3: (106) Activity Ratios and Special Issues

1: (96) Activity Ratios

2: (10) Ratio Analysis and Earnings Quality

1: (96) Activity Ratios

Fact Pattern: The information below pertains to Zach Enterprises for the years indicated.
Ending Year 1:

Inventory $ 60,000

Accounts payable 50,000

Accrued expenses 70,000

Cost of goods sold 240,000

Ending Year 2:

Inventory $ 70,000

Accounts payable 80,000

Accrued expenses 110,000

Cost of goods sold 270,000

Question: 1Assuming a 360-day year, Zach’s days’ purchases in accounts payable equal

A. 86.75 days.

B. 68.83 days.

C. 84.69 days.

D. 83.53 days.
Question: 2 Accounts receivable turnover ratio will normally decrease as a result of

A. A change in credit policy to lengthen the period for cash discounts.

B. A significant sales volume decrease near the end of the accounting period.

C. The write-off of an uncollectible account (assume the use of the allowance for credit
losses method).

D. An increase in cash sales in proportion to credit sales.

Question: 3 A firm expects to report net income of at least $10 million annually for the foreseeable
future. The firm could increase its return on equity by taking which of the following
actions with respect to its inventory turnover and the use of equity financing?
Inventory Turnover Use of Equity Financing

A. Increase Decrease

B. Increase Increase

C. Decrease Increase

D. Decrease Decrease

Question: 4A corporation has a decrease in its operating cycle and a decrease in its cash cycle. All else remaining
unchanged, this would occur if the corporation’s

A. Receivables period decreased.

B. Inventory period increased.

C. Receivables period increased.

D. Payables period increased.

Question: 5A company with an accounts receivable turnover of 8.1 would be most concerned if
 A. Last year’s days sales outstanding in receivables was 44.9.

B. The accounts receivable turnover for the industry was 10.4.

C. A best practice analysis indicated an accounts receivable turnover of 13.0.

D. The company’s credit terms with vendors are net 30 days.

Question: 6Barrow Company’s sales have remained constant, but the company’s inventory turnover has risen each
year for the past 3 years. This trend could indicate increased

A. Stockouts.

B. Assets.

C. Product costs.

D. Carrying costs.

Fact Pattern: The year-end financial statements for Queen Bikes reflect the data presented as follows.
Ten percent of Queen’s net sales are in cash.
Year 1 Year 2 Year 3
Net sales 1,500 units at $100 1,200 units at $100 1,200 units at $125
Ending inventory 100 units at $50 100 units at $50 100 units at $50
Average receivables $12,500 $12,000 $14,400
Net income $18,750 $ 9,400 $26,350

Question: 7 Queen’s receivables turnover ratios for Year 2 and Year 3 are

A. 10.00 and 10.42, respectively.

B. 1.00 and 1.04, respectively.

C. 10.8 and 9.0, respectively.

D. 9.0 and 9.375, respectively.

Question: 8 Corporation H had current assets of $250,000 at the beginning of the year and $50,000
of current liabilities. Which of the following transactions would result in an increase of
working capital?
 A. Purchasing $50,000 of inventory with cash.

B. Purchasing $50,000 of inventory on account.

C. A declaration of dividends.

D. Issuing a $10,000 10-year bond with principal and interest due in 10 years.

Fact Pattern: A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms
of 3/10, net 30, that is, a 3% discount if payment is made within 10 days; otherwise full payment is due at
the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on
day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the
year for both types of customers.

Question: 9 What is the expected average collection period for the company?

A. 20 days.

B. 15 days.

C. 10 days.

D. 5 days.

Question: 10 The ratio that measures a firm’s ability to generate sales from its assets is

A. Days’ sales in inventory.

B. Asset turnover.

C. Sales to working capital.

D. Days’ sales in receivables.

Fact Pattern:
Lisa, Inc.

Statement of Financial Position

 December 31, Year 2

(000s)

Assets Year 2 Year 1

Current assets:
Cash $ 30 $ 25
Trading securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost or market) 60 50
Prepaid items 15 20

Total current assets 170 140

Long-term investments:
Securities (at cost) 25 20
Property, plant, & equipment:
Land (at cost) 75 75
Building (net) 80 90
Equipment (net) 95 100
Intangible assets
Patents (net) 35 17
Goodwill (net) 20 13

Total long-term assets 330 315

Total assets $500 $455

Liabilities & Shareholders’ Equity
Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest 15 15
Total current liabilities 85 55
Long-term debt:
Notes payable 10% due 12/31/Year 9 10 10
Bonds payable 12% due 12/31/Year 8 15 15
Total long-term debt 25 25
Total liabilities $110 $ 80
Shareholders’ equity:
Preferred -- 5% cumulative, $100 par,
non-participating, 1,000 shares authorized,
issued and outstanding $100 $100
Common -- $10 par 20,000 shares authorized,
15,000 issued and outstanding shares 150 150
Additional paid-in capital -- common 75 75
Retained earnings 65 50
 Total shareholders’ equity $390 $375
Total liabilities & equity $500 $455

Question: 11 Assume net credit sales and cost of goods sold for Year 2 were $300,000 and
$220,000, respectively. Lisa, Inc.’s average collection period for Year 2, using a 360-
day year, was

A. 45 days.

B. 54 days.

C. 36 days.

D. 61 days.

Fact Pattern: The Statement of Financial Position for King Products Corporation for the fiscal
years ended June 30, Year 2, and June 30, Year 1, is presented below. Net sales and cost of
goods sold for the year ended June 30, Year 2, were $600,000 and $440,000, respectively.
King Products Corporation
Statement of Financial Position
(in thousands)
June 30
Year 2 Year 1
Cash $ 60 $ 50
Marketable securities (at market) 40 30
Accounts receivable (net) 90 60
Inventories (at lower of cost or market) 120 100
Prepaid items 30 40
Total current assets $ 340 $280
Land (at cost) $ 200 $190
Building (net) 160 180
Equipment (net) 190 200
Patents (net) 70 34
Goodwill (net) 40 26
Total long-term assets $ 660 $630
Total assets $1,000 $910
Notes payable $ 46 $ 24
Accounts payable 94 56
Accrued interest 30 30
Total current liabilities $ 170 $110
Notes payable, 10% due 12/31/Year 7 $ 20 $ 20
Bonds payable, 12% due 6/30/Year 10 30 30
Total long-term debt $ 50 $ 50
Total liabilities $ 220 $160
 Preferred stock -- 5% cumulative, $100 par, nonparticipating,
authorized, issued and outstanding, 2,000 shares $ 200 $200
Common stock -- $10 par, 40,000 shares authorized,
30,000 shares issued and outstanding 300 300
Additional paid-in capital -- common 150 150
Retained earnings 130 100
Total equity $ 780 $750
Total liabilities & equity $1,000 $910

