True/False

1. TheFinancialAccountingStandardsBoard(FASB)isthefederalregulatorybodythatgovernsthe
saleandlistingofsecurities.
2. GAAPistheaccountingprofessionsrulesettingbody.

3. GenerallyacceptedaccountingprinciplesareauthorizedbytheFinancialAccountingStandards
Board(FASB).
4. Publiclyownedcorporationsarethosewhicharefinancedbytheproceedsfromthetreasury
securities.

5. PubliclyownedcorporationsarerequiredbytheSecuritiesandExchangeCommission(SEC)and
individualstatesecuritiescommissionstoprovidetheirstockholderswithanannualstockholders
report.

6. Thepresidentsletter,asthefirstcomponentofthestockholdersreport,istheprimary
communicationfrommanagementtothefirmsemployees.

7. Commonstockdividendspaidtostockholdersareequaltotheearningsavailableforcommon
stockholdersdividedbythenumberofsharesofcommonstockoutstanding.

8. Theincomestatementisafinancialsummaryofthefirmsoperatingresultsduringaspecified
periodwhilethebalancesheetisasummarystatementofthefirmsfinancialpositionatagiven
pointintime.

9. Theparvalueofcommonstockisanarbitrarilyassignedpersharevalueusedprimarilyfor
accountingpurposes.

10. Paidincapitalinexcessofparrepresentsthefirmsbookvaluereceivedfromtheoriginalsaleof
commonstock.

11. Earningspersharerepresentsamountearnedduringtheperiodoneachoutstandingshareof
commonstock.

12. Netfixedassetsrepresentthedifferencebetweengrossfixedassetsandthetotalexpenserecorded
forthedepreciationoffixedassets.

13. Earningspershareresultsfromdividingearningsavailableforcommonstockholdersbythe
numberofsharesofcommonstockauthorized.

14. Retainedearningsrepresentthecumulativetotalofallearningsretainedandreinvestedinthefirm
sinceitsinception.

15. Thebalancesheetisastatementwhichbalancesthefirmsassets(whatitowns)againstitsdebt
(whatitowes).

16. Theamountpaidinbytheoriginalpurchasersofcommonstockisshownbytwoentriesinthe
firmsbalancesheetcommonstockandpaidincapitalinexcessofparoncommonstock.

17. Theoriginalpricepersharereceivedbythefirmonasingleissueofcommonstockisequaltothe
sumofthecommonstockandpaidincapitalinexcessofparaccountsdividedbythenumberof
sharesoutstanding.
18. The statement of cash flows reconciles the net income earned during a given year, and
any cash dividends paid, with the change in retained earnings between the start and end of that
year.
19. Thecumulativetranslationadjustmentisanequityreserveaccountontheparentcompanysbooks
inwhichtranslationgainsandlossesareaccumulated.

20. Thestatementofcashflowsprovidesinsightintothefirmsassetsandliabilitiesandreconciles
themwithchangesinitscashandmarketablesecuritiesduringtheperiodofconcern.

21. AU.S.parentcompanysforeignequityaccountsaretranslatedintodollarsusingtheexchangerate
thatprevailedwhentheparentsequityinvestmentwasmade(thehistoricalrate).

22. AU.S.parentcompanysforeignretainedearningsareadjustedtoreflectgainsandlossesresulting
fromcurrencymovementsaswellaseachyearsoperatingprofitsorlosses.

23. TheFinancialAccountingStandardsBoard(FASB)StandardNo.52mandatesthatU.S.based
companiestranslatetheirforeigncurrencydenominatedassetsandliabilitiesintodollarsusingthe
currentrate(translation)method.

24. Timeseriesanalysisistheevaluationofthefirmsfinancialperformanceincomparisontoother
firm(s)atthesamepointintime.

25. Asarule,thenecessaryinputstoaneffectivefinancialanalysisinclude,atminimum,theincome
statementandthestatementofcashflow.

26. Crosssectionalratioanalysisinvolvescomparingthefirmsratiostothoseoffirmsinother
industriesatthesamepointintime.

27. Benchmarkingisatypeofcrosssectionalanalysisinwhichthefirmsratiovaluesarecomparedto
thoseoffirmsinotherindustries,primarilytoidentifyareasforimprovement.

28. Timeseriesanalysisevaluatesperformanceoffirmsatthesamepointintimeusingfinancialratios.

29. Thefirmscreditorsareprimarilyinterestedintheshorttermliquidityofthecompanyandits
abilitytomakeinterestandprincipalpayments.

30. Benchmarkingisatypeoftimeseriesanalysisinwhichthefirmsratiovaluesarecomparedto
thoseofakeycompetitororgroupofcompetitors,primarilytoisolateareasofopportunityfor
improvement.

31. Ratioanalysismerelydirectstheanalysttopotentialareasofconcern;itdoesnotprovide
conclusiveevidenceastotheexistenceofaproblem.
32. Inacrosssectionalcomparisonoffirmsoperatinginseverallinesofbusiness,theindustryaverage
ratiosofanyofthefirmsproductlinesmaybeusedtoanalyzethemultiproductfirmsfinancial
performance.

33. Duetoinflationaryeffects,inventorycostsanddepreciationwriteoffscandifferfromtheirtrue
values,therebydistortingprofits.

34. Ifananalysisisconcernedonlywithcertainspecificaspectsofafirmsfinancialposition,oneor
tworatiosmayprovidesufficientinformationfromwhichtomakeareasonablejudgment.

35. Inratioanalysis,thefinancialstatementsbeingusedforcomparisonshouldbedatedatthesame
pointintimeduringtheyear.Ifnot,theeffectofseasonalitymayproduceerroneousconclusions
anddecisions.
Answer: TRUE

36. Theuseoftheauditedfinancialstatementsforratioanalysismaynotbepreferablebecausethere
maybenoreasontobelievethatthedatacontainedinthemreflectthefirmstruefinancial
condition.
37. Bothpresentandprospectiveshareholdersareinterestedinthefirmscurrentandfuturelevelof
riskandreturn.Thesetwodimensionsdirectlyaffectshareprice.
38. Thecomparisonofaparticularratiotothestandard(industryaverage)ismadeinordertoisolate
anydeviationsfromthenorm.Inthecaseofratiosforwhichhighervaluesarepreferred,aslongas
thefirmthatisbeinganalyzedhasavalueinexcessoftheindustryaverageitcanbeviewed
favorably.

39. Theuseofdifferingaccountingtreatmentsespeciallyrelativetoinventoryanddepreciationcan
distorttheresultsofratioanalysis,regardlessofwhethercrosssectionalortimeseriesanalysisis
used.

40. Inflationaryeffectstypicallyhaveagreaterimpactthelargerthedifferencesintheageoftheassets
ofthefirmsbeingcompared.Withoutadjustment,inflationtendstocauseolderfirms(witholder
fixedassets)toappearmoreefficientandprofitablethannewerfirms(withnewerfixedassets).

