Chapt

er03-Fi
nanci
alAnal
ysi
s

Chapter03
Fi
nanci
alAnalysi
s

Mul
ti
pleChoi
ceQuest
ions
 

1.
 Rati
oanalysi
sisnotuseful for:
 
A.
 hist
ori
caltr
endanalysi
swi thinaf i
rm.
B.
 comparisonofrat
ioswithinasi ngl
eindust
ry.
C.
 measuringtheeff
ectsoff i
nancing.
D.
 measuringemployeesatisfacti
on.

Accessibil
it
y:KeyboardNavi
gat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-05TheAnal ysi
s
 

2.
 I
ndustri
esmostsensi ti
vet
oinf
lat
ion-
inducedpr
ofi
tsar
ethosewi
th:
 
A.
 seasonalproducts.
B.
 cycli
calpr
oducts.
C.
 consumerpr oducts.
D.
 high-
profi
tproducts.

Accessibil
it
y:KeyboardNavi
gat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-05TheAnal ysi
s
 

3-
1
Chapt
er03-Fi
nanci
alAnal
ysi
s

3. 
UsingASPE, t
he_____
____
___
__met
hodofi
nvent
orycost
ingi
smostl
i
kel
ytol
ead
toinfl
ati
on-i
nducedprof
it
s. 
A. 
FIFO
B. 
Specifi
cit
em
C. 
Wei ght
edaverage
D. 
Lowerofcostormar ket

Accessibil
it
y:KeyboardNavi
gat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osi
ncompar
isont
oindust
ryav
erages.
Topic:03-08Infl
ati
onaryI
mpact
 

4. 
Inadditi
ontocomparisonwit
hindust
ryr
ati
os,
iti
sal
sohel
pful
toanal
yzer
ati
os
usi
ng: 
A. 
ethical
behaviour
.
B. 
compar i
sonofindust
rybenchmarks.
C. 
focusgroups.
D. 
trendanaly
sis.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

5.
 I
nexami ni
ngt heli
quidi
tyrat
ios,
thepri
maryemphasi
sist
hef
ir
m's:
 
A.
 abil
i
tyt oeffecti
vel
yempl oyitsr
esour
ces.
B.
 overall
debtposi t
ion.
C.
 abil
itytopayshor t-
term obl
i
gati
onsontime.
D.
 abil
i
tyt oearnanadequat er
etur
n.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

3-
2
Chapt
er03-Fi
nanci
alAnal
ysi
s

6.
 Whichoft hefoll
owingi
snotanassetut
il
izat
ionr
ati
o? 
A.
 I
nvent orytur
nover
B.
 Returnonasset s
C.
 Capitalassettur
nover
D.
 Averagecol l
ecti
onperi
od

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

7.
 Whi chtworatiosareusedi nt heDuPontsystem t
ocr
eat
eret
urnonasset
s? 
A.
 Returnonasset sandassett urnover
B.
 Prof i
tmarginandassett urnov er
C.
 Returnont otalcapit
alandt hepr of
itmargi
n
D.
 I
nv entoryt
urnov erandreturnoncapi t
alassets

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

8.
 Totalassettur
nov
erindi
cat
esthefi
rm'
s:
 
A.
 li
quidit
y.
B.
 debtpositi
on.
C.
 abil
itytouseit
sassetst
ogenerat
esal
es.
D.
 profi
tabil
i
ty.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
3
Chapt
er03-Fi
nanci
alAnal
ysi
s

9.
 Ashor t
-term credit
orwoul
dbemosti
nter
est
edi
n: 
A.
 profi
tabil
ityrati
os.
B.
 assetutili
zationrati
os.
C.
 li
quidit
yr ati
os.
D.
 debtutil
izationrati
os.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

10.
 Ifaf
ir
m hasbot hi nt
erestexpenseandleasepayment
s: 
A. 
ti
mesinterestearnedwi l
lbesmal l
ert
hanfixedchar
gecover
age.
B. 
ti
mesinterestearnedwi l
lbegreatert
hanfixedchar
gecover
age.
C. 
ti
mesinterestearnedwi l
lbethesameasf ixedchar
gecover
age.
D. 
fi
xedchargecov eragecannotbecomput e

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

11. 
ABCCo.hasanav er
agecol
l
ecti
onper i
odof60day s.Totalcr
editsal
esfort
he
yearwer
e$3,285,
000.Whati
sthebalanceinaccount
sr ecei
vableatyear
-end?(
Use
365daysinayear
.) 
A. 
$54,
750
B. 
$109,
500
C. 
$540,
000
D. 
$547,
500

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
4
Chapt
er03-Fi
nanci
alAnal
ysi
s

12. 
Af i
rm hasoperati
ngprofi
tof$120,
000aft
erdeducti
ngleasepaymentsof
$20,000.I
nterestexpensei
s$40,000.Whati
sthefi
rm'sfi
xedchargecover
age? 
A. 
6.00x
B. 
4.00x
C. 
3.50x
D. 
2.33x

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

13. 
Af i
rm hascur
rentassetsof$75,000andtotal
assetsof$375,
000.Thef
ir
m's
sal
esar e$900,
000.Thefirm'scapi
talassett
urnoveri
s: 
A. 
3.0x.
B. 
12.0x.
C. 
2.4x.
D. 
5.0x.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

14. 
Assetuti
l
izati
onrati
os: 
A. 
rel
atethebalancesheetassetstot hei
ncomestat
ementsal
es.
B. 
measurehowmuchcashi savail
ableforr
einv
est
mentint
ocurr
entasset
s.
C. 
aremostimpor t
anttoshareholders.
D. 
measuresthef i
rm'
sabili
tytogener at
eaprofi
tonsal
es.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
5
Chapt
er03-Fi
nanci
alAnal
ysi
s

15. 
Whi chofthefoll
owingisapotenti
al probl
em ofut i
li
zingrati
oanalysi
s? 
A. 
Trendsandi ndustr
yaveragesarefuturi
sticinnature
B. 
Financial
dataisidenti
calduetopri
ce- l
evelchanges
C. 
Firmswi t
hinanindustr
yusesimilaraccount i
ngpr i
nciplesandappli
cati
on
D. 
Firmswi t
hinanindustrymaynotusesi mi l
araccountingmet hods

Accessibil
it
y:KeyboardNavi
gat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-05TheAnal ysi
s
 

16. 
Repl acementcostaccounti
ng( cur
rentcostmet hod)willusually
: 
A. 
increaseassets,decreasenetincomebef or
et axes,andlowert her eturnonequi
ty.
B. 
i
ncr easeassets,i
ncreasenetincomebef oretaxes,andincreaset her eturnon
equity
.
C. 
decr easeassets,
increasenetincomebef or
et axes,andincreaset her etur
non
equity
.
D. 
increaseassets,i
ncreasenetincomebef oretaxes,andlowert her eturnonequit
y.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
06Ident
if
ysour
cesofdi
stor
ti
oni
nrepor
tedi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

