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Ratio Analysis
Ratio Analysis MCQs
?
Tosh Enterprises reported the following account information: Accounts receivable $400,000 Accounts payable $260,000 B...
1.68
2.14
5.00
5.29
?
Tosh Enterprises reported the following account information: Accounts receivable $400,000 Accounts payable $260,000 B...
0.68
1.68
2.14
2.31
?
Tosh Enterprises reported the following account information: Accounts receivable $400,000 Accounts payable $260,000 B...
$600,000
$1,120,000
$1,200,000
$1,220,000
?
A financial analyst has obtained the following data from Kryton Industries’ financial statements: Cash $200,000 Market...
0.5
0.8
1.00
1.20
?
Given an acid test ratio of 2.0, current assets of $5,000, and inventory of $2,000, the value of current liabilities is
$1,500
$2,500
$3,500
$6,000
?
The selected data pertain to Tilghman Company at December 31: Quick assets $208,000 Acid test ratio 2.6 to 1 Current ...
$59,429
$80,000
$134,857
$187,200
?
Devlin Company’s acid test ratio at May 31 Year 2, was
0.60 to 1.
0.90 to 1.
1.14 to 1.
1.86 to 1.
?
Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm experienced $2 million in cost of sales and sustains an inventory tur...
$1,000,000
$500,000
$1,500,000
$1,250,000
?
All of the following are included when calculating the acid test ratio except
Six-month treasury bills.
Prepaid insurance.
Accounts receivable.
60-day certificates of deposit.
?
A company’s cash ratio will decrease if the company
Purchases commercial paper.
Purchases materials on account.
Sells goods for cash at a selling price lower than cost.
Receives cash by issuing a short-term note payable.
?
In analyzing the short-term liquidity of a firm, many analysts prefer to use the quick (or acid test) ratio rather than the current ratio. The primary...
Quick ratio excludes account receivables.
Current ratio includes marketable securities that may be mispriced.
Pro-forma cash flow statements focus on cash only.
Conversion of inventory into cash is less reliable.
?
A corporation has $90 million in current assets. If the corporation has a current ratio of 1.2 and a quick ratio of 0.9, what is net working capital? ...
$10 million.
$15 million.
$81 million.
$108 million.
?
Bond Corporation has a current ratio of 2 to 1 and a quick ratio (acid test) of 1 to 1. A transaction that would change Bond’s quick ratio but ...
Sale of inventory on account at cost.
Collection of accounts receivable.
Payment of accounts payable.
Purchase of a patent for cash
?
Rice, Inc., uses the allowance method to account for uncollectible accounts. An account receivable that was previously determined uncollectible and wr...
None None
Increase Increase
Decrease Decrease
None Increase
?
Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets ex...
Increase the current ratio, but the quick ratio would not be affected.
Increase the quick ratio, but the current ratio would not be affected.
Increase both the current and quick ratios.
Decrease both the current and quick ratios.
?
Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets ex...
Increase the current ratio.
Decrease the current ratio.
Increase net working capital.
Decrease net working capital.
?
Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets ex...
Increase the current ratio.
Decrease the current ratio and the quick ratio.
Increase the quick ratio.
Not affect the current or quick ratios.
?
Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets ex...
Decreased the quick ratio.
Increased the quick ratio.
Increased net working capital.
Decreased the current ratio.
?
Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets ex...
Decreases net working capital.
Decreases the current ratio.
Decreases the quick ratio.
Affects all of the answers as indicated.
?
Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets ex...
Current ratio to a greater degree than the quick ratio.
Quick ratio to a greater degree than the current ratio.
Current and quick ratio to the same degree.
Current ratio but not the quick ratio.
?
Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company’s current ratio will be increased by
The purchase of $100,000 of inventory on account.
The payment of $100,000 of accounts payable.
The collection of $100,000 of accounts receivable.
Refinancing a $100,000 long-term loan with short-term debt.
?
Peters Company has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if
A previously declared stock dividend were distributed.
The company wrote off an uncollectible receivable.
The company sold merchandise on open account that earned a normal gross margin.
The company purchased inventory on open account.
?
