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Financial Accounting, 11^th edition

Test Bank and Video Questions

By Pratt and Peters

Chapter 5: Using Financial Statement Information

For Instructor Use Only

Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.

Table of Contents

Multiple Choice Questions 2

Matching Questions 34

Short Problems 38

Short Essay Questions 56

Data Analytic Questions 61

Video Questions 63

Multiple Choice Questions

1) The current ratio is:

A) current assets divided by current liabilities.

B) current liabilities divided by current assets.

C) current assets divided by total liabilities.

D) total assets divided by total liabilities.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 1 / None

2) The current ratio:

A) provides users with an estimate of a company's human resources.

B) is reported on a company's balance sheet in the asset section.

C) is a measure of a company's solvency.

D) is a measure of a company's leverage.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 2 / None

3) Earnings per share:

A) must appear on a company's income statement if the company is publicly traded.

B) is rarely used by analysts since it is not required by GAAP.

C) is based on the market price of the company's stock.

D) is typically presented in its two forms: simple and advanced.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 3 / None

4) Return on equity compares:

A) the market price of the company's stock to its dividend policy.

B) a company's earnings to the dividends paid for the year.

C) the profits of a company to the investment in the company made by its shareholders.

D) the profits of a company to the selling price of each share of stock.

Diff: Easy

Learning Objective: 5.3; 5.4

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 4 / None

5) Operating performance is a company's ability to:

A) control acquisitions of other companies in the same industry.

B) generate cash from sources other than regular operations.

C) increase its net assets through regular operations.

D) employ off-balance-sheet financing.

Diff: Easy

Learning Objective: 5.2; 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 5 / None

6) Financial statements are a measure of a company's:

A) future net income.

B) future cash flows.

C) past financial performance and current financial position.

D) future financial performance and future financial position.

Diff: Easy

Learning Objective: 5.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 6 / None

7) The price-earnings ratio is:

A) the market price of an equity share divided by earnings per share.

B) the amount of a company's retained earnings.

C) the purchase price of a firm's assets divided by net income.

D) used to measure the speed at which the company sells its inventories.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 7 / None

8) Financial flexibility is:

A) a good indicator of a company's ability to grow through operations.

B) evident when a company's assets are greater than its liabilities.

C) the ability to convert existing assets into money.

D) the ability to generate cash from sources other than regular operations.

Diff: Easy

Learning Objective: 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 8 / None

9) A standard audit report:

A) states that a company has the right to select members of its board of directors.

B) indicates that a company's financial statements have been prepared in a manner consistent with professional standards.

C) states whether a company will be profitable or not in the future.

D) serves as a guarantee that the financial statements are free of any errors.

Diff: Easy

Learning Objective: 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 9 / None

10) Liquidity is the ability:

A) to increase net assets through regular operations.

B) to generate cash from sources other than regular operations.

C) to convert existing assets into cash.

D) of financial statement users to predict a company's cash flows.

Diff: Easy

Learning Objective: 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 10 / None

11) Which of the following may be a limitation of financial statements?

A) Subject to biases of management

B) Provides limited information on the company's accounting methods

C) Typically reflects the view of inherently unethical managers

D) Relies heavily on market values

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 11 / None

12) Which one of the following is a reason a company's reported book value and its market capitalization (number of outstanding equity shares x market price per share) often differ significantly?

A) Book value relies heavily on market values.

B) GAAP offers little opportunity for management discretion.

C) Financial statements are forward-looking.

D) Financial statements refer to past transactions while stock prices reflect future expectations about the company.

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 12 / None

13) The current ratio helps assess a company's:

A) profitability.

B) asset turnover.

C) capital structure leverage.

D) solvency.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 13 / None

14) Return on equity helps assess a company's:

A) marketability.

B) solvency.

C) profitability.

D) leverage.

Diff: Easy

Learning Objective: 5.3; 5.4

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 14 / None

15) The quick ratio helps assess a company's:

A) annual stock price.

B) solvency.

C) inventory turnover.

D) profit during the current period.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 15 / None

16) The dividend yield ratio helps assess the:

A) profitability of the current year.

B) cash return on a shareholder's investment.

C) company's ability to pay its current liabilities as they come due.

D) solvency of a company.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 16 / None

17) Which of the following ratios would be of primary importance to a manager in evaluating the success of a new policy designed to reduce the dollar amount invested in products awaiting sale at any one time?

A) Total asset turnover

B) Fixed assets turnover

C) Receivables turnover

D) Inventory turnover

Diff: Medium

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None, Resource Management; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 17 / None

18) Which of the following ratios would an investor use to determine why return on equity increased during a year?

A) Earnings per share

B) Return on assets

C) Capital structure leverage

D) Both B and C

Diff: Medium

Learning Objective: 5.4

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 18 / None

19) Assessing a company's inventory turnover helps assess the:

A) effectiveness of a company's receivables collection activities.

B) ability to lean on inventory suppliers for financing.

C) speed at which inventories move through operations.

D) company's leverage position.

Diff: Easy

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 19 / None

20) Of the following ratios which would be most important to a supplier in deciding to extend short-term credit for goods delivered?

A) Earnings per share

B) Debt/equity ratio

C) Return on equity

D) Quick ratio

Diff: Medium

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 20 / None

21) Of the following ratios which would be the most important to a creditor in deciding whether to extend long-term credit to a customer?

A) Quick ratio

B) Capital structure leverage

C) Inventory turnover

D) Earnings per share

Diff: Medium

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 21 / None

22) Of the following ratios which would be the most important to a manager in evaluating the success of a computerized collection process?

A) Accounts receivable turnover

B) Account payable turnover

C) Quick ratio

D) Return of equity

Diff: Easy

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 22 / None

23) Book value (or shareholders' equity) fails to reflect a company's market capitalization (Number of equity shares outstanding × per share market value) primarily because:

A) financial statements rely heavily on present value measures.

B) financial statements are backward-looking.

C) financial statements are forward-looking.

D) financial statements fail to reflect measures of financial performance.

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 23 / None

24) Which of the following is a fundamental way in which financial accounting numbers are useful?

A) They can predict the way the stock price will behave.

B) They are used to assess the quality of a company's products.

C) They can be used to predict a company's future earnings.

D) They identify the effect of inflation on the value of company's assets.

Diff: Medium

Learning Objective: 5.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 24 / None

25) The long-term debt ratio:

A) measures the significance of long-term debt as a source of asset financing.

B) measures the effect of management's use of long-term debt.

C) compares profits to the company's total debt.

D) is a measure of profitability.

Diff: Easy

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 25 / None

26) The use of financial statements for predicting future earnings and cash flows is limited due to:

A) management bias, lack of forward-looking information, and an inability to objectively measure certain relevant information.

B) lack of judgment, management bias, and subjective adjustments for inflation.

C) lack of backward-looking information.

D) the omission of objectively-determined historical costs.

Diff: Medium

Learning Objective: 5.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 26 / None

27) Which one of the following would an investor most likely assess to determine whether to invest in a particular company?

A) Determine the number of employees a company has.

B) Obtain an understanding of the company's prospects within its industry.

C) Determine the number of years the company has been in business.

D) Calculate the amount of advertising costs incurred by the company during the previous year.

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: None / BB: Industry; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 27 / None

28) A company would likely "take a bath":

A) in periods of extraordinarily high net income.

B) just prior to creating hidden reserves.

C) when it has experienced an extremely poor year.

D) when its quality of earnings is very high.

Diff: Medium

Learning Objective: 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 28 / None

29) An analyst assessed a company and determined the company reported a "high quality of earnings." This implies that:

A) management issued a press release indicating it was not aware of any fraud during the current year.

B) the company's management exercised little or no discretionary influence in reporting financial statement information to shareholders.

C) management has used its influence in determining the dollar amounts reported on financial statements.

D) reported earnings represents a conservative estimate of "true" earnings.

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 29 / None

30) Managers who structure financing transactions to avoid reported debt on a company's balance sheet are using:

A) hidden reserves.

B) fraudulent methods by default.

C) performance overstatement.

D) off-balance-sheet financing.

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 30 / None

31) Information concerning industry averages will likely be found in:

A) Barron's.

B) The Wall Street Journal.

C) Dun & Bradstreet's Key Business Ratios.

D) The New York Times.

Diff: Easy

Learning Objective: 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 31 / None

32) Common-size financial statements are based on:

A) percentages of other numbers on the same statements.

B) percent comparisons of other companies in the same industry.

C) percent comparisons of other companies from different industries.

D) percent comparisons of a company's financial statement numbers with its stock prices.

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 32 / None

33) The primary measure of the overall success of a company for a particular period of time is:

A) total shareholders' equity.

B) total assets.

C) net income divided by the shareholders' investment in the company.