17. 
Incomecanbedi stortedbyf act
orsotherthani
nfl
ati
on.Themosti
mpor
tant
causesofdi stort
ionfori nter-
indust
rycomparisonsar
e: 
A. 
accountingt r
ends.
B. 
applicat
ionofI FRS.
C. 
ti
mi ngofr evenuer eceiptsandnonrecurri
nggainsorl
osses.
D. 
cashr ei
nv estment.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
06Identi
fysourcesofdi
stor
ti
oni
nrepor
tedi
ncome.
Topic:03-07Distor
ti
onInFinancialRepor
ti
ng
 

3-
6
Chapt
er03-Fi
nanci
alAnal
ysi
s

18.
 Disinflat
ionmaycause:  
A. 
ani ncreaseinthev alueofgol d,
sil
ver,andgems.
B. 
ar educedr equir
edr etur
ndemandedbyi nvest
orsonfinancialasset
s.
C. 
increasedr etur
ndemandedbyi nvestorsonnon-fi
nancialassets.
D. 
addi t
ionalprofi
tsthroughr i
singinventorycost
s.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-06I
denti
fysour
cesofdi
stor
ti
oni
nrepor
tedi
ncome.
Topic:03-09Disi
nflat
ionEf
fect
 

19.
 Aqui ckrati
omuchsmal l
erthant hecur rentrati
oref
lect
s: 
A. 
asmal lporti
onofcurrentassetsisi ninventory.
B. 
alargepor t
ionofcurrentassetsisini nventor
y .
C. 
thatthefi
rm will
haveahi ghinvent oryturnover.
D. 
thatthefi
rm willhav
eahi ghr et
urnonasset s.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

20. 
Dur inginflat
ion,repl
acementcostaccount
ingwi
l
l:
 
A. 
decr easet hev al
ueofassets.
B. 
raiset hedebtt oassetrat
io.
C. 
increasei ncomes.
D. 
reducei ncomes.

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

3-
7
Chapt
er03-Fi
nanci
alAnal
ysi
s

21. 
Afi
rm'slongterm assets=$75,000,tot
alassets=$200,
000,
inventor
y=$25,
000
andcurr
entli
abil
i
ties=$50, 000.Cal
culat
ethecurrentr
ati
oandquickrati
o. 
A. 
Curr
entrati
o=0. 5;
Quickr ati
o=1.5
B. 
Curr
entrati
o=1. 0;
Quickr at
io=2.0
C. 
Curr
entrati
o=1. 5;
Quickr ati
o=2.0
D. 
Curr
entrati
o=2. 5;Quickrati
o=2.0

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

22. 
TheBubbaCor p.hadneti
ncomebef or
etaxesof$300,000andsalesof
$2,
000,000.I
fiti
sinthe50%taxbracketit
saftert
axprof
itmargini
s: 
A. 
7.5%
B. 
10%
C. 
12.5%
D. 
15%

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

23.
 XYZ'
srecei
vabl
estur
noveri
s10x.Theaccount
srecei
vabl
eaty
ear
-endar
e
$600,
000.Whatwasthesal
esfi
gurefort
heyear? 
A. 
$60,
000
B. 
$6,
000,
000
C. 
$7,
200,
000
D. 
$6,
600,
000

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
8
Chapt
er03-Fi
nanci
alAnal
ysi
s

24. 
Af i
rm hastotalasset
sof$2,
000,
000.I
thas$900,
000inl
ong-
ter
m debt
.The
sharehol
ders'equit
yis$900,
000.Whati
sthetot
aldebtt
oassetr
ati
o? 
A. 
45%
B. 
40%
C. 
55%
D. 
100%

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

25.
 Afi
rm hasadebttoequityrati
oof50%,
debtof$300,
000,
andneti
ncomeof
$90,
000.Thereturnonequi
tyis: 
A. 
60%
B. 
15%
C. 
30%
D. 
notenoughinfor
mati
on.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

26. 
Af i
rm hasadebttoassetrat
ioof75%,
$240,
000i
ndebt
,andneti
ncomeof
$48,000.Calcul
ateret
urnonequi
ty.
 
A. 
60%
B. 
20%
C. 
26%
D. 
Notenoughi nfor
mat i
on

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
9
Chapt
er03-Fi
nanci
alAnal
ysi
s

27. I
fgovernmentbondspay8. 5%i
nterestandCDICinsuredsavingsaccount
spay
5.5%i nt
erest
,sharehol
dersinamoderatel
yriskyfi
rm wouldexpectret
urn-
on-
equi
ty
valuesof: 
A. 5.
5%.
B. 8.
5%.
C. 12.
0%.
D. above8.5%,buttheexactamounti
suncer tai
n.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

28.
 Themostr i
goroustestofafi
rm'
sabi
l
ityt
opayi
tsshor
t-
ter
m obl
i
gat
ionsi
sit
s: 
A. 
currentr ati
o.
B. 
quickr atio.
C. 
debt-to-assetsrati
o.
D. 
ti
mes- interest
-earnedrat
io.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

29. 
Inv
estorsandf i
nancialanal
yst
swanti
ngtoeval
uat
etheoper
ati
ngef
fi
ciencyofa
fi
rm's,
manager swouldprobabl
ylookpr
imar
il
yatthef
ir
m's:
 
A. 
debtutil
i
zat ionrati
os.
B. 
li
quidi
tyratios.
C. 
assetuti
lizationrat
ios.
D. 
profi
tabi
li
tyr ati
os.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

3-
10
Chapt
er03-Fi
nanci
alAnal
ysi
s

30. 
Thehigherafir
m'sdebtutili
zati
onr at
ios,excl
udi
ngdebt
-t
o-t
otal
asset
s,t
he:
 
A. 
lessri
skythefir
m'sfi
nancialposit
ion.
B. 
mor eri
skythefi
rm'sfi
nancialposit
ion.
C. 
mor eeasil
ythefi
rm wil
lbeabletopaydi v
idends.
D. 
lesseasil
ythefi
rm wil
lbeabletopaydi v
idends.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

31. 
Foragi venl
evelofpr
ofit
abili
tyasmeasur edbyprofi
tmar
gin,
thef
ir
m'sr
etur
non
equitywi l
l:
 
A. 
increaseasi t
sdebt-t
o-assetsrat
iodecreases.
B. 
decr easeasitscurr
entrati
oincreases.
C. 
increaseasi t
sdebt-t
oassetsr at
ioincr
eases.
D. 
decr easeasitsti
mes-int
erest-
earnedrati
odecreases.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

