Test Bank For Accounting What the Numbers Mean 12Ed by David Marshall

Accounting - What the Numbers Mean, 12e (Marshall) Chapter 3 Fundamental Interpretations Made from Financial Statement Data 1) Financial statement ratios support informed judgments and decision making most effectively: A) when viewed for a single year. B) when viewed as a trend of entity data. C) when compared to an industry average for the most recent year. D) when the trend of entity data is compared to the trend of industry data. Answer: D Difficulty: 2 Medium Topic: Illustration of Trend Analysis Learning Objective: 03-07 Generalize about how trend analysis can be used most effectively. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2) When comparing entity financial ratios with industry ratios: A) it should be assumed that the data result from the consistent application of alternative accounting methods. B) relative values at a point in time may not be significant. C) the trend of entity ratios should be compared to the current year's industry ratio. D) entity ratios should not be compared with industry ratios. Answer: B Difficulty: 2 Medium Topic: Illustration of Trend Analysis Learning Objective: 03-07 Generalize about how trend analysis can be used most effectively. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3) The return on investment measure of performance: A) is never as important a measure of management effectiveness as the amount of net income. B) relates dividends paid to the entity's assets. C) is calculated using net income as the amount of return. D) is calculated by dividing average assets for a period by the amount of net income for the period. Answer: C Difficulty: 1 Easy Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Remember AACSB: Analytical Thinking 1 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Accessibility: Keyboard Navigation 4) Another term for return on investment is: A) Return on equity. B) Return on assets. C) Return on retained earnings. D) Return to sender. Answer: B Difficulty: 2 Medium Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5) The return on investment measure of performance: A) is relevant only to business enterprises. B) is used by individuals to compare investment performance. C) is calculated using sales as the amount of return. D) is calculated using total assets at the beginning of the period as the amount of investment. Answer: B Difficulty: 1 Easy Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6) An advantage of the DuPont model for calculating ROI is that: A) it focuses on asset utilization as well as net income. B) it is easier to use than the straightforward ROI formula. C) it uses average assets and the straightforward ROI formula does not. D) it uses average stockholders' equity. Answer: A Difficulty: 1 Easy Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7) Around Square, Inc. had an ROI of 12.5%, turnover of 5.0, and sales of $8 million for the year. Around Square's margin for the year was: A) $1,000,000 B) 2.5% C) 4.0% D) $1,600,000 Answer: B Explanation: 12.5% = ? × 5.0 Solve for missing number: 12.5% divided by 5.0 = 2.5% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8) Mamba Metals, Inc. had an ROI of 12%, margin of 3%, and sales of $20 million for the year. Mamba's turnover for the year was: A) 3.0 B) 4.0 C) 36% D) $600,000 Answer: B Explanation: 12% = 3% × ? Solve for missing number: 12% divided by 3% = 4.0 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 9) Rotablade's net income was $600,000 on sales of $24 million for the year. Average assets for the year were $8 million. For the year: A) margin was 4%, turnover was 3.0, and ROI was 12%. B) margin was 2.5%, turnover was 2.0, and ROI was 5%. C) margin was 4%, turnover was 2.0, and ROI was 8%. D) margin was 2.5%, turnover was 3.0, and ROI was 7.5% Answer: D Explanation: Margin = $600,000 / $24,000,000 = 2.5% Turnover = $24,000,000 / $8,000,000 = 3.0 ROI = 2.5% × 3.0 = 7.5% Difficulty: 3 Hard Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 10) United Machining's margin was 2% and turnover was 3.0 on sales of $60 million for the year. On the basis on this information: A) net income for the year was $3,600,000, average assets were $20 million, and ROI was 2%. B) net income for the year was $1,200,000, average assets were $10 million, and ROI was 2%. C) net income for the year was $1,200,000, average assets were $20 million, and ROI was 6%. D) net income for the year was $3,600,000, average assets were $10 million, and ROI was 6%. Answer: C Explanation: Net income = 2% × $60,000,000 = $1,200,000 Average assets = $60,000,000 / 3.0 = $20,000,000 ROI = 2% × 3.0 = 6% Difficulty: 3 Hard Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 4 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11) Mechforce Manufacturing's net income was $420,000 on sales of $14 million. Average assets for the year were $10 million. Margin for the year was: A) 1.4 B) 1.8 C) 3.0% D) 4.2% Answer: C Explanation: Margin = Net income / Sales = $420,000 / $14,000,000 = 3.0% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12) Mechforce Manufacturing's net income was $420,000 on sales of $14 million. Average assets for the year were $10 million. Turnover for the year was: A) 1.4 B) 1.8 C) 3.0% D) 4.2% Answer: A Explanation: Turnover = Sales / Average assets = $14,000,000 / $10,000,000 = 1.4 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13) Mechforce Manufacturing's net income was $420,000 on sales of $14 million. Average assets for the year were $10 million. ROI for