D) the number of shares of stock it has sold to investors.

Diff: Easy

Learning Objective: 5.2

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 33 / None

34) Many ratios require an average be used for the balance sheet numbers because the:

A) income statement refers to a point in time.

B) accountants may have made errors in the financial statements.

C) balance sheet numbers are at a point in time and are being compared to an income statement number that covers a period of time.

D) income statement numbers represent a point in time and are being compared to a balance sheet number that covers a period of time.

Diff: Medium

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 34 / None

35) Using borrowed funds to generate returns for the shareholders is called:

A) leverage.

B) profitability.

C) taking a bath.

D) solvency.

Diff: Easy

Learning Objective: 5.2; 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 35 / None

36) A company that reports high levels of capital structure leverage is probably:

A) reporting higher earnings per share than other companies in the same industry.

B) meeting its financing needs effectively.

C) relying heavily on debt as a method of financing its asset investment.

D) demonstrating it has a large amount of off-balance-sheet financing.

Diff: Medium

Learning Objective: 5.2; 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 36 / None

37) The item that causes the greatest and most immediate effect on a company's stock price will generally be:

A) cash on hand.

B) the company's solvency.

C) expected future profits.

D) dependent upon the industry in which the company operates.

Diff: Easy

Learning Objective: 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 37 / None

38) Investors who use accounting information to guide trading in foreign securities:

A) should carefully compare expenses, but not revenues to companies in the same industry in the United States.

B) must adjust the numbers of foreign-based companies' financial statements and thoroughly understand the foreign environment.

C) should contact the foreign CEO before any investment in stock occurs.

D) should contact the foreign company's auditors to find out how much dividends will be paid.

Diff: Medium

Learning Objective: 5.4

Bloom's: Knowledge

AACSB/AICPA: Diversity / BB: Global Perspective; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 38 / None

39) The DuPont (ROE) model is:

A) a method of off-balance sheet financing.

B) a framework to analyze ROE changes and identify value drivers.

C) a method of preparing a balance sheet.

D) a solvency calculation.

Diff: Easy

Learning Objective: 5.4

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 39 / None

40) Accounting numbers are useful in that they:

A) are easy to manipulate by management and help predict a company's future earnings and cash flows.

B) allow users to see management's predictions of future profits and help predict a company's future cash flows.

C) help investors and creditors influence and monitor management's business decisions and help predict a company's future earnings and cash flows.

D) help investors and creditors influence, manipulate, and monitor management's business decisions so that future profits are high.

Diff: Medium

Learning Objective: 5.1

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 40 / None

41) The two fundamental ways in which financial accounting numbers are useful are:

A) prediction and influence.

B) control and monitoring.

C) prediction and monitoring.

D) control and prediction.

Diff: Medium

Learning Objective: 5.1

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 41 / None

42) What type of audit report do most companies receive from their auditors?

A) Standard audit reports

B) No report unless the company has problems

C) A GAAP report

D) A comprehensive report

Diff: Easy

Learning Objective: 5.5A

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 42 / None

43) Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 25 $ 50

Accounts receivable 60 70

Inventory 40 30

Land, building, and equipment 225 250

Total Assets $350 $400

Liabilities and Shareholders' Equity

Accounts payable $ 85 $100

Long term note payable 180 200

Common stock 150 150

Retained earnings (65) (50)

Total Liabilities & Shareholders' Equity $350 $400

Income Statement Information

Sales (all sales are on credit) $850

Cost of goods sold 425

Gross profit 425

Expenses 440

Net income $(15)

Calculate Campbell's current and quick ratios as of December 31, 2019 and December 31, 2020 and choose the correct answers below:

A) Campbell's quick and current ratios increased from December 31, 2019 to December 31, 2020.

B) Campbell's quick and current ratios decreased from December 31, 2019 to December 31, 2020.

C) Campbell's quick ratio increased but the current ratio decreased December 31, 2019 to December 31, 2020.

D) Campbell's quick ratio decreased but the current ratio increased from December 31, 2020 to December 31, 2019.

Explanation: Campbell has the following quick and current ratios on December 31:

2020

Current: $125/$85 = 1.47

Quick: $85/$85 = 1.00

2019

Current: $150/$100 = 1.50

Quick: $120/$100 = 1.20

The current ratio declined from 1.50 to 1.47 and the quick ratio declined from 1.20 to 1.00.

Diff: Hard

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 43 / None

44) Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 25 $ 50

Accounts receivable 60 70

Inventory 40 30

Land, building, and equipment 225 250

Total Assets $350 $400

Liabilities and Shareholders' Equity

Accounts payable $ 85 $100

Long term note payable 180 200

Common stock 150 150

Retained earnings (65) (50)

Total Liabilities & Shareholders' Equity $350 $400

Income Statement Information

Sales (all sales are on credit) $850

Cost of goods sold 425

Gross profit 425

Expenses 440

Net income $(15)

Calculate Campbell's inventory turnover ratio (times) and accounts receivable turnover (times) ratio for the year ended 2020. Further, assume that in Campbell's industry, the industry average inventory turnover ratio is 12 and the industry average receivables turnover ratio is 14.

A) Campbell's inventory turnover ratio and accounts receivable turnover ratios are faster than average for Campbell's industry.

B) Campbell's inventory turnover ratio and accounts receivable turnover ratios are slower than average for Campbell's industry.

C) Campbell's inventory turnover ratio is faster but the accounts receivable turnover ratio is slower than average for Campbell's industry.

D) Campbell's inventory turnover ratio is slower and accounts receivable turnover ratio is faster than average for Campbell's industry.

Explanation: Campbell has the following turnover ratios on December 31, 20120:

Inventory turnover (times per year) is 12.14 compared to 12 for the industry and receivables turnover (times per year) is 13.08 as compared to the industry average of 14. So, inventory turnover is faster and accounts receivable turnover is slower.

Diff: Hard

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 44 / None

45) Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 25 $ 50

Accounts receivable 60 70

Inventory 40 30

Land, building, and equipment 225 250

Total Assets $350 $400

Liabilities and Shareholders' Equity

Accounts payable $ 85 $100

Long term note payable 180 200

Common stock 150 150

Retained earnings (65) (50)

Total Liabilities & Shareholders' Equity $350 $400

Income Statement Information

Sales (all sales are on credit) $850

Cost of goods sold 425

Gross profit 425

Expenses 440

Net income $(15)

Calculate Campbell's return on equity and return on assets for the year ended December 31, 2020. Assume that in Campbell's industry, the industry average return on equity is 19% and the average return on assets is 11%.

A) Campbell's return on equity and return on assets are higher than average for Campbell's industry.

B) Campbell's return on equity and return on assets are lower than average for Campbell's industry.

C) Campbell's return on equity is higher but return on assets is lower than average for Campbell's industry.

D) Campbell's return on equity is lower but return on assets is higher than average for Campbell's industry.

Explanation: ROE for 2020 is $25 / (($160 + $165)/2) = 15.4%; ROA for 2020 is $25 / (($400 + $350)/2) = 6.7%. Therefore, ROE and ROA are both lower than the industry average.

Diff: Hard

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 45 / None

46) Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 25 $ 50

Accounts receivable 60 70

Inventory 40 30

Land, building, and equipment 225 250

Total Assets $350 $400

Liabilities and Shareholders' Equity

Accounts payable $ 85 $100

Long term note payable 180 200

Common stock 150 150

Retained earnings (65) (50)

Total Liabilities & Shareholders' Equity $350 $400

Income Statement Information

Sales (all sales are on credit) $850

Cost of goods sold 425

Gross profit 425

Expenses 440

Net income $(15)

Calculate Campbell's capital structure leverage ratio as of December 31, 2020. Assume that in Campbell's industry, the industry average capital structure ratio is 3.75 as of December 31, 2020.

A) Campbell's capital structure leverage ratio is 4.12.

B) Campbell is less leveraged than average for the industry.

C) Campbell is more leveraged than average for the industry.

D) Both A and B are correct.

Explanation: Campbell has the following capital structure leverage ratio on December 31, 2020:

(($400 + $350) / 2) / (($100 + $85) / 2) = 4.05 > 3.75

Diff: Hard

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 46 / None

47) Devin Inc. has an inventory turnover ratio of 35 times per year. Devin's average number of day's inventory is:

A) less than 10.

B) between 10 and 12.

C) more than 12.

D) Unable to be determined based on this limited information.

Explanation: 365 / 35 = 10.4 days

Diff: Medium

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 47 / None

48) Justin Company has total assets, liabilities, and shareholders' equity of $38,000, $17,000, and $21,000, respectively, at the beginning of 2020. At the end of 2020, total assets, liabilities, and shareholders' equity were reported at $32,000, $13,000, and $19,000, respectively. What is Justin's 2020 debt to equity ratio?

