Chapter 3 Financial Statements and Ratio Analysis
1. The stockholders' annual report must include ________.
A) common-size financial statements
B) an income statement
C) an advance tax statement
D) the margin of safety report
2. The 2002 Sarbanes-Oxley Act was designed to ____ ___.
A) limit the compensation that could be paid to corporate CEOs
B) eliminate the many disclosure and conflict-of-interest problems of corporations
C) provide uniform international accounting standards
D) provide the guidelines to minimize the tax
3. The Public Company Accounting Oversight Board (PCAOB) ________.
A) is a not-for-profit corporation that oversees auditors of public corporations
B) is a not-for-profit corporation that oversees managers of public corporations
C) is a for-profit corporation that oversees auditors of public corporations
D) is a for-profit corporation that oversees managers of public corporations
4. Gross profit is ________.
A) operating profits minus depreciation
B) operating profits minus cost of goods sold
C) sales revenue minus operating expenses
D) sales revenue minus cost of goods sold
5. Earnings available for common stockholders is calculated as net profits ________.
A) before taxes minus preferred dividends
B) after taxes minus preferred dividends
C) after taxes minus common dividends
D) before taxes minus common dividends
6. Retained earnings on the balance sheet represents the ________.
A) net profit after taxes
B) amount of proceeds more than the par value of the original sale of common stock
C) net profit after taxes minus preferred dividends
D) cumulative total of all earnings reinvested in the firm
7. The statement of cash flows ______
A) shows the financial position of a firm at a given point of time.
B) summarizes all the purchase and sale of fixed assets and raw materials
C) provides insight into a firm's operating, investment, and financing cash flows
D) classifies a firm's cash flows as operating, investing, financing, and other activities
8. A firm has the following accounts and financial data for 2014:
The firm's earnings available to common shareholders for 2014 is ________.
A) -$224.25 B) $195.40 C) $302.40 D) $516.60
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9. A firm has the following accounts and financial data for 2014:
The firm's earnings per share for 2014 is ________.
A) $0.5335
B) $0.5125
C) $0.3204
D) $0.3024
10. On the balance sheet, net fixed assets represent ________.
A) gross fixed assets at cost minus depreciation expense
B) gross fixed assets at market value minus depreciation expense
C) gross fixed assets at cost minus accumulated depreciation
D) gross fixed assets at market value minus
11. A firm's year-end retained earnings balance are $670,000 and $560,000 for 2018 and
2019, respectively. The firm reported net profits after taxes of $100,000 in 2019. The
firm paid dividends of ________ in 2019.
A) $10,000 B) $100,000
C) $110,000 D) $210,000
12. Information on the accounting policies, procedures, calculations, and transactions
underlying entries in the financial statements can be found on ________.
A) the notes to the financial statements
AB) the statement of retained earnings
C) the proxy statement
D) the management discussion and analysis
13. Colonial Furniture's net profits before taxes for 2015 totaled $354,000. The
company's total retained earnings were $338,000 for 2014 year-end and $389,000 for
2015 year-end. Colonial is subject to a 26 percent tax rate. What was the cash
dividend declared by Colonial Furniture in 2015?
A) $280,730 B) $310,000 C) $210,960 D) $110,660
14. The ________ analysis involves comparison of current to past performance and the
evaluation of developing trends.
A) Time-series B) Cross-sectional C) Marginal D) Break-even
15. Which of the following is a limitation of ratio analysis?
A) Financial ratios cannot reveal certain specific aspects of a firm's financial position.
B) Ratios that reveal large deviations from the norm indicate the possibility of a problem.
C) It is difficult to access audited financial statements for ratio analysis.
D) Ratio analysis assumes that inflation has no effect on a firm's business.
16. An analyst should be careful when conducting ratio analysis to ensure that ________.
A) the overall performance of a firm is not judged on a single ratio
B) the role of inflation is ignored
C) ratios being compared should be calculated using financial statements dated at different
points in time during the year
D) different accounting procedures are used
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17. Inflation can distort ________.
A) book value of inventory costs B) market value of revenue
C) market value of sales D) book value of revenue
18. Which of the following is true of current ratio?
A) The more predictable a firm's cash flows, the higher the acceptable current ratio.
B) A higher current ratio indicates a higher return on equity.
C) The more predictable a firm's current ratio, the higher the current liabilities.
D) A higher current ratio indicates a greater degree of liquidity. D
19. The_____ ratios are a measure of the speed with which various accounts are
converted into sales or cash.
