Name:

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Section: _________________________
True/False: (T/F)
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Operating ratio is Cost of Goods Sold divided by sales.

Return on investment is net profit divided by start-up investment.
To calculate profit margin, divide sales into net income.
An income statement shows whether the difference between revenue and net profit is a profit or a loss.
A short average collection period assures us that accounts receivable are being efficiently managed.
All companies should have at least a 1.5 to 1 current ratio.
Cash flows from assets will always be less than cash flows from financing due to dividends.
An advantage of balance sheet numbers is that assets reflect current market values.
The income statement provides a statement of results for the firms operations.
Total assets less outstanding debt must always equal ownership equity.
The money that owners invest in the business is called owners equity.
A new business needs to manage cash flows carefully because if a firm runs out of cash, it is out of business.
Assets that can be converted to cash relatively quickly are said to be liquid.
The purchase of equipment using cash is an investing activity.
A cash outflow will be generated by an increase in a liability.
Depreciation expense reduces operating income but does not require the use of cash.
Liquidity ratios indicate how fast a firm can generate cash to pay bills.
Ratios are only useful for those areas of business that involve investment decisions.
Contribution margin is equals to fixed costs minus variable costs.
A high current ratio is always a good indication of a well-managed liquidity position.

Multiple Choice:
1. Working capital is defined as:
a. total assets less intangible assets
c. current assets divided by current liabilities
b. total assets less current assets
d. current assets less current liabilities
2. Which of the following is not a typical cash flow under investing activities?
a. cash inflow from receipt of loans
c. cash inflow from sale of property, plant, and equipment
b. cash outflow for payment of amounts
d. cash outflow for loans to other entities
borrowed
3. Which of the following is not a typical cash flow under financing activities?
a. cash inflow from sale of equity securities
c. cash outflow for payments of dividends
b. cash inflow from sale of bonds
d. cash outflow for loans to other entities
4. Which of the following transactions is not reflected in a statement of cash flows?
a. sale of treasury stock
c. purchase of foreign subsidiary with cash
b. declaration of a stock dividend
d. issuance of convertible bonds
5. Which of the following accounts will not be considered when computing cash flow from operations?
a. accounts receivable
c. inventories
b. equipment
d. accounts payable
6. Which of the following accounts is not part of working capital?
a. cash
c. investments
b. accounts receivable
d. accounts payable
7. Which of the following is the least liquid current asset?
a. Accruals
c. Accounts receivable
b. Marketable securities
d. Inventory
8. Which of the following best represents operating income?
a. Income after financing activities
c. Income from capital gains
b. Earnings before interest and taxes
d. Income from discontinued operations
9. Which of the following would not improve the current ratio?
a. Issue long-term debt to buy inventory
c. Borrow short term to finance additional fixed assets
b. Sell common stock to reduce current
d. Sell fixed assets to reduce accounts payable
liabilities
10. A company can improve (lower) its debt-to-total assets ratio by doing which of the following?
a. Borrow more
c. Shift short-term to long-term debt
b. Shift long-term to short-term debt
d. Sell common stock
11. A firm's operating cycle is equal to its inventory turnover in days (ITD)
a. plus its receivable turnover in days (RTD)
c. plus its RTD minus its payable turnover in days (PTD)
b. minus its RTD
d. minus its RTD minus its PTD
12. ____________________ of the profitability of the firm over a period of time such as a year.
a. The balance sheet is a summary
c. That statement of cash flows is a summary
b. The income statement is a summary
d. The audit report is a summary
13. In a statement of cash flows (indirect method), depreciation expense should be presented as:
a. a cash flow from financing activities
c. a deduction from net income
b. a cash flow from investing activities
d. an addition to net income
14. If a firm's total operating costs increase, the firm's operating break-even point will:
a. decrease
c. change in an undetermined direction
b. increase
d. remain unchanged
15. _____ leverage is concerned with the relationship between sales revenues and earnings before interest and taxes.
a. Variable
b. Financial

c. Operating
d. Combined

16. Conroy Company had sales of 50,000, increase in accounts payable of 4,000, decrease in accounts receivable of
3,000, tax expense of 5,000, and an increase in taxes payable of 1,000. What was the cash outflow for taxes?

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a. 54,000
c. 6,000
b. 4,000
d. 53,000
Francis Company had operating expenses of 20,000 and depreciation expenses of 4,000. Assuming no other
transactions, what was the cash paid for operating expenses?
a. 24,000
c. 22,000
b. 16,000
d. 20,400
Southeast Jewelers Inc. sells only on credit. Its days sales outstanding is 73 days, and its average accounts
receivable balance is 500,000. What are its sales for the year? Assume a 365-day year.
a. 1,500,000
c. 2,000,000
b. 2,500,000
d. 2,750,000
Lewis Inc. has sales of 2 million per year, all of which are credit sales. Its days sales outstanding is 42 days. What
is its average accounts receivable balance? Assume a 365-day year.
a. 230,137
c. 333,333
b. 266,667
d. 350,000
A fire has destroyed many of the financial records at Anderson Associates. You are assigned to piece together
information to prepare a financial report. You have found that the firms return on equity is 12 percent and its debt ratio
is 0.40. What is its return on assets?
a. 4.90%
c. 6.60%
b. 5.35%
d. 7.20%
Refer to No. 20. What is the firms debt ratio if its ROE is 15 percent and its ROA is 10 percent?
a. 67%
c. 25%
b. 50%
d. 33%
Info Technics Inc. has an equity multiplier of 2.75. The companys assets are financed with some combination of longterm debt and common equity. What is the companys debt ratio?
a. 25.00%
c. 52.48%
b. 36.36%
d. 63.64%
Refer to No. 22. What is the companys common equity ratio?
a. 25.00%
c. 63.64%
b. 36.36%
d. 75.00%
A firm has total interest charges of 20,000 per year, sales of $2 million, a tax rate of 40 percent, and a profit margin of
6 percent. What is the firms times-interest-earned ratio?
a. 10
c. 12
b. 11
d. 13
Refer to No. 24. What is the firms times-interest-earned ratio, if its profit margin decreases to 3% and its interest
charges double to 40,000 per year?
a. 3.0
c. 2.5
b. 3.5
d. 4.2
The breakeven point is obtained at intersection of
a. Total revenue and Total cost line
c. Total cost and variable cost line
b. Variable cost and fixed cost line
d. Fixed cost and total cost line
An industry is selling a product for 10 per unit. The fixed cost for assets is 40,000 with variable cost of 6 per unit.
How many units should be produced to break even?
a.
8,000
c. 10,000
b. 12,000
d. 14,000
The following assumptions are made in case of break-even analysis, except
a. All fixed costs are fixed
c. All variable costs are fixed
b. The prices of input factors are constant
d. Volume of production and volumes of sales are equal
The contribution margin ratio always increases when the
a. break-even point increases
c. variable costs as a percentage of net sales increase
b. break-even point decreases
d. variable costs as a percentage of net sales increase
To compute the break-even point in units, which of the following formulas is used?
a. FC/CM per unit
c. CM/CM ratio
b. FC/CM ratio
d. (FC+VC)/CM ratio