41. Presentandprospectiveshareholdersandlenderspaycloseattentiontothefirmsdegreeof
indebtednessandabilitytorepaydebt.Shareholdersareconcernedsincetheclaimsofcreditors
mustbesatisfiedpriortothedistributionofearningstothem.Lendersareconcernedsincethemore
indebtedthefirm,thehighertheprobabilitythatthefirmwillbeunabletosatisfytheclaimsofall
itscreditors.

42. Theliquidityofabusinessfirmreferstothesolvencyofthefirmsoverallfinancialposition.

43. Theliquidityofabusinessfirmismeasuredbyitsabilitytosatisfyitslongtermobligationsasthey
comedue.
44. Thecurrentratioprovidesabettermeasureofoverallliquidityonlywhenafirmsinventorycannot
easilybeconvertedintocash.Ifinventoryisliquid,thequickratioisapreferredmeasureofoverall
liquidity.

45. Sincethedifferencesinthecompositionofafirmscurrentassetsandliabilitiescansignificantly
affectthefirmstrueliquidity,itisimportanttolookbeyondmeasuresofoverallliquidityto
assesstheactivity(liquidity)ofspecificcurrentaccounts.

46. Theaverageageofinventoryisviewedastheaveragelengthoftimeinventoryisheldbythefirm
orastheaveragenumberofdayssalesininventory.

47. Totalassetturnovercommonlymeasurestheliquidityofafirmstotalassets.

48. Themagnificationofriskandreturnintroducedthroughtheuseoffixedcostfinancingsuchasdebt
andpreferredstockiscalledfinancialleverage.

49. Thelessfixedcostdebt(financialleverage)afirmuses,thegreaterwillbeitsriskandreturn.

50. Thehigherthevalueofthetimesinterestearnedratio,thehighertheproportionofthefirms
interestearningscomparedtoitscontractualinterestpayments.
51. Ingeneral,themoredebt(otherpeoplesmoney)afirmusesinrelationtoitsassets,thesmallerits
financialleverage.

52. Thelowerthefixedpaymentcoverageratio,theloweristhefirmsfinancialleverage.

53. Thehigherthedebtratio,themorefinancialleverageafirmhasand,thus,thegreaterwillbeits
riskandreturn.

54. Typically,highercoverageratiosarepreferred,buttoohigharatiomayindicateunderutilization
offixedpaymentobligations,whichmayresultinunnecessarilylowriskandreturn.

55. Earningspersharerepresentthedollaramountearnedanddistributedtoshareholders.

56. Grossprofitmarginmeasuresthepercentageofeachsalesdollarleftafterthefirmhaspaidforits
goodsandoperatingexpenses.

57. Netprofitmarginmeasuresthepercentageofeachsalesdollarremainingafterallcostsand
expenses,includinginterestandtaxes,havebeendeducted.
58. Returnontotalassets(ROA)measurestheoveralleffectivenessofmanagementingenerating
profitswiththeownersinvestmentinthefirm.

59. Theprice/earnings(P/E)ratiorepresentsthedegreeofconfidencethatinvestorshaveinthefirms
futureperformance.

60. Thefinancialleveragemultiplieristheratioofthefirmstotalassetstostockholdersequity.

61. TheDuPontformulaallowsthefirmtobreakdownitsreturnintothenetprofitmargin,which
measuresthefirmsprofitabilityonsales,anditstotalassetturnover,whichindicateshow
efficientlythefirmhasuseditsassetstogeneratesales.

62. TheDuPontsystemallowsthefirmtobreakitsreturnonequityintoaprofitonsalescomponent,
anefficiencyofassetusecomponent,andauseofleveragecomponent.

63. TheMcCainFeingoldActof2002waspassedtoeliminatemanyofthedisclosureandconflictof
interestproblemsofcorporations.

64. TheSarbanesOxleyActof2002waspassedtoeliminatemanyofthedisclosureandconflictof
interestproblemsofcorporations.

65. TheSarbanesOxleyActof2002establishedthePublicCompanyAccountingOversightBoard
(PCAOB)whichisanotforprofitcorporationthatoverseesauditorsofpubliccorporations.

66. TheSarbanesOxleyActof2002establishedthePrivateCompanyAccountingOversightBoard
(PCAOB)whichisaforprofitcorporationthatoverseesCEOsofpubliccorporations.

67. Theaverageageofinventorycanbecalculatedasinventorydividedby365.

68. Theaverageageofinventorycanbecalculatedasinventoryturnoverdividedby365.

69. Theaverageageofinventorycanbecalculatedas365dividedbyinventoryturnover.

70. Theaveragepaymentperiodcanbecalculatedasaccountspayabledividedbyaveragesalesper
day.

71. Theaveragepaymentperiodcanbecalculatedasaccountspayabledividedbyaveragepurchases
perday.
Multiple Choice Questions
1. Oneofthemostinfluentialdocumentsissuedbyapubliclyheldcorporationisthe
(a) lettertostockholders.
(b) annualreport.
(c) cashflowstatement.
(d) incomestatement.

2. Therulesettingbody,whichauthorizesgenerallyacceptedaccountingprinciplesis
(a) GAAP.
(b) FASB.
(c) SEC.
(d) FederalReserveSystem.

3. Accountingpracticesandproceduresusedtopreparefinancialstatementsarecalled
(a) SEC.
(b) FASB.
(c) GAAP.
(d) IRB.

4. Thefederalregulatorybodygoverningthesaleandlistingofsecuritiesiscalledthe
(a) IRS.
(b) FASB.
(c) GAAP.
(d) SEC.

5. Thestockholdersannualreportmustinclude
(a) Astatementofcashflows.
(b) Anincomestatement.
(c) Abalancesheet.
(d) Astatementofretainedearnings.
(e) Alloftheabove.

6. ThestockholdersreportmayincludeallofthefollowingEXCEPT
(a) acashbudget.
(b) anincomestatement.
(c) astatementofcashflows.
(d) astatementofretainedearnings.

7. Totalassetslessnetfixedassetsequals
(a) grossassets.
(b) currentassets.
(c) depreciation.
(d) liabilitiesandequity.

8. The_________providesafinancialsummaryofthefirmsoperatingresultsduringaspecified
period.
(a) incomestatement
(b) balancesheet
(c) statementofcashflows
 (d) statementofretainedearnings

9. Grossprofitsaredefinedas
(a) operatingprofitsminusdepreciation.
(b) operatingprofitsminuscostofgoodssold.
(c) salesrevenueminusoperatingexpenses.
(d) salesrevenueminuscostofgoodssold.

10. Operatingprofitsaredefinedas
(a) grossprofitsminusoperatingexpenses.
(b) salesrevenueminuscostofgoodssold.
(c) earningsbeforedepreciationandtaxes.
(d) salesrevenueminusdepreciationexpense.

11. Netprofitsaftertaxesaredefinedas
(a) grossprofitsminusoperatingexpenses.
(b) salesrevenueminuscostofgoodssold.
(c) EBITminusinterest.
(d) EBITminusinterestandtaxes.

12. Operatingprofitsaredefinedas
(a) salesrevenueminuscostofgoodssold.
(b) earningsbeforeinterestandtaxes.
(c) earningsbeforedepreciationandtaxes.
(d) earningsaftertax.