A) 0.70

B) 1.17

C) 0.75

D) 1.13

Explanation: Debt/equity ratio = Average total liabilities / Average total shareholders' equity

= (($17,000 + $13,000)/2) / (($21,000 + $19,000)/2) = .75

Diff: Medium

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 48 / None

49) Justin Company has total assets, liabilities, and shareholders' equity of $38,000, $17,000, and $21,000, respectively, at the beginning of 2020. At the end of 2020, total assets, liabilities, and shareholders' equity were reported at $32,000, $13,000, and $19,000, respectively. How much additional debt can Justin Company borrow in 2020 and still have its debt/equity ratio remain less than or equal to 1.00?

A) $10,000

B) $25,000

C) $12,000

D) $24,000

Explanation: Debt/equity ratio = Average total liabilities / Average total shareholders' equity = (($17,000 + $13,000)/2) ÷ (($21,000 + $19,000)/2) = .75

Average total liabilities can increase up to $20,000 and still maintain a debt/equity ratio of 1.0.

In order to make the numerator equal to $20,000, the ending debt could increase up to $23,000:

Average total liabilities = ($17,000 + $23,000)/2 = $20,000

Since total debt at the end of 2020 is $13,000, the increase in debt could be up to $10,000 ($23,000 less $13,000).

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Multiple Choice Question 49 / None

50) Sheena Company has current assets, current liabilities, and long-term liabilities of $20,000, $13,000, and $17,000, respectively. Within these amounts, $2,000 is accounts payable, and $3,500 is accounts receivable. If $2,000 of cash were used to pay off the accounts payable, what effect would this have on the current ratio?

A) The current ratio would increase by approximately 0.10.

B) The current ratio would decrease by approximately 0.10.

C) The current ratio would decrease by approximately 0.03.

D) There would be no change in the current ratio.

Explanation: Current ratio before payment of payables = $20,000/$13,000 = 1.54

Current ratio after payment of payables = ($20,000 - $2,000)/($13,000 - $2,000) = 1.64

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 50 / None

51) Buffalo Company has current assets, current liabilities, and long-term liabilities of $10,500, $3,000, and $4,000, respectively at the end of 2020. How much cash can Buffalo use to acquire equipment and retain a current ratio of at least 2.0?

A) $1,000

B) $4,500

C) $4,000

D) $6,000

Explanation: Current ratio before acquisition of equipment = $10,500/$3,000 = 3.5

Current ratio after acquisition of equipment = ($10,500 - $X)/$3,000 = 2.0

So X = $4,500

If $4,500 of cash is used, then current assets = $6,000 and the current ratio = 2.0.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 51 / None

52) Rudy Company has total assets, liabilities, and shareholders' equity of $28,000, $21,000, and $7,000, respectively. Assume no material change occurred during the year to totals on the balance sheet. What amount of debt must Rudy exchange for new shares of common stock issued in order to decrease capital structure leverage ratio to 2.0?

A) $28,000

B) $7,000

C) $14,000

D) $21,000

Explanation: Current capital structure leverage ratio = Average total assets / Average shareholders' equity = $28,000/$7,000 = 4.00

Rudy' capital structure leverage ratio is currently 4.00. In paying off new debt by issuing new stock, for every dollar added to common stock, Rudy must deduct $1 from its liabilities:

$28,000 / X = 2.0; X = $14,000

If Rudy exchanges $7,000 of stock for debt its total liabilities will be reduced to $14,000 and it will have a capital structure leverage of 2.0 ($28,000 / $14,000).

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 52 / None

53) Samson Company has common stock on its balance sheet of $120,000 and retained earnings of $140,000 at yearend. During the year, 20,000 shares of stock were outstanding. Net income was reported as $80,000. What is the company's earnings per share?

A) $4.00

B) $1.07

C) $0.73

D) $10.25

Explanation: Earnings per share = Net income / Average number of common shares outstanding = $80,000/20,000 = $ 4.00 per common share

Diff: Easy

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 53 / None

54) Grey Company has a current ratio of 1.50 and return on equity of 0.08. Which of the following statements is true?

A) Grey is very profitable, but not very solvent.

B) Grey is very profitable and very solvent.

C) Grey is not very profitable, but very solvent.

D) It is difficult to determine how profitable or solvent Grey is because no comparison numbers (across time or across similar companies) are provided

Diff: Medium

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 54 / None

55) Pasky Company has the following financial data on December 31, 2020 and December 31, 2019.

In terms of the quick and current ratio, which of the following statements is true?

A) Pasky is more solvent at the end of 2020 than at the end of 2019.

B) Pasky is less solvent at the end of 2020 than at the end of 2019.

C) Pasky solvency position has remained unchanged

D) Pasky quick ratio is increasing, but its current ratio is decreasing.

Explanation: (in thousands) 12/31/20 12/31/19

Current ratio = Current assets /

Current liabilities =

= ($35+ $69 + $9 + $87)/$42 = 4.76

= ($71 + $33 + $30 + $105)/$71 = 3.37

Quick ratio = Quick assets /

Current liabilities =

= ($35 + $69 + $9)/$42 = 2.69

= ($71 + $33 + $30)/$71 = 1.89

Pasky is more solvent in 2020. Its current ratio has increased from 3.37 to 4.76, and the quick ratio has increased from 1.89 to 2.69.

Diff: Hard

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 55 / None

56) Walker Company has the following assets on December 31, 2020 and December 31, 2019.

If Walker's quick ratio is 3.00 at the end of 2020, what is the amount of its current liabilities?

A) $325,000

B) $263,000

C) $285,000

D) There is not enough information to answer this question.

Explanation: (in thousands):

Quick ratio = ($451,000 + $302,000 + $36,000) / X = 3.0

X = $263,000

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 56 / None

57) Norton Company has the following assets on December 31, 2020 and December 31, 2019.

If at the end of 2020 Norton's current ratio is 2.20 and its current liabilities are $600,000, what is the amount of its inventory?

A) $197,000

B) $487,000

C) $238,636

D) There is not enough information to answer this question.

Explanation: $600,000 × 2.20 = $1,320,000

$1,320,000 - $370,000 - $333,000 - $130,000 = $487,000

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 57 / None

58) Norton Company has the following assets on December 31, 2020 and December 31, 2019.

If at the end of 2020 Norton's quick ratio is 2.50 and its current liabilities are $500,000, what is the amount of its accounts receivables?

A) $324,000

B) $204,000

C) $634,000

D) There is not enough information to answer this question.

Explanation: $500,000 × 2.50 = $1,250,000

$1,250,000 - $430,000 - $186,000 = $634,000

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 58 / None

59) The following ratios were computed from the financial statement of Darren Technologies:

2021 2020 2019

Return on equity 0.30 0.27 0.23

Return on assets 0.17 0.20 0.22

Capital structure leverage 1.76 1.35 1.05

Profit margin 0.11 0.10 0.09

Asset turnover 1.55 2.00 2.44

Which of the following statements is true?

A) The change in ROE across the three-year period is driven primarily by the change in ROA.

B) The change in ROA during 2021 is due primarily to the change in asset turnover.

C) The change in ROA during 2021 is due primarily to the change in profit margin.

D) The change in profit margin in 2020 was driven primarily by the change in capital structure leverage.

Diff: Medium

Learning Objective: 5.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 59 / None

60) The following ratios were computed from the financial statement of Darren Technologies:

2021 2020 2019

Return on equity 0.30 0.27 0.23

Return on assets 0.17 0.20 0.22

Capital structure leverage 1.76 1.35 1.05

Profit margin 0.11 0.10 0.09

Asset turnover 1.55 2.00 2.44

Which of the following statements is true?

A) ROE is increasing primarily because Darren is becoming more levered.

B) The change in ROA during 2020 is due primarily to the change in capital structure leverage.

C) The change in ROA during 2021 is due primarily to the change in ROE.

D) The change in profit margin in 2020 was driven primarily by the change in asset turnover.

Diff: Medium

Learning Objective: 5.4

Bloom's: Analysis

AACSB/AICPA: Analytic / None

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 60 / None

61) The following ratios were computed from the financial statement of Darren Technologies:

2021 2020 2019

Return on equity 0.30 0.27 0.23

Return on assets 0.17 0.20 0.22

Capital structure leverage 1.76 1.35 1.05

Profit margin 0.11 0.10 0.09

Asset turnover 1.55 2.00 2.44

Which of the following statements is not true?

A) Across the three-year period ROE is moving in the same direction as its level of reliance on debt financing.

B) The change in ROA during 2020 is due primarily to the change in asset turnover.

C) The change in ROA during 2021 is due primarily to the change in profit margin.