Merit, Inc., uses the direct write-off method to account for uncollectible accounts receivable. If the company subsequently collects an account receiv...
None None
Increase Increase
Increase None
None Decrease
?
The following transactions occurred during a company’s first year of operations: I. Purchased a delivery van for cash II. Borrowed money by issuan...
I only.
I and II only.
II and III only.
I and III only.
?
Birch Products, Inc., has the following current assets: Cash $250,000 Marketable securities 100,000 Accounts receivable 800,000 Inventories 1,450,...
Current ratio will decrease if a payment of $100,000 cash is used to pay $100,000 of accounts payable.
Current ratio will not change if a payment of $100,000 cash is used to pay $100,000 of accounts payable.
Quick ratio will decrease if a payment of $100,000 cash is used to purchase inventory.
Quick ratio will not change if a payment of $100,000 cash is used to purchase inventory.
?
Davis Retail, Inc., has total assets of $7,500,000 and a current ratio of 2.3 times before purchasing $750,000 of merchandise on credit for resale. Af...
Remain at 2.3 times.
Be higher than 2.3 times.
Be lower than 2.3 times.
Be exactly 2.53 times.
?
Markowitz Company increased its allowance for uncollectible accounts. This adjustment will
Increase the acid test ratio.
Increase working capital.
Reduce debt-to-asset ratio.
Reduce the current ratio.
?
Garstka Auto Parts must increase its acid test ratio above the current 0.9 level in order to comply with the terms of a loan agreement. Which one of t...
Expediting collection of accounts receivable.
Selling auto parts on account.
Making a payment to trade accounts payable.
Purchasing marketable securities for cash.
?
The owner of a chain of grocery stores has bought a large supply of mangoes and paid for the fruit with cash. This purchase will adversely impact whic...
Working capital.
Current ratio.
Quick or acid test ratio.
Price earnings ratio.
?
Both the current ratio and the quick ratio for Spartan Corporation have been slowly decreasing. For the past two years, the current ratio has been 2.3...
The current portion of long-term debt has been steadily increasing.
The cash balance is unusually low.
The accounts receivable balance has decreased.
The inventory balance is unusually high.
?
The acid test ratio shows the ability of a company to pay its current liabilities without having to
Reduce its cash balance.
Borrow additional funds.
Collect its receivables.
Liquidate its inventory.
?
When a fixed asset is sold for less than book value, which one of the following will decrease?
Total current assets.
Current ratio.
Net profit.
Net working capital.
?
If a company has a current ratio of 2.1 and pays off a portion of its accounts payable with cash, the current ratio will
Decrease.
Increase.
Remain unchanged.
Move closer to the quick ratio.
?
Clauson, Inc., grants credit terms of 1/15, net 30 and projects gross sales for next year of $2,000,000. The credit manager estimates that 40% of thei...
20 days.
24 days.
27 days.
30 days.
?
Alliance Ltd. has $80 million in current assets, comprised of $30 million in inventory and $50 million in cash and marketable securities The companyâ€...
Decrease the current ratio and increase the quick ratio.
Decrease the quick ratio while the current ratio remains unchanged.
Leave both the current ratio and the quick ratio unchanged.
Decrease the current ratio and decrease the quick ratio.
?
Carson Corporation computed the following items from its financial records for the current year: Current ratio 2 to 1 Inventory turnover 54 days Ac...
60
90
78
42
?
To determine the operating cycle for a retail department store, which one of the following pairs of items is needed?
Days’ sales in accounts receivable and average merchandise inventory
Cash turnover and net sales.
Accounts receivable turnover and inventory turnover.
Asset turnover and return on sales.
?
Accounts receivable turnover ratio will normally decrease as a result of
The write-off of an uncollectible account (assume the use of the allowance for doubtful accounts method).
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.
?
Which one of the following inventory cost flow assumptions will result in a higher inventory turnover ratio in an inflationary economy?
FIFO.
LIFO.
Weighted average.
Specific identification.
?
The days’ sales in receivables ratio will be understated if the company
Uses a natural business year for its accounting period.
Uses a calendar year for its accounting period.
Uses average receivables in the ratio calculation.
Does not use average receivables in the ratio calculation.
