Questions

A: Multiple Choice Questions

1. Which of the following is considered a profitability measure?

a. Days sales in inventory

b. Fixed asset turnover
c. Price-earnings ratio
d. Return on Assets

2. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15%
during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has
an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4.
From this we know that

a. Firm A has a higher profit margin than firm B

b. Firm B has a higher profit margin than firm A
c. Firm A and B have the same profit margin
d. Firm A has a higher equity multiplier than firm B

3. If a firm has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal
to 1.1, what is the firm's Net Working Capital?

a. $0
b. $100
c. $200
d. $1,000

4. To measure a firm's solvency as completely as possible, we need to consider

a. The firm's relative proportion of debt and equity in its capital structure
b. The firm's capital structure and the liquidity of its current assets
c. The firm's ability to use Net Working Capital to pay off its current liabilities
d. The firms leverage and its ability to make interest payments on its long-term debt

5.The __________ ratios provide the information critical to the long run operation of the
firm
A. liquidity
B. activity
C. solvency
D. profitability
6. The best financial statement to use to find information about what a company owns
and owes others is called the:
A) income statement
B) balance sheet
C) cash flow statement

7. Company A is considering a capital investment. The appropriate discount rate is

WACC= 5%. The project’s NPV is $50,000 and IRR is 6.5%. Which of the following
statements is true?
D) The project should be accepted since IRR > WACC
E) The project should be accepted since NPV > 0
F) Both the statements are true

8.Which of the following ratios measure the effectiveness with which a company uses its
assets?

Receivables Turnover : Interest Coverage

A) Yes : Yes
B) Yes : No
C) No : No

9. Generally, a high inventory turnover is a sign of:

A) Effective inventory management

B) An increase in prices
C) Fewer sales than planned

10.The matching principle attempts to find satisfactory bases of

association between
1. assets and liabilities
2. expenses and revenues
3. internal equities and external liabilities
4. none of these

11.Which of the following is not a current assets?

1. Accounts receivable
2. Inventory of finished products
3. Inventory of raw materials
4. Land
12.Which of the following equations represents the balance sheet?
 1. Assets + Liabilities = Shareholders’ equity
2. Assets = Liabilities = shareholders’ equity
3. Assets = Liabilities – Shareholders’ equity
4. Assets = Liabilities + Shareholders’ equity

ANSWERS:

Answer 1: d
Answer 2: b (Profit margin of firm A=5.33% and for firm B=7.5% - use Du Pont Identity)
Answer 3: CA/CL=1.2 and (CA-100)/CL=1.1 => solve and find CL=1,000 and
CA=1,200=> answer c
Answer 4: d
Answer 5:c

Solution:

4. What are the three Golden Rules of Accounting?

Personal Account – Debit the receiver, Credit the giver

Real Account – Debit what comes in, Credit what goes out

Nominal Account – Debit all expenses & losses, Credit all incomes & gains

3) Galactic Hyper is a chain of hypermarkets which sells most of its products for
cash, which is why its days of sales outstanding are as low as 22 days. Assuming
that the firm’s average receivables are $234,000, and the cost of goods sold
(COGS) for the 1-year period is $1,245,000, the annual sales of Galactic
are closest to:
A) $3,882,000.
B) $1,410,400.
C) $4,880,200.