D) The change in profit margin across the three-year period indicates better expense control.

Diff: Medium

Learning Objective: 5.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement/ BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 61 / None

62) Assume that the following financial ratios were computed from the 2020 financial statements of Florida Industries:

Return on sales (profit margin) 0.30

Return on assets 0.16

Capital structure leverage 1.875

Asset turnover 1.69

What was the return on equity for Florida in 2020?

A) 4%

B) 30%

C) 51%

D) 11%

Explanation: ROE = ROA × Capital Structure Leverage

ROE = 0.16 × 1.875 = 0.30

Diff: Medium

Learning Objective: 5.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 62 / None

63) Assume that the following financial ratios were computed from the 2020 financial statements of Florida Industries:

Return on sales (profit margin) 0.10

Return on assets 0.17

Capital structure leverage 2.22

Asset turnover 1.70

If Florida holds its other ratios constant in 2021, but increases its capital structure leverage ratio to 3.20, what will be the 2021 return on equity?

A) 15%

B) 51%

C) 86%

D) 54%

Explanation: ROE = ROA × Capital Structure Leverage

ROE = 0.17 × 3.20 = 0.54

Diff: Medium

Learning Objective: 5.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 63 / None

64) Assume that the following financial ratios were computed from the 2020 financial statements of Florida Industries:

Return on sales (profit margin) 0.30

Return on assets 0.51

Capital structure leverage 2.22

Asset turnover 1.69

If Florida holds its other ratios constant in 2020, but increases its profit margin to 38%, what will be the 2020 return on assets?

A) 5%

B) 78%

C) 64%

D) 51%

Explanation: ROA = Profit Margin × Asset Turnover

ROA = .30 × 1.69 = 51%

Diff: Medium

Learning Objective: 5.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 64 / None

Matching Questions

65) Match the correct ratio name from the list below labeled a through g with each formula appearing in items 1 through 5. Ignore taxes.

Ratios

a. Price/earnings ratio

b. Quick ratio

c. Earnings per share

d. Current ratio

e. Return on assets

f. Return on equity

g. Inventory turnover

_______ 1. (Cash + accounts receivable + marketable securities) / current liabilities

_______ 2. Net income / average total assets

_______ 3. Current assets / current liabilities

_______ 4. Net income / average number of shares of common stock

_______ 5. Market price per share / earnings per share

1. b

2. e

3. d

4. c

5. a

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Matching Question 1 / None

66) Match the correct ratio name from the list below labeled a through f with the ratio formulas appearing in items 1 through 4.

Ratios

a. Debt/equity ratio

b. Financial leverage

c. Return on sales

d. Price/earnings ratio

e. Return on equity

f. Dividend yield ratio

_______ 1. Market price per share / earnings per share

_______ 2. Dividends per share / market price per share

_______ 3. Average total liabilities / average total shareholders' equity

_______ 4. Net income / average shareholders' equity

1. d

2. f

3. a

4. e

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Matching Question 2 / None

67) Match the correct ratio category from the list below labeled a through e with each ratio that appears in items 1 through 12.

Ratio Categories

a. Overall performance ratio

b. Leverage ratio

c. Solvency ratio

d. Asset quality ratio

e. Expense control ratio

f. Other ratio

_______ 1. Current ratio _______ 7. Capital structure leverage

_______ 2. Return on equity _______ 8. Inventory turnover

_______ 3. Receivables turnover _______ 9. Return on assets

_______ 4. Return on sales _______ 10. Long-term debt ratio

_______ 5. Dividend yield ratio _______ 11. Price/earnings ratio

_______ 6. Quick ratio _______ 12. Interest coverage

1. c 7. b

2. a 8. d

3. d 9. a

4. e 10. b

5. f 11. f

6. c 12. c

Diff: Easy

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Matching Question 3 / None

68) For each item which appears numbered from 1 through 5 below, select the correct phrase as listed in items a through e.

Factors to Consider

a. Management bias

b. Financial flexibility

c. Liquidity

d. Taking a bath

e. Off-balance-sheet financing

_______ 1. Ability to get cash from sale of assets and issuance of debt or stock

_______ 2. Avoiding reporting future financial responsibilities on the balance sheet

_______ 3. Recognizing losses in years that are already poor

_______ 4. Delaying the sale of inventory until the following year because current profits are satisfactory

_______ 5. Ability to convert existing assets into cash

1. b

2. e

3. d

4. a

5. c

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: None / BB: None; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Matching Question 4 / None

Short Problems

69) Smith Company has total assets, liabilities, and shareholders' equity of $22,000, $7,000, and $15,000, respectively, at the beginning of 2020. At the end of 2020, total assets, liabilities, and shareholders' equity were reported at $20,000, $5,000, and $15,000, respectively.

A. On January 1, 2021 how much additional cash can Smith borrow and still have its capital structure leverage ratio remain less than or equal to 2.00?

B. What information does the capital structure leverage ratio provide?

A. Beginning capital structure leverage ratio: (($22,000 + $20,000) / 2) / (($15,000 + $15,000) / 2) = 1.4; Borrowing $18,000 in cash would increase average total assets to $30,000 (($40,000 + $20,000) / 2), which would increase capital structure leverage to 2.00 ($30,000 / $15,000)

B. The capital structure leverage ratio measures the extent to which a company relies on debt to finance its asset investment on debt.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; FC: Measurement

TOT: 7 min.

Title/Media Ref.: Short Problem 1 / None

70) Monroe Company has current assets, current liabilities, and long-term liabilities of $12,000, $3,000, and $9,000, respectively. Within these amounts, $1,200 is accounts payable, and $1,500 is accounts receivable. What effect will the payment of the accounts payable have on the current ratio? Should Monroe pay the accounts payable on the last day of the year? Explain.

Current ratio after payment of payables = ($12,000 - $1,200)/($3,000 - $1,200) = 6.0

If $1,200 of cash were used, the current ratio would increase to 6.0. It is difficult to determine whether Monroe should make this payment. Yes, it increases its current ratio, but it depends on what else Monroe could do with the cash. It is possible for Monroe to delay this payment at no additional cost depending on the terms with its supplier.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 2 / None

71) Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 70 $ 80

Accounts receivable 40 40

Inventory 40 60

Land, building, and equipment 290 310

Total Assets $440 $490

Liabilities and Shareholders' Equity

Accounts payable $ 95 $245

Common stock 210 210

Retained earnings 135 35

Total Liabilities & Shareholders' Equity $440 $490

Income Statement Information

Sale revenue $900

Cost of goods sold 300

Gross profit $600

Operating expenses 500

Net income $100

Using the current and quick ratios, indicate whether Carter became more or less solvent 2020.

2020

Current: $150/$95 = 1.58

Quick: $110/$95 = 1.16

2019

Current: $180/$245 = .73

Quick: $120/$245 = .49

Carter's current and quick ratios increased significantly during 2020. It became more solvent.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Short Problem 3 / None

72) Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 70 $ 80

Accounts receivable 40 40

Inventory 40 60

Land, building, and equipment 290 310

Total Assets $440 $490

Liabilities and Shareholders' Equity

Accounts payable $ 95 $245

Common stock 210 210

Retained earnings 135 35

Total Liabilities & Shareholders' Equity $440 $490

Income Statement Information

Sale revenue $900

Cost of goods sold 300

Gross profit $600

Operating expenses 500

Net income $100

If the industry in which Carter is a member has an average accounts receivable turnover of 27 times, determine if in 2020, Carter collects its receivables slower or faster than the average firm in its industry.

Carter's receivable turnover ratio is slower than the industry average, indicating a larger than average accounts receivable balance relative to credit sales. On average, Carter's customers pay more slowly than the average firm in its industry. That may be a problem for Carter because it has to finance its receivables for a longer period of time than the average firm in its industry.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 4 / None

73) Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 70 $ 80

Accounts receivable 40 40

Inventory 40 60

Land, building, and equipment 290 310

Total Assets $440 $490

Liabilities and Shareholders' Equity

Accounts payable $ 95 $245

Common stock 210 210

Retained earnings 135 35

Total Liabilities & Shareholders' Equity $440 $490

Income Statement Information

Sale revenue $900

Cost of goods sold 300

Gross profit $600

Operating expenses 500

Net income $100

If the industry in which Carter is a member has an average current ratio of 1.9, determine if, on December 31, 2020, Carter is more or less solvent than the average firm in its industry as measured by its current ratio.