?
When a balance sheet amount is related to an income statement amount in computing a ratio,
The balance sheet amount should be converted to an average for the year.
The income statement amount should be converted to an average for the year.
Both amounts should be converted to market value.
Comparisons with industry ratios are not meaningful.
?
The number of days’ sales in receivables is a measure of
Asset value.
Sales performance.
Profitability.
Liquidity.
?
A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivable, and a...
Net profit has increased.
The average collection period has decreased.
Gross profit has declined.
The size of the discount offered has decreased.
?
A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in th...
Average collection period has decreased.
Percentage discount offered has decreased.
Accounts receivable turnover has decreased.
Working capital has increased.
?
The ratio of sales to working capital is a measure of
Collectibility.
Financial leverage.
Liquidity.
Profitability.
?
A high sales-to-working-capital ratio could indicate
Unprofitable use of working capital.
Sales are not adequate relative to available working capital.
The firm is undercapitalized.
The firm is not susceptible to liquidity problems.
?
A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, that is, a 3% discount if payment is made ...
5 days.
10 days.
15 days.
20 days.
?
A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, that is, a 3% discount if payment is made ...
$1,808.22
$27,123.30
$36,164.38
$45,205.48
?
The Irwin Corporation has $3 million per year in credit sales The company’s average day’s sales outstanding is 40 days. Assuming a 360-day year wh...
$500,000
$333,333
$250,000
$75,000
?
The ratio that measures a firm’s ability to generate earnings from its resources is
Days’ sales in inventory
Sales to working capital.
Days’ sales in receivables
Asset turnover.
?
Maydale Inc ’s financial statements show the following information: Accounts receivable, end of Year1 $320,000 Credit sales for Year2 3,600,000 A...
0.1
9
10
11.25
?
Zubin Corporation experiences a decrease in sales and cost of goods sold, an increase in accounts receivable, and no change in inventory. If all else ...
Increased Increased
Increased Decreased
Decreased Increased
Decreased Decreased
?
On its year-end financial statements, Caper Corporation showed sales of $3,000,000, net fixed assets of $1,130,000 and total assets of $2,000,000 The ...
1.5 times.
43.3%
2.3 times.
65%
?
Globetrade is a retailer that buys virtually all of its merchandise from manufacturers in a country experiencing significant inflation. Globetrade is ...
Both the current ratio and the inventory turnover ratio would increase.
The current ratio would increase but the inventory turnover ratio would decrease.
The current ratio would decrease but the inventory turnover ratio would increase.
Both the current ratio and the inventory turnover ratio would decrease
?
Lancaster, Inc., had net accounts receivable of $168,000 and $147,000 at the beginning and end of the year respectively The company’s net income for...
9.51
10.15
10.79
10.87
?
A corporation is able to reduce its days’ sales in inventory by adopting a more efficient inventory management system. Other things remaining the sa...
Decrease the operating cycle and increase the cash cycle.
Not change the operating cycle and decrease the cash cycle.
Decrease the operating cycle and not change the cash cycle.
Decrease the operating cycle and decrease the cash cycle.
?
A company changes its credit policy from 2/10 net 30 to 1/10 net 90. The most likely effect of this change is to
Increase the days’ sales outstanding in accounts receivable and increase the cash cycle.
Increase the days’ sales outstanding in accounts receivable and decrease the cash cycle.
Decrease the days’ sales outstanding in accounts receivable and decrease the cash cycle.
Decrease the days’ sales outstanding in accounts receivable and increase the cash cycle.
?
A corporation has a decrease in its operating cycle and a decrease in its cash cycle. All else remaining unchanged this would occur if the corporation...
Payables period increased.
Receivables period decreased.
Receivables period increased.
Inventory period increased.
?
A debt to equity ratio is
About the same as the debt to assets ratio.
Higher than the debt to assets ratio.
Lower than the debt to assets ratio.
Not correlated with the debt to assets ratio.
?
The relationship of the total debt to the total equity of a corporation is a measure of
Liquidity.
Profitability.
Creditor risk.
Solvency.
?
