Chapter 03 - Working With Financial Statements

Chapter 03 - Working with Financial Statements
Chapter 03
Working with Financial Statements

Multiple Choice Questions

1. Activities of a firm which require the spening of cash are known as!
A. sources of cash.
". uses of cash.
C. cash collections.
#. cash receipts.
$. cash on han.

%. &he sources an uses of cash over a state perio of time are reflecte on the!
A. income statement.
". 'alance sheet.
C. ta( reconciliation statement.
#. statement of cash flows.
$. statement of operating position.

3. A common-si)e income statement is an accounting statement that e(presses all of a firm*s
e(penses as percentage of!
A. total assets.
". total equit+.
C. net income.
#. ta(a'le income.
$. sales.

,. Which one of the following stanari)es items on the income statement an 'alance sheet
relative to their values as of a common point in time-
A. statement of stanari)ation
". statement of cash flows
C. common-'ase +ear statement
#. common-si)e statement
$. 'ase reconciliation statement

3-1
.. /elationships etermine from a firm*s financial information an use for comparison
purposes are known as!
A. financial ratios.
". ientities.
C. imensional anal+sis.
#. scenario anal+sis.
$. solvenc+ anal+sis.

0. &he formula which 'reaks own the return on equit+ into three component parts is referre
to as which one of the following-
A. equit+ equation
". profita'ilit+ eterminant
C. S1C formula
#. #u 2ont ientit+
$. equit+ performance formula

3. &he 4.S. government coing s+stem that classifies a firm '+ the nature of its 'usiness
operations is known as the!
A. 5AS#A6 100.
". Stanar 7 2oor*s .00.
C. Stanar 1nustrial Classification coe.
#. 8overnmental 1# coe.
$. 8overnment $ngineere Coing S+stem.

9. Which one of the following is a source of cash-
A. increase in accounts receiva'le
". ecrease in notes pa+a'le
C. ecrease in common stock
#. increase in accounts pa+a'le
$. increase in inventor+

3-%
:. Which one of the following is a use of cash-
A. increase in notes pa+a'le
". ecrease in inventor+
C. increase in long-term e't
#. ecrease in accounts receiva'les
$. ecrease in common stock

A. repurchase of common stock
". acquisition of e't
C. purchase of inventor+
#. pa+ment to a supplier
$. granting creit to a customer

". ecrease in common stock
C. ecrease in long-term e't
#. ecrease in accounts pa+a'le
$. ecrease in inventor+

1%. ;n the Statement of Cash Flows< which of the following are consiere financing
activities-
1. increase in long-term e't
11. ecrease in accounts pa+a'le
111. interest pai
1=. iviens pai
A. 1 an 1= onl+
". 111 an 1= onl+
C. 11 an 111 onl+
#. 1< 111< an 1= onl+
$. 1< 11< 111< an 1=

3-3
13. ;n the Statement of Cash Flows< which of the following are consiere operating
activities-
1. costs of goos sol
111. interest pai
1=. iviens pai
A. 1 an 111 onl+
". 111 an 1= onl+
C. 1< 11< an 111 onl+
#. 1< 111< an 1= onl+
$. 1< 11< 111< an 1=

1,. Accoring to the Statement of Cash Flows< a ecrease in accounts receiva'le will >>>>>
the cash flow from >>>>> activities.
A. ecrease? operating
". ecrease? financing
C. increase? operating
#. increase? financing
$. increase? investment

1.. Accoring to the Statement of Cash Flows< an increase in interest e(pense will >>>>> the
cash flow from >>>>> activities.

10. ;n a common-si)e 'alance sheet all accounts are e(presse as a percentage of!
A. sales for the perio.
". the 'ase +ear sales.
C. total equit+ for the 'ase +ear.
#. total assets for the current +ear.
$. total assets for the 'ase +ear.

3-,
13. ;n a common-'ase +ear financial statement< accounts receiva'les will 'e e(presse
relative to which one of the following-
A. current +ear sales
". current +ear total assets
C. 'ase-+ear sales
#. 'ase-+ear total assets
$. 'ase-+ear accounts receiva'les

19. A firm uses %009 as the 'ase +ear for its financial statements. &he common-si)e< 'ase-+ear
statement for %00: has an inventor+ value of 1.09. &his is interprete to mean that the %00:
inventor+ is equal to 109 percent of which one of the following-
A. %009 inventor+
". %009 total assets
C. %00: total assets
#. %009 inventor+ e(presse as a percent of %009 total assets
$. %00: inventor+ e(presse as a percent of %00: total assets

1:. Which of the following ratios are measures of a firm*s liquiit+-
1. cash coverage ratio
11. interval measure
111. e't-equit+ ratio
1=. quick ratio
A. 1 an 111 onl+
". 11 an 1= onl+
C. 1< 111< an 1= onl+
#. 1< 11< an 111 onl+
$. 1< 11< 111< an 1=

%0. An increase in current lia'ilities will have which one of the following effects< all else hel
constant- Assume all ratios have positive values.
A. increase in the cash ratio
". increase in the net working capital to total assets ratio
C. ecrease in the quick ratio
#. ecrease in the cash coverage ratio
$. increase in the current ratio

3-.
%1. An increase in which one of the following will increase a firm*s quick ratio without
affecting its cash ratio-
A. accounts pa+a'le
". cash
C. inventor+
#. accounts receiva'le
$. fi(e assets

%%. A supplier< who requires pa+ment within ten a+s< shoul 'e most concerne with which
one of the following ratios when granting creit-
A. current
". cash
C. e't-equit+
#. quick
$. total e't

%3. A firm has an interval measure of ,9. &his means that the firm has sufficient liqui assets
to o which one of the following-
A. pa+ all of its e'ts that are ue within the ne(t ,9 hours
". pa+ all of its e'ts that are ue within the ne(t ,9 a+s
C. cover its operating costs for the ne(t ,9 hours
#. cover its operating costs for the ne(t ,9 a+s
$. meet the emans of its customers for the ne(t ,9 hours

%,. ;ver the past +ear< the quick ratio for a firm increase while the current ratio remaine
constant. 8iven this information< which one of the following must have occurre- Assume all
ratios have positive values.
A. current assets increase
". current assets ecrease
C. inventor+ increase
#. inventor+ ecrease
$. accounts pa+a'le increase

3-0
%.. /atios that measure a firm*s financial leverage are known as >>>>> ratios.
A. asset management
". long-term solvenc+
C. short-term solvenc+
#. profita'ilit+
$. 'ook value

%0. Which one of the following statements is correct-
A. 1f the total e't ratio is greater than ..0< then the e't-equit+ ratio must 'e less than 1.0.
". @ong-term creitors woul prefer the times interest earne ratio 'e 1., rather than 1...
C. &he e't-equit+ ratio can 'e compute as 1 plus the equit+ multiplier.
#. An equit+ multiplier of 1.% means a firm has A1.%0 in sales for ever+ A1 in equit+.
$. An increase in the epreciation e(pense will not affect the cash coverage ratio.

%3. 1f a firm has a e't-equit+ ratio of 1.0< then its total e't ratio must 'e which one of the
following-
A. 0.0
". 0..
C. 1.0
#. 1..
$. %.0

%9. &he cash coverage ratio irectl+ measures the a'ilit+ of a firm*s revenues to meet which
one of its following o'ligations-
A. pa+ment to supplier
". pa+ment to emplo+ee
C. pa+ment of interest to a lener
#. pa+ment of principle to a lener
$. pa+ment of a ivien to a shareholer

3-3
%:. Basper 4nite ha sales of A%1<000 in %009 an A%,<000 in %00:. &he firm*s current
accounts remaine constant. 8iven this information< which one of the following statements
must 'e true-
A. &he total asset turnover rate increase.
". &he a+s* sales in receiva'les increase.
C. &he net working capital turnover rate increase.
#. &he fi(e asset turnover ecrease.
$. &he receiva'les turnover rate ecrease.

30. &he Corner Carware has succeee in increasing the amount of goos it sells while
holing the amount of inventor+ on han at a constant level. Assume that 'oth the cost per
unit an the selling price per unit also remaine constant. &his accomplishment will 'e
reflecte in the firm*s financial ratios in which one of the following wa+s-
A. ecrease in the inventor+ turnover rate
". ecrease in the net working capital turnover rate
C. no change in the fi(e asset turnover rate
#. ecrease in the a+*s sales in inventor+
$. no change in the total asset turnover rate

31. #ee*s has a fi(e asset turnover rate of 1.1% an a total asset turnover rate of 0.:1. Sam*s
has a fi(e asset turnover rate of 1.1. an a total asset turnover rate of 0.99. "oth companies
have similar operations. "ase on this information< #ee*s must 'e oing which one of the
following-
A. utili)ing its fi(e assets more efficientl+ than Sam*s
". utili)ing its total assets more efficientl+ than Sam*s
C. generating A1 in sales for ever+ A1.1% in net fi(e assets
#. generating A1.1% in net income for ever+ A1 in net fi(e assets
$. maintaining the same level of current assets as Sam*s

3%. /atios that measure how efficientl+ a firm manages its assets an operations to generate
net income are referre to as >>>>> ratios.
A. asset management
#. profita'ilit+
$. turnover

3-9
33. 1f a firm prouces a twelve percent return on assets an also a twelve percent return on
equit+< then the firm!
A. ma+ have short-term< 'ut not long-term e't.
". is using its assets as efficientl+ as possi'le.
C. has no net working capital.
#. has a e't-equit+ ratio of 1.0.
$. has an equit+ multiplier of 1.0.

3,. Which one of the following will ecrease if a firm can ecrease its operating costs< all else
constant-
A. return on equit+
". return on assets
C. profit margin
#. equit+ multiplier
$. price-earnings ratio

3.. Al*s has a price-earnings ratio of 19... "en*s also has a price-earnings ratio of 19... Which
one of the following statements must 'e true if Al*s has a higher 2$8 ratio than "en*s-
A. Al*s has more net income than "en*s.
". "en*s is increasing its earnings at a faster rate than the Al*s.
C. Al*s has a higher market value per share than oes "en*s.
#. "en*s has a lower market-to-'ook ratio than Al*s.
$. Al*s has a higher net income than "en*s.

