MCQs

1. Allocation of the historic costs of fixed assets against the annual revenue they generate is
called
A) net profits.
B) gross profits.
C) depreciation.
D) amortization.
Answer: C

2. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method

used for ________ purposes.
A) tax
B) financial reporting
C) managerial
D) cost accounting
Answer: A

3. A corporation
A) must use the same depreciation method for tax and financial reporting purposes.
B) must use different depreciation methods for tax and financial reporting purposes.
C) may use different depreciation methods for tax and financial reporting purposes.
D) must use different (than for tax purposes), but strictly mandated, depreciation methods for
financial reporting purposes.
Answer: C

4. The depreciable value of an asset, under MACRS, is

A) the original cost (purchase price) only.
B) the original cost minus salvage value.
C) the original cost plus installation.
D) the original cost plus installation costs, minus salvage value.
Answer: C

5. Under MACRS, an asset which originally cost R10 000 is being depreciated using a 5-year
normal recovery period. What is the depreciation expense in year 3?
A) R1 900
B) R1 200
C) R1 500
D) R2 100
Answer: A

6. Under MACRS, an asset which originally cost R100 000 is being depreciated using a 10-
year normal recovery period. The depreciation expense in year 5 is
A) R10 000.
B) R12 000.
C) R21 000.
D) R 9 000.
Answer: D
7. ________ analysis involves the comparison of different firms' financial ratios at the same
point in time.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative
Answer: B

8. ________ analysis involves comparison of current to past performance and the evaluation
of developing trends.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative
Answer: A

9. The primary concern of creditors when assessing the strength of a firm is the firm's
A) profitability.
B) leverage.
C) short-term liquidity.
D) share price.
Answer: C

10. Present and prospective shareholders are mainly concerned with a firm's
A) risk and return.
B) profitability.
C) leverage.
D) liquidity.
Answer: A

11. To analyze the firm's financial performance, the following types of ratio analyses
EXCEPT ________ may be used.
A) time-series analysis
B) cross-section analysis
C) combined analysis
D) marginal analysis
Answer: D
12. Time-series analysis is often used to
A) assess developing trends.
B) correct errors of judgment.
C) reflect performance relative to some norm.
D) standardize results.
Answer: A

13. In ratio analysis, a comparison to a standard industry ratio is made to isolate ________
deviations from the norm.
A) positive
B) negative
C) any
D) standard
Answer: C

14. ________ evidence of the existence of a problem or outstanding management

performance is provided by ratio analysis.
A) Conclusive
B) Inconclusive
C) Complete
D) Definitive
Answer: B
Topic: Ratio Analysis Basics
Question Status: Revised
AACSB Guidelines: Reflective thinking skills

15. The analyst should be careful when conducting ratio analysis to ensure that
A) the overall performance of the firm is not judged on a single ratio.
B) the dates of the financial statements being compared are the same.
C) audited statements are used.
D) the same accounting procedures were used.
E) all of the above.
Answer: E

LONG QUESTIONS

1. Construct the DuPont system of analysis using the following financial data for Key Wahl
Industries and determine which areas of the firm need further analysis.

Key Financial Data:

Determine the following Ratios for Key Wahl Industries

4,500,000
Total asset turnover = = 0.67
6,750,000
3,375,000
Debt ratio = = 50%
6,750,000
1
Financial leverage multiplier = =2
1 - 0.5
 337,500
ROA = = 5%
6,750,000
ROE = ROA × Financial leverage multiplier = 10%
337,500
Net profit margin = = 7.5%
4,500,000

2. Calculate net operating profit after taxes (NOPAT) if a firm has sales of R1 000 000,
operating profit (EBIT) of R100 000, interest expense of R50 000, and a tax rate of 30%.

Answer = R70 000.

3. Calculate a firm's free cash flow if it has net operating profit after taxes of R60 000,
depreciation expense of R10 000, net fixed asset investment requirement of R40 000, a net
current asset requirement of R30 000 and a tax rate of 30%.

Answer = R0.

4. NICO Corporation had net current assets of R2 000 000 at the end of 2010 and R1 800 000
at the end of 2009. In addition, NICO had net spontaneous current liabilities of R1000 000 in
2010 and R1 500 000 in 2009. Using this information, NICO's net current asset investment
for 2010 was

Answer = -R300 000.