclaimer

C) Unqualified opinion

D) Qualified opinion

8. When a CPA firm finds that the financial statements of the company being audited are not in compliance with Generally Accepted Accounting Principle, the firm will issue which of the following?

A) Adverse opinion

B) Disclaimer

C) Unqualified opinion

D) Qualified opinion

9. If sales for 2010 and 2009 were $680,000 and $625,000, respectively, then the percentage change shown in a horizontal analysis would be:

A) 8.8% percent.

B) 8.1 percent.

C) (8.1 percent).

D) (8.8 percent).

10. The purpose of an audit opinion is to:

A) ensure that financial statements are mathematically correct.

B) ascertain there was no fraud in the company.

C) provide third-party assurance that the financial statements are presented fairly.

D) certify that the company is a good investment.

11. If total assets for 2010 and 2009 were $500,000 and $530,000, respectively, then the percentage change shown in a horizontal analysis would be:

A) 6.0 percent.

B) 5.7 percent.

C) (5.7 percent).

D) (6.0 percent).

12. If a company’s income statement showed sales equal to $365,000, a gross margin of $120,000, and net income of $45,000, then a vertical analysis of the income statement would show a percentage figure for net income equal to:

A) 100.0 percent.

B) 37.5 percent.

C) 32.3 percent.

D) 12.3 percent.

13. If a company’s balance sheet reported accounts receivable equal to $38,500, total current assets of $205,000, and total assets of $510,000, then a vertical analysis of the balance sheet would show a percentage figure for accounts receivable equal to:

A) 100.0 percent.

B) 40.2 percent.

C) 18.8 percent.

D) 7.5 percent.

14. Which of the following is an opinion on the financial statements of a company?

A) Unqualified opinion

B) Qualified opinion

C) Adverse opinion

D) Disclaimer if opinion

E) All are opinions

15. Financial ratios that help judge a firm’s efficiency in using its current assets and liabilities are collectively referred to as:

A) equity ratios.

B) ability ratios.

C) activity ratios.

D) profitability ratios.

16. The numerator used to calculate accounts receivable turnover is:

A) gross cash sales.

B) net credit sales.

C) total net sales.

D) gross sales.

17. A company’s current ratio equals:

A) current assets × current liabilities.

B) current liabilities/current assets.

C) current assets/current liabilities.

D) quick assets/quick liabilities.

18. The quick ratio is used to assess a firm’s:

A) liquidity.

B) efficiency.

C) profitability.

D) creditworthiness.

19. Which of the following two ratios measure the short-term solvency of a company?

A) Current Ratio and Times Interest Earned.

B) Quick Ratio and Current Ratio.

C) Quick Ratio and Accounts Receivable Turnover.

D) Accounts Payable Turnover and Inventory Turnover.

20. All the following ratios are generally used to assess a firm’s liquidity except:

A) quick ratio.

B) current ratio.

C) asset turnover ratio.

D) cash flow per share.

21. Which of the following ratios indicates a firm’s financial flexibility (the ability to issue stock or borrow fund)?

A) Debt-to-equity ratio

B) Return-on-equity ratio

C) Current ratio

D) Return on assets

22. All the following ratios are generally used to assess a firm’s creditworthiness except:

A) debt-to-equity ratio.

B) return-on-equity ratio.

C) times-interest-earned ratio.

D) long-term debt-to-equity ratio.

23. The times-interest-earned ratio is generally used to assess a firm’s:

A) liquidity.

B) efficiency.

C) profitability.

D) creditworthiness.

24. All the following ratios below are generally used to assess a firm’s profitability except:

A) asset turnover.

B) return on assets.

C) gross margin percentage.

D) times-interest-earned ratio.

25. The return-on-assets ratio is used to assess a firm’s:

A) liquidity.

B) efficiency.

C) profitability.

D) creditworthiness.

26. Which of the following pairs of ratios measure the profitability of a company?

A) Inventory Turnover and Asset Turnover

B) Dividend Payout and Return on Sales

C) Gross-Margin and Asset Turnover

D) Price-Earnings Ratio and Accounts Receivable Turnover

27. The denominator in the gross-margin percentage is:

A) net sales.

B) net income.

C) average inventory.

D) cost of goods sold.

28. The numerator in the return on assets ratio is:

A) net sales.

B) net income.

C) gross margin.

D) average total assets.