13. Earningsavailabletocommonshareholdersaredefinedasnetprofits
(a) aftertaxes.
(b) aftertaxesminuspreferreddividends.
(c) aftertaxesminuscommondividends.
(d) beforetaxes.

14. AllofthefollowingareexamplesofcurrentassetsEXCEPT
(a) accountsreceivable.
(b) cash.
(c) accruals.
(d) inventory.

15. AllofthefollowingareexamplesoffixedassetsEXCEPT
(a) automobiles.
(b) buildings.
(c) marketablesecurities.
(d) equipment.

16. AllofthefollowingareexamplesofcurrentliabilitiesEXCEPT
(a) accountsreceivable.
 (b) accountspayable.
(c) accruals.
(d) notespayable.

17. Thenetvalueoffixedassetsisalsocalledits
(a) marketvalue.
(b) parvalue.
(c) bookvalue.
(d) price.

18. The_________representsasummarystatementofthefirmsfinancialpositionatagivenpointin
time.
(a) incomestatement
(b) balancesheet
(c) statementofcashflows
(d) statementofretainedearnings

19. The_________summarizesthefirmsfundsflowoveragivenperiodoftime.
(a) incomestatement
(b) balancesheet
(c) statementofcashflows
(d) statementofretainedearnings

20. Thestatementofcashflowsmayalsobecalledthe
(a) sourcesandusesstatement.
(b) statementofretainedearnings.
(c) bankstatement.
(d) fundsstatement.

21. FASBStandardNo.52mandatesthatU.S.basedcompaniesmusttranslatetheirforeigncurrency
denominatedassetsandliabilitiesintodollarsusingthe
(a) Historicalrate.
(b) Currentrate.
 (c) Averagerate.
(d) Noneoftheabove.

22. Retainedearningsonthebalancesheetrepresents
(a) netprofitsaftertaxes.
(b) cash.
(c) netprofitsaftertaxesminuspreferreddividends.
(d) thecumulativetotalofearningsreinvestedinthefirm.

23. ThestatementofretainedearningsreportsallofthefollowingEXCEPT
(a) netprofitsaftertaxes.
(b) interest.
(c) commonstockdividends.
(d) preferredstockdividends.

24. Whenpreparingastatementofcashflows,retainedearningsadjustmentsarerequiredsothatwhich
ofthefollowingareseparatedonthestatement?
(a) Revenueandcost.
(b) Assetsandliabilities.
(c) Depreciationandpurchases.
(d) Netprofitsanddividends.

25. Afirmhadthefollowingaccountsandfinancialdatafor2005.

SalesRevenue $3,060 Costofgoodssold $1,800

AccountsReceivable 500 Preferredstockdividends 18
Interestexpense 126 Taxrate 40%
Totaloper.expenses 600 Numberofsharesofcommon 1,000
Accountspayable 240 stocksoutstanding

Thefirmsearningsavailabletocommonshareholdersfor2005were_________.
(a) $224
(b) $195
(c) $302
(d) $516

26. Afirmhadthefollowingaccountsandfinancialdatafor2005:

Salesrevenue $3,060 Costofgoodssold $1,800

Accountsreceivable 500 Preferredstockdividends 18
Interestexpense 126 Taxrate 40%
Totaloperatingexpenses 600 Numberofcommonshares 1,000
Accountspayable 240 outstanding
 Thefirmsearningspershare,roundedtothenearestcent,for2005was______.
(a) $0.53
(b) $0.51
(c) $0.32
(d) $0.30

27. Afirmhadthefollowingaccountsandfinancialdatafor2005.

Salesrevenue $3,060 Costofgoodssold $1,800

Accountsreceivable 500 Preferredstockdividends 18
Interestexpense 126 Taxrate 40%
Totaloperatingexpenses 600 Numberofcommonshares 1,000
Accountspayable 240 outstanding

Thefirmsnetprofitaftertaxesfor2005was______.
(a) $206
(b) $213
(c) $320
(d) $206

28. Onthebalancesheetnetfixedassetsrepresent
(a) grossfixedassetsatcostminusdepreciationexpense.
(b) grossfixedassetsatmarketvalueminusdepreciationexpense.
(c) grossfixedassetsatcostminusaccumulateddepreciation.
(d) grossfixedassetsatmarketvalueminusaccumulateddeprecation.
29. Paidincapitalinexcessofparrepresentstheamountofproceeds
(a) fromtheoriginalsaleofstock.
(b) inexcessoftheparvaluefromtheoriginalsaleofcommonstock.
(c) atthecurrentmarketvalueofcommonstock.
(d) atthecurrentbookvalueofcommonstock.

30. FirmABChadoperatingprofitsof$100,000,taxesof$17,000,interestexpenseof$34,000and
preferreddividendsof$5,000.Whatwasthefirmsnetprofitaftertaxes?

31. CandyCorporationhadpretaxprofitsof$1.2million,anaveragetaxrateof34percent,anditpaid
preferredstockdividendsof$50,000.Therewere100,000sharesoutstandingandnointerest
expense.WhatwereCandyCorporationsearningspershare?

32. Afirmhadyearend2004and2005retainedearningsbalancesof$670,000and$560,000,
respectively.Thefirmpaid$10,000individendsin2005.Thefirmsnetprofitaftertaxesin2002
was_________.
33. Acorporationhadyearend2004and2005retainedearningsbalancesof$320,000and$400,000,
respectively.Thefirmreportednetprofitsaftertaxesof$100,000in2005.Thefirmpaiddividends
in2005of_________.
(a) $0
(b) $20,000
(c) $80,000
(d) $100,000

34. Acorporationhadayearend2004retainedearningsbalanceof$220,000.Thefirmreportednet
profitsaftertaxesof$50,000in2005andpaiddividendsin2005of$30,000.Thefirmsretained
earningsbalanceatyearend2005was_________.
(a) $240,000
(b) $250,000
(c) $270,000
(d) $300,000

35. Afirmhadyearend2004and2005retainedearningsbalanceof$670,000and$560,000,
respectively.Thefirmreportednetprofitsaftertaxesof$100,000in2005.Thefirmpaiddividends
in2005of_________.
(a) $10,000
(b) $100,000
(c) $110,000
(d) $210,000

36. Ratiosprovidea_________measureofacompanysperformanceandcondition.
(a) definitive
(b) gross
(c) relative
(d) qualitative
37. _________analysisinvolvesthecomparisonofdifferentfirmsfinancialratiosatthesamepointin
time.
(a) Timeseries
(b) Crosssectional
(c) Marginal
(d) Quantitative

38. _________analysisinvolvescomparisonofcurrenttopastperformanceandtheevaluationof
developingtrends.
(a) Timeseries
(b) Crosssectional
(c) Marginal
(d) Quantitative

39. Theprimaryconcernofcreditorswhenassessingthestrengthofafirmisthefirms
(a) profitability.
(b) leverage.
(c) shorttermliquidity.
(d) shareprice.

40. Presentandprospectiveshareholdersaremainlyconcernedwithafirms
(a) riskandreturn.
(b) profitability.
(c) leverage.
(d) liquidity.

