CHAPTER 03: WORKING WITH FINANCIAL STATEMENTS 18.

18. A firm uses 2011 as the base year for its financial statements. The common-size, base-year
1. Activities of a firm which require the spending of cash are known as: statement for 2012 has an inventory value of 1.08. This is interpreted to mean that the 2012
A. uses of cash. inventory is equal to 108 percent of which one of the following?
2. The sources and uses of cash over a stated period of time are reflected on the A. 2011 inventory expressed as a percent of 2011 total assets
A. statement of cash flows. 19. Which of the following ratios are measures of a firm's liquidity?
3. A common-size income statement is an accounting statement that expresses all of a firm's A. II and IV only
expenses as percentage of: 20. An increase in current liabilities will have which one of the following effects, all else held
A. sales. constant? Assume all ratios have positive values.
4. Which one of the following standardizes items on the income statement and balance sheet A. decrease in the quick ratio
relative to their values as of a chosen point in time? 21. An increase in which one of the following will increase a firm's quick ratio without affecting
A. common-base year statement its cash ratio?
5. Relationships determined from a firm's financial information and used for comparison A. accounts receivable
purposes are known as: 22. A supplier, who requires payment within ten days, should be most concerned with which one
A. financial ratios. of the following ratios when granting credit?
6. The formula which breaks down the return on equity into three component parts is referred to as A. cash
which one of the following? 23. A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do
A. Du Pont identity which one of the following?
7. The U.S. government coding system that classifies a firm by the nature of its business A. cover its operating costs for the next 48 days
operations is known as the: 24. Ratios that measure a firm's financial leverage are known as _____ ratios.
A. Standard Industrial Classification code. A. long-term solvency
8. Which one of the following is a source of cash? 25. Which one of the following statements is correct?
A. increase in accounts payable A. An increase in the depreciation expense will not affect the cash coverage ratio.
9. Which one of the following is a use of cash? 26. If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
A. decrease in common stock A. 0.5
10. Which one of the following is a source of cash? 27. The cash coverage ratio directly measures the ability of a firm's revenues to meet which
A. acquisition of debt one of its following obligations?
11. Which one of the following is a source of cash? A. payment of interest to a lender
A. decrease in inventory 28. Jasper United had sales of $21,000 in 2011 and $24,000 in 2012. The firm's current
12. On the Statement of Cash Flows, which of the following are considered financing activities? accounts remained constant. Given this information, which one of the following statements
I. increase in long-term debt must be true?
II. decrease in accounts payable A. The net working capital turnover rate increased.
III. interest paid 29. The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the
IV. dividends paid amount of inventory on hand at a constant level. Assume that both the cost per unit and the
A. I and IV only selling price per unit also remained constant. This accomplishment will be reflected in the
13. On the Statement of Cash Flows, which of the following are considered operating activities? firm's financial ratios in which one of the following ways?
I. costs of goods sold A. decrease in the day's sales in inventory
II. decrease in accounts payable 30. Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91. Sam's has
III. interest paid a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have
IV. dividends paid similar operations. Based on this information, Dee's must be doing which one of the following?
A. I, II, and III only A. utilizing its total assets more efficiently than Sam's
14. According to the Statement of Cash Flows, a decrease in accounts receivable will _____ the
cash flow from _____ activities. 31. Ratios that measure how efficiently a firm manages its assets and operations to generate net
A. increase; operating income are referred to as _____ ratios.
15. According to the Statement of Cash Flows, an increase in interest expense will _____ the A. profitability
cash flow from _____ activities. 32. If a firm produces a twelve percent return on assets and also a twelve percent return on
A. decrease; operating equity, then the firm:
16. On a common-size balance sheet all accounts are expressed as a percentage of: A. has an equity multiplier of 1.0.
A. total assets for the current year. 33. Which one of the following will decrease if a firm can decrease its operating costs, all else
17. On a common-base year financial statement, accounts receivables will be expressed relative to constant?
which one of the following? A. price-earnings ratio
A. base-year accounts receivables 34. Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one