Carter's current ratio of 1.58 is less than the industry current ratio of 1.9. This indicates that Carter is less solvent than the average firm in its industry.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 5 / None

74) Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 70 $ 80

Accounts receivable 40 40

Inventory 40 60

Land, building, and equipment 290 310

Total Assets $440 $490

Liabilities and Shareholders' Equity

Accounts payable $ 95 $245

Common stock 210 210

Retained earnings 135 35

Total Liabilities & Shareholders' Equity $440 $490

Income Statement Information

Sale revenue $900

Cost of goods sold 300

Gross profit $600

Operating expenses 500

Net income $100

If the industry in which Carter is a member has an average return on equity of 22%, determine if in 2020 Carter provides a higher return on its equity capital than the average firm in its industry.

= $100/((($210 + $35) + ($210 + $135))/2) = 34%

Carter's return on equity is greater than the industry average. This implies that Carter provided a higher return on its equity capital than the average firm in its industry.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 6 / None

75) Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 70 $ 80

Accounts receivable 40 40

Inventory 40 60

Land, building, and equipment 290 310

Total Assets $440 $490

Liabilities and Shareholders' Equity

Accounts payable $ 95 $245

Common stock 210 210

Retained earnings 135 35

Total Liabilities & Shareholders' Equity $440 $490

Income Statement Information

Sale revenue $900

Cost of goods sold 300

Gross profit $600

Operating expenses 500

Net income $100

The industry in which Carter is a member has an average return on assets of 18%. Determine if Carter's management provides a higher return on its available assets than the average firm in its industry.

= $100/(($440 + $490)/2) = 21.5%

Carter's return on assets is greater than its industry average. This indicates that Carter is using its asset base to generate larger profits.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 7 / None

76) Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 70 $ 80

Accounts receivable 40 40

Inventory 40 60

Land, building, and equipment 290 310

Total Assets $440 $490

Liabilities and Shareholders' Equity

Accounts payable $ 95 $245

Common stock 210 210

Retained earnings 135 35

Total Liabilities & Shareholders' Equity $440 $490

Income Statement Information

Sale revenue $900

Cost of goods sold 300

Gross profit $600

Operating expenses 500

Net income $100

If the industry in which Carter is a member has an average inventory turnover of 11 times, determine if in 2020, Carter is more or less efficient at converting inventory into sold units than the average firm in its industry. Explain what information this ratio provides you.

= $300/(($40 + $60)/2) = 6 times

Carter's inventory turnover is slower than the industry average, revealing a larger average inventory relative to cost of goods sold. Carter is less efficient than the average firm in its industry in selling its inventory. During 2020, Carter sold the entire cost of its inventory only six times compared to other companies in this industry which sold their inventory an average of 11 times during the year.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Short Problem 8 / None

77) Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2020 and 2019.

Balance Sheet Information

Assets 2020 2019

Cash $ 70 $ 80

Accounts receivable 40 40

Inventory 40 60

Land, building, and equipment 290 310

Total Assets $440 $490

Liabilities and Shareholders' Equity

Accounts payable $ 95 $245

Common stock 210 210

Retained earnings 135 35

Total Liabilities & Shareholders' Equity $440 $490

Income Statement Information

Sale revenue $900

Cost of goods sold 300

Gross profit $600

Operating expenses 500

Net income $100

The industry in which Carter is a member has an average capital structure leverage ratio of 1.83. Determine if, as measured by this ratio, on December 31, 2020 Carter is more or less reliant on debt financing than the average firm in its industry. Explain.

Carter's capital structure leverage ratio is much less than the industry average. Therefore, Carter has not issued as much debt, relative to its total assets, as that of the average firm in its industry. Carter is less reliant on debt financing.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Short Problem 9 / None

78) Washington Company has current assets, current liabilities, and long-term liabilities of $6,000, $2,000, and $5,000, respectively at the end of 2020. How much cash can Washington use to acquire equipment and retain a current ratio of at least 3.0?

Current ratio after acquisition of equipment = ($6,000 - $X)/$2,000 = 3.0

So X = $0

If Washington uses cash to buy additional equipment, its current ratio will drop below 3.0.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 10 / None

79) Madison Company has current assets, current liabilities, and long-term liabilities of $8,000, $4,000, and $6,000, respectively. Within these amounts, inventory was $1,000, receivables were $3,000, cash was $4,000, and payables were $1,000. Calculate Madison's quick ratio. What information does this provide?

Madison has 1.75 times as much quick assets as current liabilities. Its ability to pay its current debts is clearly evident.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / PC: Communication; BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 11 / None

80) Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2020 and 2019.

If the industry in which Tyler is a member has an inventory turnover of 9 times per year, determine if Tyler turned its inventory into sales more quickly or more slowly than the average firm in its industry during 2020.

= $600/(($40 + $80)/2) = 10 times

Tyler's turns its inventory into sales more quickly than the industry average, revealing a smaller average inventory relative to cost of goods sold. During 2020, Tyler sold the entire cost of its inventory 10 times compared to other companies in this industry which sold their total inventory an average of 9 times during the year.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 12 / None

81) Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2020 and 2019.

The industry in which Tyler is a member has an average accounts receivable turnover of 10 times per year. How does Tyler's 2020 accounts receivable turnover compare? Comment on what information is provided with this calculation and how credit managers might use it to make decisions. Assume all sales were credit sales.

Tyler's receivables turnover ratio is higher than the industry average, indicating a smaller than average accounts receivable balance relative to credit sales. This indicates that Tyler collects cash from its customers more quickly than the average firm in its industry. Tyler collects the entire dollar amount of its receivables approximate 12 times per year compared to the industry average of 10 times per year. Or, on average, Tyler collects a typical receivable in 30 days (365/12.14), compared to 36.5 days (365/10) in the industry.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 5 min.

Title/Media Ref.: Short Problem 13 / None

82) Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2020 and 2019.

If the industry in which Tyler is a member has an average return on assets of 11%, determine if in 2020, Tyler generated a higher or lower return on its asset investment.

= $20/(($420 + $480)/2) = 4.4%

Tyler's return on assets is substantially less than the industry average of 11%. Therefore, Tyler generated a lower return on its asset investment.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 14 / None

83) Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2020 and 2019.

The industry in which Tyler is a member has an average return on equity of 10%. For 2020, determine how Tyler compares.

= $20/(($415 + $395)/2) = 4.9%

Tyler's return on equity is substantially less than the industry average of 10%. This implies that Tyler is providing a lower return on its equity capital.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 15 / None

84) Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2020 and 2019.

The industry in which Tyler operates has an average current ratio of 2.1 on December 31, 2020. Comment on Tyler's solvency, as measured by the current ratio, compared to the industry average. Discuss.

Tyler's current ratio on December 31, 2020 is 38, which is much higher than industry average. The current ratio indicates that Tyler is much more solvent than the average firm in its industry on December 31, 2020. However, high current ratios are not always a good indication of solvency. Accounts receivable and/or inventory may be slow moving and also a large cash balance is a large asset that is providing no return.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 16 / None

85) Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2020 and 2019.

The industry in which Tyler is a member has an average debt/equity ratio of 0.98. Determine if, as measured by Tyler's debt/equity ratio on December 31, 2020, Tyler is relying on debt as heavily as that of the average firm in its industry.

= (($5+ $85)/2)/((($260+ $155) + ($260 + $135))/2) = .111 = 11.1%

Since Tyler's debt/equity ratio is much less than the industry average, this implies that Tyler has a much smaller percentage of debt compared to its shareholders' equity, meaning that it is relying much less on debt financing. Tyler is not utilizing the power of leverage very heavily, but it also avoiding the risk associated with higher leverage levels.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 17 / None

86) Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2020 and 2019.

In terms of the current and quick ratios, indicate whether Tyler's became more or less solvent during 2020.

2020 = ($90 + $60 + $40)/$5 = 38.00

2019 = ($50 + $80 + $80)/$85 = 2.47

Quick ratio = Quick assets / Current liabilities =

2020 = ($90 + $60)/$5 = 30.00

2019 = ($50 + $80)/$85 = 1.53

Tyler's current and quick ratio increased significantly during 2020. However, upon closer inspection, Tyler's ratios increased because its cash position increased substantially and its accounts payable was nearly eliminated, raising questions about what Tyler intends to do with the extra cash and why Tyler is paying off its suppliers so quickly.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; FC: Measurement, Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 18 / None

87) Monroe Company has total assets, liabilities, and shareholders' equity of $27,000, $20,000, and $7,000, respectively. Assume no material change occurred during the year to totals on the balance sheet. What amount of long-term debt must Monroe retire by issuing new shares of common stock issued in order to decrease its debt/equity ratio to 1.0?

= $20,000/$7,000 = 2.86

Monroe's debt/equity ratio is currently 2.86. In paying off new debt by issuing new stock, for every dollar added to common stock, Monroe must deduct $1 from its liabilities:

= ($20,000 - X)/($7,000 + X) = 1.00 Solve for X = $6,500

Monroe can exchange stock for $6,500 of debt to get a debt/equity ratio of 1.0.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 19 / None

88) Harrison Company has common stock of $50,000 and retained earnings of $40,000 at yearend. During the year, 10,000 shares of stock were outstanding. Net income was reported as $6,000.