30. &o'in*s 6 relates the market value of a firm*s assets to which one of the following-
A. initial cost of creating the firm
". current 'ook value of the firm
C. average asset value of similar firms
#. average market value of similar firms
$. toa+*s cost to uplicate those assets

3-:
33. &he price-sales ratio is especiall+ useful when anal+)ing firms that have which one of the
following-
A. volatile market prices
". negative earnings
C. positive 2$8 ratios
#. a negative &o'in*s 6
$. increasing sales

39. Shareholers pro'a'l+ have the most interest in which one of the following sets of ratios-
A. return on assets an profit margin
". long-term e't an times interest earne
C. price-earnings an e't-equit+
#. market-to-'ook an times interest earne
$. return on equit+ an price-earnings

3:. Which one of the following accuratel+ escri'es the three parts of the #u 2ont ientit+-
A. operating efficienc+< equit+ multiplier< an profita'ilit+ ratio
". financial leverage< operating efficienc+< an profita'ilit+ ratio
C. equit+ multiplier< profit margin< an total asset turnover
#. e't-equit+ ratio< capital intensit+ ratio< an profit margin
$. return on assets< profit margin< an equit+ multiplier

,0. An increase in which of the following will increase the return on equit+< all else constant-
1. sales
11. net income
111. epreciation
1=. total equit+
A. 1 onl+
". 1 an 11 onl+
C. 11 an 1= onl+
#. 11 an 111 onl+
$. 1< 11< an 111 onl+

3-10
,1. Which of the following can 'e use to compute the return on equit+-
1. 2rofit margin /eturn on assets
11. /eturn on assets $quit+ multiplier
111. 5et incomeD&otal equit+
1=. /eturn on assets &otal asset turnover
A. 1 an 111 onl+
". 11 an 111 onl+
C. 11 an 1= onl+
#. 1< 11< an 111 onl+
$. 1< 11< 111< an 1=

,%. &he #u 2ont ientit+ can 'e use to help managers answer which of the following
questions relate to a firm*s operations-
1. Cow man+ sales ollars has the firm generate per each ollar of assets-
11. Cow man+ ollars of assets has a firm acquire per each ollar in shareholers* equit+-
111. Cow much net profit is a firm generating per ollar of sales-
1=. #oes the firm have the a'ilit+ to meet its e't o'ligations in a timel+ manner-
A. 1 an 111 onl+
". 11 an 1= onl+
C. 1< 11< an 111 onl+
#. 11< 111 an 1= onl+
$. 1< 11< 111< an 1=

,3. A firm currentl+ has A000 in e't for ever+ A1<000 in equit+. Assume the firm uses some
of its cash to ecrease its e't while maintaining its current equit+ an net income. Which one
of the following will ecrease as a result of this action-
A. equit+ multiplier
". total asset turnover
C. profit margin
#. return on assets
$. return on equit+

3-11
,,. Which one of the following statements is correct-
A. "ook values shoul alwa+s 'e given preceence over market values.
". Financial statements are frequentl+ use as the 'asis for performance evaluations.
C. Cistorical information provies no value to someone who is preicting future performance.
#. 2otential leners place little value on financial statement information.
$. /eviewing financial information over time has ver+ limite value.

,.. 1t is easier to evaluate a firm using financial statements when the firm!
A. is a conglomerate.
". has recentl+ merge with its largest competitor.
C. uses the same accounting proceures as other firms in the inustr+.
#. has a ifferent fiscal +ear than other firms in the inustr+.
$. tens to have man+ one-time events such as asset sales an propert+ acquisitions.

,0. &he most accepta'le metho of evaluating the financial statements of a firm is to compare
the firm*s current!
A. financial ratios to the firm*s historical ratios.
". financial statements to the financial statements of similar firms operating in other
C. countries.
#. financial ratios to the average ratios of all firms locate within the same geographic area.
$. financial statements to those of larger firms in unrelate inustries.
F. financial statements to the proEections that were create 'ase on &o'in*s 6.

,3. Which of the following represent pro'lems encountere when comparing the financial
statements of two separate entities-
1. $ither one< or 'oth< of the firms ma+ 'e conglomerates an thus have unrelate lines of
'usiness.
11. &he operations of the two firms ma+ var+ geographicall+.
111. &he firms ma+ use iffering accounting methos.
1=. &he two firms ma+ 'e seasonal in nature an have ifferent fiscal +ear ens.
A. 1 an 11 onl+
". 11 an 111 onl+
C. 1< 111< an 1= onl+
#. 1< 11< an 111 onl+
$. 1< 11< 111< an 1=

3-1%
,9. Wise*s Corner 8rocer ha the following current account values. What effect i the
change in net working capital have on the firm*s cash flows for %00:-

A. net use of cash of A33
". net use of cash of A93
C. net source of cash of A93
#. net source of cash of A111
$. net source of cash of A13.

,:. #uring the +ear< Fitchen Suppl+ increase its accounts receiva'le '+ A130< ecrease its
inventor+ '+ A3.< an ecrease its accounts pa+a'le '+ A,0. Cow i these three accounts
affect the firm*s cash flows for the +ear-
A. A%,. use of cash
". A10. use of cash
C. A:. use of cash
#. A:. source of cash
$. A10. source of cash

.0. A firm generate net income of A939. &he epreciation e(pense was A,3 an iviens
were pai in the amount of A%.. Accounts pa+a'les ecrease '+ A13< accounts receiva'les
increase '+ A%%< inventor+ ecrease '+ A1,< an net fi(e assets ecrease '+ A9. &here
was no interest e(pense. What was the net cash flow from operating activit+-
A. A930
". A:0%
C. A:0,
#. A:%%
$. A:30

3-13
.1. A firm has sales of A%<1:0< net income of A13,< net fi(e assets of A1<000< an current
assets of A3%0. &he firm has A310 in inventor+. What is the common-si)e statement value of
inventor+-
A. 13.30 percent
". 1,.10 percent
C. 1:.39 percent
#. 30.,% percent
$. ,3.00 percent

.%. A firm has sales of A3<,00< net income of A3:0< total assets of A,<.00< an total equit+ of
A%<3.0. 1nterest e(pense is A,0. What is the common-si)e statement value of the interest
e(pense-
A. 0.9: percent
". 1.19 percent
C. 3.0: percent
#. 10.%0 percent
$. 1,... percent

.3. @ast +ear< which is use as the 'ase +ear< a firm ha cash of A.%< accounts receiva'le of
A%19< inventor+ of A.0:< an net fi(e assets of A1<103. &his +ear< the firm has cash of A01<
accounts receiva'le of A1:9< inventor+ of A.%3< an net fi(e assets of A1<%10. What is the
common-'ase +ear value of accounts receiva'le-
A. 0.09
". 0.10
C. 0.99
#. 0.:1
$. 1.19

.,. /ussell*s #eli has cash of A130< accounts receiva'le of A93< accounts pa+a'le of A%1.< an
inventor+ of A,0:. What is the value of the quick ratio-
A. 0.31
". 0..3
C. 0.31
#. 1.0,
$. 1.03

3-1,
... 4ptown Gen*s Wear has accounts pa+a'le of A%<%1,< inventor+ of A3<:.0< cash of A1<%03<
fi(e assets of A9<,00< accounts receiva'le of A3<:03< an long-term e't of A,<%00. What is
the value of the net working capital to total assets ratio-
A. 0.31
". 0.,%
C. 0.,3
#. 0..1
$. 0..0

.0. A firm has total assets of A311<330 an net fi(e assets of A103<.3%. &he average ail+
operating costs are A%<:90. What is the value of the interval measure-
A. 31.,3 a+s
". ,9.,0 a+s
C. .0.%% a+s
#. 09.0. a+s
$. 10,.0% a+s

.3. A firm has a e't-equit+ ratio of 0.,%. What is the total e't ratio-
A. 0.30
". 0.30
C. 0.,,
#. 1..9
$. %.39

.9. A firm has total e't of A,<0%0 an a e't-equit+ ratio of 0..3. What is the value of the
total assets-
A. A0<1%9.0.
". A3<%.3.,0
C. A:<.31.:.
#. A11<03,.00
$. A1%<3%..%0

3-1.
.:. A firm has sales of A09<,00< costs of A,%<:00< interest pai of A%<100< an epreciation of
A0<.00. &he ta( rate is 3, percent. What is the value of the cash coverage ratio-
A. 1%.1,
". 1..%,
C. 13.%3
#. %3.,1
$. %,..0

00. &he "ike Shop pai A%<310 in interest an A1<9.0 in iviens last +ear. &he times interest
earne ratio is %.% an the epreciation e(pense is A,00. What is the value of the cash
coverage ratio-
A. 1.03
". 1.90
C. %.%1
#. %.,0
$. %..%

01. Al*s Sport Store has sales of A9:3<,00< costs of goos sol of A0%9<300< inventor+ of
A%09<,00< an accounts receiva'le of A3,<100. Cow man+ a+s< on average< oes it take the
firm to sell its inventor+ assuming that all sales are on creit-
A. 3,.1: a+s
". 9,.30 a+s
C. 1%1.03 a+s
#. 139.,0 a+s
$. 1.1.%1 a+s

0%. &he Flower Shoppe has accounts receiva'le of A3<30:< inventor+ of A,<,03< sales of
A%19<0,0< an cost of goos sol of A103<300. Cow man+ a+s oes it take the firm to 'oth
sell its inventor+ an collect the pa+ment on the sale assuming that all sales are on creit-
A. 1,.03 a+s
". 1..91 a+s
C. 10.%3 a+s
#. 13.19 a+s
$. 13.,3 a+s

3-10
03. A firm has net working capital of A%<31.< net fi(e assets of A%%<,03< sales of A31<3.0<
an current lia'ilities of A3<:09. Cow man+ ollars worth of sales are generate from ever+
A1 in total assets-
A. A1.09
". A1.1,
C. A1.1:
#. A1.%0
$. A1.30

0,. &he 2urple Gartin has annual sales of A093<,00< total e't of A%10<000< total equit+ of
A30.<000< an a profit margin of ..%0 percent. What is the return on assets-
A. 0.%% percent
". 0.,9 percent
C. 3.0% percent
#. 3.39 percent
$. :.3: percent

0.. /elia'le Cars has sales of A903<%00< total assets of A1<10.<100< an a profit margin of :.09
percent. &he firm has a total e't ratio of 39 percent. What is the return on equit+-
A. 13.0: percent
". 10.03 percent
C. 13.09 percent
#. %9..0 percent
$. 3%.1, percent

00. &he Geat Garket has A3,3<000 in sales. &he profit margin is ,.1 percent an the firm has
3<.00 shares of stock outstaning. &he market price per share is A%3. What is the price-
earnings ratio-
A. 0.01
". 9.:9
C. 11.,%
#. 13.1.
$. 1,.%3

3-13
03. "ig 8u+ Su's has net income of A1.0<:90< a price-earnings ratio of 1%.9< an earnings per
share of A0.93. Cow man+ shares of stock are outstaning-
A. 13<..9
". 1,<,03
C. 10.<.%3
#. 131<000
$. 133<.,0