29. A measure of a corporation’s profitability that is required to be reported as part of the income statement is the:

A) earnings per share.

B) cash flow per share.

C) times interest earned.

D) gross-margin percentage.

30. The dividend payout ratio relates the amount of dividends paid to the:

A) period’s earnings.

B) period’s gross margin.

C) net sales for the period.

D) average assets for the period.

31. Which of the following ratios commonly used by investors to evaluate a potential stock investment uses the market price of the stock as part of the calculation?

A) Earnings per share

B) Price earnings ratio

C) Dividend yield ratio

D) Both b and c are correct

32. The current ratio at the end of 2010 was:

A) 1.23.

B) 1.18.

C) 0.97.

D) 0.81.

33. The return on assets for 2010 was:

A) 9.5 percent.

B) 10.6 percent.

C) 10.8 percent.

D) 33.8 percent.

34. The return on owners’ equity for 2010 was:

A) 30.0 percent.

B) 30.8 percent.

C) 53.6 percent.

D) 84.3 percent.

35. The asset turnover ratio for 2010 was:

A) 74.8.

B) 73.1.

C) 33.8.

D) 10.8.

36. The gross margin percentage for 2010 was:

A) 32.0 percent.

B) 45.1 percent.

C) 45.2 percent.

D) 84.3 percent.

37. The DuPont ROI for 2010 was:

A) 53.6 × 32.0% = 17.2%

B) 73.1 × 9.5% = 6.9%

C) 74.8 × 14.5% = 10.8%

D) 84.3 × 10.8% = 9.1%

38. The return on sales for 2010 was:

A) 10.8 percent.

B) 14.5 percent.

C) 32.0 percent.

D) 45.2 percent.

39. The cash flow per share was:

A) $ 0.30.

B) $ 0.70.

C) $ 0.75.

D) $ 0.94.

40. The times-interest-earned ratio was:

A) 13.3.

B) 12.3.

C) 10.7.

D) 8.5.

41. The price-earnings ratio at the end of 2010 was:

A) 14.2.

B) 18.1.

C) 22.7.

D) 24.3.

42. The dividend-payout ratio was:

A) 65 percent.

B) 70 percent.

C) 75 percent.

D) 80 percent.

43. The dividend yield was:

A) 4.4 percent.

B) 4.7 percent.

C) 7.0 percent.

D) 7.5 percent.

44. If a vertical analysis were performed relative to the year ended December 31, 2010, the figure that would appear in the percent column for income tax expense would be:

A) 6.4 percent.

B) 6.9 percent.

C) 11.1 percent.

D) 23.6 percent.

45. If a vertical analysis were performed relative to the year ended December 31, 2010, the figure that would appear in the percent column for cost of goods sold would be:

A) 37.4 percent.

B) 38.1 percent.

C) 58.3 percent.

D) 61.5 percent.

46. If a vertical analysis were performed relative to the year ended December 31, 2010, the figure that would appear in the percent column for Net income would be:

A) 56.3 percent.

B) 33.6 percent.

C) 22.2 percent.

D) 21.1 percent.

47. Using horizontal analysis, the figure that would appear in the percent column for Net sales is:

A) 9.5 percent.

B) 10.5 percent.

C) 15.4 percent.

D) 16.8 percent.

48. Using horizontal analysis, the figure that would appear in the percent column for gross margin is:

A) 5.3 percent.

B) 8.5 percent.

C) 9.3 percent.

D) 23.8 percent.

49. Using horizontal analysis, the figure that would appear in the percent column for operating income is:

A) 19.0 percent.

B) 17.0 percent.

C) 14.5 percent.

D) 4.2 percent.

50. Using horizontal analysis, the figure that would appear in the percent column for net income is:

A) 14.3 percent.

B) 16.7 percent.

C) 21.1 percent.

D) 22.2 percent.

51. Which of the following helps analysts understand the relationships among the items in a financial statement?

A) Common-sized financial statements

B) Performance analysis

C) Ratio analysis

D) Trend analysis

52. In a common-sized balance sheet, each item is shown as a percentage of:

A) common stockholders’ equity.

B) stockholders’ equity.

C) total liabilities.

D) total assets.

53. In a common-sized income statement, each item is shown as a percentage of:

A) income from continuing operations.

B) comprehensive income.

C) net income.

D) net sales.