32.
 Whichofthefoll
owingi
snotconsi
der
edt
obeapr
ofi
tabi
l
ityr
ati
o? 
A. 
Profi
tmargin
B. 
Timesint
erestearned
C. 
Retur
nonequi t
y
D. 
Retur
nonasset s(inv
est
ment)

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-05TheAnal ysi
s
 

3-
11
Chapt
er03-Fi
nanci
alAnal
ysi
s

33. 
Whichi ndustr
yplacesthemostv
alueoni
ntangi
bleasset
s? 
A. 
Professionalservi
ces
B. 
Manuf acturi
ngindustr
y
C. 
Productionfacil
it
y
D. 
Assembl yfacil
it
y

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

MEGAFRAMECOMPUTERCOMPANY
Bal
anceSheet
AsatDecember31,
20X5
ASSETS
Cash $40,
000
Accountsrecei
vabl
e 60,
000
I
nventory 90,
000
Newpl antandequi
pment 220,
000
Total
Asset s $410,
000

LIABI
LITI
ESANDSHAREHOLDERSEQUI
TY
Account spay able $60,
000
Accruedexpenses 40,
000
Long-term debt 130,
000
Commonst ock 80,
000
Retai
nedear nings 100,
000
TotalLiabi
lit
iesandShareholder
sEqui
ty $410,
000

3-
12
Chapt
er03-Fi
nanci
alAnal
ysi
s

MEGAFRAMECOMPUTERCOMPANY
IncomeStat
ement
FortheyearendedDecember31,
20X5
Sales(alloncr
edit) $700,
000
Costofgoodssol d 400,
000
Grosspr ofi
t 300,
000
Sell
ingandadmi nist
rati
veexpense 100,
000
Oper at
ingprof
it 200,
000
I
nterestexpense 40,
000
Netincomebef oretaxes 160,
000
Taxes( 50%) 80,
000
Netincome 80,
000

34. 
Usi
ngtheDuPontmet
hod,r
etur
nonasset
s(i
nvest
ment
)forMegaf
rame
Computeri
sapproxi
mat
ely
: 
A. 
15%.
B. 
25%.
C. 
29%.
D. 
20%.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
13
Chapt
er03-Fi
nanci
alAnal
ysi
s

35. 
Thefi
rm'
saver
agecol
lect
ionper
iodi
s:
(Use365daysi
nayear
.)
 
A. 
31days.
B. 
25days.
C. 
12days.
D. 
20days.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

36.
 Ti
mesi
nter
estear
nedf
orMegaf
rameComput
eri
s: 
A. 
2x.
B. 
5x.
C. 
4x.
D. 
10x.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

37. 
Megafr
ame'
squi
ckr
ati
ois:
 
A. 
1:1.
B. 
1:2.
C. 
1.6:
1.
D. 
3:1.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
14
Chapt
er03-Fi
nanci
alAnal
ysi
s

38. 
Megafr
ame'
scur
rentr
ati
ois:
 
A. 
1.9:
1.
B. 
0.6:
1.
C. 
1:1.
D. 
0.86:
1.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

39. 
Megaframe'
sdebtt
oassetr
ati
ois:
 
A. 
56.1%.
B. 
75.61%.
C. 
80.49%.
D. 
90.62%

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

40. 
WhatisMegaf
rameComput
er'
stot
alassett
urnov
er?
 
A. 
3.68x.
B. 
3.18x.
C. 
2.00x.
D. 
1.71x.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
15
Chapt
er03-Fi
nanci
alAnal
ysi
s

41. 
ComputeMegaf
rame'
saf
tert
axpr
ofi
tmar
gin.
 
A. 
10.0%
B. 
14.29%
C. 
11.43%
D. 
46.34%

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

42. 
Megafr
ame'
sret
urnonequi
tyi
s: 
A. 
44.44%.
B. 
80.00%.
C. 
50.05%.
D. 
100.0%.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

43. 
Megaframe'
srecei
vabl
etur
nov
eri
s: 
A. 
4.4x.
B. 
10x.
C. 
11.67x.
D. 
14.4x.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
16
Chapt
er03-Fi
nanci
alAnal
ysi
s

44.
 Ifacompany'saccountsrecei
vabl
etur
nov
eri
sincr
easi
ng,
theav
eragecol
l
ect
ion
peri
od: 
A. 
isgoingupsl
ightl
y.
B. 
i
sgoi ngdown.
C. 
couldbemov i
ngineitherdir
ect
ion.
D. 
isgoingupbyasignifi
cantamount.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Under st
and
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

45. 
Anincr
easi
ngav eragecoll
ecti
onper iodindicat
es: 
A. 
thefi
rmisgenerati
ngmor eincome.
B. 
account
srecei
vableisgoingdown.
C. 
thecompanyisbecomi ngmor eef
ficientinitscoll
ecti
onpol
icy
.
D. 
thecompanyisbecomi nglesseff
icientinitscoll
ecti
onpoli
cy.

Accessibil
it
y:Key boardNav
igat
ion
Blooms:Under stand
Diff
icult
y:Easy
LearningObjective:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjective:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Interpret
ati
onofRati
osbyTrendAnal
ysi
s
 

46. 
Adecr easi
ngav er
agecoll
ect
ionper
iodcoul
dbeassoci
atedwi
th:
 
A. 
incr
easingsales.
B. 
decreasingsal
es.
C. 
incr
easingaccountsrecei
vabl
e.
D. 
incr
easingprofi
ts.

Accessibil
it
y:Key boardNav
igat
ion
Blooms:Under stand
Diff
icult
y:Medium
LearningObjective:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjective:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Interpret
ati
onofRati
osbyTrendAnal
ysi
s
 

3-
17
Chapt
er03-Fi
nanci
alAnal
ysi
s

47. 
Disi
nfl
ati
onascomparedt
oinf
lat
ionwoul
dnor
mal
l
ybegoodf
ori
nvest
ment
sin:
 
A. 
bonds.
B. 
gold.
C. 
coll
ecti
bleant
iques.
D. 
textbooks.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
05Interpr
etrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identif
ysourcesofdistor
ti
oninreport
edi
ncome.
Topic:03-10Valuati
onBasicswithChangingPrices
 

48.
 Anon- Canadiancompanyexper
ienci
ngrapi
dpri
ceincr
easesf
ori
tspr
oduct
wouldtaket hemostconserv
ati
veapproachbyusi
ng: 
A. 
FIFOaccount i
ng.
B. 
LIFOaccount i
ng.
C. 
averagecostaccounti
ng.
D. 
weightedav er
age.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Easy
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