41. Toanalyzethefirmsfinancialperformance,thefollowingtypesofratioanalysesEXCEPT
_________maybeused.
(a) timeseriesanalysis
(b) crosssectionanalysis
(c) combinedanalysis
(d) marginalanalysis

42. Timeseriesanalysisisoftenusedto
(a) assessdevelopingtrends.
(b) correcterrorsofjudgment.
(c) reflectperformancerelativetosomenorm.
(d) standardizeresults.

43. Inratioanalysis,acomparisontoastandardindustryratioismadetoisolate_________deviations
fromthenorm.
(a) positive
(b) negative
(c) any
(d) standard

44. _________evidenceoftheexistenceofaproblemoroutstandingmanagementperformanceis
providedbyratioanalysis.
(a) Conclusive
(b) Inconclusive
 (c) Complete
(d) Definitive

45. Theanalystshouldbecarefulwhenconductingratioanalysistoensurethat
(a) theoverallperformanceofthefirmisnotjudgedonasingleratio.
(b) thedatesofthefinancialstatementsbeingcomparedarethesame.
(c) auditedstatementsareused.
(d) thesameaccountingprocedureswereused.
(e) alloftheabove.

46. Theanalystshouldbecarefulwhenevaluatingaratioanalysisthat
(a) Theoverallperformanceofthefirmmaybejudgedonasingleratio.
(b) Thedatesofthefinancialstatementsbeingcomparedarethesametime.
(c) Preauditedstatementsareused.
(d) Alloftheabove.

47. _________iswherethefirmsratiovaluesarecomparedtothoseofakeycompetitororgroupof
competitors,primarilytoidentifyareasforimprovement.
(a) Timeseriesanalysis
(b) Benchmarking
(c) Combinedanalysis
(d) Noneoftheabove.

48. Crosssectionalratioanalysisisusedto
(a) correctexpectedproblemsinoperations.
(b) isolatethecausesofproblems.
(c) provideconclusiveevidenceoftheexistenceofaproblem.
(d) reflectthesymptomsofapossibleproblem.

49. Inthenearterm,theimportantratiosthatprovidetheinformationcriticaltotheshortrunoperation
ofthefirmare
(a) liquidity,activity,andprofitability.
(b) liquidity,activity,andcommonstock.
(c) liquidity,activity,anddebt.
(d) activity,debt,andprofitability.

50. Onewaytonegatetheeffectofinflationonratioanalysisistovaluethefixedassetsat
(a) bookvalue.
(b) liquidationvalue.
(c) replacementvalue.
(d) depreciation.

51. Inflationcandistort
(a) inventorycosts.
(b) accumulateddepreciation.
(c) interestwriteoffs.
(d) salariesandwages.

52. Withoutadjustment,inflationmaytendtocause_________firmstoappearmoreefficientand
profitablethan_________firms,allelsebeingthesame.
 (a) large;smaller
(b) older;newer
(c) smaller;larger
(d) newer;older

53. Thefollowinggroupsofratiosprimarilymeasurerisk.
(a) liquidity,activity,andprofitability
(b) liquidity,activity,andcommonstock
(c) liquidity,activity,anddebt
(d) activity,debt,andprofitability

54. The_________ratiosareprimarilymeasuresofreturn.
(a) liquidity
(b) activity
(c) debt
(d) profitability

55. The_________ofabusinessfirmismeasuredbyitsabilitytosatisfyitsshorttermobligationsas
theycomedue.
(a) activity
(b) liquidity
(c) debt
(d) profitability

56. _________ratiosareameasureofthespeedwithwhichvariousaccountsareconvertedintosales
orcash.
(a) Activity
(b) Liquidity
(c) Debt
(d) Profitability

57. The_________isusefulinevaluatingcreditandcollectionpolicies.
(a) averagepaymentperiod
(b) currentratio
(c) averagecollectionperiod
(d) currentassetturnover

58. The_________measurestheactivity,orliquidity,ofafirmsinventory.
(a) averagecollectionperiod
(b) inventoryturnover
(c) quickratio
(d) currentratio

59. Thetwobasicmeasuresofliquidityare
(a) inventoryturnoverandcurrentratio.
(b) currentratioandquickratio.
(c) grossprofitmarginandROE.
(d) currentratioandtotalassetturnover.

60. The_________isameasureofliquiditywhichexcludes_________,generallytheleastliquid
asset.
 (a) currentratio;accountsreceivable
(b) quickratio;accountsreceivable
(c) currentratio;inventory
(d) quickratio;inventory

61. The_________ratiomayindicatethefirmisexperiencingstockoutsandlostsales.
(a) averagepaymentperiod
(b) inventoryturnover
(c) averagecollectionperiod
(d) quick

62. The_________ratiomayindicatepoorcollectionsproceduresoralaxcreditpolicy.
(a) averagepaymentperiod
(b) inventoryturnover
(c) averagecollectionperiod
(d) quick

63. ABCCorp.extendscredittermsof45daystoitscustomers.Itscreditcollectionwouldbe
consideredpoorifitsaveragecollectionperiodwas
(a) 30days.
(b) 36days.
(c) 47days.
(d) 57days.

64. Whichofthefollowingratiosisdifficultforcreditorsofafirmtoanalyzebecausethedataare
usuallynotavailableinpublishedfinancialstatements?
(a) operatingleverage
(b) averagepaymentperiod
(c) quickratio
(d) averageageofinventory

65. _________areespeciallyinterestedintheaveragepaymentperiod,sinceitprovidesthemwitha
senseofthebillpayingpatternsofthefirm.
(a) Customers
(b) Stockholders
(c) Lendersandsuppliers
(d) Borrowersandbuyers

66. Afirmhasacurrentratioof1;inordertoimproveitsliquidityratios,thisfirmmight
(a) improveitscollectionpractices,therebyincreasingcashandincreasingitscurrentandquick
ratios.
(b) improveitscollectionpracticesandpayaccountspayable,therebydecreasingcurrentliabilities
andincreasingthecurrentandquickratios.
(c) decreasecurrentliabilitiesbyutilizingmorelongtermdebt,therebyincreasingthecurrentand
quickratios.
(d) increaseinventory,therebyincreasingcurrentassetsandthecurrentandquickratios.

67. Asafirmscashflowsbecomemorepredictable,
(a) thecurrentratiowillexpand.
(b) thereturnonequitywillincrease.
 (c) currentliabilitieswilldecrease.
(d) currentassetswilldecrease.

68. Iftheinventoryturnoverisdividedinto360,itbecomesameasureof
(a) salesefficiency.
(b) theaverageageoftheinventory.
(c) salesturnover.
(d) theaveragecollectionperiod.

69. The_________isusefulinevaluatingcreditandcollectionpolicies.
(a) averagepaymentperiod
(b) currentratio
(c) averagecollectionperiod
(d) currentassetturnover

70. Thetwocategoriesofratiosthatshouldbeutilizedtoassessafirmstrueliquidityarethe
(a) currentandquickratios.
(b) liquidityandprofitabilityratios.
(c) liquidityanddebtratios.
(d) liquidityandactivityratios.

