Key Concepts and Limitation Chapter 3 Quiz

1. Ratio analysis is not useful for: A. historical trend analysis within a firm. B. comparison of ratios within a single industry. C. measuring the effects of financing. D. measuring employee satisfaction. Answer: D 3. Using ASPE, the ______________ method of inventory costing is most likely to lead to inflationinduced profits. A. FIFO B. Specific item C. Weighted average D. Lower of cost or market Answer: Answer: A 15. Which of the following is a potential problem of utilizing ratio analysis? A. Trends and industry averages are futuristic in nature B. Financial data is identical due to price-level changes C. Firms within an industry use similar accounting principles and application D. Firms within an industry may not use similar accounting methods Answer: D 16. Replacement cost accounting (current cost method) will usually: A. increase assets, decrease net income before taxes, and lower the return on equity. B. increase assets, increase net income before taxes, and increase the return on equity. C. decrease assets, increase net income before taxes, and increase the return on equity. D. increase assets, increase net income before taxes, and lower the return on equity. Answer: A 17. Income can be distorted by factors other than inflation. The most important causes of distortion for inter-industry comparisons are: A. accounting trends. B. application of IFRS. C. timing of revenue receipts and nonrecurring gains or losses. D. cash reinvestment. Answer: C 18. Disinflation may cause: A. an increase in the value of gold, silver, and gems. B. a reduced required return demanded by investors on financial assets. C. increased return demanded by investors on non-financial assets. D. additional profits through rising inventory costs. Answer: B 20. During inflation, replacement cost accounting will: A. decrease the value of assets. B. raise the debt to asset ratio. C. increase incomes. D. reduce incomes. Answer: D 27. If government bonds pay 8.5% interest and CDIC insured savings accounts pay 5.5% interest, shareholders in a moderately risky firm would expect return-on-equity values of: A. 5.5%. B. 8.5%. C. 12.0%. D. above 8.5%, but the exact amount is uncertain. Answer: D 30. The higher a firm's debt utilization ratios, excluding debt-to-total assets, the: A. less risky the firm's financial position. B. more risky the firm's financial position. C. more easily the firm will be able to pay dividends. D. less easily the firm will be able to pay dividends. Answer: A 31. For a given level of profitability as measured by profit margin, the firm's return on equity will: A. increase as its debt-to-assets ratio decreases. B. decrease as its current ratio increases. C. increase as its debt-to assets ratio increases. D. decrease as its times-interest-earned ratio decreases. Answer: C 34. Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately: A. 15%. B. 25%. C. 29%. D. 20%. Answer: D 35. The firm's average collection period is: (Use 365 days in a year.) A. 31 days. B. 25 days. C. 12 days. D. 20 days. Answer: A 36. Times interest earned for Megaframe Computer is: A. 2x. B. 5x. C. 4x. D. 10x. Answer: B 37. Megaframe's quick ratio is: A. 1:1. B. 1:2. C. 1.6:1. D. 3:1. Answer: A 38. Megaframe's current ratio is: A. 1.9:1. B. 0.6:1. C. 1:1. D. 0.86:1. Answer: A 39. Megaframe's debt to asset ratio is: A. 56.1%. B. 75.61%. C. 80.49%. D. 90.62% Answer: A 40. What is Megaframe Computer's total asset turnover? A. 3.68x. B. 3.18x. C. 2.00x. D. 1.71x. Answer: D 41. Compute Megaframe's after tax profit margin. A. 10.0% B. 14.29% C. 11.43% D. 46.34% Answer: C 42. Megaframe's return on equity is: A. 44.44%. B. 80.00%. C. 50.05%. D. 100.0%. Answer: A 43. Megaframe's receivable turnover is: A. 4.4x. B. 10x. C. 11.67x. D. 14.4x. Answer: C 46. A decreasing average collection period could be associated with: A. increasing sales. B. decreasing sales. C. increasing accounts receivable. D. increasing profits. Answer: A 47. Disinflation as compared to inflation would normally be good for investments in: A. bonds. B. gold. C. collectible antiques. D. text books Answer: A 48. A non-Canadian company experiencing rapid price increases for its product would take the most conservative approach by using: A. FIFO accounting. B. LIFO accounting. C. average cost accounting. D. weighted average. Answer: B 49. Historical cost based amortization tends to ________ immediately when there is inflation. A. lower taxes B. decrease profits C. increase profits D. increase assets Answer: C 51. A large extraordinary loss has what effect on cost of goods sold? A. It raises it. B. It lowers it. C. It has no effect. D. Need more information. Answer: C 52. If accounts receivable stays the same, and credit sales go up: A. the average collection period will go up. B. the average collection period will go down. C. accounts receivable turnover will decrease. D. no changes will occur. Answer: B 53. Which of the following is a profitability ratio? A. Quick ratio B. Return on assets C. Inventory turnover D. Capital asset turnover Answer: B 54. Which of the following is an asset utilization ratio? A. Profit margin B. Inventory turnover C. Return on equity D. Return on assets Answer: B 56. According the DuPont system, which of the following is not a factor in achieving a satisfactory return on assets? A. Use of debt B. Low inventory levels C. Rapid turnover of assets D. High profit margins Answer: B 58. Return on assets (ROA) can be distorted by: A. current liabilities. B. noncurrent liabilities. C. bond principle payments. D. bond interest payments. Answer: D 59. In examining the debt utilization ratios, the primary purpose is to measure: A. ability to effectively employ its resources. B. overall debt position. C. ability to pay short-term obligations on time. D. ability to generate timely cash flows. Answer: B 61. Flounders Co. has an average collection period of 60 days. Total credit sales for the year were $9,855,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.) A. $164,250 B. $328,500 C. $1,620,000 D. $1,642,500 Answer: C 62. A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is $60,000. What is the firm's fixed charge coverage? A. 5.00x B. 4.00x C. 3.33x D. 2.40x Answer: D 64. If the company's accounts receivable turnover is decreasing, the average collection period: A. is going up. B. is going down. C. could be moving in either direction. D. is going down slightly. Answer: A 65. A decreasing average collection period indicates: A. the firm is generating more income. B. accounts receivable is going up. C. the company is becoming more efÏcient in its collection policy. D. the company is becoming less efÏcient in its collection policy. Answer: C 66. An increasing average collection period could be associated with: A. decreasing average daily cash sales. B. increasing average daily credit sales. C. decreasing accounts receivable. D. increasing accounts receivable. Answer: D 68. Juniper, Ltd. report total sales of $10,000,000 in the prior year. If these sales were 15.50X total capital assets what was the company's capital asset position in the year? A. $15,000,000 B. $155,000,000 C. $645,161 D. $6,451,613 Answer: C 69. Jones and Co., reported average receivables of $550,000 in its most recent annual report. If total credit sales were $3,000,000 what was Jones and Co.'s average collection period? (Use 365 days in a year.) A. 67 days B. 29 days C. 82 days D. 21 days Answer: A 70. If a company's profit margin was 32%, what were its reported sales if its reported net income was $650,000? A. $10,000,000 B. $9,758,982 C. $1,008,332 D. $2,031,250 Answer: D 71. If a company has a return on investment of 17%, and its equity multiplier is 1.75, its ROE would be _______. A. 64.75% B. 29.75% C. 18.25% D. 16.50% Answer: B