A. Calculate earnings per share.

B. How does earnings per share differ from most of the other ratios with respect to financial statements?

A. Earnings per share = Net income / Average number of common shares outstanding

= $6,000/10,000 = $ 0.60 per common share

B. Earnings per share must be reported on the face of the income statement whereas the other ratios are used primarily for analysis purposes and are never reported on the financial statements. It and the price/earnings ratio are the only ratios that considers the number of common shares outstanding.

Diff: Medium

Learning Objective: 5.3

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 20 / None

89) Taylor Company has the following financial data at the end of 2020 and 2019.

A. In terms of the quick and current ratio, has Taylor become more or less solvent?

B. If you were a potential short-term creditor to Taylor, would you be more willing to extend credit at the end of 2020 or 2019? Explain.

A. (in thousands) 12/31/20 12/31/19

Current ratio = Current assets / Current liabilities =

= ($15 + $23 + $3 + $16)/$18 = 3.17

= ($27 + $11 + $10 + $35)/$27 = 3.07

Quick ratio = Quick assets / Current liabilities =

= ($15 + $23 + $3)/$18 = 2. 28

= ($27 + $11 + $10)/$27 = 1.78

A. Taylor has become more solvent. Its current ratio increased from 3.07 to 3.17, and the quick ratio has increased from 1.78 to 2.28.

B. A short-term creditor would likely be more willing to extend credit to Taylor on 12/31/20 than on 12/31/19 as long as the large dollar amount in accounts receivable is expected to be collected in the near future. The reduction in current liabilities would also be reassuring.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 6 min.

Title/Media Ref.: Short Problem 21 / None

Short Essay Questions

90) Distinguish between backward-looking and forward-looking as it pertains to financial statements.

Diff: Medium

Learning Objective: 5.1

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 1 / None

91) What role do investment services, such as Moody's and Standard & Poor's, play in the assessment of a business environment?

Diff: Medium

Learning Objective: 5.1; 5.3; 5.4

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 2 / None

92) Comment on the following news headline: "Van Buren, Inc. Takes a Bath in Current Year."

Diff: Medium

Learning Objective: 5.5A

Bloom's: Synthesis

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 3 / None

93) What must an analyst learn first before analyzing a set of financial statements?

Diff: Easy

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: Industry Perspective; PC: Communication; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 4 / None

94) Identify two forms of analyzing financial statements at a particular point in time. Which of these forms is subject to great variation among different analysts?

Diff: Medium

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: None; FC: Measurement, Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 5 / None

95) Why are not all companies audited by certified public accountants?

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 6 / None

96) Briefly explain how management may influence the quality of earnings of a company.

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 7 / None

97) How might a company overstate performance? Why might this occur?

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 8 / None

98) How does off-balance-sheet financing make a company appear less risky?

Diff: Medium

Learning Objective: 5.5A

Bloom's: Synthesis

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 9 / None

99) Explain the concept of leverage.

Diff: Easy

Learning Objective: 5.2

Bloom's: Synthesis

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 10 / None

100) In what ways might an investor use accounting information provided by a foreign company differently from information provided by a domestic corporation?

Diff: Medium

Learning Objective: 5.4

Bloom's: Synthesis

AACSB/AICPA: Communication; Diversity / BB: Global Perspective; PC: Communication; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 11 / None

101) How does operating performance differ from financial flexibility?

Diff: Medium

Learning Objective: 5.5A

Bloom's: Comprehension

AACSB/AICPA: Communication / BB: None; PC: Communication; FC: Measurement, Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 12 / None

Data Analytic Questions

Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.

Key ratios for automobile manufacturer Ford Motor Company for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.

Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn = Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income

102) The change in ROE from 2018 to 2019 was driven by:

A) the change in leverage.

B) the change in return on assets.

C) the change in the current ratio.

D) the change in Ford's ability to control operating expenses.

Diff: Hard

Learning Objective: 5.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 1 / None

103) Least important to the change in asset turnover was:

A) the change in accounts receivable turnover.

B) the change in inventory turnover.

C) the change in accounts payable turnover.

D) the change in long-term asset turnover.

Diff: Hard

Learning Objective: 5.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 2 / None

104) Choose the best answer.

A) Ford's ability to control its total expenses improved over the 3-year period.

B) The productivity of Ford's assets increased over the 3-year period.

C) Ford became more reliant on long-term debt financing over the 3-year period.

D) Ford appeared to book a fairly large, unusual loss during 2019.

Diff: Hard

Learning Objective: 5.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 3 / None

105) Which of the following statements is false?

A) Ford is relying more heavily on debt financing in 2019 than in 2018.

B) The combination of the trends from 2018 to 2019 in Ford's cash collection from customers and its payments to suppliers is hurting its operating cash flows.

C) Ford is better able to cover its debt payments with operating funds in 2019 compared to 2018.

D) Asset turnover has slowed down across the 3-year period.

Diff: Hard

Learning Objective: 5.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 4 / None

Video Questions

106) Which of the following statements is true given that Home Depot reported positive net income for 2014?

A) Home Depot's return on assets must have increased from 2013.

B) Home Depot's shareholders' equity balance must have increased from the beginning to the end of 2014.

C) Home Depot's expenses must have been less than its revenues.

D) Home Depot's capital structure must have changed in favor of equity financing.

Diff: Medium

Learning Objective: 5.2

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 1 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

107) Which of the following statements bests describes the interpretation of Home Depot's ROA?

A) ROA measures how well Home Depot controlled the cost of its financing choices.

B) ROA measures the efficiency with which Home Depot's management managed its asset investments.

C) ROA measures the efficiency with which Home Depot's management managed the investment in the company made by the owners.

D) ROA measures how well Home Depot's management managed its capital structure.

Diff: Medium

Learning Objective: 5.2

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 2 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

108) Which of the following statements is not true about Home Depot's capital structure?

A) Home Depot relied more heavily on debt as a source of financing at the end of the period compared to the beginning of the period.

B) The fact that Home Depot repurchased a large amount of its outstanding common stock during the year significantly influenced its capital structure.

C) The fact that Home Depot purchased over $1 billion in property and equipment during 2014 must mean that Home Depot had to significantly increase its borrowing during the year.

D) Home Depot's capital structure refers to the extent it relies on equity vs debt to finance its asset investments.

Diff: Medium

Learning Objective: 5.2

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 3 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

109) Which of the following statements is not true about Home Depot's statement of cash flows?

A) Proceeds from the sale of common stock can be found in the financing section of the statement of cash flows.

B) Dividends paid to the shareholders can be found in the financing section of the statement of cash flows.

C) Net income is reported in the operating section of the statement of cash flows even though the net income number itself does not represent the amount of cash increase due to the company's operating activities.

D) The repurchase of Home Depot's outstanding stock from the shareholders can be found in the investing section of the statement of cash flows.

Diff: Medium

Learning Objective: 5.2

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 4 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

110) Stock-based compensation expense appears in the operating section of Home Depot's statement of cash flows as an add-back to net income because:

A) stock-based compensation expense is a non-cash expense that decreased net income on the income statement but did not reduce the cash produced by the company's operating activities.

B) stock-based compensation expense indicates how much cash Home Depot paid during the year to repurchase outstanding stock from the shareholders.

C) the cost of stock-based compensation did not appear on the income statement, so it adjusts net income on the statement of cash flows.

D) stock-based compensation is often large and difficult to understand, so it is disclosed on both the income statement and the statement of cash flows as well as the statement of shareholders' equity.

Diff: Medium

Learning Objective: 5.2

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 5 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

111) The change in Home Depot's inventory is listed in the operating section of Home Depot's statement of cash flows as a negative $455 million. This means that:

A) Home Depot's inventory balance increased during the year.

B) Home Depot's inventory balance decreased during the year.

C) the change in Home Depot's inventory balance increased net income during the year.

D) the change in Home Depot's inventory balance is actually the change in the company's cash flow.

Diff: Medium

Learning Objective: 5.2

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 6 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

112) ROE is:

A) a measure of how efficiently management managed Home Depot's assets.

B) a measure of the size of the investment made in Home Depot by the shareholders.

C) a measure of the cash received by the shareholders on their investment in Home Depot.

D) a measure of the return to the shareholders on their investment in Home Depot.

Diff: Medium

Learning Objective: 5.2

Bloom's: Knowledge

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 7 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

113) Which of the following was not a consequence of the fact that during 2014 Home Depot repurchased over $8 billion of its outstanding stock from its shareholders?