A) Activity B) Liquidity C) Debt D) Profitability
20. The _____ ___ may indicate a firm is experiencing stockouts and lost sales.
A) Average payment period
B) Inventory turnover ratio
C) Average collection period
D) Quick
21. A(n) ________ is useful in evaluating credit policies.
A) average payment period
B) current ratio
C) average collection period
D) inventory turnover ratio
22. The __ ratio indicates that a firm will be able to meet interest obligations due on
outstanding debt.
A) Debt-to-equity
B) Interest turnover
C) Total assets turnover
D) Times interest earned
23. Two frequently cited ratios of profitability that can be read directly from the common-
size income statement are ________.
A) the earnings per share and the return on total assets
B) the gross profit margin and the earnings per share
C) the gross profit margin and the return on total assets
D) the gross profit margin and the net profit margin
24. The higher, the value of ________ ratio, the better able a firm is to fulfill its interest
obligations.
A) dividend payout
B) average collection period
C) times interest earned (TIE)
D) average payment period
25. The_______ measures the percentage of profit earned on each sales dollar before
interest and taxes but after all costs and expenses.
A) Net profit margin
B) Operating profit margin
C) Gross profit margin
D) Earnings available to common shareholders
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26. A firm with a gross profit margin which meets industry standard and a net profit
margin which is below industry standard must have excessive ________.
A) general and administrative expenses
B) cost of goods sold
C) dividend payments
D) debt interests
27. The ________ measures the overall effectiveness of management in generating profits
with its available assets.
A) Total asset turnover
B) Price/earnings ratio
C) Return on equity
D) Return on total assets
D) principal payments
28. Earnings multiplier (P/E) ratio measures the ________.
A) market value of the stock to earnings per share
B) intrinsic value of the stock to earnings per share
C) book value of the stock to earnings per share
D) market price of the stock to retained earnings
29. Key Financial Data
Income Statement, Dreamscape, Inc.
For the Year Ended December 31, 2013
1) Prepare a common-size income statement for Dreamscape, Inc. for the year ended
December 31, 2013.
2) Evaluate the company's performance against industry average ratios and against last
year's results.
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30. In the DuPont system of analysis, the return on total assets (asset) is equal to ________.
A) (return on equity) × (financial leverage multiplier)
B) (return on equity) × (total asset turnover)
C) (net profit margin) × (fixed asset turnover)
D) (net profit margin) × (total asset turnover)
31. The three basic ratios used in the DuPont system of analysis are ________.
A) net profit margin, total asset turnover, and return on investment
B) net profit margin, total asset turnover, and return on equity
C) net profit margin, total asset turnover, and equity multiplier
D) net profit margin, financial leverage multiplier, and return on equity
32. Financial leverage multiplier (FLM) is an indicator of how much ________ a
corporation is utilizing.
A) operating leverage B) long-term debt C) total debt D) total assets
33. Using the DuPont system of analysis, holding other factors constant, an increase in
financial leverage will result in ________.
A) an increase in the return on equity
B) a decrease in the gross profit margin
C) an increase in the gross profit margin
D) an increase in retained earnings
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Dana Dairy Products Key Ratios
Income Statement
For the Year Ended December 31, 2013
Balance Sheet Dana Dairy Products
December 31, 2013
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34. The current ratio for Dana Dairy Products in 2013 was ________
A) 1.58 B) 0.63 C) 1.10 D) 0.91
35. Since 2012, the liquidity of Dana Dairy Products ________
A) has deteriorated B) has remained the same
C) has improved D) is not determinable
36. The net working capital for Dana Dairy Products in 2013 was __ ______
A) $10,325 B) -$10,325 C) -$1,425 D) $14,250
37. The inventory management at Dana Dairy Products ________
A) has deteriorated B) has remained the same
C) has improved slightly D) cannot be determined
38. The average collection period for Dana Dairy Products in 2013 was ________.
A) 32.5 days B) 11.8 days. C) 25.3 days. D) 35.9 days
39. Dana Dairy Products had a ________ degree of financial leverage than the industry
standard, resulting in _______.
A) lower; lower return on total assets B) lower; lower return on equity
C) higher; higher return on equity D) higher; higher return on total assets
40. Using the modified DuPont formula allows the analyst to break Dana Dairy Products
return on equity into 3 components: the net profit margin, the total asset turnover,
and a measure of leverage (the financial leverage multiplier). Which of the following
mathematical expressions represents the modified DuPont formula relative to Dana
Dairy Products' 2013 performance?
A) 5.6 (ROE) = 2.5(ROA) × 2.22 (FLM)
B) 5.6 (ROE) = 3.3 (ROA) × 1.70 (FLM)
C) 4.0 (ROE) = 2.5 (ROA) × 2.00 (FLM)
D) 2.5 (ROE) = 5.6 (ROA) × 2.22 (FLM)