71. Afirmwithatotalassetturnoverthatislowerthanindustrystandardbutwithacurrentratiowhich
meetsindustrystandardmusthaveexcessive
(a) fixedassets.
(b) inventory.
(c) accountsreceivable.
(d) debt.

72. Thefollowinggroupsofratiosprovidetheinformationcriticaltotheshortrunoperationofthe
firm.
(a) liquidity,activity,andprofitability
(b) liquidity,activity,andcommonstock
(c) liquidity,activity,anddebt
(d) activity,debt,andprofitability

73. The_________ratiosprovidetheinformationcriticaltothelongrunoperationofthefirm.
(a) liquidity
(b) activity
(c) debt
(d) profitability

74. Afirmwithatotalassetturnoverlowerthanindustrystandardmayhave
(a) excessivedebt.
(b) excessivecostofgoodssold.
(c) insufficientsales.
(d) insufficientfixedassets.

75. The_________ratiomeasurestheproportionoftotalassetsfinancedbythefirmscreditors.
(a) totalassetturnover
(b) fixedassetturnover
 (c) current
(d) debt

76. The_________ratiomeasuresthefirmsabilitytopaycontractualinterestpayments.
(a) timesinterestearned
(b) fixedpaymentcoverage
(c) debt
(d) averagepaymentperiod

77. The_________ratiomayindicatethatthefirmwillnotbeabletomeetinterestobligationsdueon
outstandingdebt.
(a) debt
(b) netprofitmargin
(c) returnontotalassets
(d) timesinterestearned

78. Thehigherthevalueof_________ratio,thebetterablethefirmistofulfillitsinterestobligations.
(a) debt
(b) averagecollectionperiod
(c) timesinterestearned
(d) averagepaymentperiod

Table2.1
BalanceSheet
ColeEaganEnterprises
December31,2005
Cash $4,500 AccountsPayable $10,000
AccountsReceivable NotesPayable
Inventory Accruals 1,000
TotalCurrentAssets TotalCurrentLiabilities
NetFixedAssets LongTermDebt
TotalAssets StockholdersEquity
TotalLiabilities&S.E.

Information(2005values)
1. Salestotaled$110,000
2. Thegrossprofitmarginwas25percent.
3. Inventoryturnoverwas3.0.
4. Thereare360daysintheyear.
5. Theaveragecollectionperiodwas65days.
6. Thecurrentratiowas2.40.
7. Thetotalassetturnoverwas1.13.
8. Thedebtratiowas53.8percent.
79. InventoryforCEEin2005was_________.(SeeTable2.1)

80. NotespayableforCEEin2005was_________.(SeeTable2.1)

81. AccountsreceivableforCEEin2005was_________.(SeeTable2.1)

82. NetfixedassetsforCEEin2005were_________.(SeeTable2.1)

83. TotalassetsforCEEin2005were_________.(SeeTable2.1)

84. LongtermdebtforCEEin2005was_________.(SeeTable2.1)

85. _________isatermusedtodescribethemagnificationofriskandreturnintroducedthroughthe
useoffixedcostfinancingsuchaspreferredstockandlongtermdebt.
(a) Financialleverage
(b) Operatingleverage
(c) Fixedpaymentcoverage
(d) Theacidtest

86. Whenassessingthefixedpaymentcoverageratio,
(a) theloweritsvaluethemoreriskyisthefirm.
(b) theloweritsvalue,theloweristhefirmsfinancialleverage.
(c) preferredstockdividendpaymentscanbedisregarded.
(d) thehigheritsvalue,thehigheristhefirmsliquidity.

87. The_________isapopularapproachforevaluatingprofitabilityinrelationtosalesbyexpressing
eachitemontheincomestatementasapercentofsales.
(a) retainedearningsstatement
(b) sourceandusestatement
(c) commonsizeincomestatement
(d) profitandlossstatement

88. The_________indicatesthepercentageofeachsalesdollarremainingafterthefirmhaspaidfor
itsgoods.
(a) netprofitmargin
(b) operatingprofitmargin
(c) grossprofitmargin
(d) earningsavailabletocommonshareholders

89. The_________measuresthepercentageofprofitearnedoneachsalesdollarbeforeinterestand
taxes.
(a) netprofitmargin
(b) operatingprofitmargin
(c) grossprofitmargin
(d) earningsavailabletocommonshareholders

90. The_________measuresthepercentageofeachsalesdollarremainingafterALLexpenses,
includingtaxes,havebeendeducted.
(a) netprofitmargin
(b) operatingprofitmargin
(c) grossprofitmargin
(d) earningsavailabletocommonshareholders
91. The_________measurestheoveralleffectivenessofmanagementingeneratingprofitswithits
availableassets.
(a) netprofitmargin
(b) price/earningsratio
(c) returnonequity
(d) returnontotalassets

92. The_________measuresthereturnonowners(bothpreferredandcommonstockholders)
investmentinthefirm.
(a) netprofitmargin
(b) price/earningsratio
(c) returnonequity
(d) returnontotalassets

93. The_________ratioiscommonlyusedtoassesstheownersappraisalofthesharevalue.
(a) debt
(b) price/earnings
(c) returnonequity
(d) returnontotalassets

94. Twofrequentlycitedratiosofprofitabilitythatcanbereaddirectlyfromthecommonsizeincome
statementare
(a) theearningspershareandthereturnontotalassets.
(b) thegrossprofitmarginandtheearningspershare.
(c) thegrossprofitmarginandthereturnontotalassets.
(d) thegrossprofitmarginandthenetprofitmargin.

95. Afirmwithagrossprofitmarginwhichmeetsindustrystandardandanetprofitmarginwhichis
belowindustrystandardmusthaveexcessive
(a) generalandadministrativeexpenses.
(b) costofgoodssold.
(c) dividendpayments.
(d) principalpayments.

96. Afirmwithsalesof$1,000,000,netprofitsaftertaxesof$30,000,totalassetsof$1,500,000,and
totalliabilitiesof$750,000hasareturnonequityof
(a) 20percent.
(b) 15percent.
(c) 3percent.
(d) 4percent.

97. TheDuPontsystemmergestheincomestatementandbalancesheetintotwosummarymeasuresof
profitability:
(a) netprofitmarginandreturnontotalassets.
(b) netprofitmarginandreturnonequity.
(c) returnontotalassetsandreturnonequity.
(d) netprofitmarginandprice/earningratio.

98. _________isusedbyfinancialmanagersasastructurefordissectingthefirmsfinancial
statementstoassessitsfinancialcondition.
 (a) Statementofcashflows
(b) TheDuPontsystemofanalysis
(c) Acommonsizeincomestatement
(d) Crosssectionalanalysis

99. IntheDuPontsystem,thereturnontotalassets(asset)isequalto
(a) (returnonequity)(financialleveragemultiplier).
(b) (returnonequity)(totalassetturnover).
(c) (netprofitmargin)(fixedassetturnover).
(d) (netprofitmargin)(totalassetturnover).

100. ThemodifiedDuPontformularelatesthefirmsreturnontotalassets(ROA)tothe
(a) returnonequity(ROE).
(b) financialleveragemultiplier.
(c) netprofitmargin.
(d) totalassetturnover.