Question: 12King Products Corporation’s receivables turnover ratio for this period was

A. 6.7

B. 4.9

C. 8.0

D. 5.9

Fact Pattern: The year-end financial statements for Queen Bikes reflect the data presented as follows.
Ten percent of Queen’s net sales are in cash.
Year 1 Year 2 Year 3
Net sales 1,500 units at $100 1,200 units at $100 1,200 units at $125
Ending inventory 100 units at $50 100 units at $50 100 units at $50
Average receivables $12,500 $12,000 $14,400
Net income $18,750 $ 9,400 $26,350

Question: 13 Queen’s inventory turnover ratios for Year 2 and Year 3 are

A. 12 and 12, respectively.

B. 12 and 18, respectively.

C. 24 and 24, respectively.

D. 18 and 18, respectively.

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
 (in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and
Accounts receivable (net) 68 48 administrative 52 51
Inventory 90 80 Interest expense 8 9
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Total current assets $255 $216 Income taxes 36 34
Investments, at equity 38 30 Net income $ 54 $ 51
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 14 In Year 2, Devlin Company’s working capital turnover

A. Decreased 0.08 times.

B. Increased 0.31 times.

C. Increased 0.10 times.

 D. Decreased 0.35 times.

Question: 15 Company X had sales in the current year of $400,000. At the beginning of the year, X
had current assets of $200,000 and current liabilities of $100,000. By the end of the
year, current assets had increased to $250,000 and current liabilities remained
constant at $100,000. Assuming that working capital is based on the average
difference between current assets and current liabilities, what is X’s working capital
turnover ratio for the current year?

A. 2.67

B. 4.00

C. 3.20

D. 2.00

Fact Pattern: Garland Corporation’s income statement for the year just ended is shown below.
Net sales $ 900,000

Beginning inventory $ 125,000

Purchases 540,000

Goods available for sale $ 665,000

Ending inventory (138,000)

Cost of goods sold (527,000)

Gross profit $ 373,000

Operating expenses (175,000)

Operating income $ 198,000

Income tax expense (79,000)

Net income $ 119,000

Question: 16 Garland’s average inventory turnover ratio is

A. 3.82
 B. 6.84

C. 6.52

D. 4.01

Fact Pattern: The controller of Palmito Company has gathered the following information:
Beginning of Year End of Year

Inventory $6,400 $7,600

Accounts receivable 2,140 3,060

Accounts payable 3,320 3,680

Total sales for the year were $85,900, of which $62,400 were credit sales. The cost of goods sold was
$24,500.

Question: 17 Palmito’s inventory turnover ratio for the year was

A. 3.2 times.

B. 8.9 times.

C. 3.5 times.

D. 8.2 times.

Fact Pattern: A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms
of 3/10, net 30, that is, a 3% discount if payment is made within 10 days; otherwise full payment is due at
the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on
day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the
year for both types of customers.

Question: 18 Assume that the average collection period is 25 days. After the credit policy is well
established, what is the expected average accounts receivable balance for the
company at any point in time, assuming a 365-day year?

A. $1,808.22

B. $45,205.48

C. $36,164.38
 D. $27,123.30

Question: 19 Year-end financial statements showed sales of $3,000,000, net fixed assets of
$1,300,000, and total assets of $2,000,000. The fixed asset turnover is

A. 1.5 times.

B. 43.3%.

C. 2.3 times.

D. 65%.

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and
Accounts receivable (net) 68 48 administrative 52 51
Inventory 90 80 Interest expense 8 9
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Total current assets $255 $216 Income taxes 36 34
Investments, at equity 38 30 Net income $ 54 $ 51
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 20Devlin’s accounts payable turnover for the year ended May 31, Year 2, is

A. 5.25 times.

B. 7.50 times.

C. 6.07 times.

D. 4.25 times.

Question: 21 This question is based on the following information:

Beginning of Year End of Year

Inventory $6,400 $7,600

Accounts receivable 2,140 3,060

Accounts payable 3,320 3,680

Total sales for the year (365 days) were $85,900, of which $62,400 were credit sales.
The cost of goods sold was $24,500. The days’ purchases in accounts payable equal

A. 47 days.

B. 40 days.

C. 52 days.

D. 50 days.
Question: 22 The assets of a corporation are presented below:

January 1 December 31

Cash $ 48,000 $ 62,000

Marketable securities 42,000 35,000

Accounts receivable 68,000 47,000

Inventory 125,000 138,000

Plant & equipment

(net of accumulated depreciation) 325,000 424,000

For the year just ended, the corporation had net income of $96,000 on $900,000 of
sales. The corporation’s fixed assets turnover ratio is

A. 1.37 times.

B. 2.40 times.

C. 2.77 times.

D. 2.12 times.

Question: 23 Based on the data presented below, what is the cost of sales for the year?

Current ratio 3.5

Acid test ratio 3.0
Year-end current liabilities $600,000
Beginning inventory $500,000
Inventory turnover 8.0

A. $6,400,000

B. $3,200,000

C. $2,400,000

D. $1,600,000
Question: 24A corporation has days’ sales in receivables of 40 days, days’ sales in inventory of 45 days, and a
cash cycle of 30 days. The corporation has days’ purchases in payables of

A. 115 days.

B. 35 days.

C. 55 days.

D. 25 days.

Question: 25 A retailer buys virtually all of its merchandise from manufacturers in a country
experiencing significant inflation. The retailer is considering changing its method of
inventory costing from first-in, first-out (FIFO) to last-in, first-out (LIFO). What effect
would the change from FIFO to LIFO have on the retailer’s current ratio and inventory
turnover ratio?

A. The current ratio would decrease but the inventory turnover ratio would increase.

B. The current ratio would increase but the inventory turnover ratio would decrease.

C. Both the current ratio and the inventory turnover ratio would decrease.

D. Both the current ratio and the inventory turnover ratio would increase.

Question: 26 The following data are available for the current year for the Ben Jonson Company. It
uses a 365-day year when computing ratios.