Everything else being equal, a highly leveraged firm will have earnings per share. List A List B
More Lower
More Less volatile
Less Less volatile
Less Higher
?
If the ratio of total liabilities to equity increases, a ratio that must also increase is
Times interest earned.
Total liabilities to total assets.
Return on equity.
The current ratio.
?
A measure of long-term debt-paying ability is a company’s
Length of the operating cycle.
Return on assets.
Inventory turnover ratio.
Times interest earned ratio.
?
All of the following financial indicators are measures of liquidity and activity except the
Average collection period in days.
Merchandise inventory turnover.
Accounts receivable turnover.
Times interest earned ratio.
?
A bondholder would be most concerned with which one the following ratios?
Inventory turnover.
Times interest earned.
Quick ratio.
Earnings per share.
?
In general, as a company increases the amount of short-term financing relative to long-term financing, the
Greater the risk that it will be unable to meet principal and interest payments.
Leverage of the firm increases.
Likelihood of having idle liquid assets increases.
Current ratio increases.
?
Which one of the following factors would likely cause a firm to increase its use of debt financing as measured by the debt to total capital ratio?
Increased economic uncertainty.
An increase in the degree of operating leverage.
An increase in the price-earnings ratio.
An increase in the corporate income tax rate.
?
Which of the outcomes represented in the following table would result from a company’s retirement of debt with excess cash? Total Assets Turnover...
Increase Increase
Increase Decrease
Decrease Increase
Decrease Decrease
?
A company issued long-term bonds and used the proceeds to repurchase 40% of the outstanding shares of its stock. This financial transaction will like...
Total assets turnover ratio to increase.
Current ratio to decrease.
Times interest earned ratio to decrease.
Fixed charge coverage ratio to increase.
?
Stanford Company leased some special-purpose equipment from Vincent, Inc., under a long-term lease that was treated as an operating lease by Stanford....
Debt/equity ratio.
Accounts receivable turnover.
Fixed asset turnover.
Net income percentage.
?
Which one of the following is the best indicator of long-term debt paying ability?
Working capital turnover.
Asset turnover.
Current ratio.
Debt to total assets ratio.
?
The following information has been derived from the financial statements of Boutwell Company: Current assets $640,000 Total assets 990,000 Long-ter...
.5
.37
.33
.13
?
The interest expense for a company is equal to its earnings before interest and taxes (EBIT). The company’s tax rate is 40%. The company’s times i...
2
1
0.6
1.2
?
A company has interest expense of $4 million, sales revenue of $50 million, earnings before interest and taxes of $20 million, and an income tax rate ...
12.5
7.5
5.0
0.2
?
The degree of operating leverage (DOL) is
A measure of the change in earnings available to common stockholders associated with a given change in operating earnings.
A measure of the change in operating income resulting from a given change in sales.
Lower if the degree of total leverage is higher, other things held constant.
Higher if the degree of total leverage is lower, other things held constant.
?
For a firm with a degree of operating leverage of 3.5, an increase in sales of 6% will
Increase pre-tax profits by 3.5%.
Decrease pre-tax profits by 3.5%.
Increase pre-tax profits by 21%.
Increase pre-tax profits by 1.71%.
?
This year, Nelson Industries increased earnings before interest and taxes (EBIT) by 17%. During the same period, net income after tax increased by 42%...
1.7
4.2
2.47
5.9
?
A firm with a higher degree of operating leverage when compared to the industry average implies that the
Firm has higher variable costs.
Firm’s profits are more sensitive to changes in sales volume
Firm is more profitable.
Firm is less risky.
?
A degree of operating leverage of 3 at 5,000 units means that a
3% change in earnings before interest and taxes will cause a 3% change in sales.
3% change in sales will cause a 3% change in earnings before interest and taxes.
1% change in sales will cause a 3% change in earnings before interest and taxes.
1% change in earnings before interest and taxes will cause a 3% change in sales.
?
Firms with high degrees of financial leverage would be best characterized as having
High debt-to-equity ratios.
Zero coupon bonds in their capital structures.
Low current ratios.
High fixed-charge coverage.
?
The use of debt in the capital structure of a firm
Increases its financial leverage.
Increases its operating leverage.