49. 
Historical
costbasedamor
ti
zat
iont
endst
o__
___
___i
mmedi
atel
ywhent
her
eis
i
nflati
on. 
A. 
lowert axes
B. 
decreasepr of
it
s
C. 
increaseprofi
ts
D. 
increaseassets

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Interpr
etrati
osandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identif
ysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-07Distor
ti
onInFinancialRepor
ti
ng
 

3-
18
Chapt
er03-Fi
nanci
alAnal
ysi
s

50.
 Whathappensi fleasepaymentsarer
educed?
 
A. 
Timesinterestearnedgoesup.
B. 
Fixedchargecov eragegoesup.
C. 
Fixedchargecov eragestay
sthesame.
D. 
Fixedchargecov eragegoesdown.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

51. 
Al argeext
raordinar
ylosshaswhatef
fectoncostofgoodssol
d? 
A. 
Itraisesi
t.
B. 
Itl
ower sit
.
C. 
Ithasnoef fect.
D. 
Needmor einformati
on.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Easy
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

52.
 Ifaccount
sr eceiv
ablestaysthesame,andcr
edi
tsal
esgoup:
 
A. 
theav er
agecollecti
onperiodwil
lgoup.
B. 
theav er
agecollecti
onperiodwil
lgodown.
C. 
accountsreceivabl
et ur
noverwil
ldecr
ease.
D. 
nochangeswi l
loccur.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
19
Chapt
er03-Fi
nanci
alAnal
ysi
s

53.
 Whichoft hefoll
owingi
sapr
ofi
tabi
l
ityr
ati
o? 
A. 
Quickrat
io
B. 
Retur
nonasset s
C. 
Inv
entoryturnover
D. 
Capit
alassetturnover

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

54.
 Whi chofthefoll
owi
ngi
sanassetut
il
izat
ionr
ati
o? 
A. 
Profitmargin
B. 
Inventor
yturnover
C. 
Returnonequi t
y
D. 
Returnonasset s

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

55. 
Whichoft hefoll
owi ngi
snotadebtut
il
izat
ionr
ati
o? 
A. 
Debttototalassets
B. 
Timesinterestearned
C. 
Currentr
atio
D. 
Fixedchargecov erage

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
20
Chapt
er03-Fi
nanci
alAnal
ysi
s

56.
 Accor dingtheDuPontsy st
em,
whi
choft
hef
oll
owi
ngi
snotaf
act
ori
nachi
evi
nga
sat
isfactor yret
urnonassets? 
A. 
Useofdebt
B. 
Lowi nv entor
ylevel
s
C. 
Rapidt urnoverofasset
s
D. 
Highpr of i
tmargi
ns

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

57. 
Af i
rm hascurr
entasset
sof$150,
000andt otal
assetsof$750,
000.Thef
ir
m's
sal
esar e$1,800,
000.Thefi
rm'
scapi
talassett
urnoveri
s: 
A. 
3.0x
B. 
12.0x
C. 
2.4x
D. 
5.0x

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

58. 
Retur
nonasset s(ROA)canbedi
stor
tedby
: 
A. 
curr
entli
abi l
i
ties.
B. 
noncurr
entl i
abili
ti
es.
C. 
bondprinciplepayment s.
D. 
bondinterestpay ments.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

3-
21
Chapt
er03-Fi
nanci
alAnal
ysi
s

59.
 Inexamini
ngthedebtut il
i
zati
onrati
os,
thepri
mar
ypur
posei
stomeasur
e: 
A. 
abil
it
ytoeffect
ivel
yempl oyit
sresour
ces.
B. 
overal
ldebtpositi
on.
C. 
abil
it
ytopayshor t-
ter
m obli
gati
onsontime.
D. 
abil
it
ytogeneratetimelycashfl
ows.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

60.
 Whatdocover
ager at
iosdemonst
rat
e? 
A. 
Howaf i
rmisexpectedtohandl
ecurr
entassetbal
ances.
B. 
Debtmanagementofthefir
m andabi
li
tyt
omeetf i
nancial
obl
i
gat
ions.
C. 
Prof
itmargi
nofthefir
m.
D. 
Theret
urnonassetsofthefi
rm.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

61. 
FloundersCo.hasanav er
agecol
lect
ionper
iodof60days.Total
credi
tsalesf
or
theyearwer e$9,
855,000.Whati
sthebalancei
naccount
sreceiv
ableatyear
-end?
(Use365day sinay ear.
) 
A. 
$164,250
B. 
$328,500
C. 
$1,620,000
D. 
$1,642,500

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
22
Chapt
er03-Fi
nanci
alAnal
ysi
s

62. 
Af i
rm hasoperati
ngprofi
tof$200,
000aft
erdeducti
ngleasepaymentsof
$40,000.I
nterestexpensei
s$60,000.Whati
sthefi
rm'sfi
xedchargecover
age? 
A. 
5.00x
B. 
4.00x
C. 
3.33x
D. 
2.40x

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

63. 
Af i
rm'slongt
erm assets=$150,
000,tot
al assets=$400,000,i
nvent
ory=
$50,000,andcurr
entl
iabil
it
ies=$100,
000.Calculatethecur
rentrat
ioandqui
ckr
ati
o. 
A. 
Currentrati
o=0.5;
Quickr at
io=1.5
B. 
Currentrati
o=1.0;
Quickr at
io=2.
0
C. 
Currentrati
o=1.5;
Quickr at
io=2.0
D. 
Cur r
entrati
o=2.5;Quickrat
io=2.0

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

64. 
Ift
hecompany '
saccount
sreceivabl
etur
nov
eri
sdecr
easi
ng,
theav
erage
col
lect
ionperi
od:
 
A. 
isgoingup.
B. 
i
sgoi ngdown.
C. 
couldbemov i
ngineit
herdi
rect
ion.
D. 
isgoingdownsli
ghtl
y.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Under st
and
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
23
Chapt
er03-Fi
nanci
alAnal
ysi
s

65. 
Adecreasingav er
agecol
lect
ionperiodindicates:
 
A. 
thefi
rmisgener ati
ngmoreincome.
B. 
account
sr ecei
vableisgoi
ngup.
C. 
thecompanyi sbecomingmor eeffi
cientinitscoll
ecti
onpoli
cy.
D. 
thecompanyi sbecominglesseff
ici
enti nit
scol l
ecti
onpoli
cy.

Accessibil
it
y:Key boardNav
igat
ion
Blooms:Under stand
Diff
icult
y:Easy
LearningObjective:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjective:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Interpret
ati
onofRati
osbyTrendAnal
ysi
s
 

66. 
Anincreasi
ngav eragecollecti
onperi
odcoul
dbeassoci
atedwi
th:
 
A. 
decreasingaveragedai l
ycashsales.
B. 
i
ncreasingaveragedai lycr
editsal
es.
C. 
decreasingaccountsr ecei
vable.
D. 
incr
easingaccountsr eceiv
able.