December 31, December 31,

Year 2 Year 3

Net credit sales $6,205,000

Accounts receivable 335,000 $350,000

Inventory 870,000 960,000

Cost of goods sold 4,380,000

If the Ben Jonson Company’s cash cycle for Year 2 is 51.40 days, its days’ purchases
in accounts payable equal

A. 40.81 days.

B. 143.61 days.
 C. 104.19 days.

D. 71.11 days.

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and
Accounts receivable (net) 68 48 administrative 52 51
Inventory 90 80 Interest expense 8 9
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Total current assets $255 $216 Income taxes 36 34
Investments, at equity 38 30 Net income $ 54 $ 51
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691
Question: 27 Devlin Company’s inventory turnover for the year ended May 31, Year 2, was

A. 5.65 times.

B. 3.88 times.

C. 3.67 times.

D. 5.33 times.

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and
Accounts receivable (net) 68 48 administrative 52 51
Inventory 90 80 Interest expense 8 9
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Total current assets $255 $216 Income taxes 36 34
Investments, at equity 38 30 Net income $ 54 $ 51
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 28Assuming a 360-day year, Devlin’s days’ purchases in accounts payable equal

A. 59.31 days.

B. 60.13 days.

C. 48.00 days.

D. 74.12 days.

Question: 29 An internal auditor’s preliminary analysis of accounts receivable turnover revealed the
following rates:

Year 1 Year 2 Year 3

7.3 6.2 4.3

Which of the following is the most likely cause of the decrease in accounts receivable
turnover?

A. Shortening of due date terms.

B. Increase in the cash discount offered.

C. Increased cash sales.

D. Liberalization of credit policy.

Question: 30 To determine the operating cycle for a retail department store, which one of the
following pairs of items is needed?

A. Asset turnover and return on sales.

B. Days’ sales in accounts receivable and average merchandise inventory.

 C. Cash turnover and net sales.

D. Accounts receivable turnover and inventory turnover.

Fact Pattern: The following inventory and sales data are available for the current year for Volpone
Company. Volpone uses a 365-day year when computing ratios.
November 30, November 30,

Year 2 Year 1

Net credit sales $6,205,000

Gross receivables 350,000 320,000

Inventory 960,000 780,000

Cost of goods sold 4,380,000

Question: 31 Volpone Company’s operating cycle for Year 2 is

A. 70.61

B. 93.09

C. 92.21

D. 99.71

Fact Pattern: Broomall Corporation has decided to include certain financial ratios in its year-end annual
report to shareholders. Selected information relating to its most recent fiscal year is provided below.
Cash $ 10,000

Accounts receivable:

– Beginning of year 24,000

– End of year 20,000

Prepaid expenses 8,000

Inventory:

– Beginning of year 26,000

– End of year 30,000

Available-for-sale securities:

– Historical cost 9,000

– Fair value at year end 12,000

Accounts payable 15,000

Notes payable (due in 90 days) 25,000

Bonds payable (due in 10 years) 35,000

Net credit sales for year 220,000

Cost of goods sold 140,000

Question: 32 Using a 365-day year, Broomall’s accounts receivable turnover period is

A. 33.2 days.

B. 39.8 days.

C. 36.5 days.

D. 26.1 days.

Question: 33 The information below pertains to EPM Industries for the years indicated:

Ending Year 1:

Inventory $ 40,000

Accounts payable 70,000

Accrued expenses 90,000

Cost of goods sold 270,000

Ending Year 2:

Inventory $ 60,000
 Accounts payable 70,000

Accrued expenses 130,000

Cost of goods sold 250,000

Ending Year 3:

Inventory $ 90,000

Accounts payable 50,000

Accrued expenses 105,000

Cost of goods sold 290,000

EPM’s accounts payable turnover for Year 3 is

A. 6.40 times.

B. 4.83 times.

C. 6.33 times.

D. 5.33 times.

Fact Pattern: Selected data from White Corporation’s financial statements for the year ended November
30, Year 2, are as follows (all sales are on credit).
Current ratio 1.4

Quick ratio 0.86

Current liabilities $450,000

Accounts receivable turnover 3.65

Merchandise inventory turnover 3.30

Rate of return on assets 6.5%

Selected account balances at November 30, Year 1

Accounts receivable $355,000

Merchandise inventory 237,000

Year 2 operations

Sales $1,241,000

Cost of goods sold 792,000

Question: 34 The approximate number of days in White’s operating cycle is

A. 100.0

B. 105.3

C. 210.6

D. 110.6

Question: 35 The following financial information is given (in millions of dollars):

Prior Year Current Year

Sales $10 $11

Cost of goods sold 6 7

Current assets:

Cash 2 3

Accounts receivable 3 4

Inventory 4 5
Based on year-end figures for assets, between the prior year and the current year, did
the days’ sales in inventory and days’ sales in receivables increase or decrease?
Assume a 365-day year.
Days’ Sales Days’ Sales
in Inventory in Receivables

A. Increased Decreased

B. Decreased Decreased

C. Decreased Increased

D. Increased Increased

Question: 36 The following information is for Ali Co. at its fiscal year end:

Liabilities $ 60,000
 Equity $500,000

Shares of common stock issued and outstanding 10,000

Net income $ 30,000

During the year, officers and directors exercised share options for 2,000 shares of
stock at an option price of $10 per share. What was the effect of exercising the share
options?

A. Debt-to-equity ratio increased.

B. Asset turnover decreased.

C. Earnings per share increased.

D. No ratios were affected.

Question: 37What are the effects on the following ratios of an entity’s retirement of debt through cash payment?
Following
Total Assets Period’s Interest-
Turnover Ratio Earned Ratio

A. Increase Increase

B. Decrease Decrease

C. Decrease Increase

D. Increase Decrease

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon Company
for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal year. McKeon’s
controller is in the process of reviewing the Year 2 budget and calculating some key ratios based on the
budget. McKeon Company monitors yield or return ratios using the average financial position of the
company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000