Decreases its financial leverage.
Decreases its operating leverage.
?
A financial analyst with Mineral, Inc., calculated the company’s degree of financial leverage as 1.5. If income before interest increases by 5%, ear...
1.5%
3.33%
5.0%
7.5%
?
Which one of the following statements concerning the effects of leverage on earnings before interest and taxes (EBIT) and earnings per share (EPS) is ...
For a firm using debt financing, a decrease in EBIT will result in a proportionally larger decrease in EPS.
A decrease in the financial leverage of a firm will increase the beta value of the firm.
If Firm A has a higher degree of operating leverage than Firm B and Firm A offsets this by using less financial leverage, then both firms will have the same variability in EBIT.
Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT.
?
Since incorporating 3 years ago, Lawrence, Inc., has estimated bad debts at a rate of 3% using the income statement approach. During its fourth year i...
Both operating leverage and times interest earned.
The current year’s income by $1,125,000 and decrease the firm’s operating leverage
The current year’s income by $375,000 and increase the firm’s operating leverage
The current year’s income by $30,000 and decrease the firm’s financial leverage
?
Which of the following costs, when subtracted from total revenue, yields economic profit?
Recurring operating costs.
Fixed and variable costs.
Variable costs.
Opportunity costs of all inputs
?
All of the following are affected when merchandise is purchased on credit except
total current assets.
total current liabilities.
net working capital.
current ratio.
?
On December 31, year 2, Northpark Co. collected a receivable due from a major customer. Which of the following ratios would be increased by this tra...
Inventory turnover ratio.
Receivable turnover ratio.
Current ratio.
Quick ratio.
?
Which of the following statements concerning ratio analysis is/are correct? I. Ratio analysis uses only monetary measures for analysis purposes. ...
I. only.
II only.
Both I and II.
Neither I nor II.
?
Farrow Co. is applying for a loan in which the bank requires a quick ratio of at least 1. Farrow’s quick ratio is 0.8. Which of the following a...
Purchasing inventory through the issuance of a long-term note.
Implementing stronger procedures to collect accounts receivable at a faster rate.
Paying an existing account payable.
Selling obsolete inventory at a loss.
?
Information that relates to a firm’s solvency is used primarily to assess a firm’s ability to
Convert assets to cash.
Pay it debts.
Generate profits.
Collect its receivables in a timely manner.
?
A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current...
0.11
0.78
1.75
2.11
?
Bobcat Company has a current ratio of 2:1. Which one of the following transactions could Bobcat use to increase its current ratio?
Borrowing cash by giving a short-term note.
Paying off accounts payable.
Paying off long-term debt.
Factoring accounts receivable.
?
A company has income after tax of $5.4 million, interest expense of $1 million for the year, depreciation expense of $1 million, and a 40% tax rate. W...
5.4
6.4
7.4
10.0
?
The following information was taken from the income statement of Hadley Co.: Beginning inventory 17,000 Purchases 56,000 Ending inventory 13,000 ...
3
4
5
6
?
Cyco, Inc. determined the following concerning its operating activities: Accounts receivable conversion cycle 18 days Accounts payable conversion ...
42 days.
39 days.
21 days.
15 days.
?
The following calculations were made from Clay Co.’s 2003 books: Number of days’ sales in inventory 61 Days Number of days’ s...
33 days
47 days
61 days
94 days
?
The controller of Peabody, Inc. has been asked to present an analysis of accounts receivable collections at the upcoming staff meeting. The following ...
5.0
4.7
3.5
0.6
?
Super Sets, Inc. manufactures and sells television sets. All sales are finalized on credit with terms of 2/10, n/30. Seventy percent of Super Set cust...
10.
16.
24.
40.
?
A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total ass...
$0
$260
$640
$900
?
Return on assets is computed as Net Income (as appropriately adjusted)/Average Total Assets. DuPont Company developed a method of separating the retu...
Gross profit margin (ratio) and average total asset turnover ratio.
Net profit margin (ratio) and average total asset turnover ratio.
Gross profit margin (ratio) and average fixed asset turnover ratio.
Net profit margin (ratio) and average fixed asset turnover ratio.