A) Home Depot's capital structure was changed in favor of debt over equity.

B) Home Depot's net cash from operating activities was significantly reduced.

C) Home Depot's total assets decreased from the beginning to the end of the year.

D) Home Depot's ROA and ROE were pushed upwards.

Diff: Medium

Learning Objective: 5.2

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 8 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

114) During 2014 Home Depot's goodwill account increased from $1.1 to almost $1.3 billion. What must have happened during the year?

A) Home Depot's reputation with its customers must have improved.

B) Home Depot must have reported very high profits.

C) Home Depot must have invested heavily in property and equipment.

D) Home Depot must have acquired some other companies during the year.

Diff: Medium

Learning Objective: 5.2

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 9 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

115) Home Depots' cash balance decreased during the year by over $500 million. What can reasonably be concluded?

A) Home Depot spent too much money repurchasing its outstanding common stock.

B) Home Depot invested too much cash in property and equipment and other companies.

C) Home Depot's net operating cash inflows were less than that addition of its cash outflows from investing and financing activities.

D) While Home Depot may have been profitable, those profits were overstated because it actually lost money during the year.

Diff: Medium

Learning Objective: 5.2

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: How to read and analyze financial statements - 5 questions - Home Depot Video: Question 10 / Video: How to read and analyze financial statement - 5 questions - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

116) If a company's shareholders have invested $200,000 in the company, and the company borrows another $300,000, the company's capital structure:

A) is more than its total assets.

B) is unlevered.

C) is 60% debt.

D) is less than its total assets.

Diff: Medium

Learning Objective: 5.2

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Key areas of business performance Video: Question 1 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

117) In financial jargon the term "leverage" means that:

A) a company's assets are invested in relatively risky investments.

B) a company's retained earnings is a major part of its capital structure.

C) a company relies on debt financing.

D) a company's operating activities are generating revenues more quickly than they are incurring expenses.

Diff: Easy

Learning Objective: 5.2

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Key areas of business performance Video: Question 2 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

118) Which of the following statements does not describe one of the consequences of high levels of leverage?

A) To be safe, a highly leveraged company must make sure that it has (or can create) enough cash to meet the required payments when due.

B) When debt is used to finance profitable projects, large returns can be generated by the shareholders on their investments in the company.

C) High levels of leverage often place large obligations on a company's future cash flows.

D) High levels of leverage often lower the risk borne by a company's shareholders.

Diff: Medium

Learning Objective: 5.2

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Key areas of business performance Video: Question 3 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

119) Solvency is defined as:

A) the ability to generate profits in the current operating period.

B) the ability to meet debt obligations as they come due.

C) the ability to convert assets into cash.

D) the ability to borrow when needed.

Diff: Easy

Learning Objective: 5.2

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Key areas of business performance Video: Question 4 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

120) Which of the following can often be a consequence of high levels of solvency?

A) Highly liquid assets that are not providing high rates of return.

B) High levels of expenses.

C) High levels of revenues.

D) Too much goodwill on the balance sheet.

Diff: Medium

Learning Objective: 5.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / None

Title/Media Ref.: Key areas of business performance Video: Question 5 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

121) Asset turnover refers to:

A) the level of liquidity of a company's assets.

B) the ability of the assets to generate revenues.

C) how quickly a company's assets are being depreciated.

D) the extent to which the assets are financed with debt instead of equity.

Diff: Easy

Learning Objective: 5.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / None

Title/Media Ref.: Key areas of business performance Video: Question 6 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

122) Which of the following statements is false?

A) A large balance in assets normally means a well-run company.

B) Asset quality is often gaged by how quickly the assets turnover.

C) If a company had a large amount of slow moving inventory, that would slow down its asset turnover.

D) Effective asset investments tend to generate revenues more quickly than do ineffective assets.

Diff: Medium

Learning Objective: 5.2

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Key areas of business performance Video: Question 7 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

123) Which of the following statements is false?

A) Assets that turnover quickly virtually guarantee high profits.

B) It is normally a good sign for a company if the ratio of its cost of goods sold divided by it revenues decreases.

C) Expense control is just as important as speedy asset turnover to profitability.

D) High dividend payments do not directly reduce profits.

Diff: Medium

Learning Objective: 5.2

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Key areas of business performance Video: Question 8 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

124) Which of the following lists include the four key areas of performance established in the video?

A) Dividend policy, revenues, expenses, and capital structure

B) Leverage, risk, asset size, revenues, and ROE

C) ROA, ROE, profits, dividends, and leverage

D) Leverage, solvency, asset turnover, and expense control

Diff: Medium

Learning Objective: 5.2

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Key areas of business performance Video: Question 9 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

125) If the four key areas of performance established in the video are well managed, which one of the following would not necessarily be expected?

A) Relatively high levels of ROA and ROE

B) The ability to meet debt obligations as they come due

C) High levels of revenue relative to the company's investment in assets.

D) High levels of dividends

Diff: Medium

Learning Objective: 5.2

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Key areas of business performance Video: Question 10 / Video: Key areas of business performance. www.wiley.com/go/pratt/financialaccounting11e

126) Which one of the key areas listed below directly addresses the nature of a company's capital structure?

A) Leverage

B) Solvency

C) Asset turnover

D) Expense control

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 1 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

127) Which one of the key areas listed below directly addresses a company's profitability?

A) Leverage

B) Solvency

C) Asset turnover

D) Expense control

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 2 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

128) Which ratio below indicates the extent to which a company relies on debt financing?

A) Profit margin

B) Current ratio

C) Interest coverage

D) Capital structure leverage

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 3 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

129) Which ratio below indicates the extent to which a company's operations can generate funds necessary to meet debt payments as they come due?

A) Current ratio

B) Interest coverage

C) Asset turnover

D) Cost of goods sold as a percent of sales

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 4 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

130) Which ratio below indicates the extent to which a company is controlling its expenses?

A) Profit margin

B) Accounts payable turnover

C) Quick ratio

D) Capital structure leverage

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 5 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

131) Which ratio below would be particularly important for a retailer who wishes to sell its goods as fast as possible?

A) Current ratio

B) Accounts payable turnover

C) Inventory turnover

D) Operating expenses as a percent of sales

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 6 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

132) Which ratio below would be particularly important for a retailer who wishes to keep track of its margins?

A) Interest coverage

B) Inventory turnover

C) Cost of goods sold as a percent sales

D) Current ratio

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 7 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

133) Which ratio below focuses on the timing of collections from customers?

A) Inventory turnover

B) Profit margin

C) Accounts payable turnover

D) Accounts receivable turnover

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 8 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

134) Which ratio below provides an overall measure of the quality with which a company is managing its assets?

A) Return on assets

B) Asset turnover

C) Profit margin

D) Return on equity

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 9 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

135) Which ratio below provides an overall measure of the quality of how a company manages both its assets and how they are financed?

A) Return on assets

B) Asset turnover

C) Profit margin

D) Return on equity

Diff: Medium

Learning Objective: 5.3

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Financial ratio analysis - Home Depot Video: Question 10 / Video: Financial ratio analysis - Home Depot. www.wiley.com/go/pratt/financialaccounting11e

136) Which of the following statements about financial ratio comparisons is not true?

A) Ratio analysis involves comparisons for a single company across time.

B) Ratio analysis involves comparisons among similar companies.

C) Ratio analysis involves comparing certain financial numbers to other financial statement numbers.

D) Ratio analysis involves comparing company ratios to macro-economic indicators.

Diff: Easy

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 1 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

137) Based on the video which list of four key areas below was emphasized when trying to understand a company's overall performance?

A) Leverage, solvency, asset turnover, expense control

B) Revenue generation, dividend policy, asset liquidity, profitability

C) Leverage, profitability, dividend policy, asset liquidity

D) Asset turnover, revenue generation, expense control, dividend policy

Diff: Medium

Learning Objective: 5.3

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 2 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

138) The capital structure leverage ratio for both Home Depot and Lowe's increased during 2014. What does this mean about both companies?

A) Both companies are more solvent.

B) Both companies are less profitable.

C) Both companies increased their reliance on debt to finance their assets.

D) Both companies experienced asset growth.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 3 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

139) The 2014 interest coverage ratios for Home Depot and Lowe's were 12.91 and 8.72, respectively. This means that:

A) Home Depot has more liquid assets than Lowe's.

B) Home Depot pays its interest expense faster than Lowe's.

C) Home Depot has less debt than Lowe's.

D) Home Depot generates more funds annually through its operating activities relative to its interest costs than Lowe's.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 4 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

140) The 2014 accounts payable turnover for Home Depot and Lowe's (measured in days) was 40 and 50, respectively. This means that:

A) Home Depot is less profitable than Lowe's.

B) Home Depot has more debt in its capital structure than Lowe's.

