AU 60 Chapter 6 Practice Questions And Answers

AU 60 Chapter 6 Practice Questions And
Answers
Apcompany'spcommon-
sizepstatementplistsptwopyears,p20X3pandp20X4.pInp20X3,pthepinventoriesplinepwaspfivepperc
ent,pandpinp20X4pthepinventoriesplinepwaspsevenppercent.pWhichponepofpthepfollowingpcouldp
anpunderwriterpinferpfrompthispinformation?p-pCORRECTppANSWER-
Theppercentagepofpinventoriesptoptotalpassetspincreased.

Apsignificantpdifferencepbetweenpthepcurrentpratiopandpthepacid-testpratiopispthat:p-
pCORRECTppANSWER-Inventorypispexcludedpfrompthepcalculationpofpthepacid-testpratio.




Apsignificantplimitationpofpfinancialpratiopanalysispispthat:p-pCORRECTppANSWER-
Nopconcretepguidancepispavailablepforpdeterminingpwhichpratiosparepthepmostpimportantporp
atpwhatplevelptheypareptoophighporptooplow.

AccountspReceivablepTurnoverpRatiop-pCORRECTppANSWER-
Anpefficiencypratiopthatpindicatesphowpquicklypapbusinesspcollectspthepamountspowedpbypitsp
customers.

AccountspReceivablepTurnoverpRatiopformula:p-pCORRECTppANSWER-
CreditpSalesp/pAccountspReceivable.

AcidpTestpRatiopFormula:p-pCORRECTppANSWER-CurrentpAssetsp-
pStockp/pCurrentpLiabilities.




Allpofpthepfollowingparepcommonpprofitabilitypmeasurespusedpinpratiopanalysis,pEXCEPT:p-
pCORRECTppANSWER-Turnoverpofpassets.




Anpanalystpispcomparingpthepfinancialpdatapofptwopcompaniespthatpcompetepinpthepsamepind
ustry,pCompanypApandpCompanypB.pEachpofptheptwopcompaniesphaspthepsamepreturnponpa
ssetspratiop(ROA),pandpthepanalystpwantsptopunderstandphowpeachpispusingpitspresourcespto
pachievepthispresult.pFurtherpanalysisprevealspthatpCompanypAphaspaplowerpassetpturnoverpr

atiopthanpCompanypB.pThispanalysispindicatespthat:p-pCORRECTppANSWER-
CompanypBpispgeneratingpaphigherplevelpofpsalespinpproportionptopitspassetspthanpCompanyp
A.

, Anpunderwriterpispattemptingptopconductpratiopanalysisponpapcompany.pThepunderwriterpnoti
cespthatpthepcompanyphasp$12pmillionpinptotalpsales,p$8pmillionpinpcashpsales,p$4pmillionpinpc
reditpsales,pandpap$2pmillionpaccountspreceivablepbalance.pBasedponpthesepfigures,pwhatpis
pthepcompany'spaccountspreceivablepturnoverpratio?p-pCORRECTppANSWER-

2.p($4pmillion/$2pmillion).

Anpunderwriterpispattemptingptopconductpratiopanalysisponpapcompany.pThepunderwriterpnoti
cespthatpthepcompanyphasp$2pmillionpinpcash,p$1pmillionpinpmarketablepsecurities,p$3pmillion
pinpinventory,p$2pmillionpinpaccountspreceivable,pandp$7pmillionpinpcurrentpliabilities.pWhichp

onepofpthepfollowingpconclusionspcanpthepunderwriterpreachpbypcalculatingpliquiditypratios?p-
pCORRECTppANSWER-

Thepcompanypmaypnotpbepableptopmeetpitspshortptermpobligationspbecausepitspacidptestprati
opisplesspthanpone.

Anpunderwriterpispattemptingptopconductpratiopanalysisponpapcompany.pThepunderwriterpnoti
cespthatpthepcompanyphasp$3pmillionpinptotalpassets,p$1pmillionpinpcurrentpassets,p$2pmillionp
inptotalpliabilities,pandp$1pmillionpinpcurrentpliabilities.pWhichponepofpthepfollowingpconclusion
spcanpthepunderwriterpreachpbypcalculatingpthepcompany'spdebt-to-assetspratio?p-
pCORRECTppANSWER-Thepcompany'spassetsparepfinancedpmostlypthroughpdebt.p(Debt-

to-
assetspratiop=pTotalpliabilitiesp÷ptotalpassets.p$2pmillionp÷p$3pmillionp=p.667.pApratiopoverp.5pin
dicatespfinancingpmostlypbypdebt.)

Anpunderwriterpispattemptingptopconductpratiopanalysisponpapcompany.pThepunderwriterpnoti
cespthatpthepcompanyphasp$8pmillionpinpsales,p$5pmillionpinpgrosspprofit,pandp$2pmillionpinpne
tpincome.pWhichponepofpthepfollowingpconclusionspcanpthepunderwriterpreachpbypcalculating
pthepcompany'spnetpprofitpmargin?p-pCORRECTppANSWER-Twenty-

fiveppercentpofpthepcompany'spsalespispleftpafterpallpexpensespareppaid.p(Netpprofitpmarginp=p
Netpincomep÷psales.p$2pmillionp÷p$8pmillionp=p.25.)

Anpunderwriterpispconductingpratiopanalysispandpnoticespthatpapcompanyphasp$1.5pmillionpin
plong-

termpdebt,p$3pmillionpinpshareholder'spequity,pandp$5pmillionpinpassets.pWhichponepofpthepfol
lowingpstatementspisptruepbasedponpthepcompany'spdebtptopequitypratio?p-
pCORRECTppANSWER-

Thepdebtptopequitypratiopisp.50pandpthepcompanypispmostlypfinancedpbypequity.p(Debt-to-
equitypratiop=pLong-termpdebtp÷pshareholders'pequity.p$1.5pmillionp÷p$3pmillionp=p.50.)

Anpunderwriterpispconductingpverticalpanalysispusingpapcommon-
sizepbalancepsheetpforptheppastptwopfiscalpyears.pThepunderwriterpnoticespthepfigureplistedpu
nderp"netpreceivables"pisp11.5ppercentpforpthepcurrentpfiscalpyearpcomparedptop9.5ppercentpf
orptheppriorpfiscalpyear.pThesepfigurespindicatepthat:p-pCORRECTppANSWER-
Theppercentagepofpnetpreceivablesptoptotalpassetspincreasedpbyp2ppercent.