09. A firm has 100<000 shares of stock outstaning< sales of A1.:, million< net income of
A1%0<,00< a price-earnings ratio of 19.3< an a 'ook value per share of A:.1%. What is the
market-to-'ook ratio-
A. 1.0%
". 1.9,
C. %.%3
#. %.,.
$. %..3

0:. ;scar*s #og Couse has a profit margin of ..0 percent< a return on assets of 1%.. percent<
an an equit+ multiplier of 1.,:. What is the return on equit+-
A. 13.1, percent
". 19.03 percent
C. 1:.03 percent
#. %1.0: percent
$. %%.30 percent

30. &a+lor*s Gen*s Wear has a e't-equit+ ratio of ,% percent< sales of A3,:<000< net income
of A,1<300< an total e't of A1:9<,00. What is the return on equit+-
A. 3.3: percent
". 9.,1 percent
C. 9.3, percent
#. :.0: percent
$. :.10 percent

3-19
31. A firm has a e't-equit+ ratio of .3 percent< a total asset turnover of 1.1%< an a profit
margin of ,.: percent. &he total equit+ is A.11<0,0. What is the amount of the net income-
A. A%9<03:
". A3.<1,3
C. A,,<09,
#. A,3<001
$. A.%<,19

3-1:
3%. What is the quick ratio for %00:-
A. 0..0
". 0.00
C. 1.3%
#. 1.03
$. 1.3:

33. Cow man+ a+s of sales are in receiva'les- H4se %00: valuesI
A. 13.09 a+s
". %3.33 a+s
C. %0.,: a+s
#. %:.,1 a+s
$. 3%.:3 a+s

3,. What is the price-sales ratio for %00: if the market price is A19.,: per share-
A. %.,3
". 3.%:
C. 3.03
#. ,.1%
$. ,.39

3.. What is e't-equit+ ratio- H4se %00: valuesI
A. 0..%
". 0.93
C. 0.:,
#. 1.01
$. 1.00

30. What is the cash coverage ratio for %00:-
A. :.,3
". 10..3
C. 11.0,
#. 11.9%
$. 1%.31

3-%0
33. What is the return on equit+- H4se %00: valuesI
A. 10.%0 percent
". 10.39 percent
C. %0.09 percent
#. %:.:0 percent
$. ,0.1, percent

39. What is the amount of the iviens pai for %00:-
A. A11<100
". A1.<000
C. A3%<000
#. A,1<%00
$. A,.<100

3:. What is the amount of the cash flow from investment activit+ for %00:-
A. A19<100
". A%,<900
C. A%:<300
#. A3%<000
$. A3:<,00

3-%1

90. What is the net working capital to total assets ratio for %00:-
A. %,.19 percent
". 30.9% percent
C. ,..,: percent
#. .1.,3 percent
$. 0..93 percent

91. Cow man+ a+s on average oes it take 2recision &ool to sell its inventor+- H4se %00:
valuesI
A. 10,.30 a+s
". 193.33 a+s
C. %1:.03 a+s
#. %,3.,0 a+s
$. %93.31 a+s

3-%%
9%. Cow man+ ollars of sales are 'eing generate from ever+ ollar of net fi(e assets- H4se
%00: values.I
A. A0.99
". A1.93
C. A%.33
#. A%..:
$. A3.0:

93. What is the equit+ multiplier for %00:-
A. 1.03
". 1.3%
C. 1.99
#. 1.:3
$. %.03

9,. What is the times interest earne ratio for %00:-
A. :.03
". 10.1%
C. 1%..:
#. 1,.:3
$. 10.0.

9.. What is the return on equit+ for %00:- H4se %00: valuesI
A. 1..%: percent
". 10.,0 percent
C. 13.39 percent
#. 19.0% percent
$. 19.1% percent

90. What is the net cash flow from investment activit+ for %00:-
A. -A1<9,0
". -A1<090
C. -A90
#. A90
$. A1<9,0

3-%3
93. Cow oes accounts receiva'le affect the statement of cash flows for %00:-
A. a use of A,<%19 of cash as an investment activit+
". a source of A903 of cash as an operating activit+
C. a use of A,<%19 of cash as a financing activit+
#. a source of A903 of cash as an investment activit+
$. a use of A903 of cash as an operating activit+

99. "@ @um'er has earnings per share of A1.%1. &he firm*s earnings have 'een increasing at
an average rate of 3.1 percent annuall+ an are e(pecte to continue oing so. &he firm has
%1<.00 shares of stock outstaning at a price per share of A19.30. What is the firm*s 2$8
ratio-
A. 0.,9
". 1.%,
C. %.9.
#. 3.:3
$. ,.::

9:. &ownsen $nterprises has a 2$8 ratio of ..3< net income of A,:<%00< a price-earnings
ratio of 13.0< an a profit margin of 3.1 percent. What is the earnings growth rate-
A. 0.33 percent
". 1.00 percent
C. 3.3% percent
#. ..30 percent
$. 10.00 percent

:0. A firm has total assets with a current 'ook value of A09<300< a current market value of
A3,<300< an a current replacement cost of A3.<000. What is the value of &o'in*s 6-
A. .9.
". .93
C. .:%
#. .:.
$. .:9

3-%,
:1. #i(ie Suppl+ has total assets with a current 'ook value of A309<:00 an a current
replacement cost of A,90<%00. &he market value of these assets is A,0,<900. What is the value
of &o'in*s 6-
A. .90
". .:%
C. .:0
#. 1.01
$. 1.00

:%. #anelion Fiels has a &o'in*s 6 of .:0. &he replacement cost of the firm*s assets is
A%%.<000 an the market value of the firm*s e't is A10:<000. &he firm has %0<000 shares of
stock outstaning an a 'ook value per share of A%.0:. What is the market to 'ook ratio-
A. %..0 times
". 3.19 times
C. 3.., times
#. ,.01 times
$. ,.%0 times

:3. A firm has annual sales of A3%0<000< a price-earnings ratio of %,< an a profit margin of
,.% percent. &here are 1,<000 shares of stock outstaning. What is the price-sales ratio-
A. 0.:3
". 1.01
C. 1.09
#. 1.1.
$. 1.%%

:,. @assiter 1nustries has annual sales of A%%0<000 with 10<000 shares of stock outstaning.
&he firm has a profit margin of 3.. percent an a price-sales ratio of 1.%0. What is the firm*s
price-earnings ratio-
A. 1,
". 10
C. 19
#. %0
$. %%

3-%.
Essay Questions

:.. Assume a firm has a positive cash 'alance which is increasing annuall+. Wh+ then is it
important to anal+)e a statement of cash flows-

:0. Jou nee to anal+)e a firm*s performance in relation to its peers. Jou can o this either '+
comparing the firms* 'alance sheets an income statements or '+ comparing the firms* ratios.
1f +ou onl+ ha time to use one means of comparison which metho woul +ou use an wh+-

:3. 1n general< what oes a high &o'in*s 6 value inicate an how relia'le oes that value
ten to 'e-

:9. What value oes the 2$8 ratio provie to financial anal+sts-

3-%0
::. What value can the price-sales ratio provie to financial managers that the price-earnings
ratio cannot-

100. 1t is commonl+ recommene that the managers of a firm compare the performance of
their firm to that of its peers. 1ncreasingl+< this is 'ecoming a more ifficult task. $(plain
some of the reasons wh+ comparisons of this t+pe can frequentl+ 'e either ifficult to perform
or prouce misleaing results.


101. &he "urger Cut has sales of A%: million< total assets of A,3 million< an total e't of A13
million. &he profit margin is 11 percent. What is the return on equit+-
A. 3.,% percent
". 10.03 percent
C. 11.09 percent
#. 13.31 percent
$. 1,.%9 percent

3-%3
10%. &he Come Suppl+ Co. has a current accounts receiva'le 'alance of A300<000. Creit
sales for the +ear Eust ene were A1<930<000. Cow man+ a+s on average i it take for
creit customers to pa+ off their accounts uring this past +ear-
A. .,.%: a+s
". .0.01 a+s
C. .3..0 a+s
#. .:.9, a+s
$. 01.00 a+s

103. "@ 1nustries has ening inventor+ of A300<000< an cost of goos sol for the +ear Eust
ene was A1<,10<000. ;n average< how long oes a unit of inventor+ sit on the shelf 'efore it
is sol-
A. 13.10 a+s
". %1.,3 a+s
C. 33.00 a+s
#. 39.%: a+s
$. 93.13 a+s

10,. Coulter Suppl+ has a total e't ratio of 0.,3. What is the equit+ multiplier-
A. 0.9:
". 1.13
C. 1.,3
#. 1.9:
$. %.13

10.. Cigh Gountain Foos has an equit+ multiplier of 1...< a total asset turnover of 1.3< an a
profit margin of 3.. percent. What is the return on equit+-
A. 9.:, percent
". 10.93 percent
C. 1%.0: percent
#. 1,.39 percent
$. 1..11 percent

3-%9
100. @ancaster &o+s has a profit margin of :.0 percent< a total asset turnover of 1.31< an a
return on equit+ of %1.01 percent. What is the e't-equit+ ratio-
A. 0.%%
". 0.%9
C. 0.,0
#. 0.3%
$. 0.39

103. Charlie*s Chicken has a e't-equit+ ratio of %.0.. /eturn on assets is :.% percent< an
total equit+ is A.00<000. What is the net income-
A. A10.<010
". A1,9<30:
C. A1.3<130
#. A101<009
$. A10,<:0:

109. Canine Suppl+ has sales of A%<%00< total assets of A1<,00< an a e't-equit+ ratio of 0.3.
1ts return on equit+ is 1. percent. What is the net income-
A. A139.10
". A1,1.,1
C. A1.%.0:
#. A1.0.03
$. A101..,

10:. "illings< 1nc. has net income of A101<000< a profit margin of 3.0 percent< an an accounts
receiva'le 'alance of A1%3<100. Assume that 00 percent of sales are on creit. What is the
a+s* sales in receiva'les-
A. %1.:0 a+s
". %3..0 a+s
C. 33.19 a+s
#. 3..0, a+s
$. 30.1: a+s

3-%:
110. 8lastone 2avers has a long-term e't ratio of 0.0 an a current ratio of 1.3. Current
lia'ilities are A300< sales are A,<,,0< the profit margin is :.. percent< an the return on equit+
is 1:.. percent. Cow much oes the firm have in net fi(e assets-
A. A,<990.19
". A.<1:3.0:
C. A.<000.03
#. A.<9,9.1.
$. A0<103.30

111. A firm has a e't-total asset ratio of 3, percent an a return on total assets of 13 percent.
What is the return on equit+-
A. %0 percent
". .0 percent
C. 0. percent
#. 9, percent
$. 13. percent

11%. &he #ocksie 1nn has net income for the most recent +ear of A9<,.0. &he ta( rate was 39
percent. &he firm pai A1<300 in total interest e(pense an eucte A1<:00 in epreciation
e(pense. What was the cash coverage ratio for the +ear-
A. 10.,9 times
". 11.,9 times
C. 1%.3: times
#. 1%.:. times
$. 13.03 times

113. "each Wear has current lia'ilities of A3.0<000< a quick ratio of 1.0.< inventor+ turnover
of 3.%< an a current ratio of %.:. What is the cost of goos sol-
A. A:90<000
". A1<000<000
C. A1<%00<000
#. A1<,00<000
$. A1<.00<000

3-30
Chapter 03 Working with Financial Statements Answer Fe+


1. Activities of a firm which require the spening of cash are known as!
A. sources of cash.
B. uses of cash.
C. cash collections.
#. cash receipts.
$. cash on han.
/efer to section 3.1

AACSB: N/A
Difficulty: Basic
Learning Objective: 3-1
Section: 31
!o"ic: #ses of cas$

%. &he sources an uses of cash over a state perio of time are reflecte on the!
A. income statement.
". 'alance sheet.
C. ta( reconciliation statement.
D. statement of cash flows.
$. statement of operating position.

