Examples of Questions on Ratio Analysis

A: Common-size Statements

1. BMX Company has the following data from its balance sheet.

Accounts 2019 2018

Cash 800,000 750,000
Accounts 210,000 160,000
receivables
Inventory 80,000 10,000
Total Assets 2,200,000 1,800,000

Using the common-size balance sheet approach, which of the years is better in terms of
cash and why?

Solutions
Note: Whenever common-size balance sheet approach is mentioned, you are to divide the
required parameter by Total Assets.

2019

2018
2. The following is data drawn from the income statement of 2 companies: MKX and
GTM.

Account MKX GTM

Net Sales 950,000 1,200,000
Cost of goods 150,000 210,000
sold
Net income 600,000 850,000

Using the common-size income statement approach, which of the companies is better in
terms of net income and why?

Solutions
Note: Whenever common-size income statement approach is mentioned, you are to
divide the required parameter by Net sales.

MKX

GTM
3. The following is data drawn from the balance sheet of 2 companies: ABC and XYZ.

Account ABC XYZ

Cash 500,000 400,000
Accounts 150,000 200,000
receivable
Inventories 250,000 260,000
Total current 550,000 500,000
liabilities
Total assets 1,500,000 1,650,000

Using the common-size balance sheet approach, determine which one of the companies is
better in terms of clearing (selling out) their inventories and why?

Solutions
Note: Whenever common-size balance sheet approach is mentioned, you are to divide the
required parameter by Total assets.

ABC

XYZ
4. The following is data for two different years drawn from the income statement of
Mouza Pharmacy.

Account 2019 2018

Net Sales 800,000 1,000,000
Cost of goods 100,000 150,000
sold
Total expenses 300,000 380,000
Net income 400,000 550,000

Using the common-size income statement approach, in which of the years was Mouza
Pharmacy better in terms of total expenses and why?

Solutions
Note: Whenever common-size income statement approach is mentioned, you are to
divide the required parameter by Net sales.

2019

2018

B: Multiple Choice Questions

1. Which of the following is considered a profitability measure?

a. Days sales in inventory
b. Fixed asset turnover
c. Price-earnings ratio
d. Cash coverage ratio
e. Return on Assets [23]
2. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15%
during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has
an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4.
Using the DuPont equation which of the firms has higher profit margin?

Solution

FIRM A

FIRM B

a. Firm A has a higher profit margin than firm B

b. Firm B has a higher profit margin than firm A
c. Firm A and B have the same profit margin
d. Firm A has a higher equity multiplier than firm B
e. You need more information to say anything about the firm's profit margin

3. If a firm has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal
to 1.1, what is the firm's Net Working Capital?

Solution

a. $0
b. $100
c. $200
d. $1,000
e. $1,200