Accessibil
it
y:Key boardNav
igat
ion
Blooms:Under stand
Diff
icult
y:Medium
LearningObjective:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjective:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Interpret
ati
onofRati
osbyTrendAnal
ysi
s
 

67. 
Afirm hasaDebt
-t
o-Assetr
ati
oof35%andTot
alAsset
sof$350,
000.Whati
sthe
fi
rm'sTotalDebt
? 
A. 
$122,500
B. 
$650,000
C. 
$100,000
D. 
$60,000

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
24
Chapt
er03-Fi
nanci
alAnal
ysi
s

68. 
Juniper,Lt
d.reportt
otalsal
esof$10,
000,
000i
ntheprioryear.I
fthesesal
eswer
e
15.50Xtotalcapi
talassetswhatwasthecompany
'scapi
talassetposit
ionint
he
year? 
A. 
$15,000,000
B. 
$155,000,000
C. 
$645,161
D. 
$6,451,613

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

69. 
JonesandCo. ,report
edaverager
ecei
vablesof$550,
000init
smostrecent
annualrepor
t.Ift
otalcredi
tsal
eswere$3,000,000whatwasJonesandCo.'
saver
age
col
lect
ionperiod?(Use365day sinayear
.) 
A. 
67day s
B. 
29day s
C. 
82day s
D. 
21day s

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

70. 
Ifacompany'
sprofi
tmargi
nwas32%,
whatwer
eit
srepor
tedsal
esi
fit
srepor
ted
netincomewas$650,000?
 
A. 
$10,000,
000
B. 
$9,758,
982
C. 
$1,008,
332
D. 
$2,031,
250

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
25
Chapt
er03-Fi
nanci
alAnal
ysi
s

71.
 Ifacompanyhasaret
urnoni
nvest
mentof17%,
andi
tsequi
tymul
ti
pli
eri
s1.
75,
i
tsROEwoul dbe___
___
_. 
A. 
64.75%
B. 
29.75%
C. 
18.25%
D. 
16.50%

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 
 

Tr
ue/Fal
seQuest
ions
 

72.
 Absolut
eval
uest
akenf
rom f
inanci
alst
atement
sar
emor
eusef
ult
hanr
elat
ive
val
ues. 
FALSE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-05TheAnal ysi
s
 

73.
 Heav
yuseofl
ong-
ter
m debtcanbeofbenef
itt
oaf
ir
m. 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
26
Chapt
er03-Fi
nanci
alAnal
ysi
s

74.
 Thest
ockmar
kett
endst
omov
eupwheni
nfl
ati
ongoesup.
 
FALSE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

75.
 UnderI
nter
nat
ional
Financi
alRepor
tingStandards,
twocompani
eswi
thi
dent
ical
operat
ingr
esul
tsmaynotreporti
denti
calnetincomes. 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

76.
 Acur
rentr
ati
oof2t
o1i
sal
way
saccept
abl
e,f
oracompanyi
nanyi
ndust
ry.
 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

77.
 I
nanal
yzi
ngr
ati
os,
theageoft
hef
ir
m'sasset
sneednotbeconsi
der
ed.
 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

3-
27
Chapt
er03-Fi
nanci
alAnal
ysi
s

78. 
Aslongaspri
cescont
inuet
orisefast
erthancost
sinani
nfl
ati
onar
yenv
ironment
,
repor
tedprof
it
swil
lgener
all
ycont
inuetori
se. 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

79. 
Tocomput
ethequi
ckr
ati
o,account
srecei
vabl
ear
enoti
ncl
udedi
ncur
rent
assets.
 
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

80.
 Rat
iosar
eusedt
ocompar
edi
ff
erentf
ir
msi
nthesamei
ndust
ry.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

81.
 Li
qui
dit
yrat
iosi
ndi
cat
ehowf
astaf
ir
m cangener
atecasht
opaybi
l
ls.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
28
Chapt
er03-Fi
nanci
alAnal
ysi
s

82.
 Assetut
il
izat
ionr
ati
osdescr
ibehowcapi
tal
isbei
ngut
il
izedt
obuyasset
s. 
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

83. 
Returnonequi
tywi
l
lbehi
ghert
hanr
etur
nonasset
sift
her
eisdebti
nthecapi
tal
str
ucture.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

84. 
TheDuPontsystem ofpr
ofit
abil
i
tyanal
ysisemphasi
zesthatpr
ofi
tgener
atedby
assetscanbeder
ivedbyv ar
iouscombinat
ionsofpr
ofi
tmarginsandassett
urnov
er.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

85.
 Rat
iosar
enotdi
stor
tedbyi
nfl
ati
on.
 
FALSE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Inf
lati
onaryI
mpact
 

3-
29
Chapt
er03-Fi
nanci
alAnal
ysi
s

86.
 Pr
ofi
tabi
l
ityr
ati
osaredi
stor
tedbyinf
lat
ionbecauseprof
it
sar
est
atedi
ncur
rent
dol
lar
sandassetsandequi
tyar
estatedi
nhi st
ori
caldol
l
ars.
 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

87.
 Hi
gherdebtut
il
izat
ionrat
ioswi
l
lal
way
sincr
easeaf
ir
m'sr
etur
nonequi
tygi
vena
posi
ti
veret
urnonassets.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

88. 
Theterm"inv
ent
oryprof
it
s"r
efer
stoprofi
tsmadeinthepr
ocessofsel
l
ing
fi
nishedgoodsatpr
iceshi
ghert
hanthei
rcostofgoodssol
 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

89. 
Prof
it
abi
l
ityr
ati
osallowonetomeasur
etheabil
i
tyoft
hef
ir
mtoear
nanadequat
e
ret
urnonsal
es,t
otalasset
s,andi
nvest
edcapi
tal
.
 