101. IntheDuPontsystem,thereturnonequityisequalto
(a) (netprofitmargin)(totalassetturnover).
(b) (stockholdersequity)(financialleveragemultiplier).
(c) (returnontotalassets)(financialleveragemultiplier).
(d) (returnontotalassets)(totalassetturnover).

102. Afirmwithasubstandardnetprofitmargincanimproveitsreturnontotalassetsby
(a) increasingitsdebtratio.
(b) increasingitstotalassetturnover.
(c) decreasingitsfixedassetturnover.
(d) decreasingitstotalassetturnover.

103. Adecreaseintotalassetturnoverwillresultin_________inthereturnonequity.
(a) anincrease
(b) adecrease
(c) nochange
(d) anundeterminedchange

104. Afirmwithasubstandardreturnontotalassetscanimproveitsreturnonequity,allelseremaining
thesame,by
(a) increasingitsdebtratio.
(b) increasingitstotalassetturnover.
(c) decreasingitsdebtratio.
(d) decreasingitstotalassetturnover.

105. ThethreesummaryratiosbasictotheDuPontsystemofanalysisare
(a) netprofitmargin,totalassetturnover,andreturnoninvestment.
(b) netprofitmargin,totalassetturnover,andreturnonequity.
(c) netprofitmargin,totalassetturnover,andequitymultiplier.
(d) netprofitmargin,financialleveragemultiplier,andreturnonequity.

106. Thefinancialleveragemultiplierisanindicatorofacorporationutilizing
 (a) operatingleverage.
(b) longtermdebt.
(c) totaldebt.
(d) totalassets.

107. Thefinancialleveragemultiplierisanindicatorofacorporationutilizing
(a) operatingleverage.
(b) financialleverage.
(c) longtermdebt.
(d) currentliabilities.

108. Anincreaseinfinancialleveragewillresultin_________inthereturnonequity.
(a) anincrease
(b) adecrease
(c) nochange
(d) anundeterminedchange

109. Afirmwithatotalassetturnoverlowerthantheindustrystandardandacurrentratiowhichmeets
theindustrystandardmayhave
(a) excessivefixedassets.
(b) excessiveinventory.
(c) excessiveaccountsreceivable.
(d) excessivedebt.
110. Afirmwithatotalassetturnoverlowerthantheindustrystandardmayhave
(a) excessivedebt.
(b) excessivecostofgoodssold.
(c) insufficientsales.
(d) insufficientfixedassets.

Table2.2
DanaDairyProductsKeyRatios
Industry Actual Actual
Average 2004 2005
CurrentRatio 1.3 1.0
QuickRatio 0.8 0.75
AveragecollectionPeriod 23days 30days
InventoryTurnover 21.7 19
DebtRatio 64.7% 50%
TimesInterestEarned 4.8 5.5
GrossProfitMargin 13.6% 12.0%
NetProfitMargin 1.0% 0.5%
Returnontotalassets 2.9% 2.0%
ReturnonEquity 8.2% 4.0%
 IncomeStatement
DanaDairyProducts
FortheYearEndedDecember31,2005
SalesRevenue $100,000
Less:CostofGoodsSold 87,000
GrossProfits $13,000
Less:OperatingExpenses 11,000
OperatingProfits $2,000
Less:InterestExpense 500
NetProfitsBeforeTaxes $1,500
Less:Taxes(40%) 600
NetProfitsAfterTaxes $900

BalanceSheet
DanaDairyProducts
December31,2005
Assets
Cash $1,000
AccountsReceivable 8,900
Inventories 4,350
TotalCurrentAssets $14,250
GrossFixedAssets $35,000
Less:AccumulatedDepreciation 13,250
NetFixedAssets 21,750
TotalAssets $36,000

Liabilities&StockholdersEquity
AccountsPayable $9,000
Accruals 6,675
TotalCurrentLiabilities $15,675
LongtermDebt 4,125
TotalLiabilities $19,800
CommonStock 1,000
RetainedEarnings 15,200
TotalStockholdersEquity $16,200
TotalLiabilities&StockholdersEquity $36,000
111. ThecurrentratioforDanaDairyProductsin2005was_________.(SeeTable2.2)

112. Since2004,theliquidityofDanaDairyProducts_________.(SeeTable2.2)
(a) hasdeteriorated
(b) remainedthesame
(c) hasimproved
(d) cannotbedetermined

113. ThenetworkingcapitalforDanaDairyProductsin2005was_________.(SeeTable2.2)

114. TheinventoryturnoverforDanaDairyProductsin2005was_________.(SeeTable2.2)
(a) 43
(b) 5
(c) 20
(d) 25

115. TheinventorymanagementatDanaDairyProducts_________since2004.(SeeTable2.2)
(a) hasdeteriorated
(b) remainedthesame
(c) hasimprovedslightly
(d) cannotbedetermined

116. TheaveragecollectionperiodforDanaDairyProductsin2005was(SeeTable2.2)

117. IfDanaDairyProductshascredittermswhichspecifythataccountsreceivableshouldbepaidin
25days,theaveragecollectionperiod_________since2004.(SeeTable2.2)
(a) hasdeteriorated
(b) remainedthesame
(c) hasimproved
(d) cannotbedetermined

118. DanaDairyProductshada_________degreeoffinancialleveragethantheindustrystandard,
resultingin_________.(SeeTable2.2)
(a) lower;lowerreturnontotalassets
(b) lower;lowerreturnonequity
(c) higher;higherreturnonequity
(d) higher;higherreturnontotalassets

119. ThedebtratioforDanaDairyProductsin2005was(SeeTable2.2)

120. DanaDairyProductsgrossprofitmarginwasinferiortotheindustrystandard.Thismayhave
resultedfrom(SeeTable2.2)
(a) ahighsalesprice.
(b) thehighcostofgoodssold.
(c) excessivesellingandadministrativeexpenses.
(d) excessiveinterestexpense.

121. ThegrossprofitmarginandnetprofitmarginforDanaDairyProductsin2005were(See
Table2.2)
 (a) 13percentand0.9percent,respectively.
(b) 13percentand1.5percent,respectively.
(c) 2percentand0.9percent,respectively.
(d) 2percentand1.5percent,respectively.

122. ThereturnontotalassetsforDanaDairyProductsfor2005was(SeeTable2.2)
(a) 0.9percent.
(b) 5.5percent.
(c) 25percent.
(d) 2.5percent.

123. ThereturnonequityforDanaDairyProductsfor2005was(SeeTable2.2)

124. UsingthemodifiedDuPontformulaallowstheanalysttobreakDanaDairyProductsreturnon
equityinto3components:thenetprofitmargin,thetotalassetturnover,andameasureofleverage
(thefinancialleveragemultiplier).Whichofthefollowingmathematicalexpressionsrepresentsthe
modifiedDuPontformularelativetoDanaDairyProducts2005performance?(SeeTable2.2)
(a) 5.6(ROE)2.5(ROA)2.24(Financialleveragemultiplier)
(b) 5.6(ROE)3.3(ROA)1.70(Financialleveragemultiplier)
(c) 4.0(ROE)2.0(ROA)2.00(Financialleveragemultiplier)
(d) 2.5(ROE)5.6(ROA)0.44(Financialleveragemultiplier)

125. Asthefinancialleveragemultiplierincreasesthismayresultin
(a) anincreaseinthenetprofitmarginandreturnoninvestment,duetothedecreaseininterest
expenseasdebtdecreases.
(b) anincreaseinthenetprofitmarginandreturnoninvestment,duetotheincreaseininterest
expenseasdebtincreases.
(c) adecreaseinthenetprofitmarginandreturnoninvestment,duetotheincreaseininterest
expenseasdebtincreases.
(d) adecreaseinthenetprofitmarginandreturnoninvestment,duetothedecreaseininterest
expenseasdebtdecreases.