54. Which of the following helps analysts understand the relationship between two financial statement items?

A) Common-sized financial statements

B) Performance analysis

C) Ratio analysis

D) Trend analysis

55. Which of the following statements about the current ratio is false?

A) It includes inventories.

B) It is a measure of profitability.

C) It is equal to current assets divided by current liabilities.

D) It is affected by the accounting methods used by a company.

56. Which of the following statements about sources of external standards for evaluating firm’s performance is false?

A) Much of the information provided by investor services comes from firms’ annual reports.

B) Investor services often provide comparative ratios as well as other financial information.

C) Investor services must follow SEC guidelines for reporting form and terminology used.

D) All the information available to internal users is not provided by external sources.

57. What are the two elements of return on assets?

A) Return on equity and return on sales

B) Return on equity and asset turnover

C) Return on sales and asset turnover

D) Return on sales and profit margin

58. The total-asset-turnover ratio measures:

A) how well a firm uses its assets to produce sales.

B) the rate of return on a firm’s investment in assets.

C) the portion of assets that has been financed by investors.

D) the portion of assets that has been financed by creditors.

59. Which of the following statements about the current ratio is false?

A) A firm with a higher current ratio is better off than one with a lower current ratio.

B) It is determined by dividing current assets by current liabilities.

C) It is affected by the accounting methods firms use.

D) It is larger than the quick ratio.

60. When decision makers want to know how well a firm manages the amounts owed to them by customers as compared to other firms, they should use:

A) current ratio.

B) asset turnover.

C) cash flow per share.

D) average collection period.

61. Which of the following would be most useful to you in deciding whether or not to make a short-term loan to a firm?

A) Return on assets

B) Return on sales

C) Current ratio

D) EPS

62. Which combination of ratios describes the length of the operating cycle?

1. Days in the Selling Period + Days in the Collection Period
2. Days in the Collection Period + Days in the Payment Period
3. Days in the Collection Period + Days in the Selling Period + Days in the Payment Period
4. Days in the Payment Period + Days in the Selling Period

63. Which of the following ratios would be computed automatically in performing vertical analysis of an income statement?

A) Dividend-payout ratio

B) Earnings per share

C) Return on sales

D) Current ratio

64. Which of the following would be most useful in deciding whether or not to purchase a firm’s common stock?

A) Return on equity

B) Return on assets

C) Asset turnover

D) Current ratio

65. Which of the following would be least useful in assessing a firm’s long-term debt-paying ability?

A) Long-term debt to equity

B) Times interest earned

C) Debt to equity

D) Current ratio

66. Financial statements that report two or more years of information side by side are referred to as:

A) consolidated.

B) comparative.

C) combined.

D) trended.

67. The current ratio at the end of 2010 was:

A) 1.76.

B) 1.56.

C) 1.45.

D) 1.03.

68. The return on assets for 2010 was:

A) 10.5 percent.

B) 11.6 percent.

C) 13.8 percent.

D) 15.1 percent.

69. The return on owners’ equity for 2010 was:

A) 35.0 percent.

B) 37.8 percent.

C) 45.0 percent.

D) 57.3 percent.

70. The asset-turnover ratio for 2010 was:

A) 45.8.

B) 57.1.

C) 63.3.

D) 75.6.

71. The gross margin percentage for 2010 was:

A) 33.0 percent.

B) 40.1 percent.

C) 42.2 percent.

D) 45.6 percent.

72. The current ratio at the end of 2010 was:

A) 1.76.

B) 1.56.

C) 1.45.

D) 1.36.

73. The return on assets for 2010 was:

A) 10.5 percent.

B) 11.6 percent.

C) 18.8 percent.

D) 20.7 percent.

74. The return on owners’ equity for 2010 was:

A) 35.0 percent.

B) 58.8 percent.

C) 60.7 percent.

D) 65.3 percent.

75. The asset-turnover ratio for 2010 was:

A) 79.3.

B) 81.3.

C) 85.6.

D) 90.1.

76. The gross margin percentage for 2010 was:

A) 35.0 percent.

B) 45.1 percent.

C) 49.7 percent.

D) 52.3 percent.

77. What is the role of auditors in capital markets? How is this role affected by the fact that auditors are paid by the firms they audit?

78. Explain the computation of cash flow per share. Do you believe cash flow per share should replace earnings per share? Why or why not?

79. You know that a firm has a current ratio of 2.2 to 1. What other information do you need in order to determine whether that’s good or bad?

