Multiple-Choice Quiz

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Chapter 6: Financial Statement Analysis

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1. Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent.

1.60

2.05

2.50

4.00

2. Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales?

$3,750,000

$480,000

$300,000

$1,500,000

3. Which of the following would NOT improve the current ratio?

Borrow short term to finance additional fixed assets.

Issue long-term debt to buy inventory.

Sell common stock to reduce current liabilities.

Sell fixed assets to reduce accounts payable.

4. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if

cost of goods sold increased relative to sales.

sales increased relative to expenses.

the U.S. Congress increased the tax rate.

dividends were decreased.

5. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company

will not experience any difficulty with its creditors.

has less liquidity than other firms in the industry.

will be viewed as having high creditworthiness.

has greater than average financial risk when compared to other firms in its industry.

6. Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.)

$26.1 million

$23.7 million

$7.4 million

$18.7 million

7. A company can improve (lower) its debt-to-total assets ratio by doing which of the following?

Borrow more.

Shift short-term to long-term debt.

Shift long-term to short-term debt.

Sell common stock.

8. Which of the following statements (in general) is correct?

A low receivables turnover is desirable.

The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

An increase in net profit margin with no change in sales or assets means a poor ROI.

The higher the tax rate for a firm, the lower the interest coverage ratio.

9. Retained earnings for the "base year" equals 100.0 percent. You must be looking at

a common-size balance sheet.

a common-size income statement.

an indexed balance sheet.

an indexed income statement.

10. Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?

.667

.333

11. A firm's operating cycle is equal to its inventory turnover in days (ITD)

plus its receivable turnover in days (RTD).

minus its RTD.

plus its RTD minus its payable turnover in days (PTD).

minus its RTD minus its PTD.

12. When doing an "index analysis," we should expect that changes in a number of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company.

net sales

cost of goods sold

earnings before interest and taxes (EBIT)

earnings before taxes (EBT)

The following item is NEW to the 13th edition.

13. The process of convergence of accounting standards around the world aims to .

narrow or remove national accounting differences

move non-US accounting standards towards US Generally Accepted Accounting Principles (US GAAP)

create one set of rules-based accounting standards for all countries

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