AACSB: N/A
Difficulty: Basic
Section: 31
!o"ic: State%ent of cas$ flo&s

3-31
3. A common-si)e income statement is an accounting statement that e(presses all of a firm*s
e(penses as percentage of!
A. total assets.
". total equit+.
C. net income.
#. ta(a'le income.
E. sales.
/efer to section 3.%

AACSB: N/A
Difficulty: Basic
Section: 3'
!o"ic: Co%%on-si(e state%ent

,. Which one of the following stanari)es items on the income statement an 'alance sheet
relative to their values as of a common point in time-
A. statement of stanari)ation
". statement of cash flows
C. common-'ase +ear statement
#. common-si)e statement
$. 'ase reconciliation statement

AACSB: N/A
Difficulty: Basic
Section: 3'
!o"ic: Co%%on-base year state%ent

3-3%
.. /elationships etermine from a firm*s financial information an use for comparison
purposes are known as!
. financial ratios.
". ientities.
C. imensional anal+sis.
#. scenario anal+sis.
$. solvenc+ anal+sis.

AACSB: N/A
Difficulty: Basic
Learning Objective: 3-'
Section: 33
!o"ic: )inancial ratios

0. &he formula which 'reaks own the return on equit+ into three component parts is referre
to as which one of the following-
A. equit+ equation
". profita'ilit+ eterminant
C. S1C formula
D. #u 2ont ientit+
$. equit+ performance formula
/efer to section 3.,

AACSB: N/A
Difficulty: Basic
Section: 3*
!o"ic: Du +ont i,entity

3-33
3. &he 4.S. government coing s+stem that classifies a firm '+ the nature of its 'usiness
operations is known as the!
A. 5AS#A6 100.
". Stanar 7 2oor*s .00.
C. Stanar 1nustrial Classification coe.
#. 8overnmental 1# coe.
$. 8overnment $ngineere Coing S+stem.
/efer to section 3..

AACSB: N/A
Difficulty: Basic
Learning Objective: 3-*
Section: 3-
!o"ic: S.C co,es

". ecrease in notes pa+a'le
C. ecrease in common stock
D. increase in accounts pa+a'le
$. increase in inventor+

AACSB: N/A
Difficulty: Basic
Section: 31
!o"ic: Source of cas$

3-3,
:. Which one of the following is a use of cash-
A. increase in notes pa+a'le
". ecrease in inventor+
C. increase in long-term e't
#. ecrease in accounts receiva'les
E. ecrease in common stock

AACSB: N/A
Difficulty: Basic
Section: 31
!o"ic: #se of cas$

A. repurchase of common stock
B. acquisition of e't
C. purchase of inventor+
#. pa+ment to a supplier
$. granting creit to a customer

AACSB: N/A
Difficulty: Basic
Section: 31

3-3.
". ecrease in common stock
C. ecrease in long-term e't
#. ecrease in accounts pa+a'le
E. ecrease in inventor+

AACSB: N/A
Difficulty: Basic
Section: 31

1%. ;n the Statement of Cash Flows< which of the following are consiere financing
activities-
1. increase in long-term e't
111. interest pai
1=. iviens pai
. 1 an 1= onl+
". 111 an 1= onl+
C. 11 an 111 onl+
#. 1< 111< an 1= onl+
$. 1< 11< 111< an 1=

AACSB: N/A
Difficulty: Basic
Section: 31

3-30
13. ;n the Statement of Cash Flows< which of the following are consiere operating
activities-
1. costs of goos sol
111. interest pai
1=. iviens pai
A. 1 an 111 onl+
". 111 an 1= onl+
C. 1< 11< an 111 onl+
#. 1< 111< an 1= onl+
$. 1< 11< 111< an 1=

AACSB: N/A
Difficulty: Basic
Section: 31

1,. Accoring to the Statement of Cash Flows< a ecrease in accounts receiva'le will >>>>>
the cash flow from >>>>> activities.

AACSB: N/A
Difficulty: Basic
Section: 31

3-33
1.. Accoring to the Statement of Cash Flows< an increase in interest e(pense will >>>>> the
cash flow from >>>>> activities.
. ecrease? operating

AACSB: N/A
Difficulty: Basic
Section: 31

10. ;n a common-si)e 'alance sheet all accounts are e(presse as a percentage of!
A. sales for the perio.
". the 'ase +ear sales.
C. total equit+ for the 'ase +ear.
D. total assets for the current +ear.
$. total assets for the 'ase +ear.

AACSB: N/A
Difficulty: Basic
Section: 3'
!o"ic: Co%%on-si(e balance s$eet

3-39
13. ;n a common-'ase +ear financial statement< accounts receiva'les will 'e e(presse
relative to which one of the following-
A. current +ear sales
". current +ear total assets
C. 'ase-+ear sales
#. 'ase-+ear total assets
E. 'ase-+ear accounts receiva'les

AACSB: N/A
Difficulty: Basic
Section: 3'

19. A firm uses %009 as the 'ase +ear for its financial statements. &he common-si)e< 'ase-+ear
statement for %00: has an inventor+ value of 1.09. &his is interprete to mean that the %00:
inventor+ is equal to 109 percent of which one of the following-
A. %009 inventor+
". %009 total assets
C. %00: total assets
D. %009 inventor+ e(presse as a percent of %009 total assets
$. %00: inventor+ e(presse as a percent of %00: total assets

AACSB: N/A
Difficulty: Basic
Section: 3'

3-3:
1:. Which of the following ratios are measures of a firm*s liquiit+-
1. cash coverage ratio
11. interval measure
111. e't-equit+ ratio
1=. quick ratio
A. 1 an 111 onl+
B. 11 an 1= onl+
C. 1< 111< an 1= onl+
#. 1< 11< an 111 onl+
$. 1< 11< 111< an 1=

AACSB: N/A
Difficulty: Basic
Section: 33
!o"ic: Li/ui,ity ratios

%0. An increase in current lia'ilities will have which one of the following effects< all else hel
constant- Assume all ratios have positive values.
A. increase in the cash ratio
". increase in the net working capital to total assets ratio
C. ecrease in the quick ratio
#. ecrease in the cash coverage ratio
$. increase in the current ratio

AACSB: N/A
Difficulty: .nter%e,iate
Section: 33
!o"ic: 0atio analysis

3-,0
%1. An increase in which one of the following will increase a firm*s quick ratio without
affecting its cash ratio-
A. accounts pa+a'le
". cash
C. inventor+
D. accounts receiva'le
$. fi(e assets

AACSB: N/A
Difficulty: Basic
Section: 33

%%. A supplier< who requires pa+ment within ten a+s< shoul 'e most concerne with which
one of the following ratios when granting creit-
A. current
B. cash
C. e't-equit+
#. quick
$. total e't

AACSB: N/A
Difficulty: Basic
Section: 33

3-,1
%3. A firm has an interval measure of ,9. &his means that the firm has sufficient liqui assets
to o which one of the following-
A. pa+ all of its e'ts that are ue within the ne(t ,9 hours
". pa+ all of its e'ts that are ue within the ne(t ,9 a+s
C. cover its operating costs for the ne(t ,9 hours
D. cover its operating costs for the ne(t ,9 a+s
$. meet the emans of its customers for the ne(t ,9 hours

AACSB: N/A
Difficulty: Basic
Section: 33
!o"ic: .nterval %easure

%,. ;ver the past +ear< the quick ratio for a firm increase while the current ratio remaine
constant. 8iven this information< which one of the following must have occurre- Assume all
ratios have positive values.
A. current assets increase
". current assets ecrease
C. inventor+ increase
D. inventor+ ecrease
$. accounts pa+a'le increase

AACSB: N/A
Difficulty: Basic
Section: 33
!o"ic: 1uic2 ratio

3-,%
%.. /atios that measure a firm*s financial leverage are known as >>>>> ratios.
A. asset management
B. long-term solvenc+
#. profita'ilit+
$. 'ook value

AACSB: N/A
Difficulty: Basic
Section: 33
!o"ic: Long-ter% solvency ratios

%0. Which one of the following statements is correct-
A. 1f the total e't ratio is greater than ..0< then the e't-equit+ ratio must 'e less than 1.0.
". @ong-term creitors woul prefer the times interest earne ratio 'e 1., rather than 1...
C. &he e't-equit+ ratio can 'e compute as 1 plus the equit+ multiplier.
#. An equit+ multiplier of 1.% means a firm has A1.%0 in sales for ever+ A1 in equit+.
E. An increase in the epreciation e(pense will not affect the cash coverage ratio.

AACSB: N/A
Section: 33
!o"ic: )inancial leverage ratios

3-,3
%3. 1f a firm has a e't-equit+ ratio of 1.0< then its total e't ratio must 'e which one of the
following-
A. 0.0
B. 0..
C. 1.0
#. 1..
$. %.0

AACSB: N/A
Difficulty: Basic
Section: 33

%9. &he cash coverage ratio irectl+ measures the a'ilit+ of a firm*s revenues to meet which
one of its following o'ligations-
A. pa+ment to supplier
". pa+ment to emplo+ee
C. pa+ment of interest to a lener
#. pa+ment of principle to a lener
$. pa+ment of a ivien to a shareholer

AACSB: N/A
Difficulty: Basic
Section: 33

3-,,
%:. Basper 4nite ha sales of A%1<000 in %009 an A%,<000 in %00:. &he firm*s current
accounts remaine constant. 8iven this information< which one of the following statements
must 'e true-
A. &he total asset turnover rate increase.
". &he a+s* sales in receiva'les increase.
C. &he net working capital turnover rate increase.
#. &he fi(e asset turnover ecrease.
$. &he receiva'les turnover rate ecrease.