80. Is a firm that has a high dividend payout ratio better to invest in than one that has a low dividend payout ratio? Why or why not?

81. If a firm’s return on assets decreases and its asset turnover increases, how has the return on sales changed? Was this change more or less than the change in asset turnover? Explain.

82. Write out the dividend payout ratio (Show your work here).

Explain how is the dividend payout ratio is used.

83. Write out the dividend yield ratio (Show your work).

Explain how the dividend yield ratio is used.

84. Write out the earnings per share ratio (EPS) (Show your work).

Explain how the earnings per share ratio is used?

85. Prepare a vertical analysis of the following balance sheet:

86. Using the following income statements for Conduit Corporation for the years ending December 31, 2010 and 2009, prepare a horizontal analysis showing both dollar amounts and percentages:

87. Xenetech Industries gathered the following selected account balance information for the years ending December 31, 2010 and 2009:

Calculate the following ratios for 2010:

(a) Return on Assets

(b) Return on Owners’ Equity

(c) Asset Turnover

(d) Return on Sales

(e) DuPont ROI

(f) Debt-to-Equity

Answers:

Average Total Assets:

[$90,000 + $368,000) + ($122,000 + $316,000)]/2 = $448,000

(a) $115,000/$448,000 = 25.7%

(b) $115,000/($282,000 + $216,000)/2 = 46.2%

(c) $439,000/$448,000 = 98.0

(d) $115,000/$439,000 = 26.2%

(e) Asset Turnover × Return on Sales 98.0 × 26.2% = 25.68%

(f) ($64,000 + $112,000)/$282,000 = 62.4%

88. Given the following information, calculate the current ratio:

* Based on ending balance of assets

89. The Goldenrod Company gathered the following information:

Stockholders’ Equity as of December 31, 2010:

Market Price per Share of Stock on

December 31, 2010: $14

Assuming the common stock was outstanding for the entire year, calculate the following ratios for 2010:

(a) Cash Flow per Share

(b) Times Interest Earned

(c) Price Earnings Ratio

(d) Dividend Payout Ratio

(e) Dividend Yield

Answers:

(a) $234,000/200,000 = $1.17 per share

(b) $214,000 + $8,000 = $222,000/$25,000 = 8.88

(c) EPS = $155,000/200,000 = $.775

$14.00/$.775 = 18.1

(d) $70,000/$155,000 = 45.2%

(e) ($70,000/200,000)/$14.00 = 2.5%

90. Colors Inc. gathered the following year-end data (in thousands) for 2008 and 2007:

The current ratio at the end of 2010 was (show your work):

The return on assets for 2010 was (show your work):

The return on owners’ equity for 2010 was (show your work):

The asset turnover ratio for 2010 was (show your work):

The gross margin percentage for 2010 was (show your work):

91. Brown Cow Inc. gathered the following year-end data (in thousands) for 2010 and 2009:

The current ratio at the end of 2010 was (show your work):

The return on assets for 2010 was (show your work):

The return on owners’ equity for 2010 was (show your work):

The asset turnover ratio for 2010 was (show your work):

The gross margin percentage for 2010 was (show your work):

92. Hot Inc. has the following financial information. Calculate the inventory turnover ratio and explain how it is used (show your work).

Show Answer Here:

Answers:

COGS / Avg. Inventory

100,000 / (( 150,000 + 100,000)) / 2 = 0.80

The inventory turnover ratio helps explain a company’s inventory management. The higher the inventory turnover ratio, the more the company is converting the company’s inventory into sales. Current management techniques like to keep inventory levels low to reduce the value of assets not generating a return.

93. Moving Inc. had an average stock market price equal to $35.00. The current market price equals $55.00. During the current year, the earnings per share equaled $15.00. What is the price-earnings ratio? Explain the uses for the price-earning ratio.

94. Get the actual financial statements of a publicly traded company (do not use bank or insurance company due to classification issues) and calculate the following selected ratios. Explain what the ratios mean. Make sure at least one ratio is used from each of the 5 classifications. Have students use the EDGAR Data Base at SEC.gov and find the most recent 10-K and use its financial statements for the ratio.

Suggested Ratios

Activity: A/R turnover, Inventory Turnover

Liquidity and Solvency: Current and Quick

Debt-Paying: Debt to Equity and Times Interest Earned

Profitability: Return on Assets, Return on Common Equity

Market-Based: Dividend Payout, Price-Earnings

Answers: Will vary by company