126. The2002lawthatestablishedthePublicCompanyAccountingOversightBoard(PCAOB)was
called
(a) TheMcCainFeingoldAct.
(b) TheHarkinsOxleyAct.
(c) TheSarbanesHarkinsAct.
(d) TheSarbanesOxleyAct.

127. The2002SarbanesOxleyActwasdesignedto
(a) limitthecompensationthatcouldbepaidtocorporateCEOs
(b) eliminatethemanydisclosureandconflictofinterestproblemsofcorporations
(c) provideuniforminternationalaccountingstandards
(d) twooftheabove

128. ThePublicCompanyAccountingOversightBoard(PCAOB)
(a) isanotforprofitcorporationthatoverseesauditorsofpubliccorporations.
(b) isanotforprofitcorporationthatoverseesmanagersofpubliccorporations.
(c) isaforprofitcorporationthatoverseesauditorsofpubliccorporations.
 (d) isaforprofitcorporationthatoverseesmanagersofpubliccorporations.

129. IfNicoCorporationhascostofgoodssoldof$300,000andinventoryof$30,000,thenthe
inventoryturnoveris_________andtheaverageageofinventoryis_________.

130. IfNicoCorporationhasannualpurchasesof$300,000andaccountspayableof$30,000,then
averagepurchasesperdayare_________andtheaveragepaymentperiodis_________.
(a) 36.5;821.9
(b) 36.0;833.3
(c) 821.9;36.5
(d) 833.3;36.0

Essay Questions
1. AgSilverMining,Inc.has$500,000ofearningsbeforeinterestandtaxesattheyearend.Interest
expensesfortheyearwere$10,000.Thefirmexpectstodistribute$100,000individends.Calculate
theearningsaftertaxesforthefirmassuminga40percenttaxonordinaryincome.
2. Attheendof2005,theLongLifeLightBulbCompanyannouncedithadproducedagrossprofitof
$1million.Thecompanyhasalsoestablishedthatoverthecourseofthisyearithasincurred
$345,000inoperatingexpensesand$125,000ininterestexpenses.Thecompanyissubjecttoa30
percenttaxrateandhasdeclared$57,000totalpreferredstockdividends.
(a) Howmuchistheearningsavailableforcommonstockholders?
(b) Computetheincreasedretainedearningsfor2005ifthecompanyweretodeclarea$4.25
commonstockdividend.Thecompanyhas15,000sharesofcommonstockoutstanding.

3. ReliableAutoPartshas5,000sharesofcommonstockoutstanding.Thecompanyalsohasthe
followingamountsinrevenueandexpenseaccounts.

Salesrevenue $85,000
Generalandadministrativeexpense 7,500
Interestexpense 3,500
Depreciationexpense 5,000
Preferredstockdividends 500
Sellingexpense 4,000
Costofgoodssold 50,000

Calculate
(a) grossprofits.
(b) operatingprofits.
(c) netprofitsbeforetaxes.
(d) netprofitsaftertaxes(assumea40percenttaxrate).
(e) cashflowfromoperations.
(f) earningsavailabletocommonstockholders.
(g) earningspershare.


4. ColonialFurnituresnetprofitsbeforetaxesfor2002totaled$354,000.Thecompanystotal
retainedearningswere$338,000for2004yearendand$389,000for2005yearend.Colonialis
subjecttoa26percenttaxrate.HowlargewasthecashdividenddeclaredbyColonialFurniturein
2005?

5. OnDecember31,2004,theBradshawCorporationhad$485,000asanendingbalanceforits
retainedearningsaccount.During2005,thecorporationdeclareda$3.50/sharedividendtoits
stockholders.TheBradshawCorporationhas35,000sharesofcommonstockoutstanding.When
thebookswereclosedfor2005yearend,thecorporationhadafinalretainedearningsbalanceof
$565,000.WhatwasthenetprofitearnedbyBradshawCorporationduring2005?

6. TheSunshineCompanyhadaretainedearningsbalanceof$850,000atthebeginningof2005.By
theendof2005,thecompanysretainedearningsbalancewas$950,000.During2005,thecompany
earned$245,000asnetprofitsafterpayingitstaxes.Thecompanywasthenabletopayits
preferredstockholders$45,000.Computethecommonstockdividendpersharein2005assuming
10,000sharesofcommonstockoutstanding.

7. Discussthelimitationsofratioanalysisandthecautionswhichmustbetakenwhenreviewinga
crosssectionalandtimeseriesanalysis.
Answer: Insummarizingalargenumberofratios,allaspectsofthefirmsactivitiescanbe
assessed.However,limitationsofratioanalysismustberecognized.Acomparisonof
currentandpastratiosmayrevealmismanagement.But,theratiodoesnotgivedefinitive
causetotheproblem.Additionalinvestigationisnecessarytoconfirmthepossible
problem.Theanalystmustbecautiousofthefollowingpoints:1)asingleratiodoesnot
providesufficientinformationtojudgetheoverallperformanceofthefirm,2)thedatesof
thefinancialstatementsshouldbethesame,3)auditedstatementsshouldbeused,4)
similaraccountingtreatmentofcomparativedataisessential,and5)inflationand
differingassetagescandistortratiocomparisons.
8.

KeyFinancialData
Dreamscape,Inc. IndustryAverage

Ratio FortheYearEnded FortheYearEnded

(%ofSales) December31,2004 December31,2005

Costofgoodssold 74.5% 70.0%

Grossprofits 25.5 30.0
Sellingexpense 8.0 7.0
Gen.&admin.expense 5.1 4.9
Depreciationexpense 2.4 2.0
Totaloperatingexpense 15.5 13.9
Operatingprofits 10.0 16.1
Interestexpense 1.4 1.0
Netprofitsbeforetaxes 8.6 15.1
Taxes 2.4 6.0
Netprofitsaftertaxes 5.2 9.1
 IncomeStatement,Dreamscape,Inc.
FortheYearEndedDecember31,2005
Salesrevenue $1,000,000
Less:Costofgoodssold 750,000
Grossprofits $250,000
Less:Operatingexpenses
SellingExpense $70,000
Gen.&admin.expense 48,000
Depreciationexpense 20,000
Totaloperatingexpense $138,000
Operatingprofits $112,000
Less:Interestexpense $20,000
Netprofitsbeforetaxes $92,000
Less:Taxes $36,800
Netprofitsaftertaxes $55,200

PrepareacommonsizeincomestatementforDreamscape,Inc.fortheyearendedDecember31,
2005.Evaluatethecompanysperformanceagainstindustryaverageratiosandagainstlastyears
results.