of the following statements must be true if Al's has a higher PEG ratio than Ben's?
A. Ben's is increasing its earnings at a faster rate than the Al's.
35. Tobin's Q relates the market value of a firm's assets to which one of the following?
A. today's cost to duplicate those assets
36. The price-sales ratio is especially useful when analyzing firms that have which one of the
following?
A. negative earnings
37. Shareholders probably have the most interest in which one of the following sets of ratios?
A. net source of cash of $132
A. return on equity and price-earnings
38. Which one of the following accurately describes the three parts of the Du Pont identity? 48. During the year, Kitchen Supply increased its accounts receivable by $130, decreased its
A. equity multiplier, profit margin, and total asset turnover inventory by $75, and decreased its accounts payable by $40. How did these three accounts
39. An increase in which of the following will increase the return on equity, all else constant? affect the firm's cash flows for the year?
A. I and II only A. $95 use of cash
40. Which of the following can be used to compute the return on equity?
I. Profit margin × Return on assets
II. Return on assets × Equity multiplier III. Net
income/Total equity
IV. Return on assets × Total asset turnover
A. II and III only
41. The Du Pont identity can be used to help managers answer which of the following questions
related to a firm's operations?
I. How many sales dollars has the firm generated per each dollar of assets? 49. A firm generated net income of $862. The depreciation expense was $47 and dividends were
II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity? paid in the amount of $25. Accounts payables decreased by $13, accounts receivables
III. How much net profit is a firm generating per dollar of sales? increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There
IV. Does the firm have the ability to meet its debt obligations in a timely manner? was no interest expense. What was the net cash flow from operating activity?
A. I, II, and III only Net cash from operating activities = $862 + $47 - $13 - $28 + $14 = $882
42. A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its 50. A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of
cash to decrease its debt while maintaining its current equity and net income. Which one of the $720. The firm has $310 in inventory. What is the common-size statement value of inventory?
following will decrease as a result of this action? A. 13.36 percent
A. equity multiplier Common-size inventory = $310/($1,600 + $720) = 13.36 percent
43. Which one of the following statements is correct? 51. A firm has sales of $3,200, net income of $390, total assets of $4,500, and total equity of
$2,750. Interest expense is $50. What is the common-size statement value of the interest
A. Financial statements are frequently used as the basis for performance evaluations.
expense?
44. It is easier to evaluate a firm using financial statements when the firm:
Common-size interest = $50/$3,200 = 1.56 percent
A. uses the same accounting procedures as other firms in the industry.
52. Last year, which is used as the base year, a firm had cash of $52, accounts receivable of
45. The most acceptable method of evaluating the financial statements of a firm is to compare
$218, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61,
the firm's current:
accounts receivable of $198, inventory of $527, and net fixed assets of $1,216. What is the
A. financial ratios to the firm's historical ratios.
common-base year value of accounts receivable?
46. Which of the following represent problems encountered when comparing the financial
Common-base year accounts receivable = $198/$218 = 0.91
statements of two separate entities?
53. Russell's Deli has cash of $136, accounts receivable of $95, accounts payable of $210, and
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of
inventory of $409. What is the value of the quick ratio?
business.
Quick ratio = ($136 + $95)/$210 = 1.10
II. The operations of the two firms may vary geographically.
54. Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed
III. The firms may use differing accounting methods.
assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the
IV. The two firms may be seasonal in nature and have different fiscal year ends.
value of the net working capital to total assets ratio?
I,II,III,IV
Net working capital to total assets = ($1,263 + $3,907 + $7,950 - $2,214)/($1,263 + $3,907 +
47. I, II, III, and IVWise's Corner Grocer had the following current account values. What effect
$7,950 + $8,400) = 0.51
did the change in net working capital have on the firm's cash flows for 2012?
55. A firm has total assets of $310,100 and net fixed assets of $168,500. The average daily
operating costs are $2,980. What is the value of the interval measure?
Interval measure = ($310,100 - $168,500)/$2,980 = 47.52 days
56. A firm has a debt-equity ratio of 0.42. What is the total debt ratio?
The debt-equity ratio is 0.42. If total debt is $42 and total equity is $100, then total assets
are $142.

