MIDTERM DEPARTMENTAL EXAMINATION

Multiple Choice. Identify the choice that completes the statement or answers the question.

Some have argued that analyzing balance sheet items are more important than income statement items. Which of the
following could be a reason for this?
The balance sheet is a collection of all transactions, past and present, while the income statement only reflects the most
recent events.
The income statement is a poor tool for analyzing current transactions, while the balance sheet is better at this.
The balance sheet is a better measure of cash flow.
Profitability ratios use items from the balance sheet and profitability is the most important issue.

A comparison of the amounts for the same item in financial statements of two or more periods is called
Vertical analysis.
Return on total assets.
Earnings per share.
Horizontal analysis.

Leverage is
The ability to earn a satisfactory return on the investments in the business.
The proportion of debt to stockholders' equity.
The ability to pay current debts when they come due.
Also called profit margin.

When reviewing a credit application, the credit manager should be most concerned with the applicant company’s
Profit margin and return on assets.
Price-earnings ratio and current ratio.
Working capital and return on equity.
Working capital and current ratio.

An expression of the amount of each item in a statement as a percentage of some designated total for comparative
purposes is called
Vertical analysis.
Return on total assets.
Earnings per share.
Horizontal analysis.

Which of the following statements is correct? Statement 1. Ratios are used to compare different companies in the same
industry. Statement 2. Financial ratios are used to weigh and evaluate the operational performance of the company.
Statement 3. Liquidity ratios indicate how fast a company can generate cash to pay bills.
Statement 1 only.
Statement 2 only.
Statement 3 only.
All of the statements are correct.
None of the statement is correct.

Which of the following statements is correct? Statement 1. Asset utilization ratios describe how capital is being utilized to
buy assets. Statement 2. Profitability ratios allow one to measure the ability of the firm to earn an adequate return on
sales, total assets, and invested capital. Statement 3. Asset utilization ratios measure the returns on various assets such
as return on total assets.
Statement 1 only.
Statement 2 only.
Statement 3 only.
All of the statements are correct.
None of the statement is correct.

Which of the following statements is NOT correct? Statement 1. Debt utilization ratios are used to evaluate the firm's debt
position with regard to its asset base and earning power. Statement 2. The DuPont system of analysis emphasizes that
profit generated by assets can be derived by various combinations of profit margins and asset turnover. Statement 3.
Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets, but not a
combination of both.
Statement 1 only.
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Statement 2 only.
Statement 3 only.
All of the statements are NOT correct.
All of the statements are correct.

Which one of the following ratios would be of greatest interest to a bank that is considering lending money to a firm?
Average collection period
Inventory turnover
Return on equity
Times interest earned

Which of the following ratios is the best measure of profitability based upon the core running of the business?
Gross profit margin
Operating profit margin
Net profit margin
Return on assets

Merchandise inventory turnover measures the relationship between

Assets and current liabilities.
Merchandise inventory and current liabilities.
Expenses and merchandise inventory.
Cost of goods sold and merchandise inventory.

Justine Company has current assets of P400,000 and current liabilities of P500,000. Justine Company's current ratio would
be increased by:
The purchase of P100,000 of inventory on account.
The payment of P100,000 of accounts payable.
The collection of P100,000 of accounts receivable.
Refinancing a P100,000 long-term loan with short-term debt.

Gillian Company has a current ratio greater than 1 and an acid-test ratio less than 1. How would cash payments to suppliers
to reduce accounts payable affect these ratios?
Increased current ratio and increased quick ratio.
Decreased current ratio and decreased quick ratio.
Decreased current ratio and increased quick ratio.
Increases current ratio and decreased quick ratio.

Nathalie Inc. could improve its current ratio of 2 by:

Paying a previously declared stock dividend.
Writing off an uncollectible receivable.
Selling merchandise on credit at a profit.
Purchasing inventory on credit.

Aira Company has an acid-test (quick) ratio of 2.0. This ratio would decrease if:
Previously declared common stock dividends were paid.
The company collected an account receivable.
The company sold merchandise on open account that earned a normal gross margin.
The company purchased inventory on open account.

Angel Company has an acid-test ratio of 0.8. Which of the following actions would improve the acid-test ratio?
Collect some accounts receivable.
Acquire some inventory on account.
Sell some equipment for cash.
Use cash to pay off some accounts payable.

Accounts receivable turnover will normally decrease as a result of:

The write-off of an uncollectible account against the allowance for bad debts.
A significant sales volume decrease near the end of the accounting period.
An increase in cash sales in proportion to credit sales.
A change in credit policy to lengthen the period for cash discounts.
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Total liabilities divided by total stockholders' equity is the calculation for the
Current ratio.
Ratio of liabilities to stockholders' equity.
Return on investment ratio.
Times interest earned ratio.