9. InanefforttoanalyzeClockworkCompanyfinances,Jimrealizedthathewasmissingthe
companysnetprofitsaftertaxesforthecurrentyear.Findthecompanysnetprofitsaftertaxes
usingthefollowinginformation.
Returnontotalassets2%
TotalAssetTurnover0.5
CostofGoodsSold$105,000
GrossProfitMargin0.30

10. ConstructtheDuPontsystemofanalysisusingthefollowingfinancialdataforKeyWahlIndustries
anddeterminewhichareasofthefirmneedfurtheranalysis.

KeyFinancialData
KeyWahlIndustries:
Sales $4,500,000
Netprofitsaftertaxes 337,500
Totalassets 6,750,000
Totalliabilities 3,375,000
IndustryAverages:
Totalassetturnover 0.71
Debtratio 33.00%
Financialleveragemultiplier 1.50
Returnontotalassets 6.75%
Returnonequity 10.00%
Netprofitmargin 9.50%
11. Giventhefollowingbalancesheet,incomestatement,historicalratiosandindustryaverages,
calculatethePulp,Paper,andPaperboard,Inc.financialratiosforthemostrecentyear.Analyzeits
overallfinancialsituationforthemostrecentyear.Analyzeitsoverallfinancialsituationfromboth
acrosssectionalandtimeseriesviewpoint.Breakyouranalysisintoanevaluationofthefirms
liquidity,activity,debt,andprofitability.

IncomeStatement
Pulp,PaperandPaperboard,Inc.
FortheYearEndedDecember31,2005
SalesRevenue $2,080,976
Less:CostofGoodsSold 1,701,000
GrossProfits $379,976
Less:OperatingExpenses 273,846
OperatingProfits $106,130
Less:InterestExpense 19,296
NetProfitsBeforeTaxes $86,834
Less:Taxes(40%) 34,810
NetProfitsAfterTaxes $52,024

BalanceSheet
Pulp,PaperandPaperboard,Inc.
December31,2005
Assets
Cash $95,000
Accountsreceivable 237,000
Inventories 243,000
Totalcurrentassets $575,000
Grossfixedassets 500,000
Less:Accumulateddepreciation 75,000
Netfixedassets $425,000
Totalassets $1,000,000
Liabilitiesandstockholdersequity
Currentliabilities
Accountspayable $89,000
Notespayable 169,000
Accruals 87,000
Totalcurrentliabilities $345,000
Longtermdebt 188,000
Totalliabilities $533,000
Stockholdersequity
Commonstock 255,000
Retainedearnings 212,000
Totalstockholdersequity $467,000
Totalliabilitiesandstockholdersequity $1,000,000
 HistoricalandIndustryAverageRatios
Pulp,PaperandPaperboard,Inc.
Industry
Ratio 2003 2004 2005 2005
CurrentRatio 1.6 1.7 1.6
QuickRatio 0.9 1.0 0.9
InventoryTurnover 8.1 9.3 8.4
AverageCollectionPeriod 33days 37days 39days
TotalAssetTurnover 2.3 2.2 2.2
DebtRatio 60% 56% 58%
TimesInterestEarned 2.5 3.5 2.3
GrossProfitMargin 21% 19.7% 20.4%
OperatingProfitMargin 4.7% 4.8% 4.7%
NetProfitMargin 1.8% 1.6% 1.4%
Returnontotalassets 4.1% 3.5% 3.08%
ReturnonEquity 10.3% 7.9% 7.3%
Answer:

HistoricalandIndustryAverageRatios
Pulp,PaperandPaperboard,Inc.
Industry
Ratio 2003 2004 2005 2005
CurrentRatio 1.6 1.7 1.67 1.6
QuickRatio 0.9 1.0 0.96 0.9
InventoryTurnover 8.1 9.3 7.0 8.4
AverageCollectionPeriod 33days 37days 41days 39days
TotalAssetTurnover 2.3 2.2 2.1 2.2
DebtRatio 60% 56% 53% 58%
TimesInterestEarned 2.5 3.5 5.5% 2.3
GrossProfitMargin 21% 19.7% 18.0% 20.4%
OperatingProfitMargin 4.7% 4.8% 5.1% 4.7%
NetProfitMargin 1.8% 1.6% 2.5% 1.4%
Returnontotalassets 4.1% 3.5% 5.2% 3.08%
ReturnonEquity 0.3% 7.9% 11.1% 7.3%
 LIQUIDITY:Theliquidityof3Pisontargetwiththeindustrystandardin2005and
showsnotrendsince2000.
ACTIVITY:Inventoryandaccountsreceivablemanagementhasdeterioratedsince2004
andisinferiorwhencomparedtotheindustrystandard.Thelowinventoryturnovermay
becausedbyoverstockingand/orobsoleteinventories.Thehighaveragecollection
periodmayhaveresultedfrompoorcollectionsprocedures.Furtherinvestigationis
necessarytodeterminethecauseofthevariances.
DEBT:3Phaslessdebtthantheindustryaverage.Thetrendsince2003hasbeentoward
reducingthedebtratio.Thefirm,therefore,issubjecttolessfinancialriskthanthe
averagefirmintheindustry.
PROFITABILITY:Althoughthegrossprofitmarginisinferiortotheindustryaverage,
theoperatingandnetprofitmarginfarexceedthestandards,boostingreturnontotal
assetsandreturnonequity.Thetrendinthegrossprofitmarginisunfavorableandmay
eitherbecausedbyaslideinproductpricesoranescalationincostofsales.Thecauseof
thepoorgrossprofitmarginshouldbeinvestigated.
Overall,thefirmneedstofocusattentiononinventoryandaccountsreceivable
managementandthecauseofthepoorgrossprofitmargin.Ingeneral,thefirmisingood
financialcondition.

12. CompletethebalancesheetforGeneralAviation,Inc.basedonthefollowingfinancialdata.

BalanceSheet
GeneralAviation,Inc.
December31,2005
Assets
Cash $8,005
Marketablesecurities
Accountsreceivable
Inventories
Totalcurrentassets
Grossfixedassets
Less:Accumulateddepreciation $50,000
Netfixedassets
Totalassets

LiabilitiesandStockholdersEquity
Accountspayable $28,800
Notespayable
Accruals $18,800
Totalcurrentliabilities
Longtermdebts
Totalliabilities
Stockholdersequity
Preferredstock 2,451
Commonstockatpar 30,000
Paidincapitalinexcessofpar 6,400
Retainedearnings 90,800
Totalstockholdersequity
Totalliabilitiesandstockholdersequity
KeyFinancialData(2005)
1. Salestotaled$720,000.
2. Thegrossprofitmarginwas38.7percent.
3. Inventoryturned6times.
4. Thereare360daysinayear.
5. Theaveragecollectionperiodwas31days.
6. Thecurrentratiowas2.35.
7. Thetotalassetturnoverwas2.81.
8. Thedebtratiowas49.4percent.
9. Totalcurrentassetsequal$159,565.