C) Home Depot pays its inventory suppliers more quickly than Lowe's.

D) Home Depot is more solvent than Lowe's.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 5 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

141) Total asset turnover for Lowe's during 2014 (measured in times) was 1.63. This means that:

A) the sales revenue dollar amount for 2014 was 1.63 times larger than the average assets held by the company during the year.

B) the dollar value of the average assets held by the company during the year was 1.63 times total liabilities.

C) the sales revenue dollar amount for 2014 was 1.63 times larger than the balance of the company's assets at the end of the year.

D) the average total asset dollar value during 2014 was 1.63 times larger than the total expenses recognized during the year.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 6 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

142) During 2014 both inventory and non-current asset turnover was faster for Home Depot than for Lowe's. This means that:

A) Home Depot was more profitable than Lowe's.

B) the revenues Home Depot generated on its investments in both inventory and facilities were higher than the revenues generated by Lowe's on its investments in inventory and facilities.

C) Home Depot reported a higher ROE than Lowe's.

D) Home Depot is more solvent than Lowe's.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 7 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

143) If Home Depot reduced its prices on all its merchandise, what do you think would happen to its inventory turnover ratio and the ratio of cost of goods sold (COGS) / sales?

A) Inventory turnover would likely speed up; and COGS/ sales would likely decrease.

B) Inventory turnover would likely speed up; and COGS/sales would likely increase.

C) Inventory turnover would likely slow down; and COGS/sales would likely decrease.

D) Inventory turnover would likely slow down; and COGS/sales would likely increase.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 8 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

144) During 2014 Home Depot reported a profit margin of .07, while Lowe's reported a profit margin of .04. This means that:

A) Home Depot's revenues were larger than Lowe's.

B) Home Depot carries more liquid assets than Lowe's.

C) Home Depot has a higher ROA than Lowe's.

D) Home Depot controls its expenses, relative to its revenues, better than Lowe's.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 9 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

145) The ratio analysis comparing Home Depot to Lowe's indicated that Home Depot carried a little more debt but was quite a bit more solvent. It also indicated that Home Depot turned over its assets more quickly and controlled its expenses more effectively. Which of the following would not be suggested by these differences?

A) Home Depot would report a higher ROA.

B) Home Depot would report a higher ROE.

C) Home Depot is currently enjoying higher financial performance and better financial condition.

D) Home Depot issues more dividends than Lowe's.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using financial ratios to compare similar companies - Home Depot & Lowe's Video: Question 10 / Video: Using financial ratios to compare similar companies — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

146) Which of the following statements is true?

A) A company that increases its profit margin will increase its ROE.

B) A company that increases its ROA will increase its ROE.

C) A company that increases both its ROA and capital structure leverage will increase its ROE.

D) A company that reduces its reliance on debt will increase its ROE.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 1 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

147) Which of the following statements in not true?

A) Increasing the quick ratio normally leads to faster asset turnover.

B) When a company increases its reliance on debt vs equity financing, if it does so without reducing ROA, ROE will increase.

C) Other things being equal, increasing inventory turnover will increase asset turnover.

D) If profit margin remains constant, increasing asset turnover will increase ROA.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 2 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

148) Which of the following ratios would be considered a direct driver of profit margin?

A) ROA

B) Current ratio

C) Short/long-term debt ratio

D) Cost of goods sold / sales

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 3 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

149) Which of the following ratios would be considered a direct driver of ROA?

A) ROE

B) Capital structure leverage

C) Profit margin

D) Interest coverage

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 4 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

150) Which of the following is not true about holding highly liquid assets?

A) It can slow down asset turnover.

B) It will increase the quick ratio.

C) It can reduce the risks associated with high levels of leverage.

D) It normally leads to higher profit margins.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 5 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

151) ROE is equal to:

A) profit margin × asset turnover.

B) ROA × capital structure leverage.

C) profit margin × capital structure leverage.

D) ROA × asset turnover.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 6 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

152) ROA is equal to:

A) profit margin × ROE.

B) profit margin × capital structure leverage.

C) asset turnover × profit margin.

D) solvency × capital structure leverage.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 7 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

153) If a company increases its inventory turnover, what can reasonably be concluded?

A) Its profit margin probably increased.

B) It is more solvent.

C) ROA increased if profit margin was not reduced.

D) ROA was definitely increased.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 8 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

154) If a company buys back treasury stock from its shareholders, what can reasonably be concluded?

A) ROE increased if ROA was not reduced.

B) The company's solvency increased.

C) Profit margin was increased.

D) Capital structure leverage was reduced.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 9 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

155) If a company increases both its profit margin and asset turnover, while holding its capital structure leverage constant, what can reasonably be concluded?

A) The company is more solvent.

B) The company is less solvent.

C) The company has a higher portion of long-term debt in its capital structure.

D) The company's ROE increased.

Diff: Medium

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Financial ratio analysis using the ROE model Video: Question 10 / Video: Financial ratio analysis using the ROE model. www.wiley.com/go/pratt/financialaccounting11e

156) Operating expenses as a percent of operating revenue for Home Depot was lower during 2013 and 2014 than for Lowe's. What can reasonably be concluded?

A) Lowe's has slower asset turnover.

B) Lowe's is less solvent.

C) Lowe's has less debt.

D) Lowe's probably has a lower profit margin.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 1 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

157) Home Depot reported consistently higher current and quick ratios than Lowe's in both 2013 and 2014. What can reasonably be concluded?

A) Home Depot has a greater dollar amount of liquid assets, compared to its current liabilities.

B) Home Depot has higher levels of long-term debt.

C) Home Depot is more profitable.

D) Home Depot has a higher ROA.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 2 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

158) Home Depot has a higher profit margin and a faster asset turnover compared to Lowe's. What can reasonably be concluded?

A) Home Depot has higher interest coverage.

B) Home Depot has a higher ROE.

C) Home Depot is more solvent.

D) Home Depot has a higher ROA.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 3 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

159) Home Depot pays its inventory suppliers more quickly (every 40 days) than Lowe's (every 50 days). What can reasonably be concluded?

A) Home Depot is more profitable.

B) Home Depot relies more heavily on debt.

C) Home Depot has faster asset turnover.

D) Home Depot's suppliers are likely happier than Lowes' suppliers.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 4 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

160) The ratio of cost of goods sold / operating revenue for Home Depot is roughly equal to that of Lowe's. However, Home Depot has faster inventory turnover. Assuming that other factors are constant, what can reasonably be concluded?

A) Home Depot has a higher profit margin.

B) Home Depot has a slower asset turnover.

C) Home Depot has a higher ROA.

D) Home Depot has a higher ROE.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 5 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

161) During 2014 Lowe's increased its reliance on short-term debt, while Home Depot decreased it. What can reasonably be concluded?

A) Lowe's has more debt in its capital structure.

B) Lowe's has less debt in its capital structure.

C) Lowe's is less solvent.

D) On average, the debt obligations facing Lowe's will come due more quickly than those facing Home Depot.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 6 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

162) Return on assets increased for both Home Depot and Lowe's during 2014. What can reasonably be concluded?

A) Both profit and asset turnover must have increased for both companies during the year.

B) Capital structure leverage must have increased for both companies during the year.

C) Return on equity must have increased for both companies during the year.

D) Profit margin × asset turnover must have increased for both companies during the year.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 7 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

163) On the basis of all four solvency ratios, Home Depot appears to be more solvent than Lowe's. What can reasonably be concluded?

A) Home Depot has more debt than Lowe's.

B) Home Depot has a higher ROA than Lowe's.

C) Home Depot is better able than Lowe's to meet its debt obligations when they come due.

D) Home Depot has faster asset turnover than Lowe's.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 8 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

164) Home Depot's profit margin increased during 2014. Which of the following would be a likely reason?

A) Operating expenses as a percent of operating revenues decreased.

B) Inventory turnover sped up.

C) Current ratio increased.

D) Interest coverage increased.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Analytic / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 9 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

165) During 2014 Home Depot enjoyed a higher ROE than Lowe's. Which of the following would be the most likely reason?

A) Home Depot's long-term debt / current liability ratio increased, which increased capital structure leverage. Lowe's long-term debt / current liability ratio decreased.

B) Home Depot's asset turnover sped up during the year faster than did Lowes' asset turnover.

C) Home Depot's ROA and capital structure leverage were both higher than the ROA and capital structure leverage of Lowe's.

D) Home Depot had higher levels of both solvency and ROA than Lowe's.

Diff: Hard

Learning Objective: 5.3

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Using the ROE model - Home Depot & Lowe's Video: Question 10 / Video: Using the ROE model — Home Depot & Lowe's. www.wiley.com/go/pratt/financialaccounting11e

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