Ratio analysis can be useful for

Historical trend analysis within a company.
Comparison of ratios within a single industry.
Measuring the effects of financing.
All of the statements are true.

In examining the liquidity ratios, the primary emphasis is the company's

Ability to effectively employ its resources.
Overall debt position.
Ability to pay short-term obligations on time.
Ability to earn an adequate return.

Which of the following is not an asset utilization ratio?

Inventory turnover
Return on assets
Fixed asset turnover
Average collection period

Which of the following is NOT considered to be a profitability ratio?

Profit margin
Times interest earned
Return on equity
Return on assets (investment)

Which two ratios are used in the DuPont system to create return on assets?
Return on assets and asset turnover
Profit margin and asset turnover
Return on total capital and the profit margin
Inventory turnover and return on fixed assets

For a given level of profitability as measured by profit margin, the company's return on equity will
Increase as its debt-to-assets ratio decreases.
Decrease as its current ratio increases.
Increase as its debt-to assets ratio increases.
Decrease as its times-interest-earned ratio decreases.

Asset utilization ratios

Relate balance sheet assets to income statement sales.
Measure how much cash is available for reinvestment into current assets.
Are most important to stockholders.
Measures the company's ability to generate a profit on sales.

A decreasing average collection period could be associated with (select one best answer)
Increasing sales.
Decreasing sales.
Decreasing account receivable.
None of the choices.

If accounts receivable stays the same, and credit sales go up

The average collection period will go up.
The average collection period will go down.
Accounts receivable turnover will increase.
None of the choices.
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Total asset turnover indicates the company's

Liquidity.
Debt position.
Ability to use its assets to generate sales.
Profitability.

When is the return on assets equal to the return on equity?

When the current ratio of the company equals 1.
When the company issues equal amounts of long-term debt and common stock.
When the company issues no dividends for a given time period.
When the company only issues equity to finance its borrowing.

Investors and financial analysts wanting to evaluate the operating efficiency of a company's managers would probably
look primarily at the company's
Debt utilization ratios.
Liquidity ratios.
Asset utilization ratios.
Profitability ratios.

Which one of the following ratios would be of greatest interest to the common shareholders?
Current ratio
Total asset turnover
Return on equity
Average collection period

According to the DuPont formula, which one of the following will not increase a profitable company’s return on equity?
Increasing total asset turnover.
Increasing net profit margin.
Lowering corporate income taxes.
Lowering equity multiplier.

Shaila Company has a current ratio of 2.5. What will be the effect of a purchase of inventory with cash on the acid-test
ratio and on working capital?
Decreased acid-test ratio and decreased working capital.
Decreased acid-test ratio and no effect on working capital.
No effect on acid-test ratio and decreased working capital.
No effect on acid-test ratio and no effect working capital.

An increasing average collection period indicates

The company is generating more income.
Accounts receivable are going down.
The company is becoming more efficient in its collection policy.
The company is becoming less efficient in its collection policy.

Which of the following is NOT a purpose of the statement of cash flows?

To show cash flow from operations.
To show cash flow from financing activities.
To show cash flow from investing activities.
To show all investing and financing transactions.
To show operating expenses for a period of time.

Holding all other things constant, which of the following represents a cash outflow?
The company sells a machine.
The company acquires inventory.
The company receives a bank loan.
The company increases accounts payable.

When calculating a company’s free cash flow from earnings before interest and taxes we must add back depreciation,
amortization and depletion expense and allowances because
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They are non-cash expenditures.

The accounting method for reporting such expenses may be different from that reported to the taxing authority.
They approximate the value of fixed asset purchases during the year.
They are unrelated to the amount of taxes paid during the year.

Gross profit variance analysis can be used to study the effect of:
Changes in selling prices on a company's profitability.
Changes in cost of goods sold on a company's profitability.
Changes in volume of goods sold on a company's profitability.
Changes in product sales mix on a company's profitability.
All of the choices.

All other things being equal, a company that sells multiple products should attempt to structure its sales mix so the
greatest portion of the mix is composed of those products with the highest:
Selling price.
Cost of goods sold.
Gross profit/margin.
Quantity/unit sold.
Fixed costs.

Which of the following underlying assumptions form(s) the basis for gross profit variance analysis?
Sales and costs behave in a linear manner.
Costs can be categorized as variable.
In multiproduct organizations, the sales mix remains discretionary.
All of the choices are assumptions that underlie gross profit variance analysis.