TRUE

Accessibil
it
y:KeyboardNavigation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-01Calculat
e13fi
nanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-02RatiosforCompar ati
vePur
poses
 

3-
30
Chapt
er03-Fi
nanci
alAnal
ysi
s

90.
 Assetut
il
izat
ionr
ati
osmeasur
ether
etur
nsonv
ari
ousasset
ssuchasr
etur
non
tot
alasset
s. 
FALSE

Accessibil
it
y:KeyboardNavigation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-01Calculat
e13fi
nanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-02RatiosforCompar ati
vePur
poses
 

91.
 Abankerort
radecr
edi
tori
smostconcer
nedaboutaf
ir
m'spr
ofi
tabi
l
ityr
ati
os.
 
FALSE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

92. 
Rati
osareonl
yusef
ulf
ort
hosear
easofbusi
nesst
hati
nvol
vei
nvest
ment
deci
sions.
 
TRUE

Accessibil
it
y:KeyboardNavigation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-01Calculat
e13fi
nanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-02RatiosforCompar ati
vePur
poses
 

93.
 LI
FOinvent
orypr
ici
ngdoesabet
terj
obt
hanFI
FOi
nequat
ingcur
rentcost
swi
th
cur
rentr
evenue.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

3-
31
Chapt
er03-Fi
nanci
alAnal
ysi
s

94. 
Financi
alr
ati
osar
eusedt
owei
ghandev
aluat
etheoper
ati
onal
per
for
manceof
thefi
rm. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

95.
 FI
FOwi
l
lcausei
nfl
atedpr
ofi
tsdur
ingdef
lat
ion.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

96. 
Fier
cel
ycompetit
iveindust
ri
essuchasthecomput erindust
ryhavehadlower
prof
itmarginsandr
eturnonequityi
nrecentyearsev
ent houghtheyareunder
extr
emepr essur
etomaintainhi
ghprofi
tabi
li
ty.
 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-05TheAnal ysi
s
 

97.
 Assetut
il
izat
ionr
ati
osr
elat
ebal
ancesheetasset
stoi
ncomest
atementsal
es.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
32
Chapt
er03-Fi
nanci
alAnal
ysi
s

98.
 Afi
rm wi
thheav
ylong-t
erm debtcanbenef
itdur
ingi
nfl
ati
onar
yti
mes,
asdebt
canberepai
dwith"
cheaper"dol
lar
s. 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

99.
 Dur
ingdi
si
nfl
ati
on,
stockpr
icest
endt
ogoupbecauset
hei
nvest
or'
srequi
redr
ate
ofr
etur
ngoesdown. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-05I
nterpr
etrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dentif
ysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-09Disi
nflat
ionEf
fect
 

100. 
Analy
stsagreethatext
raordi
nar
ygains/
lossesshoul
dbeexcl
udedfrom r
ati
o
anal
ysisbecausetheyareone-t
imeevent
s,anddonotmeasureannualoper
ati
ng
perf
ormance. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

3-
33
Chapt
er03-Fi
nanci
alAnal
ysi
s

101.
 Retur
nonequi
tyf
orav
eryr
iskyf
ir
m shoul
dbehi
ghert
hanr
etur
nonequi
tyf
ora
l
essriskyfi
rm.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

102.
 Thecur
rentr
ati
oisamor
esev
eret
estofaf
ir
m'sl
i
qui
dit
ythant
hequi
ckr
ati
o. 
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

103.
 Assetuti
l
izat
ionr
ati
oscanbeusedt
omeasur
etheef
fect
ivenessofaf
ir
m's
managers. 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

104. 
FIFOinvent
oryv
aluat
ioni
sresponsi
blef
ormuchoft
hei
nvent
orypr
ofi
tscaused
byinf
lati
on. 
TRUE

Accessibil
it
y:KeyboardNavi
gation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-
05Inter
pretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-
06Identi
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-08Infl
ati
onaryI
mpact
 

3-
34
Chapt
er03-Fi
nanci
alAnal
ysi
s

105.
 Debtuti
l
izat
ionr
ati
osareusedtoev
aluat
ethef
ir
m'sdebtposi
ti
onwi
thr
egar
dto
i
tsassetbaseandearni
ngpower. 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

106. 
Sat
isf
actor
yretur
nonassetsmaybeachi
evedthroughhi
ghpr
ofi
tmar
ginsor
rapi
dtur
noverofassets,
butnotacombi
nat
ionofboth.
 
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

107. 
Intangibleasset
sarebecominganimpor
tantpartoftheasset
si ncompany
fi
nancialstatementsbecauseaccount
ant
sarerecognizi
ngthegrowingimpactof
brandnames.  
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

108. 
Indust
riesmostsensit
ivet
oinf
lat
ion-
inducedpr
ofi
tsar
ethosewi
thcy
cli
cal
productssuchaslumber,copper
,et
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-
03Examinether
ati
osincompari
sont
oindust
ryaver
ages.
LearningObjecti
ve:03-
04Examinether
ati
osandcompanyperf
ormancebymeansoft
rendanal
ysi
s.
Topic:03-06Int
erpret
ati
onofRati
osbyTrendAnal
ysi
s
 

3-
35
Chapt
er03-Fi
nanci
alAnal
ysi
s

109.
 Theuseofcapi
tal
asset
swi
l
laf
fectt
heequi
tymul
ti
pli
er.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

110.
 Recei
vabl
est
urnov
eri
sther
eci
procal
oft
hecol
l
ect
ionper
iodt
imes365.
 
TRUE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

111.
 Ret
urnonequi
ty(
ROE)wi
l
lnotchangei
fthef
ir
mincr
easesi
tsuseofdebt
. 
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

112. 
BigBathAccountingist
het
endencyoff
ir
mst owri
teof
fsi
gni
fi
cantpor
ti
onsof
assetsdur
ing"t
roubled"ti
meswi
ththeeff
ectofal
l
owingmanagementt
ostartov
er
whent i
mesgetbetter.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

3-
36
Chapt
er03-Fi
nanci
alAnal
ysi
s

113.
 "
Bigbat
hs"ar
eusual
l
ytakenaf
teracor
por
ater
eor
gani
zat
ion.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

114.
 Accr
ual
account
ingcanr
esul
tinwi
dev
ari
ati
onsi
noper
ati
ngr
esul
twi
thi
nan
i
ndustr
y. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 

115.
 FI
FOisasy st
em thati
ncl
udesinv
entoryi
ntocostofgoodssol
dinwhi
cht
he
i
temspurchasedfi
rstarewri
tt
enofffi
rst
. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-05I
nterpretrat
iosandidenti
fycorr
ecti
veact
ionf
orabnor
malr
esul
ts.
LearningObjecti
ve:03-06I
dent i
fysourcesofdist
ort
ioninreport
edi
ncome.
Topic:03-11AccountingDi
scr et
ion
 
 

Shor
tAnswerQuest
ions
 

3-
37
Chapt
er03-Fi
nanci
alAnal
ysi
s

116.
 Whatar
ethe3mai
nusesoff
inanci
alr
ati
os?
 

Fi
nanci
alr
ati
osar
eusedt
o

Weighandevaluatetheoper
ati
ngperformanceofthefi
rm nowandf
ori
tspast
Judgecomparati
v eperf
ormancebet
weenf ir
ms
Deter
miner
elativeasopposedtoabsoluteperf
ormance

Accessibil
it
y:KeyboardNavigation
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:03-01Calculat
e13fi
nanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-02RatiosforCompar ati
vePur
poses
 

117. 
Retur
nonequi
ty(
ROE)indicat
esaret
urntot heownersofthefi
rm andi
scl
osel
y
fol
lowedbyinv
est
mentanal
ysts.What4defi
cienciesdoesthi
srati
ohave? 