AACSB: N/A
Section: 33
!o"ic: !urnover ratios

30. &he Corner Carware has succeee in increasing the amount of goos it sells while
holing the amount of inventor+ on han at a constant level. Assume that 'oth the cost per
unit an the selling price per unit also remaine constant. &his accomplishment will 'e
reflecte in the firm*s financial ratios in which one of the following wa+s-
A. ecrease in the inventor+ turnover rate
". ecrease in the net working capital turnover rate
C. no change in the fi(e asset turnover rate
D. ecrease in the a+*s sales in inventor+
$. no change in the total asset turnover rate

AACSB: N/A
Section: 33
!o"ic: !urnover ratios

3-,.
31. #ee*s has a fi(e asset turnover rate of 1.1% an a total asset turnover rate of 0.:1. Sam*s
has a fi(e asset turnover rate of 1.1. an a total asset turnover rate of 0.99. "oth companies
have similar operations. "ase on this information< #ee*s must 'e oing which one of the
following-
A. utili)ing its fi(e assets more efficientl+ than Sam*s
B. utili)ing its total assets more efficientl+ than Sam*s
C. generating A1 in sales for ever+ A1.1% in net fi(e assets
#. generating A1.1% in net income for ever+ A1 in net fi(e assets
$. maintaining the same level of current assets as Sam*s

AACSB: N/A
Section: 33
!o"ic: Asset utili(ation ratios

3%. /atios that measure how efficientl+ a firm manages its assets an operations to generate
net income are referre to as >>>>> ratios.
A. asset management
D. profita'ilit+
$. turnover

AACSB: N/A
Difficulty: Basic
Section: 33
!o"ic: +rofitability ratios

3-,0
33. 1f a firm prouces a twelve percent return on assets an also a twelve percent return on
equit+< then the firm!
A. ma+ have short-term< 'ut not long-term e't.
". is using its assets as efficientl+ as possi'le.
C. has no net working capital.
#. has a e't-equit+ ratio of 1.0.
E. has an equit+ multiplier of 1.0.

AACSB: N/A
Section: 33

3,. Which one of the following will ecrease if a firm can ecrease its operating costs< all else
constant-
A. return on equit+
". return on assets
C. profit margin
#. equit+ multiplier
E. price-earnings ratio

AACSB: N/A
Section: 33

3-,3
3.. Al*s has a price-earnings ratio of 19... "en*s also has a price-earnings ratio of 19... Which
one of the following statements must 'e true if Al*s has a higher 2$8 ratio than "en*s-
A. Al*s has more net income than "en*s.
B. "en*s is increasing its earnings at a faster rate than the Al*s.
C. Al*s has a higher market value per share than oes "en*s.
#. "en*s has a lower market-to-'ook ratio than Al*s.
$. Al*s has a higher net income than "en*s.

AACSB: N/A
Section: 33
!o"ic: 3ar2et value ratios

30. &o'in*s 6 relates the market value of a firm*s assets to which one of the following-
A. initial cost of creating the firm
". current 'ook value of the firm
C. average asset value of similar firms
#. average market value of similar firms
E. toa+*s cost to uplicate those assets

AACSB: N/A
Difficulty: Basic
Section: 33

3-,9
33. &he price-sales ratio is especiall+ useful when anal+)ing firms that have which one of the
following-
A. volatile market prices
B. negative earnings
C. positive 2$8 ratios
#. a negative &o'in*s 6
$. increasing sales

AACSB: N/A
Difficulty: Basic
Section: 33

39. Shareholers pro'a'l+ have the most interest in which one of the following sets of ratios-
A. return on assets an profit margin
". long-term e't an times interest earne
C. price-earnings an e't-equit+
#. market-to-'ook an times interest earne
E. return on equit+ an price-earnings

AACSB: N/A
Difficulty: Basic
Section: 33

3-,:
3:. Which one of the following accuratel+ escri'es the three parts of the #u 2ont ientit+-
A. operating efficienc+< equit+ multiplier< an profita'ilit+ ratio
". financial leverage< operating efficienc+< an profita'ilit+ ratio
C. equit+ multiplier< profit margin< an total asset turnover
#. e't-equit+ ratio< capital intensit+ ratio< an profit margin
$. return on assets< profit margin< an equit+ multiplier

AACSB: N/A
Difficulty: Basic
Section: 3*

,0. An increase in which of the following will increase the return on equit+< all else constant-
1. sales
11. net income
111. epreciation
1=. total equit+
A. 1 onl+
B. 1 an 11 onl+
C. 11 an 1= onl+
#. 11 an 111 onl+
$. 1< 11< an 111 onl+

AACSB: N/A
Difficulty: Basic
Section: 3*

3-.0
,1. Which of the following can 'e use to compute the return on equit+-
1. 2rofit margin /eturn on assets
11. /eturn on assets $quit+ multiplier
111. 5et incomeD&otal equit+
1=. /eturn on assets &otal asset turnover
A. 1 an 111 onl+
B. 11 an 111 onl+
C. 11 an 1= onl+
#. 1< 11< an 111 onl+
$. 1< 11< 111< an 1=

AACSB: N/A
Difficulty: Basic
Section: 3*

,%. &he #u 2ont ientit+ can 'e use to help managers answer which of the following
questions relate to a firm*s operations-
1. Cow man+ sales ollars has the firm generate per each ollar of assets-
11. Cow man+ ollars of assets has a firm acquire per each ollar in shareholers* equit+-
111. Cow much net profit is a firm generating per ollar of sales-
1=. #oes the firm have the a'ilit+ to meet its e't o'ligations in a timel+ manner-
A. 1 an 111 onl+
". 11 an 1= onl+
C. 1< 11< an 111 onl+
#. 11< 111 an 1= onl+
$. 1< 11< 111< an 1=

AACSB: N/A
Difficulty: Basic
Section: 3*

3-.1
,3. A firm currentl+ has A000 in e't for ever+ A1<000 in equit+. Assume the firm uses some
of its cash to ecrease its e't while maintaining its current equit+ an net income. Which one
of the following will ecrease as a result of this action-
. equit+ multiplier
". total asset turnover
C. profit margin
#. return on assets
$. return on equit+

AACSB: N/A
Section: 3*

,,. Which one of the following statements is correct-
A. "ook values shoul alwa+s 'e given preceence over market values.
B. Financial statements are frequentl+ use as the 'asis for performance evaluations.
C. Cistorical information provies no value to someone who is preicting future performance.
#. 2otential leners place little value on financial statement information.
$. /eviewing financial information over time has ver+ limite value.

AACSB: N/A
Section: 3-
!o"ic: 4valuating financial state%ents

3-.%
,.. 1t is easier to evaluate a firm using financial statements when the firm!
A. is a conglomerate.
". has recentl+ merge with its largest competitor.
C. uses the same accounting proceures as other firms in the inustr+.
#. has a ifferent fiscal +ear than other firms in the inustr+.
$. tens to have man+ one-time events such as asset sales an propert+ acquisitions.

AACSB: N/A
Difficulty: Basic
Section: 3-

,0. &he most accepta'le metho of evaluating the financial statements of a firm is to compare
the firm*s current!
. financial ratios to the firm*s historical ratios.
". financial statements to the financial statements of similar firms operating in other
C. countries.
#. financial ratios to the average ratios of all firms locate within the same geographic area.
$. financial statements to those of larger firms in unrelate inustries.
F. financial statements to the proEections that were create 'ase on &o'in*s 6.

AACSB: N/A
Section: 3-

3-.3
,3. Which of the following represent pro'lems encountere when comparing the financial
statements of two separate entities-
1. $ither one< or 'oth< of the firms ma+ 'e conglomerates an thus have unrelate lines of
'usiness.
11. &he operations of the two firms ma+ var+ geographicall+.
111. &he firms ma+ use iffering accounting methos.
1=. &he two firms ma+ 'e seasonal in nature an have ifferent fiscal +ear ens.
A. 1 an 11 onl+
". 11 an 111 onl+
C. 1< 111< an 1= onl+
#. 1< 11< an 111 onl+
E. 1< 11< 111< an 1=

AACSB: N/A
Difficulty: Basic
Section: 3-

3-.,
,9. Wise*s Corner 8rocer ha the following current account values. What effect i the
change in net working capital have on the firm*s cash flows for %00:-

A. net use of cash of A33
". net use of cash of A93
C. net source of cash of A93
D. net source of cash of A111
$. net source of cash of A13.

AACSB: Analytic
Difficulty: Basic
Section: 31
!o"ic: Sources an, uses of cas$

3-..
,:. #uring the +ear< Fitchen Suppl+ increase its accounts receiva'le '+ A130< ecrease its
inventor+ '+ A3.< an ecrease its accounts pa+a'le '+ A,0. Cow i these three accounts
affect the firm*s cash flows for the +ear-
A. A%,. use of cash
". A10. use of cash
C. A:. use of cash
#. A:. source of cash
$. A10. source of cash

AACSB: Analytic
Difficulty: Basic
Section: 31
!o"ic: Sources an, uses of cas$

.0. A firm generate net income of A939. &he epreciation e(pense was A,3 an iviens
were pai in the amount of A%.. Accounts pa+a'les ecrease '+ A13< accounts receiva'les
increase '+ A%%< inventor+ ecrease '+ A1,< an net fi(e assets ecrease '+ A9. &here
was no interest e(pense. What was the net cash flow from operating activit+-
A. A930
". A:0%
C. A:0,
#. A:%%
$. A:30
5et cash from operating activities K A939 L A,3 - A13 - A%% L A1, K A:0,

AACSB: Analytic
Difficulty: Basic
Section: 31
!o"ic: O"erating cas$ flo&s

3-.0
.1. A firm has sales of A%<1:0< net income of A13,< net fi(e assets of A1<000< an current
assets of A3%0. &he firm has A310 in inventor+. What is the common-si)e statement value of
inventor+-
. 13.30 percent
". 1,.10 percent
C. 1:.39 percent
#. 30.,% percent
$. ,3.00 percent
Common-si)e inventor+ K A310DHA1<000 L A3%0I K 13.30 percent

AACSB: Analytic
Difficulty: Basic
Section: 3'
!o"ic: Co%%on-si(e state%ents

.%. A firm has sales of A3<,00< net income of A3:0< total assets of A,<.00< an total equit+ of
A%<3.0. 1nterest e(pense is A,0. What is the common-si)e statement value of the interest
e(pense-
A. 0.9: percent
B. 1.19 percent
C. 3.0: percent
#. 10.%0 percent
$. 1,... percent
Common-si)e interest K A,0DA3<,00 K 1.19 percent