Current liabilities 78,000 85,000

Long-term debt 75,000 30,000

Common stock ($30 par value) 300,000 300,000

Retained earnings 32,000 20,000

Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000

Inventory 70,000 80,000

Prepaid expenses 20,000 20,000

Question: 38 The Year 2 receivables turnover ratio for McKeon Company is

A. 3.500

B. 5.000

C. 1.882

D. 4.118

Fact Pattern:
RST Corporation Comparative Income

Statements for the Years 5 and 6

Year 6 Year 5

Sales (all are credit) $285,000 $200,000

Cost of goods sold 150,000 120,000

Gross profit $135,000 $ 80,000

Selling and administrative expenses 65,000 36,000

Income before interest and income taxes $ 70,000 $ 44,000

Interest expense 3,000 3,000

Income before income taxes $ 67,000 $ 41,000

Income tax expense 27,000 16,000

Net income $ 40,000 $ 25,000

RST Corporation

Comparative Balance Sheets

End of Years 5 and 6

Assets Year 6 Year 5

Current assets:
Cash $ 5,000 $ 4,000
Short-term marketable investments 3,000 2,000
Accounts receivable (net) 16,000 14,000
Inventory 30,000 20,000

Total current assets $ 54,000 $ 40,000

Noncurrent assets:
Long-term investments 11,000 11,000
Property, plant, and equipment 80,000 70,000
Intangibles 3,000 4,000

Total assets $148,000 $125,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 11,000 $ 7,000

Accrued payables 1,000 1,000

Total current liabilities $ 12,000 $ 8,000

Long-term Liabilities:

0% Bonds payable, due in Year 12 30,000 30,000

Total liabilities $ 42,000 $ 38,000

Stockholders’ equity:

Common stock, 2,400 shares, $10 par $ 24,000 $ 24,000

Retained earnings 82,000 63,000

Total stockholders’ equity $106,000 $ 87,000

Total liabilities and stockholders’ equity $148,000 $125,000

The market value of RST’s common stock at the end of Year 6 was $100.00 per share.

Question: 39 RST’s accounts receivable turnover for Year 6 is

A. 16.2 times.

B. 17.8 times

C. 10 times.

D. 19 times.

Fact Pattern:
Selected data from Ostrander Corporation’s financial statements for the years indicated are presented in
thousands.

Year 2 Operations December 31

Net credit sales $4,175 Year 2 Year 1
Cost of goods sold 2,880 Cash $ 32 $ 28
Interest expense 50 Trading securities 169 172
Income tax 120 Accounts receivable (net) 210 204
Gain on disposal of a segment Merchandise inventory 440 420
(net of tax) 210 Tangible fixed assets 480 440
Administrative expense 950 Total assets 1,397 1,320
Net income 385 Current liabilities 370 368
Total liabilities 790 750
Common stock outstanding 226 210
Retained earnings 381 360

Question: 40 The number of days of receivables (using 365 days) for Ostrander Corporation in Year
2 is

A. 18.10 days.
 B. 20.17 days.

C. 17.83 days.

D. 18.36 days.

Fact Pattern: Selected data from White Corporation’s financial statements for the year ended November
30, Year 2, are as follows (all sales are on credit).
Current ratio 1.4

Quick ratio 0.86

Current liabilities $450,000

Accounts receivable turnover 3.65

Merchandise inventory turnover 3.30

Rate of return on assets 6.5%

Selected account balances at November 30, Year 1

Accounts receivable $355,000

Merchandise inventory 237,000

Year 2 operations

Sales $1,241,000

Cost of goods sold 792,000

Question: 41Assuming that prepaid expenses are immaterial, White’s ending merchandise inventory is

A. $180,000

B. $243,000

C. $387,000

D. $630,000

Fact Pattern: The controller of Palmito Company has gathered the following information:
Beginning of Year End of Year

Inventory $6,400 $7,600

Accounts receivable 2,140 3,060

Accounts payable 3,320 3,680

Total sales for the year were $85,900, of which $62,400 were credit sales. The cost of goods sold was
$24,500.

Question: 42 Palmito’s payables turnover ratio for the year was

A. 7.3 times.

B. 17.8 times.

C. 7.0 times.

D. 16.9 times.

Question: 43A high sales-to-working-capital ratio could indicate

A. Sales are not adequate relative to available working capital.

B. The firm is not susceptible to liquidity problems.

C. The firm is undercapitalized.

D. Unprofitable use of working capital.

Question: 44 Given that sales stay constant, a change in the term of credit from 3/10, n/30 to 1.5/10,
n/30 will most likely impact the following ratios in what way?
Current Ratio Operating Cycle

A. Increase Decrease

B. Increase Increase

C. Unaffected Increase

D. Decrease Decrease

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon Company
for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal year. McKeon’s
controller is in the process of reviewing the Year 2 budget and calculating some key ratios based on the
budget. McKeon Company monitors yield or return ratios using the average financial position of the
company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000

Current liabilities 78,000 85,000

Long-term debt 75,000 30,000

Common stock ($30 par value) 300,000 300,000

Retained earnings 32,000 20,000

Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000

Inventory 70,000 80,000

Prepaid expenses 20,000 20,000

Question: 45 Using a 365-day year, McKeon’s inventory turnover is

A. 171 days.

B. 78 days.

C. 183 days.

D. 160 days.
Question: 46 Financial statements show the following information:

Accounts receivable, end of Year 1 $ 320,000

Credit sales for Year 2 3,600,000

Accounts receivable, end of Year 2 400,000

The accounts receivable turnover ratio is

A. 9.00

B. 11.25

C. 0.10

D. 10.00

Question: 47 A firm sells 20,000 automobiles per year for $25,000 each. The firm’s average
receivables are $30,000,000 and average inventory is $40,000,000. The firm’s average
collection period is closest to which one of the following? Assume a 365-day year.

A. 22 days.

B. 17 days.

C. 29 days.

D. 61 days.

Fact Pattern: The information below pertains to Zach Enterprises for the years indicated.
Ending Year 1:

Inventory $ 60,000

Accounts payable 50,000

Accrued expenses 70,000

Cost of goods sold 240,000

Ending Year 2:

Inventory $ 70,000
Accounts payable 80,000

Accrued expenses 110,000

Cost of goods sold 270,000

Question: 48 Zach’s accounts payable turnover for Year 2 is

A. 4.15 times.

B. 3.50 times.

C. 4.31 times.

D. 5.23 times.

Question: 49 A company grants credit terms of 1/15, net 30 and projects gross sales for next year of
$2,000,000. The credit manager estimates that 40% of their customers pay on the
discount date, 40% on the net due date, and 20% pay 15 days after the net due date.
Assuming uniform sales and a 360-day year, what is the projected days’ sales
outstanding (rounded to the nearest whole day)?