Focusesonpastr
esul
tsnotf
utur
eexpect
edr
esul
ts

Doesnotfocusonshar epri
ce,t
hegoaloft
hef i
rm
Rel
iesonbookv alueandnottheact
ualmarketval
ueoftheinvest
ment
Doesn'
tcaptur
et hefi
rm'sassumedri
sktogenerateear
nings

Accessibil
it
y:KeyboardNavigation
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:03-01Calculat
e13fi
nanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-02RatiosforCompar ati
vePur
poses
 

3-
38
Chapt
er03-Fi
nanci
alAnal
ysi
s

118.
 Asdefi
nedbythet
ext
,li
steachofthe3pr
ofi
tabi
l
ityr
ati
osandexpl
aint
he
i
nfor
mationtheypr
ovi
deaboutafir
m. 

Pr
ofi
tabi
l
ityr
ati
os:

Prof
itmargin,r
etur
nonassets(i
nvestment)
,ret
urnonequity(
commonsharehol
der
s)
Prof
itabi
l
ityrat
iosmeasur
eretur
n(profi
t)onsal
es,t
otalasset
s,andshar
ehol
der
s'
capi
tal

Exami netheeff
ectiv
eemploymentofresources
Areusuallydependentonanadequat
esal eslevel
Infl
uencesharepriceper
for
mance,andthusar eimpor
tantt
oequi
tyi
nvest
orsand
securi
tyanaly
sts

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

119.
 Asdefi
nedbythet
ext
,li
steachofthe8assetut
il
izat
ionr
ati
osandexpl
aint
he
i
nfor
mationtheypr
ovi
deaboutafir
m. 

Assetut
il
izat
ionr
ati
os:

Receiv
ableturnover
,av eragecollecti
onperi
od(dayssal
esout
standi
ng),
inv
entory
tur
nover,i
nventor
yhol dingperiod,accountspayabl
etur
nov
er,
accountspayabl
e
peri
od,capi
talassetturnov er
,totalassett
urnov
er

Measur ethespeedoref fi
ciencyofturni
ngov erasset
sconstructi
ngthecash
conversi
oncy cl
e
Identi
fytheti
mespery earinvent
oryissold,
theaccountsreceivabl
ecoll
ect
ed,ort
he
producti
vi
tyofcapitalassetsingenerati
ngsales
Ar eaprimaryresponsibi
li
tyofmanagement

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

3-
39
Chapt
er03-Fi
nanci
alAnal
ysi
s

120.
 Asdefi
nedbythet
ext
,li
steachofthe2l
i
qui
dit
yrat
iosandexpl
aint
he
i
nfor
mationtheypr
ovi
deaboutafir
m. 

Cur
rentr
ati
o,qui
ckr
ati
o

Emphasizetheabi
li
tytopayoffshor
t-t
erm obl
i
gati
onsastheyfal
ldue
Quickl
yimpactday-
to-dayoper
ati
ons
Focusbankersandcredit
orsontheabi
li
tytogener
atet
imelycashfl
ows

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

121.
 Asdefi
nedbythet
ext
,li
steachofthe3debtut
il
izat
ionr
ati
osandexpl
aint
he
i
nfor
mationtheypr
ovi
deaboutafir
m. 

Debtuti
l
izati
onrat
ios.
Debttototal
asset
s,ti
mesi
nter
estear
ned,
fixedchar
gecov
erage

Eval
uatet
heover
all
debtposi
ti
onofthefi
rminli
ghtoftheassetbaseandear
ning
power
Areexami
nedbydebthol
dersi
nli
ghtofsecur
it
ybehinddebtobli
gati
ons

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Under st
and
Diff
icult
y:Hard
LearningObjecti
ve:03-
01Calcul
ate13f
inanci
alr
ati
ost
hatmeasur
epr
ofi
tabi
l
ity
;assetut
il
izat
ion;
li
qui
dit
y;anddebtut
il
izat
ion.
Topic:03-03DuPontAnalysi
s
 

3-
40
Chapt
er03-Fi
nanci
alAnal
ysi
s

122. 
Completethefol
l
owi
ngbal
ancesheetf
ort
heRangeCompanyusi
ngt
he
fol
lowingi
nformati
on:

Debtt oAssets=60%
QuickRatio=1. 1
AssetTur nover=5x
CapitalAssetTurnov
er=12.
037x
CurrentRatio=2
AverageCol l
ecti
onPeri
od=17.
0708day
s

Cash  Currentli
abil
it
ies  
Recei
vabl
es  Bondspay able  
I
nventor
y  Totalli
abil
it
ies  
Total
currentasset
s  Networ th  
Pl
antandEqui pment  Totalli
abil
it
ies  
Total
Assets $325,
000AndNetWor th  

3-
41
Chapt
er03-Fi
nanci
alAnal
ysi
s

Assumeal
lsal
esar
eoncr
edi
t.
 

A)Tot al assett urnov er=Sal es/Total Asset s=5=X/ $325,000

Sal
es=X=$1, 625, 000
B)Debt ot otalasset s=Deb/ Tot alAsset s=0. 60=X/ $325,000
Debt=X=$195, 000
C)Capi tal assett ur nov er=Sal es/Capi talAssets=12, 037=$1, 625,
000/
X
Capital assets=X=$135, 000
D)Tot al assets-capi tal assets=Cur rentasset s
$325,000-$135, 000=$190, 000
E)Cur rentr ati
o=Cur rentAsset s/CurrentLiabili
ti
es=2=$190, 000/X
CurrentLi abili
ti
es=X=$95, 000
F)Tot al l
iabil
it
ies-cur rentliabili
ties=bondspay abl
e
$195,000-$95, 000=$100, 000
G)Tot al assets-t otal liabil
it
ies=networ th
$325,000-$195, 000=$130, 000
H)Av er agecol lectionper i
od=Recei vables/Averagesdailycredi
tsal
es=$17.0708=
X/(
$6, 625, 000/365)
I
)Qui ckr atio=( Cur rentasset s-inv entory)CurrentLi
abili
ties=2=$190,000/
X
Currentasset s-I nv ent ory=Recei vables+Cash
=($76, 000+X) / $95, 000
Cash=X=$28, 500
J)Invent ory=Cur rentasset s-cash-r eceivabl
es
I
nvent or y=$190, 000-$28, 500-$76, 000
I
nvent or y=$85, 500

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

123.
 Gi
venthebal
ancesheetandincomestatementf
orSimmonsMai nt
enance
Company,comput
etherati
osbelow.The"r
ightanswer
"refer
stothequestionof
whet
heraparti
cul
arrat
ioforSi
mmonsi sbett
erorworsethantheindustr
yaverage.