Total debt ratio = $42/$142 = 0.30.

57. A firm has total debt of $4,850 and a debt-equity ratio of 0.57. What is the value of the total
assets?
Total equity = $4,850/0.57 = $8,508.77
Total assets = $4,850 + $8,508.77 = $13,358.77
58. A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of
$6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio?
Cash coverage ratio = ($68,400 - $42,900)/$2,100 = 12.14
59. The Bike Shop paid $1,990 in interest and $1,850 in dividends last year. The times interest
earned ratio is 2.2 and the depreciation expense is $520. What is the value of the cash coverage
ratio?
EBIT = 2.2 × $1,990 = $4,378; Cash coverage ratio = ($4,378 + $520)/$1,990 = 2.46
60. Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400,
and accounts receivable of $74,100. How many days, on average, does it take the firm to sell
its inventory assuming that all sales are on credit?
Inventory turnover = $628,300/$208,400 = 3.014875
Days in inventory = 365/3.014875 = 121.07 days
61. The Flower Shoppe has accounts receivable of $3,506, inventory of $4,407, sales of $218,640,
and cost of goods sold of $169,290. How many days does it take the firm to sell its inventory and
collect the payment on the sale assuming that all sales are on credit?
Days in inventory = 365/($169,290/$4,407) = 9.502 days
Days' sales in receivables = 365/($218,640/$3,506) = 5.853 days
Total days in inventory and receivables = 9.502 + 5.853 = 15.35 days
62. A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and
current liabilities of $3,908. How many dollars worth of sales are generated from every $1 in total
assets?
Total asset turnover = $31,350/($2,715 + $22,407 +
$3,908) = 1.08 Every $1 in total assets generates $1.08 in
sales.
63. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000,
and a profit margin of 4.80 percent. What is the return on assets?
Return on assets = (.048 × $687,400)/($210,000 + $365,000) = 5.74 percent
64. Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of 9.68
percent. The firm has a total debt ratio of 78 percent. What is the return on equity?
Return on equity = (.0968 × $807,200)/[$1,105,100 × (1 - .78)] = 32.14 percent
65. The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has 7,500
shares of stock outstanding. The market price per share is $22. What is the price-earnings ratio?
Earnings per share = (.041 × $747,000)/7,500 = 4.0836
Price-earnings ratio = $22/4.0836 = 5.39
66. Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings per
share of $0.87. How many shares of stock are outstanding?
Number of shares = $150,980/$0.87 = 173,540
67. A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a
price-earnings ratio of 18.7, and a book value per share of $7.92. What is the market-to-book
ratio?
Earnings per share = $126,400/160,000 = $0.79
Price per share = $0.79 × 18.7 = $14.773
Market-to-book ratio = $14.773/$7.92 = 1.87
68. Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent,
and an equity multiplier of 1.49. What is the return on equity?
Return on equity = 12.5 percent × 1.49 = 18.63 percent, using the Du Pont Identity
69. Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of $749,000, net income of
$41,300, and total debt of $206,300. What is the return on equity?
Return on equity = $41,300/($206,300/0.42) = 8.41 percent
70. A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin
of 4.9 percent. The total equity is $511,640. What is the amount of the net income?
Return on equity = .049 × 1.12 × (1 + 0.57) = .0861616
Net income = $511,640 × .0861616 = $44,084
87. BL Lumber has earnings per share of $1.21. The firm's earnings have been increasing at an
average rate of 3.1 percent annually and are expected to continue doing so. The firm has
21,500 shares of stock outstanding at a price per share of $15.60. What is the firm's PEG
ratio?
PEG ratio = ($15.60/$1.21)/(.031 × 100) = 4.16
88. Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio
of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?
5.3 = 17.6/(Earnings growth rate × 100); Earnings growth rate = 3.32 percent
89. A firm has total assets with a current book value of $68,700, a current market value of $74,300,
and a current replacement cost of $79,200. What is the value of Tobin's Q?
Tobin's Q = $74,300/$79,200 = .94
90. Dixie Supply has total assets with a current book value of $368,900 and a current replacement
cost of $486,200. The market value of these assets is $464,800. What is the value of Tobin's
Q?
Tobin's Q = $464,800/$486,200 = .96
91. Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000
and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock
outstanding and a book value per share of $2.09. What is the market to book ratio?
Market value of assets = .96 × $225,000 = $216,000
Market value of equity = $216,000 - $101,000 = $115,000
Market value per share $115,000/20,000 = $5.75
Market-to-book ratio = $5.75/$2.09 = 2.75 times
92. A firm has annual sales of $320,000, a price-earnings ratio of 24, and a profit margin of 4.2
percent. There are 14,000 shares of stock outstanding. What is the price-sales ratio?
Earnings per share = ($320,000 × .042)/14,000 =
$0.96 Price-sales ratio = (24 ×
$0.96)/($320,000/14,000) = 1.01
93. Lassiter Industries has annual sales of $220,000 with 10,000 shares of stock outstanding. The
firm has a profit margin of 6 percent and a price-sales ratio of 1.20. What is the firm's price-
earnings ratio?
Price per share = 1.20 × ($220,000/10,000) = $26.40
Earnings per share = ($220,000 × .06)/10,000 = $1.32
Price-earnings ratio = $26.40/$1.32 = 20
94. The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of $13
million. The profit margin is 11 percent. What is the return on equity?
Return on equity = (.11 × $29m)/($43m - $13m) = 10.63 percent
95. The Home Supply Co. has a current accounts receivable balance of $280,000. Credit sales for
the year just ended were $1,830,000. How many days on average did it take for credit customers
to pay off their accounts during this past year?
 Receivables turnover = $1,830,000/$280,000 = Return on equity = .13 Total assets/.26 Total assets = 50 percent
6.536 times Days' sales in receivables = 365/6.536 105. The Dockside Inn has net income for the most recent year of $8,450. The tax rate was 35
= 55.85 percent. The firm paid $1,300 in total interest expense and deducted $1,900 in depreciation
96. BL Industries has ending inventory of $300,000, and cost of goods sold for the year just expense. What was the cash coverage ratio for the year?
ended was $1,410,000. On average, how long does a unit of inventory sit on the shelf before Earnings before taxes = $8,450/(1 - .35) = $13,000.00
it is sold?
Inventory turnover = $1,410,000/$300,000 = 4.7 times Earnings before interest, taxes, and depreciation = $13,000.00 + $1,300 + $1,900 =
Day's sales in inventory = 365/4.7 = 77.66 days $16,200.00 Cash coverage ratio = $16,200.00/$1,300 = 12.46 times
97. Coulter Supply has a total debt ratio of 0.52. What is the equity multiplier? 106. Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 3.2,
Debt-equity ratio = .52/(1 - 0.52) = 1.083 and a current ratio of 2.9. What is the cost of goods sold?
Current assets = 2.9 × $350,000 = $1,015,000
Equity multiplier = 1 + 1.083 = 2.083
98. High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and a profit ($1,015,000 - Inventory)/$350,000 = 1.65; Inventory =
margin of 7.5 percent. What is the return on equity? $437,500 Costs of goods sold = 3.2 × $437,500 =
Return on equity = .075 × 1.3 × 1.55 = 15.11 percent $1,400,000
99. Lancaster Toys has a profit margin of 7.5 percent, a total asset turnover of 1.71, and a return on
equity of 21.01 percent. What is the debt-equity ratio?
Equity multiplier = .2101/(.075 × 1.71) = 1.638
Debt-equity ratio = 1.638 - 1 = 0.638