A. 30 days.

B. 24 days.

C. 27 days.

D. 20 days.

Question: 50The days’ sales in receivables ratio will be understated if the company

A. Uses a natural business year for its accounting period.

B. Uses average receivables in the ratio calculation.

C. Uses a calendar year for its accounting period.

D. Does not use average receivables in the ratio calculation.

Question: 51 A company changes its credit policy from 2/10 net 30 to 1/10 net 90. The most likely
effect of this change is to

A. Decrease the days’ sales outstanding in accounts receivable and increase the cash
cycle.

B. Increase the days’ sales outstanding in accounts receivable and decrease the cash
cycle.

C. Decrease the days’ sales outstanding in accounts receivable and decrease the cash
cycle.

D. Increase the days’ sales outstanding in accounts receivable and increase the cash
cycle.

Question: 52 At the beginning of the current year, Corporation G had current assets of $300,000 and
current liabilities of $100,000. Additionally, noncurrent assets were $200,000 and
noncurrent liabilities were $150,000. By the end of the year, current assets had
increased by 10% and current liabilities increased by 25%. Also, noncurrent assets and
liabilities each increased by 5% by the end of the year. By what amount does working
capital change by the end of the year?

A. $5,000 increase.

B. $7,500 increase.

C. $50,000 increase.

D. $2,500 increase.

Fact Pattern: The following inventory and sales data are available for the current year for Volpone
Company. Volpone uses a 365-day year when computing ratios.
November 30, November 30,

Year 2 Year 1

Net credit sales $6,205,000

Gross receivables 350,000 320,000

Inventory 960,000 780,000

Cost of goods sold 4,380,000

Question: 53 Volpone Company’s average number of days to sell inventory for Year 2 is
 A. 71.51

B. 72.50

C. 51.18

D. 65.00

Question: 54 A company has $3 million per year in credit sales. The company’s average days’ sales
outstanding is 40 days. Assuming a 360-day year, what is the company’s average
amount of accounts receivable outstanding?

A. $500,000

B. $333,333

C. $250,000

D. $75,000

Fact Pattern: Broomall Corporation has decided to include certain financial ratios in its year-end annual
report to shareholders. Selected information relating to its most recent fiscal year is provided below.
Cash $ 10,000

Accounts receivable:

– Beginning of year 24,000

– End of year 20,000

Prepaid expenses 8,000

Inventory:

– Beginning of year 26,000

– End of year 30,000

Available-for-sale securities:

– Historical cost 9,000

– Fair value at year end 12,000

Accounts payable 15,000

Notes payable (due in 90 days) 25,000

Bonds payable (due in 10 years) 35,000

Net credit sales for year 220,000

Cost of goods sold 140,000

Question: 55 Broomall’s average inventory turnover for the year was

A. 5.4 times.

B. 7.9 times.

C. 5.0 times.

D. 4.7 times.

Question: 56 A company had net accounts receivable of $168,000 and $147,000 at the beginning
and end of the year, respectively. The company’s net income for the year was
$204,000 on $1,700,000 in total sales. Cash sales were 6% of total sales. The
company’s average accounts receivable turnover ratio for the year is

A. 10.79

B. 10.87

C. 9.51

D. 10.15

Question: 57 An entity has net sales of $5,000,000 and a total debt to total assets ratio of 70%. If the
entity has total debt of $1,000,000, its total asset turnover is

A. 2.45

B. 3.33

C. 3.50

D. 7.14
Question: 58 A financial analyst is analyzing the accounts receivable period for three companies by
comparing their days’ sales in receivables. The financial analyst has collected the
following information for the companies.

Company A Company B Company C

Net credit sales $175,000 $145,000 $225,000

Average accounts receivable 10,000 20,000 11,500

Average allowance for credit losses 3,500 6,500 4,500

If each of the companies has credit terms of net 30 days, the financial analyst
is most likely to conclude which one of the following?

A. Company C is less efficient than Company A in collecting payment.

B. Company B is the least efficient in collecting payment.

C. Company A is the most efficient in collecting payment.

D. Company B is more efficient than Company C in collecting payment.

Question: 59 A C corporation computed the following items from its financial records for the current
year:

Current ratio 2 to 1

Inventory turnover 54 days

Accounts receivable turnover 24 days

Current liabilities turnover 36 days

The number of days in the operating cycle for the current year was

A. 60

B. 42

C. 78

D. 90
Question: 60 A retail company has experienced rapid growth in sales during the current year. An
analyst has calculated the following ratios for this company.

Prior Year Current Year

Inventory turnover 5.4 9.3

Receivables turnover 4.2 3.5

Fixed asset turnover 2.4 3.6

Quick ratio 1.5 1.2

Based on the above, the analyst may conclude that sales increased due to more

A. Control over inventory levels.

B. Stores opening in the current year.

C. Favorable credit policies.

D. Competitive pricing.

Question: 61 The following information is from Antiope Co.’s financial statements for the current
year:

Accounts receivable turnover

Ten times during the year

Average total assets

$1,000,000

Average receivables during the year

$200,000
What was the total assets turnover for the year?

A. 5.0

B. 0.2

C. 0.50

D. 2.0
Fact Pattern: The following inventory and sales data are available for the current year for Volpone
Company. Volpone uses a 365-day year when computing ratios.
November 30, November 30,

Year 2 Year 1

Net credit sales $6,205,000

Gross receivables 350,000 320,000

Inventory 960,000 780,000

Cost of goods sold 4,380,000

Question: 62 Volpone Company’s average number of days to collect accounts receivable for Year 2
is

A. 18.82

B. 19.43

C. 19.71

D. 20.59

Fact Pattern:
Lisa, Inc.