3-
42
Chapt
er03-Fi
nanci
alAnal
ysi
s

SI
MMONSMAI NTENANCECOMPANY
BalanceSheet
Assets  
Liabil
it
ies  
Cash $15,000Account sPayabl
e $21,
000
Accts.Receiv abl
e 22,000NotesPay able 20,
000
I
nvent ory 30,000AccruedExpenses 5,
000
CurrentAsset s 67,000CurrentLiabi
li
ti
es 46,
000
NetCapi talAssets 73,000Long-term Debt 30,
000
   
ShareholdersEqui
ty 64,
000
TotalLiabil
i
ties& $140,000ShareholdersEqui
ty $140,
000
TotalAssets

IncomeStat
ement
Sales:(80%credit)   $120,
000
Less: CostofGoodsSol d   45,
000
GrossPr ofi
t   75,
000
Sell
ingandAdmi nistrati
veExpense 20,
000  
RentExpense( Lease) 8,
000 28,
000
EBIT   47,
000
I
nterestExpense   5,
000
Earningsbeforetaxes   42,
000
Taxes( @ 25%)   10,
500
NetIncome   $31,
500
     
Commonshar esout standi
ng    
EPS    

3-
43
Chapt
er03-Fi
nanci
alAnal
ysi
s

Commonshar
esout
standi
ng15,
000

EPS$2.
10

Rat
io Rati
osf
or Indust r
y Ci
rcl
etheri
ght
Simmons Aver age answer
Profitmar gin   17. 5% Bett
erworse
Returnoni nvestment   20. 8% Bett
erworse
Returnonequi ty   35% Bett
erworse
Recei vablest urnov er   4.4x Bett
erworse
Avg.col lect i
onper iod   68.0day s Bett
erworse
I
nv entor yturnov er   3.5x Bett
erworse
Capital assett urnov er   2.4x Bett
erworse
Total assett urnov er   .76x Bett
erworse
Currentr atio   1.28 Bett
erworse
Quickr atio   .
85 Bett
erworse
Debtt ot otal assets   .
45 Bett
erworse
Ti
mesi nterestear ned   12.0x Bett
erworse
Fi
xedchar gecov erage   3.6x Bett
erworse

3-
44
Chapt
er03-Fi
nanci
alAnal
ysi
s

Rat
io Rati
osf or Indust r
yCir
clet
her
ight
Simmons Aver ageanswer
Profitmar gin 26.25% 17. 5%Bett
er
Returnoni nvestment 22.50% 20. 8%Bett
er
Returnonequi ty 49.22% 35%Bet t
er
Recei vablest urnov er 4.36x 4.4xBett
er
Avg.col lect i
onper iod 83.6day s 68.0day sBett
er
I
nv entor yturnov er 4.0x 3.5xBett
er
Capital assett urnov er 1.64x 2.4xBett
er
Total assett urnov er .86x .76xBett
er
Currentr atio 1.46 1.28Bett
er
Quickr atio .80 .
85Bett
er
Debtt ot otal assets .54 .
45Bett
er
Ti
mesi nterestear ned 9.4x 12.0xBett
er
Fi
xedchar gecov erage 4.23x 3.6xBett
er

CALCULATI
ONS

3-
45
Chapt
er03-Fi
nanci
alAnal
ysi
s

Profitmar gin = $31,

500 = 26.25%
    $120,
000    
Returnoni nvestment = $31,
500 = 22.50%
    $140,
000    
Returnonequi ty = $31,
500 = 49.22%
    $64,
000    
Recei vablest urnov er = $120,
000 = 5.45x
    $22,
000    
Avg.col lect i
onper iod = $22,
000 = 83.6day s
    $120,000( .
80)/
365    
I
nv entor yturnov er = $120,
000 = 4.0x
    $30,
000    
Capital assett urnov er = $120,
000 = 1.64x
    $73,
000    
Total assett urnov er = $120,
000 = 086
    $140,
000    
Currentr atio = $67,
000 = 1.46
    $46,
000    
Quickr atio = $37,
000 = .80
    $46,
000    
Debtt ot otal assets = $46, 000+30,000 = .54
    $140,
000    
Ti
mesi nterestear ned = $47,
000 = 9.4x
    $5,
000    
Fi
xedchar gecov erage = $47, 000+$8,000 = 4.23
    $5,000+$8,000    

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Anal y
ze
Diff
icult
y:Hard
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
46
Chapt
er03-Fi
nanci
alAnal
ysi
s

124.
 Foll
iesBookst
ore,
theonl
ybookst
orecloset
ocampus,hadneti
ncomei
n20X5
of$90,000.Herear
esomeofthefi
nancial
rati
osfr
om t
heannualr
eport
.

Profi
tMargin 12%
Retur
nonI nvest
ment 20%
DebttoAssetRatio 55%

Usi
ngt
heser
ati
os,
cal
cul
atet
hef
oll
owi
ngf
orFol
l
iesBookst
ore:

A)Sales
B)Totalassets
C)Totalassettur
nover
D)Totaldebt
E)Shareholder
s'equi
ty
F)Returnonequity 

A)ProfitMar gin=NetI ncome/Sales=12%=$90, 000/X

Sal
es=X=$750, 000
B)ROI=NetI ncome/TotalAssets=20%=$90, 000/X
Tot
al assets=X=$450, 000
C)ROI=Pr ofitmar gi
nXt ot
alassettur
nov
er
Tot
al assett urnover=20%/12%=1. 667
D)Debt /Total assetr
ati
o=Tot aldebt/
Tot
alassets=55%=X/
$450,
000
Tot
al deb=X=$247, 500
E)

Shar
ehol
der
sequi
ty= Tot
alassets—totaldebt
Shar
ehol
der
sequi
ty= $450,000-$247,500
Shar
ehol
der
sequi
ty= $202.500

3-
47
Chapt
er03-Fi
nanci
alAnal
ysi
s

F)ROE=NetI
ncome/
Shar
ehol
der
s'equi
ty=$90,
000/
$202,
500=444=44.
4%

Or

ROE=ROIXEquit
ymulti
pli
er=ROIX(Tot
alasset
s/Equi
ty)
ROE=2-X($450,
000/
$202,500)=(
20X2.22)=444=44.4%

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:03-02Assessacompany
'ssour
ceofpr
ofi
tabi
l
ityusi
ngt
heDuPontsy
stem ofanal
ysi
s.
Topic:03-04Classi
ficati
onSystem
 

3-
48