AACSB: Analytic
Difficulty: Basic
Section: 3'
!o"ic: Co%%on-si(e state%ents

3-.3
.3. @ast +ear< which is use as the 'ase +ear< a firm ha cash of A.%< accounts receiva'le of
A%19< inventor+ of A.0:< an net fi(e assets of A1<103. &his +ear< the firm has cash of A01<
accounts receiva'le of A1:9< inventor+ of A.%3< an net fi(e assets of A1<%10. What is the
common-'ase +ear value of accounts receiva'le-
A. 0.09
". 0.10
C. 0.99
D. 0.:1
$. 1.19
Common-'ase +ear accounts receiva'le K A1:9DA%19 K 0.:1

AACSB: Analytic
Difficulty: Basic
Section: 3'
!o"ic: Co%%on-base year state%ents

.,. /ussell*s #eli has cash of A130< accounts receiva'le of A93< accounts pa+a'le of A%1.< an
inventor+ of A,0:. What is the value of the quick ratio-
A. 0.31
". 0..3
C. 0.31
D. 1.0,
$. 1.03
6uick ratio K HA130 L A93IDA%1. K 1.0,

AACSB: Analytic
Difficulty: Basic
Section: 33

3-.9
... 4ptown Gen*s Wear has accounts pa+a'le of A%<%1,< inventor+ of A3<:.0< cash of A1<%03<
fi(e assets of A9<,00< accounts receiva'le of A3<:03< an long-term e't of A,<%00. What is
the value of the net working capital to total assets ratio-
A. 0.31
". 0.,%
C. 0.,3
D. 0..1
$. 0..0
5et working capital to total assets K HA1<%03 L A3<:03 L A3<:.0 - A%<%1,IDHA1<%03 L A3<:03 L
A3<:.0 L A9<,00I K 0..1

AACSB: Analytic
Difficulty: Basic
Section: 33

.0. A firm has total assets of A311<330 an net fi(e assets of A103<.3%. &he average ail+
operating costs are A%<:90. What is the value of the interval measure-
A. 31.,3 a+s
B. ,9.,0 a+s
C. .0.%% a+s
#. 09.0. a+s
$. 10,.0% a+s
1nterval measure K HA311<330 - A103<.3%IDA%<:90 K ,9.,0 a+s

AACSB: Analytic
Difficulty: Basic
Section: 33

3-.:
.3. A firm has a e't-equit+ ratio of 0.,%. What is the total e't ratio-
. 0.30
". 0.30
C. 0.,,
#. 1..9
$. %.39
&he e't-equit+ ratio is 0.,%. 1f total e't is A,% an total equit+ is A100< then total assets are
A1,%. &otal e't ratio K A,%DA1,% K 0.30.

AACSB: Analytic
Difficulty: Basic
Section: 33

.9. A firm has total e't of A,<0%0 an a e't-equit+ ratio of 0..3. What is the value of the
total assets-
A. A0<1%9.0.
". A3<%.3.,0
C. A:<.31.:.
#. A11<03,.00
E. A1%<3%..%0
&otal equit+ K A,<0%0D0..3 K A9<10..%0
&otal assets K A,<0%0 L A9<10..%0 K A1%<3%..%0

AACSB: Analytic
Difficulty: Basic
Section: 33

3-00
.:. A firm has sales of A09<,00< costs of A,%<:00< interest pai of A%<100< an epreciation of
A0<.00. &he ta( rate is 3, percent. What is the value of the cash coverage ratio-
. 1%.1,
". 1..%,
C. 13.%3
#. %3.,1
$. %,..0
Cash coverage ratio K HA09<,00 - A,%<:00IDA%<100 K 1%.1,

AACSB: Analytic
Difficulty: Basic
Section: 33

00. &he "ike Shop pai A%<310 in interest an A1<9.0 in iviens last +ear. &he times interest
earne ratio is %.% an the epreciation e(pense is A,00. What is the value of the cash
coverage ratio-
A. 1.03
". 1.90
C. %.%1
D. %.,0
$. %..%
$"1& K %.% A%<310 K A.<09%? Cash coverage ratio K HA.<09% L A,00IDA%<310 K %.,0

AACSB: Analytic
Section: 33

3-01
01. Al*s Sport Store has sales of A9:3<,00< costs of goos sol of A0%9<300< inventor+ of
A%09<,00< an accounts receiva'le of A3,<100. Cow man+ a+s< on average< oes it take the
firm to sell its inventor+ assuming that all sales are on creit-
A. 3,.1: a+s
". 9,.30 a+s
C. 1%1.03 a+s
#. 139.,0 a+s
$. 1.1.%1 a+s
1nventor+ turnover K A0%9<300DA%09<,00 K 3.01,93.
#a+s in inventor+ K 30.D3.01,93. K 1%1.03 a+s

AACSB: Analytic
Difficulty: Basic
Section: 33

0%. &he Flower Shoppe has accounts receiva'le of A3<30:< inventor+ of A,<,03< sales of
A%19<0,0< an cost of goos sol of A103<300. Cow man+ a+s oes it take the firm to 'oth
sell its inventor+ an collect the pa+ment on the sale assuming that all sales are on creit-
A. 1,.03 a+s
B. 1..91 a+s
C. 10.%3 a+s
#. 13.19 a+s
$. 13.,3 a+s
#a+s in inventor+ K 30.DHA103<300DA,<,03I K :.01, a+s
#a+s* sales in receiva'les K 30.DHA%19<0,0DA3<30:I K 0.1:% a+s
&otal a+s in inventor+ an receiva'les K :.01, L 0.1:% K 1..91 a+s

AACSB: Analytic
Difficulty: Basic
Section: 33

3-0%
03. A firm has net working capital of A%<31.< net fi(e assets of A%%<,03< sales of A31<3.0<
an current lia'ilities of A3<:09. Cow man+ ollars worth of sales are generate from ever+
A1 in total assets-
. A1.09
". A1.1,
C. A1.1:
#. A1.%0
$. A1.30
&otal asset turnover K A31<3.0DHA%<31. L A%%<,03 L A3<:09I K 1.09
$ver+ A1 in total assets generates A1.09 in sales.

AACSB: Analytic
Difficulty: Basic
Section: 33

0,. &he 2urple Gartin has annual sales of A093<,00< total e't of A%10<000< total equit+ of
A30.<000< an a profit margin of ..%0 percent. What is the return on assets-
. 0.%% percent
". 0.,9 percent
C. 3.0% percent
#. 3.39 percent
$. :.3: percent
/eturn on assets K H.0.%0 A093<,00IDHA%10<000 L A30.<000I K 0.%% percent

AACSB: Analytic
Difficulty: Basic
Section: 33

3-03
0.. /elia'le Cars has sales of A903<%00< total assets of A1<10.<100< an a profit margin of :.09
percent. &he firm has a total e't ratio of 39 percent. What is the return on equit+-
A. 13.0: percent
". 10.03 percent
C. 13.09 percent
#. %9..0 percent
E. 3%.1, percent
/eturn on equit+ K H.0:09 A903<%00IDMA1<10.<100 H1 - .39IN K 3%.1, percent

AACSB: Analytic
Section: 33

00. &he Geat Garket has A3,3<000 in sales. &he profit margin is ,.1 percent an the firm has
3<.00 shares of stock outstaning. &he market price per share is A%3. What is the price-
earnings ratio-
. 0.01
". 9.:9
C. 11.,%
#. 13.1.
$. 1,.%3
$arnings per share K H.0,1 A3,3<000ID3<.00 K ,.0930
2rice-earnings ratio K A%3D,.0930 K 0.01

AACSB: Analytic
Difficulty: Basic
Section: 33

3-0,
03. "ig 8u+ Su's has net income of A1.0<:90< a price-earnings ratio of 1%.9< an earnings per
share of A0.93. Cow man+ shares of stock are outstaning-
A. 13<..9
". 1,<,03
C. 10.<.%3
#. 131<000
E. 133<.,0
5um'er of shares K A1.0<:90DA0.93 K 133<.,0

AACSB: Analytic
Difficulty: Basic
Section: 33

09. A firm has 100<000 shares of stock outstaning< sales of A1.:, million< net income of
A1%0<,00< a price-earnings ratio of 19.3< an a 'ook value per share of A:.1%. What is the
market-to-'ook ratio-
. 1.0%
". 1.9,
C. %.%3
#. %.,.
$. %..3
$arnings per share K A1%0<,00D100<000 K A0.3:
2rice per share K A0.3: 19.3 K A1,.333
Garket-to-'ook ratio K A1,.333DA:.1% K 1.0%

AACSB: Analytic
Section: 33

3-0.
0:. ;scar*s #og Couse has a profit margin of ..0 percent< a return on assets of 1%.. percent<
an an equit+ multiplier of 1.,:. What is the return on equit+-
A. 13.1, percent
B. 19.03 percent
C. 1:.03 percent
#. %1.0: percent
$. %%.30 percent
/eturn on equit+ K 1%.. percent 1.,: K 19.03 percent< using the #u 2ont 1entit+

AACSB: Analytic
Difficulty: Basic
Section: 3*

30. &a+lor*s Gen*s Wear has a e't-equit+ ratio of ,% percent< sales of A3,:<000< net income
of A,1<300< an total e't of A1:9<,00. What is the return on equit+-
A. 3.3: percent
". 9.,1 percent
C. 9.3, percent
#. :.0: percent
$. :.10 percent
/eturn on equit+ K A,1<300DHA1:9<,00D0.,%I K 9.3, percent

AACSB: Analytic
Difficulty: Basic
Section: 3*

3-00
31. A firm has a e't-equit+ ratio of .3 percent< a total asset turnover of 1.1%< an a profit
margin of ,.: percent. &he total equit+ is A.11<0,0. What is the amount of the net income-
A. A%9<03:
". A3.<1,3
C. A,,<09,
#. A,3<001
$. A.%<,19
/eturn on equit+ K .0,: 1.1% H1 L 0..3I K .0901010
5et income K A.11<0,0 .0901010 K A,,<09,

AACSB: Analytic
Section: 3*

3-03

3%. What is the quick ratio for %00:-
A. 0..0
B. 0.00
C. 1.3%
#. 1.03
$. 1.3:
6uick ratio for %00: K HA%09<100 - A190<300IDA13,<300 K 0.00

AACSB: Analytic
Difficulty: Basic
Section: 33

3-09
33. Cow man+ a+s of sales are in receiva'les- H4se %00: valuesI
A. 13.09 a+s
". %3.33 a+s
C. %0.,: a+s
#. %:.,1 a+s
E. 3%.:3 a+s
Accounts receiva'le turnover for %00: K A0%3<900DA.0<300 K 11.03
#a+s* sales in receiva'les for %00: K 30.D11.03 K 3%.:3