Statement of Financial Position

December 31, Year 2

(000s)

Assets Year 2 Year 1

Current assets:
Cash $ 30 $ 25
Trading securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost or market) 60 50
Prepaid items 15 20

Total current assets 170 140

Long-term investments:
 Securities (at cost) 25 20
Property, plant, & equipment:
Land (at cost) 75 75
Building (net) 80 90
Equipment (net) 95 100
Intangible assets
Patents (net) 35 17
Goodwill (net) 20 13

Total long-term assets 330 315

Total assets $500 $455

Liabilities & Shareholders’ Equity
Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest 15 15
Total current liabilities 85 55
Long-term debt:
Notes payable 10% due 12/31/Year 9 10 10
Bonds payable 12% due 12/31/Year 8 15 15
Total long-term debt 25 25
Total liabilities $110 $ 80
Shareholders’ equity:
Preferred -- 5% cumulative, $100 par,
non-participating, 1,000 shares authorized,
issued and outstanding $100 $100
Common -- $10 par 20,000 shares authorized,
15,000 issued and outstanding shares 150 150
Additional paid-in capital -- common 75 75
Retained earnings 65 50
Total shareholders’ equity $390 $375
Total liabilities & equity $500 $455

Question: 63 Assume sales and cost of goods sold for Year 2 were $300,000 and $220,000,
respectively. Lisa, Inc.’s inventory turnover for Year 2 was

A. 3.7 times.

B. 4.0 times.

C. 4.4 times.

D. 5.0 times.
Question: 64 The following represents select financial information of J Company for the year ended
December 31, Year 1:

Inventory – 1/1/Year 1 $ 60,000

Inventory – 12/31/Year 1 40,000

Accounts Payable – 1/1/Year 1 30,000

Accounts Payable – 12/31/Year 1 20,000

Cost of Goods Sold 270,000

Calculate J Company’s accounts payable turnover ratio for the year ended December
31, Year 1.

A. 10.0 times.

B. 12.5 times.

C. 5.0 times.

D. 10.8 times.

Question: 65A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease
in the amount of bad debts, and a decrease in the investment in accounts receivable. Based upon this information,
the company’s

A. Average collection period has decreased.

B. Working capital has increased.

C. Percentage discount offered has decreased.

D. Accounts receivable turnover has decreased.

Question: 66 The following computations were made from Bruckner Co.’s current-year books:

Number of days’ sales in inventory 55

 Number of days’ sales in trade

accounts receivable 26
What was the number of days in Bruckner’s current-year operating cycle?

A. 26

B. 81

C. 40.5

D. 55

Question: 67 An unexpected decrease in which of the following ratios could indicate that fictitious
inventory has been recorded?

A. Average collection period.

B. Total asset turnover.

C. Price-earnings.

D. Current.

Question: 68 A firm has a current ratio of 2.5 and a quick ratio of 2.0. If the firm experienced $2
million in cost of sales and sustains an inventory turnover of 8.0, what are the firm’s
current assets?

A. $500,000

B. $1,250,000

C. $1,500,000

D. $1,000,000

Fact Pattern: Selected data from White Corporation’s financial statements for the year ended November
30, Year 2, are as follows (all sales are on credit).
Current ratio 1.4
 Quick ratio 0.86

Current liabilities $450,000

Accounts receivable turnover 3.65

Merchandise inventory turnover 3.30

Rate of return on assets 6.5%

Selected account balances at November 30, Year 1

Accounts receivable $355,000

Merchandise inventory 237,000

Year 2 operations

Sales $1,241,000

Cost of goods sold 792,000

Question: 69 White’s balance in accounts receivable at November 30, Year 2, is

A. $216,986

B. $78,973

C. $325,000

D. $355,000

Fact Pattern: Assume the following information pertains to Ramer Company, Matson Company, and for
their common industry for a recent year.
Industry

Ramer Matson Average

Current ratio 3.50 2.80 3.00

Accounts receivable turnover 5.00 8.10 6.00

Inventory turnover 6.20 8.00 6.10

Times interest earned 9.00 12.30 10.40

Debt to equity ratio 0.70 0.40 0.55

Return on investment 0.15 0.12 0.15

Dividend payout ratio 0.80 0.60 0.55

Earnings per share $3.00 $2.00 --

Question: 70 Which one of the following is correct if both companies have the same total assets and
the same sales?

A. Ramer has more cash than Matson.

B. Matson has a shorter operating cycle than Ramer.

C. Matson is more effectively using financial leverage.

D. Ramer has fewer current liabilities than Matson.

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and
Accounts receivable (net) 68 48 administrative 52 51
Inventory 90 80 Interest expense 8 9
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Total current assets $255 $216 Income taxes 36 34
Investments, at equity 38 30 Net income $ 54 $ 51
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 71 Devlin Company’s asset turnover for the year ended May 31, Year 2, was

A. 0.08 times.

B. 0.83 times.

C. 0.46 times.

D. 0.67 times.

Question: 72 A company had $6 million in credit sales last fiscal year. The company’s beginning
accounts receivable balance was $1 million and its ending receivable balance was
$1.25 million on its year-end financial statements. If the industry average period for the
collection of accounts receivables is 90 days, the company’s accounts receivable
collection period is less than the industry average by approximately

A. 60 days.

B. 68 days.

C. 22 days.

D. 52 days.

Question: 73A wholesale supplier has collected the following financial data on three companies that only
purchase their products for resale to retail consumers.

Company A Company B Company C

Sales £1,000,000 £1,250,000 £2,450,000

Gross profit margin 20% 30% 25%

Beginning inventory £35,000 £80,000 £155,000

Ending inventory £65,000 £225,000 £175,000
On the basis of the information provided above, the supplier is able to conclude that

A. Company C is turning the product inventory the fastest.

B. Companies A and C are both turning the product inventory faster than Company B.

C. Companies B and C are both turning the product inventory faster than Company A.

D. Company B is turning the product inventory the fastest.

Question: 74 A company is expanding and wants to increase its level of inventory to support an
aggressive sales target. They would like to finance this expansion using debt. The
company currently has loan covenants that require the current ratio to be at least 1.2.
The average cost of the current liabilities is 12%, and the cost of the long-term debt is
8%. Below is the current balance sheet for the company.

Current assets $200,000 Current liabilities $165,000

Fixed assets 100,000 Long-term debt 100,000

Equity 35,000

Total assets $300,000 Total debt & equity $300,000

Which one of the following alternatives will provide the resources to expand the
inventory while lowering the total cost of debt and satisfying the loan covenant?

A. Sell fixed assets with a book value of $20,000 for $25,000, and use the proceeds to
increase inventory.

B. Collect $25,000 accounts receivable, use $10,000 to purchase inventory, and use the
balance to reduce short-term debt.

C. Increase both accounts payable and inventory by $25,000.

D. Borrow short-term funds of $25,000, and purchase inventory of $25,000.

Question: 75Corporation M had the following items on its balance sheet at the end of Year 1:

Cash $ 55,000
Marketable securities 60,000

Inventory 35,000

Land 70,000

Office building 100,000

Accounts payable (due 2/1/Y2) 40,000

Interest payable (due 6/1/Y3) 20,000

Wages payable (due 1/5/Y2) 10,000

What is M’s working capital at the end of Year 1?