100. Charlie's Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and total
equity is $560,000. What is the net income?
Equity multiplier = 1 + 2.05 = 3.05
Return on equity = .092 × 3.05 = .2806
Net income = .2806 × $560,000 = $157,136
101. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0.5. Its
return on equity is 15 percent. What is the net income?
Return on equity = .15 = (Net income/$2,200) × ($2,200/$1,400) × (1 + 0.50)
Net income = $140.00
102. Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts
receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the
days' sales in receivables?
Sales = $161,000/.076 = $2,118,421
Credit sales = $2,118,421 × .66 = $1,398,158
Accounts receivable turnover = $1,398,158/$127,100 = 11 times
Days' sales in receivables = 365/11 = 33.18 days
103. Gladstone Pavers has a long-term debt ratio of 0.6 and a current ratio of 1.6. Current liabilities
are $700, sales are $4,440, the profit margin is 9.5 percent, and the return on equity is 19.5
percent. How much does the firm have in net fixed assets?
Current assets = 1.6 × $700 = $1,120

Net income = .095 × $4,440 = $421.80

Total equity = $421.80/.195 = $2,163.0769

0.6 = Long term debt/(Long-term debt + $2,163.0769); Long-term debt =

$3,244.6153 Total debt = $700 + $3,244.6153 = $3,944.6153

Total assets = $3,944.6153 + $2,163.0769 =

$6,107.6922 Net fixed assets = $6,107.6922 -
$1,120 = $4,987.69
104. A firm has a debt-total asset ratio of 74 percent and a return on total assets of 13 percent.
What is the return on equity?
(Total assets - Total equity)/Total assets = .74; Total equity = .26
Total assets Net income = .13 Total assets