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Chapter 6 - Practice Problems
Chapter 6 - Practice Problems
Chapter 6 - Practice Problems
a. account receivable
c. account payable
d. inventory
e. retained earnings
a. I and IV only
b. I and II only
d. II and IV only
e. B and C
5. The financial records of Taylor and Daughter, show current assets of $850 and net fixed assets
of $2,450. The firm has $700 in liabilities, which is the amount the firm would need to pay today
to extinguish its debt. The firm estimates that it could sell its current assets for $800 and its fixed
assets for $1,990. What is the market value of the stockholders' equity?
a. $250
b. $800
c. $1,200
d. $2,090
e. $2,600
6. A firm's balance sheet shows current assets of $410, net fixed assets of $685, long-term debt
of $320, and owners' equity of $590. What is the value of the firm's current liabilities?
a. $35
b. $165
c. $185
d. $225
e. $825
7. A firm has cash of $15, accounts payable of $18, inventory of $102, net fixed assets of $147,
accounts receivable of $31, and stockholder's equity of $87. The current assets equal _____ and
the long-term debt is:
a. $148; $187.
b. $148; $190.
c. $148; $208.
d. $295; $190.
a. return on assets
b. total asset turnover
c. cash ratio
e. profit margin
9. _____ ratios are designed to determine a firm's long-run ability to meet its obligations.
a. Liquidity
b. Asset turnover
c. Profitability
d. Financial leverage
e. Market value
11. If a firm uses cash to purchase inventory, its quick ratio will increase.
a. True b. False
12. CatchaTan Co. had net sales of $750,000 over the past year. During that time, average
receivables were $150,000. Assuming a 365-day year, what was the average collection period?
a. 4 days
b. 5 days
c. 36 days
d. 48 days
e. 73 days
13. A firm has sales of $750, total assets of $400, and a debt-equity ratio of 1.50. If the return on
equity is 10 percent, what is the firm's net income?
a. $16
b. $20
c. $32
d. $40
14. Asset utilization ratios are intended to describe how efficiently a firm uses its assets to
generate sales.
a. True
b. False
15. A firm has a return on equity of 15 percent, earnings before taxes of $30,000, a total asset
turnover of.80, a profit margin of 4.5 percent, and a tax rate of 35 percent. What is the firm's
return on assets?
a. 3.6 percent
b. 3.9 percent
c. 5.7 percent
d. 6.4 percent
e. 9.3 percent
16. Under which of the following forms of business organization are the losses to an owner limited to the
amount which he or she has invested in the organization?
I. common stockholder II. limited partner III. general partner IV. sole proprietor
a. I only
b. I and II only
c. I, II and IV only
17. Which one of the following is an advantage enjoyed by a corporation but not by a sole proprietorship?
18. Which one of the following is a true statement concerning a general partnership?
a. General partners are not responsible for the debts of the partnership.
c. The income from the partnership is taxed as personal income to the individual partners.
a. One drawback of forming a corporation is that it makes it more difficult for the firm to
raise capital
c. One disadvantage of forming a corporation is that this makes it more difficult for the
firm's investors to transfer their ownership interests.
20. Three advantages of the corporation are the ease of transfer of ownership, limited liability for the
shareholders and an unlimited life for the business entity
a. True
b. False