A. $80,000

B. $100,000

C. $170,000

D. $250,000

Question: 76 An entity has total asset turnover of 3.5 times and a total debt to total assets ratio of
70%. If the entity has total debt of $1,000,000, it has a sales level of

A. $2,450,000

B. $408,163

C. $200,000

D. $5,000,000

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon Company
for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal year. McKeon’s
controller is in the process of reviewing the Year 2 budget and calculating some key ratios based on the
budget. McKeon Company monitors yield or return ratios using the average financial position of the
company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000

Current liabilities 78,000 85,000

Long-term debt 75,000 30,000

Common stock ($30 par value) 300,000 300,000

Retained earnings 32,000 20,000

Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000

Inventory 70,000 80,000

Prepaid expenses 20,000 20,000

Question: 77 McKeon Company’s total asset turnover ratio for Year 2 is

A. 0.348

B. 0.722

C. 0.761

D. 0.805

Question: 78 A corporation is able to reduce its days’ sales in inventory by adopting a more efficient
inventory management system. Other things remaining the same, this would

A. Decrease the operating cycle and decrease the cash cycle.

B. Decrease the operating cycle and not change the cash cycle.

C. Not change the operating cycle and decrease the cash cycle.
 D. Decrease the operating cycle and increase the cash cycle.

Question: 79 The selected data pertain to a company at December 31:

Quick assets $ 208,000

Acid test ratio 2.6 to 1

Current ratio 3.5 to 1

Net sales for the year $1,800,000

Cost of sales for the year $ 990,000

Average total assets for the year $1,200,000

The company’s asset turnover ratio for the year is

A. .675

B. 1.21

C. .825

D. 1.50

Fact Pattern: The Statement of Financial Position for King Products Corporation for the fiscal
years ended June 30, Year 2, and June 30, Year 1, is presented below. Net sales and cost of
goods sold for the year ended June 30, Year 2, were $600,000 and $440,000, respectively.
King Products Corporation
Statement of Financial Position
(in thousands)
June 30
Year 2 Year 1
Cash $ 60 $ 50
Marketable securities (at market) 40 30
Accounts receivable (net) 90 60
Inventories (at lower of cost or market) 120 100
Prepaid items 30 40
Total current assets $ 340 $280
Land (at cost) $ 200 $190
Building (net) 160 180
Equipment (net) 190 200
Patents (net) 70 34
 Goodwill (net) 40 26
Total long-term assets $ 660 $630
Total assets $1,000 $910
Notes payable $ 46 $ 24
Accounts payable 94 56
Accrued interest 30 30
Total current liabilities $ 170 $110
Notes payable, 10% due 12/31/Year 7 $ 20 $ 20
Bonds payable, 12% due 6/30/Year 10 30 30
Total long-term debt $ 50 $ 50
Total liabilities $ 220 $160
Preferred stock -- 5% cumulative, $100 par, nonparticipating,
authorized, issued and outstanding, 2,000 shares $ 200 $200
Common stock -- $10 par, 40,000 shares authorized,
30,000 shares issued and outstanding 300 300
Additional paid-in capital -- common 150 150
Retained earnings 130 100
Total equity $ 780 $750
Total liabilities & equity $1,000 $910

Question: 80 King Products Corporation’s average collection period for the fiscal year ended June
30, Year 2, using a 360-day year was

A. 45 days.

B. 61 days.

C. 36 days.

D. 54 days.

Question: 81 A company’s accounts receivable turnover rate decreased from 7.3 to 4.3 over the last
3 years. What is the most likely cause for the decrease?

A. A more liberal credit policy.

B. Increased cash sales.

C. An increase in the discount offered for early payment.

D. A change in net payment due from 30 to 25 days.

Question: 82 The difference between average and ending inventory is immaterial.

Current ratio 2.0

Quick ratio 1.5

Current liabilities $120,000

Inventory turnover (based on cost of goods sold) 8 times

Gross profit margin 40%

Net sales for the year were

A. $800,000

B. $240,000

C. $1,200,000

D. $480,000

Question: 83 A firm has decided to make an additional investment in its operating assets, which are
financed by debt. Assuming all other factors remain constant, this increase in
investment will have which of the following effects?
Operating Profit Margin Total Asset Turnover Return on Assets

A. Decrease Decrease Decrease

B. Increase No Change Increase

C. No Change Increase Decrease

D. No Change Decrease Decrease

Question: 84 Selected information for Clay Corp. for the year ended December 31 follows:

Average days’ sales in inventories 124

Average days’ sales in accounts receivable 48

The average number of days in the operating cycle for the year was

A. 76
 B. 86

C. 172

D. 124

Fact Pattern: Garland Corporation’s income statement for the year just ended is shown below.
Net sales $ 900,000

Beginning inventory $ 125,000

Purchases 540,000

Goods available for sale $ 665,000

Ending inventory (138,000)

Cost of goods sold (527,000)

Gross profit $ 373,000

Operating expenses (175,000)

Operating income $ 198,000

Income tax expense (79,000)

Net income $ 119,000

Question: 85 If Garland Corporation’s net accounts receivable were $68,000 and $47,000 at the
beginning and end of the year, respectively, the company’s average number of days’
sales in accounts receivable (using a 360-day year) is

A. 23 days.

B. 19 days.

C. 8 days.

D. 13 days.
Question: 86 The assets of a corporation are presented below:

January 1 December 31

Cash $ 48,000 $ 62,000

Marketable securities 42,000 35,000

Accounts receivable 68,000 47,000

Inventory 125,000 138,000

Plant & equipment

(net of accumulated depreciation) 325,000 424,000

For the year just ended, the corporation had net income of $96,000 on $900,000 of
sales. The corporation’s total asset turnover ratio is

A. 1.48

B. 1.50

C. 1.37

D. 1.27

Question: 87 A corporation experiences a decrease in sales and cost of goods sold, an increase in
accounts receivable, and no change in inventory. If all else is held constant, what is the
total effect of these changes on the receivables turnover and inventory ratios?
Inventory Receivables
Turnover Turnover

A. Increased Decreased

B. Decreased Decreased

C. Increased Increased

D. Decreased Increased
Question: 88 An entity has a high fixed assets turnover ratio. What conclusion can a financial analyst
draw from this?