the year was: A) 1.4 B) 1.8 C) 3.0% D) 4.2% Answer: D Explanation: ROI = $420,000 / $10,000,000 = 4.2%, or ROI = Margin × Turnover = ($420,000 / $14,000,000) × ($14,000,000 / $10,000,000) = 3.0% × 1.4 = 4.2% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14) Yellowday Energy's margin was 3% and turnover was 4.0 on sales of $50 million for the year. Net income for the year was: A) $500,000 B) $1,500,000 C) $2,000,000 D) $6,000,000 Answer: B Explanation: Net income = Margin × Sales = 3% × $50,000,000 = $1,500,000 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15) Yellowday Energy's margin was 3% and turnover was 4.0 on sales of $50 million for the year. Average assets for the year were: A) $1,500,000 B) $6,000,000 C) $12,500,000 D) $20,000,000 Answer: C Explanation: Average assets = Sales / Turnover = $50,000,000 / 4.0 = $12,500,000 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 16) Yellowday Energy's margin was 3% and turnover was 4.0 on sales of $50 million for the year. ROI for the year was: A) 3.0% B) 4.0% C) 12.0% D) 12.5% Answer: C Explanation: ROI = Margin × Turnover = 3% × 4.0 = 12% Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation Learning Objective: 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 7 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 17) Another term for return on equity is: A) return on investment. B) return on assets. C) return on retained earnings. D) none of these. Answer: D Difficulty: 2 Medium Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18) Return on equity: A) will be the same as return on investment. B) relates dividends and turnover. C) relates dividends and stockholders' equity. D) relates net income and stockholders' equity. Answer: D Difficulty: 1 Easy Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 19) ZeroFued's net income for the year was $300,000. Average assets totaled $2 million, and average liabilities totaled $500,000. Return on equity (ROE) was: A) 12% B) 15% C) 20% D) 60% Answer: C Explanation: $300,000 / ($2,000,000 − $500,000) = 20% Difficulty: 3 Hard Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 20) Compoform's net income for the year was $320,000. Average liabilities totaled $1.6 million and average stockholders' equity totaled $2.4 million. Return on investment (ROI) was: A) 8.0% B) 13.3% C) 20.0% D) 40.0% Answer: A Explanation: $320,000 / ($1,600,000 + $2,400,000) = 8.0% Difficulty: 3 Hard Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21) Which of the following is not usually considered a measure of an entity's liquidity? A) Current ratio. B) Acid-test ratio. C) Cash ratio. D) Working capital. Answer: C Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-05 Explain the meaning of liquidity and discuss why it is important. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 22) A current ratio of 6.0 is usually an indication that the firm: A) has a low degree of liquidity. B) has a reasonable degree of liquidity. C) has not made the most productive use of its assets. D) has made the most productive use of its assets. Answer: C Difficulty: 3 Hard Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 9 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 23) For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is that it: A) raises the current ratio. B) lowers the current ratio. C) doesn't affect the current ratio. D) depends on the amount paid. Answer: A Difficulty: 3 Hard Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 24) Which of the following is a universally accepted measure of profitability? A) Return on investment. B) Return on retained earnings. C) Return on liabilities. D) All of these. Answer: A Difficulty: 2 Medium Topic: Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 25) If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be: A) Higher. B) Lower. C) The same. D) Would depend on the amount borrowed. Answer: C Difficulty: 3 Hard Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 10 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26) Which of the following accounts is part of working capital? A) Retained Earnings B) Sales C) Merchandise Inventory D) Common Stock Answer: C Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 27) Financial ratios: A) help financial statement users to evaluate the financial characteristics of companies by putting the large dollar amounts reported in financial statements into relative terms for comparison purposes. B) provide for a more meaningful analysis when the trends of financial ratios for a company are compared to the industry average trends over a period of time. C) Both of these statements are true. D) Neither of these statements is true. Answer: C Difficulty: 2 Medium Topic: Financial Ratios and Trend Analysis Learning Objective: 03-01 Discuss why financial statement ratios are important. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 11 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 28) Presented below are the comparative balance sheets of Joe's Garage, Inc., at December 31, 2020, and 2019. Sales for the year ended December 31, 2020, totaled $1,780,000. Assets Cash Accounts receivable Merchandise inventory Total current assets Land Plant and equipment Less: Accumulated depreciation Total assets Liabilities Short-term debt Accounts payable Other accrued liabilities Total current liabilities Long-term debt Total liabilities Stockholders' Equity Common stock, no par, 100,000 shares authorized, 35,000 and 28,000 shares issued, respectively Retained earnings: Beginning balance Net income for the year Dividends for the year Ending balance Total stockholders' equity Total liabilities and stockholders' equity $ 90,000 268,000 402,000 $ 760,000 132,000 728,000 (372,000 ) $ 1,248,000 $ 98,000 184,000 128,000 $ 410,000 174,000 $ 584,000 $ 204,000 402,000 148,000 (90,000 ) $ 460,000 $ 664,000 $ 1,248,000 $ 98,000 212,000 394,000 $ 704,000 120,000 650,000 (314,000 ) $ 1,160,000 $ 86,000 168,000 134,000 $ 388,000 214,000 $ 602,000 $ 156,000 336,000 134,000 (68,000 ) $ 402,000 $ 558,000 $ 1,160,000 JOE'S GARAGE, INC. Balance Sheets December 31, 2020, and 2019 12 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Required: A) Calculate ROI for 2020. B) Calculate ROE for 2020. C) Calculate working capital at December 31, 2020. D) Calculate the current ratio at December 31, 2020. E) Calculate the acid-test ratio at December 31, 2020. Answer: A) ROI = Margin × Turnover = (Net Income / Sales) × (Sales / Average assets) = ($148,000 / $1,780,000) × [$1,780,000 / (($1,160,000 + $1,248,000) / 2)] = 8.31% × 1.478 = 12.3% B) ROE = Net income / Average stockholders' equity = $148,000 / [($558,000 + $664,000) / 2] = 24.2% C) Working capital = Current assets – Current liabilities = $760,000 – $410,000 = $350,000 D) Current ratio = Current assets / Current liabilities = $760,000 / $410,000 = 1.85 E) Acid-test ratio = (Cash + Accounts Receivable) / Current liabilities = ($90,000 + $268,000) / $410,000 = 0.87 Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation; Return on Investment; Working Capital and Measures of Liquidity; Return on Equity Learning Objective: 03-02 Explain the importance and show the calculation of return on investment.; 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model.; 03-04 Explain the importance and show the calculation of return on equity.; 03- 06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 29) Attesson, Inc. has a current ratio of 1.9 and current assets of $136,800. Required: Calculate Attesson's current liabilities and working capital. Answer: $136,800 current assets / 1.9 current ratio = $72,000 current liabilities $136,800 current assets – $72,000 current liabilities = $64,800 working capital Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 30) 2R Designs has accounts receivable of $4,100, cash of $3,500, property, plant, and equipment of $30,200, merchandise inventory of $2,200, accounts payable of $5,700, other accrued liabilities of $1,300, common stock of $10,000, and retained earnings of $23,000. Required: Calculate 2R Designs' working capital and current ratio. Answer: $3,500 cash + $4,100 accounts receivable + $2,200 inventory = $9,800 current assets $5,700 accounts payable + $1,300 other accrued liabilities = $7,000 current liabilities $9,800 current assets – $7,000 current liabilities = $2,800 working capital $9,800 current assets / $7,000 current liabilities = 1.4 current ratio Difficulty: 2 Medium Topic: Working Capital and Measures of Liquidity Learning Objective: 03-06 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 15 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 31) One-Two-Tree Landscaping Services has net income of $18,000, sales of $300,000, and average total assets of $125,000. Required: Calculate One-Two-Tree's margin, turnover, and return on investment (ROI). Answer: $18,000 net income / $300,000 sales = 6% margin $300,000 sales / $125,000 average total assets = 2.4 turnover 6% margin × 2.4 turnover = 14.4% ROI, or $18,000 net income / $125,000 average total assets = 14.4% ROI Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation; Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment.; 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 32) NTO Designs has a margin of 7%, turnover of 1.2, and sales of $2,100,000. Required: Calculate NTO Designs' net income, average total assets, and return on investment (ROI). Answer: $2,100,000 sales × 7% margin = $147,000 net income $2,100,000 sales / 1.2 turnover = $1,750,000 average total assets 7% margin × 1.2 turnover = 8.4% ROI, or $147,000 net income / $1,750,000 average total assets = 8.4% ROI Difficulty: 2 Medium Topic: The DuPont Model: An Expansion of the ROI Calculation; Return on Investment Learning Objective: 03-02 Explain the importance and show the calculation of return on investment.; 03-03 Illustrate how to calculate and interpret margin and turnover using the DuPont model. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 16 Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 33) FGT Motorsports had net assets at the end of the year of $320,000. The only transactions affecting stockholders' equity during the year were net income of $51,000 and dividends of $11,000. Required: Calculate FGT Motorsports' average stockholders' equity and return on equity (ROE). Answer: Net assets = Assets – Liabilities = Stockholders' Equity Thus, "net assets" at the end of the year = ending SE ROE = Net income / Average stockholders' equity Average stockholders' equity = (beginning SE + ending SE) / 2 Thus, you need to calculate beginning stockholders' equity in order to be able to determine the average stockholders' equity. $320,000 ending SE – $51,000 net income + $11,000 dividends = $280,000 beginning SE ($280,000 beginning SE + $320,000 ending SE) / 2 = $300,000 average stockholders' equity $51,000 net income / $300,000 average stockholders' equity = 17% ROE Difficulty: 2 Medium Topic: Return on Equity Learning Objective: 03-04 Explain the importance and show the calculation of return on equity. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 17