AACSB: Analytic
Difficulty: Basic
Section: 33

3,. What is the price-sales ratio for %00: if the market price is A19.,: per share-
A. %.,3
". 3.%:
C. 3.03
D. ,.1%
$. ,.39
2rice-sales ratio K A19.,:DMA0%3<900DHA1,0<000DA1IN K ,.1%

AACSB: Analytic
Difficulty: Basic
Section: 33

3-0:
3.. What is e't-equit+ ratio- H4se %00: valuesI
A. 0..%
". 0.93
C. 0.:,
D. 1.01
$. 1.00
#e't-equit+ ratio K HA13,<300 L A1,1<000IDHA1,0<000 L A131<900I K 1.01

AACSB: Analytic
Difficulty: Basic
Section: 33

30. What is the cash coverage ratio for %00:-
A. :.,3
B. 10..3
C. 11.0,
#. 11.9%
$. 1%.31
Cash coverage ratio K HA:.<%00 L A11<%00IDA10<100 K 10..3

AACSB: Analytic
Difficulty: Basic
Section: 33

3-30
33. What is the return on equit+- H4se %00: valuesI
A. 10.%0 percent
". 10.39 percent
C. %0.09 percent
#. %:.:0 percent
$. ,0.1, percent
/eturn on equit+ K A.0<%00DHA1,0<000 L A131<900I K %0.09 percent

AACSB: Analytic
Difficulty: Basic
Section: 33

39. What is the amount of the iviens pai for %00:-
A. A11<100
". A1.<000
C. A3%<000
#. A,1<%00
E. A,.<100
#iviens pai K A.0<%00 - HA131<900 - A1%0<300I K A,.<100

AACSB: Analytic
Difficulty: Basic
Section: 31

3-31
3:. What is the amount of the cash flow from investment activit+ for %00:-
A. A19<100
". A%,<900
C. A%:<300
#. A3%<000
$. A3:<,00
Cash flow from investment activit+ K A%3:<,00 - A%01<300 L A11<%00 K A%:<300

AACSB: Analytic
Difficulty: Basic
Section: 31

3-3%
90. What is the net working capital to total assets ratio for %00:-
A. %,.19 percent
". 30.9% percent
C. ,..,: percent
#. .1.,3 percent
$. 0..93 percent
5et working capital to total assets for %00: K HA%3<1%: - A9<39,IDA,1<%0: K ,..,: percent

AACSB: Analytic
Difficulty: Basic
Section: 33

91. Cow man+ a+s on average oes it take 2recision &ool to sell its inventor+- H4se %00:
valuesI
A. 10,.30 a+s
". 193.33 a+s
C. %1:.03 a+s
#. %,3.,0 a+s
E. %93.31 a+s
#a+s* sales in inventor+ K 30.DHA%9<%%.DA%1<:09I K %93.31 a+s

AACSB: Analytic
Difficulty: Basic
Section: 33

3-33
9%. Cow man+ ollars of sales are 'eing generate from ever+ ollar of net fi(e assets- H4se
%00: values.I
A. A0.99
". A1.93
C. A%.33
D. A%..:
$. A3.0:
Fi(e asset turnover for %00: K A30<,09DA1,<090 K %..:
For ever+ A1 in net fi(e assets< the firm generates A%..: in sales.

AACSB: Analytic
Difficulty: Basic
Section: 33

93. What is the equit+ multiplier for %00:-
A. 1.03
". 1.3%
C. 1.99
D. 1.:3
$. %.03
$quit+ multiplier for %00: K A,1<%0:DHA13<.00 L A3<9%.I K 1.:3

AACSB: Analytic
Difficulty: Basic
Section: 33

3-3,
9,. What is the times interest earne ratio for %00:-
A. :.03
". 10.1%
C. 1%..:
#. 1,.:3
$. 10.0.
&imes interest earne for %00: K A0<,%3DA.10 K 1%..:

AACSB: Analytic
Difficulty: Basic
Section: 33

9.. What is the return on equit+ for %00:- H4se %00: valuesI
A. 1..%: percent
". 10.,0 percent
C. 13.39 percent
D. 19.0% percent
$. 19.1% percent
/eturn on equit+ for %00: K A3<9,3DHA13<.00 L A3<9%.I K 19.0% percent

AACSB: Analytic
Difficulty: Basic
Section: 33

3-3.
90. What is the net cash flow from investment activit+ for %00:-
A. -A1<9,0
B. -A1<090
C. -A90
#. A90
$. A1<9,0
5et cash flow from investment activit+ for %00: K -A1<090
Aition to net fi(e assets K A1,<090 - A1,<100 L A1<300 K A1<090

AACSB: Analytic
Difficulty: Basic
Section: 31

93. Cow oes accounts receiva'le affect the statement of cash flows for %00:-
A. a use of A,<%19 of cash as an investment activit+
". a source of A903 of cash as an operating activit+
C. a use of A,<%19 of cash as a financing activit+
#. a source of A903 of cash as an investment activit+
E. a use of A903 of cash as an operating activit+
Change in accounts receiva'le for %00: K A,<%19 - A3<,11 K A903
An increase in accounts receiva'le is a use of cash as an operating activit+.

AACSB: Analytic
Difficulty: Basic
Section: 31

3-30
99. "@ @um'er has earnings per share of A1.%1. &he firm*s earnings have 'een increasing at
an average rate of 3.1 percent annuall+ an are e(pecte to continue oing so. &he firm has
%1<.00 shares of stock outstaning at a price per share of A19.30. What is the firm*s 2$8
ratio-
A. 0.,9
". 1.%,
C. %.9.
#. 3.:3
E. ,.::
2$8 ratio K HA19.30DA1.%1IDH.031 100I K ,.::

AACSB: Analytic
Difficulty: Basic
Section: 33

9:. &ownsen $nterprises has a 2$8 ratio of ..3< net income of A,:<%00< a price-earnings
ratio of 13.0< an a profit margin of 3.1 percent. What is the earnings growth rate-
A. 0.33 percent
". 1.00 percent
C. 3.3% percent
#. ..30 percent
$. 10.00 percent
..3 K 13.0DH$arnings growth rate 100I? $arnings growth rate K 3.3% percent

AACSB: Analytic
Difficulty: Basic
Section: 33

3-33
:0. A firm has total assets with a current 'ook value of A09<300< a current market value of
A3,<300< an a current replacement cost of A3.<000. What is the value of &o'in*s 6-
A. .9.
". .93
C. .:%
#. .:.
E. .:9
&o'in*s 6 K A3,<300DA3.<000 K .:9

AACSB: Analytic
Difficulty: Basic
Section: 33

:1. #i(ie Suppl+ has total assets with a current 'ook value of A309<:00 an a current
replacement cost of A,90<%00. &he market value of these assets is A,0,<900. What is the value
of &o'in*s 6-
A. .90
". .:%
C. .:0
#. 1.01
$. 1.00
&o'in*s 6 K A,0,<900DA,90<%00 K .:0

AACSB: Analytic
Difficulty: Basic
Section: 33

3-39
:%. #anelion Fiels has a &o'in*s 6 of .:0. &he replacement cost of the firm*s assets is
A%%.<000 an the market value of the firm*s e't is A10:<000. &he firm has %0<000 shares of
stock outstaning an a 'ook value per share of A%.0:. What is the market to 'ook ratio-
. %..0 times
". 3.19 times
C. 3.., times
#. ,.01 times
$. ,.%0 times
Garket value of assets K .:0 A%%.<000 K A%10<000
Garket value of equit+ K A%10<000 - A10:<000 K A103<000
Garket value per share A103<000D%0<000 K A..3.
Garket-to-'ook ratio K A..3.DA%.0: K %..0 times

AACSB: Analytic
Section: 33

:3. A firm has annual sales of A3%0<000< a price-earnings ratio of %,< an a profit margin of
,.% percent. &here are 1,<000 shares of stock outstaning. What is the price-sales ratio-
A. 0.:3
B. 1.01
C. 1.09
#. 1.1.
$. 1.%%
$arnings per share K HA3%0<000 .0,%ID1,<000 K A0.:0
2rice-sales ratio K H%, A0.:0IDHA3%0<000D1,<000I K 1.01

AACSB: Analytic
Section: 33

3-3:
:,. @assiter 1nustries has annual sales of A%%0<000 with 10<000 shares of stock outstaning.
&he firm has a profit margin of 3.. percent an a price-sales ratio of 1.%0. What is the firm*s
price-earnings ratio-
A. 1,
B. 10
C. 19
#. %0
$. %%
2rice per share K 1.%0 HA%%0<000D10<000I K A%0.,0
$arnings per share K HA%%0<000 .03.ID10<000 K A1.0.
2rice-earnings ratio K A%0.,0DA1.0. K 10

AACSB: Analytic
Section: 33

Essay Questions

:.. Assume a firm has a positive cash 'alance which is increasing annuall+. Wh+ then is it
important to anal+)e a statement of cash flows-
1t is possi'le that the increase in the cash 'alance is a result of issuing more equit+ or
assuming more e't an not the result of generating cash from operations. 1f a firm cannot
generate positive cash flows internall+< the firm will eventuall+ encounter ifficulties in
raising e(ternal funs an coul possi'l+ face 'ankruptc+.
Fee'ack! /efer to section 3.1

AACSB: 0eflective t$in2ing
Difficulty: Basic
Section: 31

3-90
:0. Jou nee to anal+)e a firm*s performance in relation to its peers. Jou can o this either '+
comparing the firms* 'alance sheets an income statements or '+ comparing the firms* ratios.
1f +ou onl+ ha time to use one means of comparison which metho woul +ou use an wh+-
Firms generall+ are si)e ifferentl+ making it ifficult to o comparisons on a ollar 'asis.
"+ using ratios< the relationships 'etween varia'les can 'e seen without 'eing influence '+
firm si)e. 1n aition< ratios allow +ou to anal+)e performance an see relationships that are
ifficult to see when looking onl+ at ollar amounts. &hus< the logical choice woul 'e to
compare the firms using ratio anal+sis.
Fee'ack! /efer to section 3..

Section: 3-
!o"ic: 0atio analysis

:3. 1n general< what oes a high &o'in*s 6 value inicate an how relia'le oes that value
ten to 'e-
A high &o'in*s 6 inicates that the current market value of a firm*s assets represents a high
percentage of the firm*s replacement cost. Cigher 6 values ten to inicate that a firm has a
significant competitive avantage anDor has attractive investment opportunities. &he pro'lem
with &o'in*s 6 is that the information use in the computation of the 6 value is often
questiona'le.

Section: 33
!o"ic: !obin5s 1

3-91
:9. What value oes the 2$8 ratio provie to financial anal+sts-
&he 2$8 ratio ivies the 2$ ratio '+ the e(pecte future earnings growth rate H&he growth
rate is multiplie '+ 100I. A high 2$8 value tens to inicate that the firm*s 2$ ratio< an thus
the stock price< is too high relative to the e(pecte growth rate of the firm*s earnings. &his is
particularl+ true when a firm*s 2$8 an 2$ ratios are noticea'l+ greater than those of its
peers.

Section: 33
!o"ic: +46 an, +4 ratios

::. What value can the price-sales ratio provie to financial managers that the price-earnings
ratio cannot-
&he price-earnings ratio loses its value when a firm has either )ero or negative earnings. &his
pro'lem is avoie '+ using the price-sales ratio as sales shoul alwa+s 'e a positive value. 1n
aition< the price-sales ratio is not affecte '+ a firm*s e(penses or ta(es whereas the price-
earnings ratio is. 1f earnings are positive< 'oth ratios can 'e use to ascertain if there is an+
maEor change in the relationship 'etween a firm*s costs an its sales from one time perio to
another.

Section: 33
!o"ic: +rice-sales ratio

3-9%
100. 1t is commonl+ recommene that the managers of a firm compare the performance of
their firm to that of its peers. 1ncreasingl+< this is 'ecoming a more ifficult task. $(plain
some of the reasons wh+ comparisons of this t+pe can frequentl+ 'e either ifficult to perform
or prouce misleaing results.
Gan+ firms are involve in multiple areas of 'usiness over iverse geographical locations
there'+ making it ifficult< if not impossi'le to ientif+ a peer that has trul+ similar
operations. Firms operating in ifferent areas ma+ 'e su'Eecte to various regulations which
might affect also their operations. 1n aition< man+ firms are c+clical in nature an have
var+ing fiscal +ears which complicates the comparison of financial statements. &he financial
results for a firm are also affecte '+ various accounting practices an one-time events< such
as a merger< acquisition< or ivestiture. 1f each of these ifferences 'etween firms is not
hanle properl+< an+ resulting comparisons or conclusions can 'e fault+. So< while it is
recommene that peer anal+sis 'e conucte< oing so in a meaningful manner can present
quite a challenge.
Fee'ack! /efer to section 3..

Section: 3-
!o"ic: +eer analysis


101. &he "urger Cut has sales of A%: million< total assets of A,3 million< an total e't of A13
million. &he profit margin is 11 percent. What is the return on equit+-
A. 3.,% percent
B. 10.03 percent
C. 11.09 percent
#. 13.31 percent
$. 1,.%9 percent
/eturn on equit+ K H.11 A%:mIDHA,3m - A13mI K 10.03 percent

AACSB: Analytic
Difficulty: Basic
4OC 7: 3-'
Section: 33
!o"ic: 0eturn on e/uity

3-93
10%. &he Come Suppl+ Co. has a current accounts receiva'le 'alance of A300<000. Creit
sales for the +ear Eust ene were A1<930<000. Cow man+ a+s on average i it take for
creit customers to pa+ off their accounts uring this past +ear-
A. .,.%: a+s
". .0.01 a+s
C. .3..0 a+s
D. .:.9, a+s
$. 01.00 a+s
/eceiva'les turnover K A1<930<000DA300<000 K 0.1 times
#a+s* sales in receiva'les K 30.D0.1 K .:.9, a+s

AACSB: Analytic
Difficulty: Basic
4OC 7: 3-3
Section: 33
!o"ic: Average collection "erio,

103. "@ 1nustries has ening inventor+ of A300<000< an cost of goos sol for the +ear Eust
ene was A1<,10<000. ;n average< how long oes a unit of inventor+ sit on the shelf 'efore it
is sol-
A. 13.10 a+s
". %1.,3 a+s
C. 33.00 a+s
#. 39.%: a+s
$. 93.13 a+s
1nventor+ turnover K A1<,10<000DA300<000 K ,.3 times
#a+*s sales in inventor+ K 30.D,.3 K 33.00 a+s

AACSB: Analytic
Difficulty: Basic
4OC 7: 3-*
Section: 33
!o"ic: .nventory turnover

3-9,
10,. Coulter Suppl+ has a total e't ratio of 0.,3. What is the equit+ multiplier-
A. 0.9:
". 1.13
C. 1.,3
D. 1.9:
$. %.13
#e't-equit+ ratio K .,3DH1 - 0.,3I K 0.9:
$quit+ multiplier K 1 L 0.9: K 1.9:

AACSB: Analytic
Difficulty: Basic
4OC 7: 3--
Section: 33
!o"ic: 4/uity %ulti"lier

10.. Cigh Gountain Foos has an equit+ multiplier of 1...< a total asset turnover of 1.3< an a
profit margin of 3.. percent. What is the return on equit+-
A. 9.:, percent
". 10.93 percent
C. 1%.0: percent
#. 1,.39 percent
E. 1..11 percent
/eturn on equit+ K .03. 1.3 1... K 1..11 percent

AACSB: Analytic
Difficulty: Basic
4OC 7: 3-8
Section: 3*

3-9.
100. @ancaster &o+s has a profit margin of :.0 percent< a total asset turnover of 1.31< an a
return on equit+ of %1.01 percent. What is the e't-equit+ ratio-
A. 0.%%
B. 0.%9
C. 0.,0
#. 0.3%
$. 0.39
$quit+ multiplier K .%101DH.0:0 1.31I K 1.%9
#e't-equit+ ratio K 1.%9 - 1 K 0.%9

AACSB: Analytic
Difficulty: Basic
4OC 7: 3-9
Section: 3*

103. Charlie*s Chicken has a e't-equit+ ratio of %.0.. /eturn on assets is :.% percent< an
total equit+ is A.00<000. What is the net income-
A. A10.<010
". A1,9<30:
C. A1.3<130
#. A101<009
$. A10,<:0:
$quit+ multiplier K 1 L %.0. K 3.0.
/eturn on equit+ K .0:% 3.0. K .%900
5et income K .%900 A.00<000 K A1.3<130

AACSB: Analytic
Difficulty: Basic
4OC 7: 3-1'
Section: 33
!o"ic: 4/uity %ulti"lier an, return on e/uity

3-90
109. Canine Suppl+ has sales of A%<%00< total assets of A1<,00< an a e't-equit+ ratio of 0.3.
1ts return on equit+ is 1. percent. What is the net income-
A. A139.10
". A1,1.,1
C. A1.%.0:
#. A1.0.03
E. A101..,
/eturn on equit+ K .1. K H5et incomeDA%<%00I HA%<%00DA1<,00I H1 L 0.30I
5et income K A101..,

AACSB: Analytic
4OC 7: 3-19
Section: 3*

10:. "illings< 1nc. has net income of A101<000< a profit margin of 3.0 percent< an an accounts
receiva'le 'alance of A1%3<100. Assume that 00 percent of sales are on creit. What is the
a+s* sales in receiva'les-
A. %1.:0 a+s
". %3..0 a+s
C. 33.19 a+s
#. 3..0, a+s
$. 30.1: a+s
Sales K A101<000D.030 K A%<119<,%1
Creit sales K A%<119<,%1 .00 K A1<3:9<1.9
Accounts receiva'le turnover K A1<3:9<1.9DA1%3<100 K 11 times
#a+s* sales in receiva'les K 30.D11 K 33.19 a+s

AACSB: Analytic
4OC 7: 3-1:
Section: 33
!o"ic: Days5 sales in receivables

3-93
110. 8lastone 2avers has a long-term e't ratio of 0.0 an a current ratio of 1.3. Current
lia'ilities are A300< sales are A,<,,0< the profit margin is :.. percent< an the return on equit+
is 1:.. percent. Cow much oes the firm have in net fi(e assets-
A. A,<990.19
B. A.<1:3.0:
C. A.<000.03
#. A.<9,9.1.
$. A0<103.30
Current assets K 1.3 A300 K A:10
5et income K .0:. A,<,,0 K A,%1.90
&otal equit+ K A,%1.90D.1:. K A%<103.030:
0.0 K @ong term e'tDH@ong-term e't L A%<103.030:I? @ong-term e't K A3<%,,.01.3
&otal e't K A300 L A3<%,,.01.3 K A3<:,,.01.3
&otal assets K A3<:,,.01.3 L A%<103.030: K A0<103.0:%%
5et fi(e assets K A0<103.0:%% - A:10 K A.<1:3.0:

AACSB: Analytic
4OC 7: 3-';
Section: 33
!o"ic: 0atios an, fi<e, assets

111. A firm has a e't-total asset ratio of 3, percent an a return on total assets of 13 percent.
What is the return on equit+-
A. %0 percent
B. .0 percent
C. 0. percent
#. 9, percent
$. 13. percent
H&otal assets - &otal equit+ID&otal assets K .3,? &otal equit+ K .%0 &otal assets
5et income K .13 &otal assets
/eturn on equit+ K .13 &otal assetsD.%0 &otal assets K .0 percent

AACSB: Analytic
4OC 7: 3-''
Section: 33
!o"ic: 0eturn on e/uity

3-99
11%. &he #ocksie 1nn has net income for the most recent +ear of A9<,.0. &he ta( rate was 39
percent. &he firm pai A1<300 in total interest e(pense an eucte A1<:00 in epreciation
e(pense. What was the cash coverage ratio for the +ear-
A. 10.,9 times
". 11.,9 times
C. 1%.3: times
D. 1%.:. times
$. 13.03 times
$arnings 'efore ta(es K A9<,.0DH1 - .39I K A13<0%:.03
$arnings 'efore interest< ta(es< an epreciation K A13<0%:.03 L A1<300 L A1<:00 K
A10<9%:.03
Cash coverage ratio K A10<9%:.03DA1<300 K 1%.:. times

AACSB: Analytic
4OC 7: 3-'3
Section: 33
!o"ic: Cas$ coverage ratio

113. "each Wear has current lia'ilities of A3.0<000< a quick ratio of 1.0.< inventor+ turnover
of 3.%< an a current ratio of %.:. What is the cost of goos sol-
A. A:90<000
". A1<000<000
C. A1<%00<000
D. A1<,00<000
$. A1<.00<000
Current assets K %.: A3.0<000 K A1<01.<000
HA1<01.<000 - 1nventor+IDA3.0<000 K 1.0.? 1nventor+ K A,33<.00
Costs of goos sol K 3.% A,33<.00 K A1<,00<000

AACSB: Analytic
4OC 7: 3-'*
Section: 33
!o"ic: Cost of goo,s sol,

3-9:

Chapter 03 - Working With Financial Statements

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