A. The entity may be undercapitalized.

B. The entity may be overcapitalized.

C. The entity has favorable profitability.

D. The entity may have a problem with employees converting inventory to personal use.

Question: 89Last year, a company’s days’ sales in receivables was 73 days. This year, days’ sales in receivables is
91.25 days. Over the same time period, sales have declined by 20%. In this period of time, what has happened to the
level of the company’s accounts receivable?

A. There is not enough information provided to make a determination.

B. Accounts receivables have increased.

C. Accounts receivables have decreased.

D. There has been no change in accounts receivable.

Fact Pattern:
Lisa, Inc.

Statement of Financial Position

December 31, Year 2

(000s)

Assets Year 2 Year 1

Current assets:
Cash $ 30 $ 25
Trading securities 20 15
Accounts receivable (net) 45 30
 Inventories (at lower of cost or market) 60 50
Prepaid items 15 20

Total current assets 170 140

Long-term investments:
Securities (at cost) 25 20
Property, plant, & equipment:
Land (at cost) 75 75
Building (net) 80 90
Equipment (net) 95 100
Intangible assets
Patents (net) 35 17
Goodwill (net) 20 13

Total long-term assets 330 315

Total assets $500 $455

Liabilities & Shareholders’ Equity
Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest 15 15
Total current liabilities 85 55
Long-term debt:
Notes payable 10% due 12/31/Year 9 10 10
Bonds payable 12% due 12/31/Year 8 15 15
Total long-term debt 25 25
Total liabilities $110 $ 80
Shareholders’ equity:
Preferred -- 5% cumulative, $100 par,
non-participating, 1,000 shares authorized,
issued and outstanding $100 $100
Common -- $10 par 20,000 shares authorized,
15,000 issued and outstanding shares 150 150
Additional paid-in capital -- common 75 75
Retained earnings 65 50
Total shareholders’ equity $390 $375
Total liabilities & equity $500 $455

Question: 90 Assume net credit sales and cost of goods sold for Year 2 were $300,000 and
$220,000, respectively. Lisa, Inc.’s accounts receivable turnover for Year 2 was

A. 5.9 times.

B. 4.9 times.
 C. 6.7 times.

D. 8.0 times.

Question: 91 All of the following financial indicators are measures of liquidity and activity except the

A. Merchandise inventory turnover.

B. Average collection period in days.

C. Accounts receivable turnover.

D. Times interest earned ratio.

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and
Accounts receivable (net) 68 48 administrative 52 51
Inventory 90 80 Interest expense 8 9
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Total current assets $255 $216 Income taxes 36 34
Investments, at equity 38 30 Net income $ 54 $ 51
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 92At the beginning of Year 1, Devlin’s net property, plant, and equipment was $420,000. Its fixed
assets turnover for the year ended May 31, Year 2, was

A. 1.24 times.

B. Lower than the total asset turnover.

C. 1.12 times.

D. 1.28 times.

Question: 93 The following data are available for the current year for Volpone Company. Volpone
uses a 365-day year when computing ratios.

December 31, December 31,

Year 2 Year 1

Net credit sales $6,205,000

Accounts receivable 335,000 $350,000

Inventory 870,000 960,000

Cost of goods sold 4,380,000

Volpone Company’s operating cycle for Year 2 is

A. 96.40

B. 70.61
 C. 100.15

D. 96.84

Fact Pattern: The Statement of Financial Position for King Products Corporation for the fiscal
years ended June 30, Year 2, and June 30, Year 1, is presented below. Net sales and cost of
goods sold for the year ended June 30, Year 2, were $600,000 and $440,000, respectively.
King Products Corporation
Statement of Financial Position
(in thousands)
June 30
Year 2 Year 1
Cash $ 60 $ 50
Marketable securities (at market) 40 30
Accounts receivable (net) 90 60
Inventories (at lower of cost or market) 120 100
Prepaid items 30 40
Total current assets $ 340 $280
Land (at cost) $ 200 $190
Building (net) 160 180
Equipment (net) 190 200
Patents (net) 70 34
Goodwill (net) 40 26
Total long-term assets $ 660 $630
Total assets $1,000 $910
Notes payable $ 46 $ 24
Accounts payable 94 56
Accrued interest 30 30
Total current liabilities $ 170 $110
Notes payable, 10% due 12/31/Year 7 $ 20 $ 20
Bonds payable, 12% due 6/30/Year 10 30 30
Total long-term debt $ 50 $ 50
Total liabilities $ 220 $160
Preferred stock -- 5% cumulative, $100 par, nonparticipating,
authorized, issued and outstanding, 2,000 shares $ 200 $200
Common stock -- $10 par, 40,000 shares authorized,
30,000 shares issued and outstanding 300 300
Additional paid-in capital -- common 150 150
Retained earnings 130 100
Total equity $ 780 $750
Total liabilities & equity $1,000 $910

Question: 94 King Products Corporation’s inventory turnover ratio for the fiscal year ended at June
30, Year 2, was
 A. 4.0

B. 6.0

C. 3.7

D. 4.4

Question: 95 An increase in sales resulting from an increased cash discount for prompt payment
would be expected to cause

A. A decrease in the cash conversion cycle.

B. An increase in the operating cycle.

C. A decrease in purchase discounts taken.

D. An increase in the average collection period.

Question: 96 A corporation had net credit sales last year of $18,600,000 (of which 20% were
installment sales). It also had an average accounts receivable balance of $1,380,000.
Credit terms are 2/10, net 30. Based on a 360-day year, the average collection period
last year was

A. 27.2 days.

B. 26.2 days.

C. 26.7 days.

D. 33.4 days.
2: (10) Ratio Analysis and Earnings Quality

Question: 1A company with a lower quality of earnings is most likely to

A. Manage the recognition of revenues, expenses, gains, and losses.

B. Present an operating profit margin lower than the industry average.

C. Hire lower-skilled workers or purchase lower-quality materials.

D. Rely on a few large customers to generate a large portion of its sales.

Question: 2 The key difference between accounting profit and economic profit is that economic
profit

A. Excludes income tax and interest expense.

B. Considers the opportunity cost of equity.

C. Calculates changes in supply using EOQ models.

D. Highlights the historical cost concept.

Question: 3 A bank has received loan applications from three companies in the plastics
manufacturing business and currently has the funds to grant only one of these
requests. Specific data shown below has been selected from these applications for
review and comparison with industry averages.

S R H Industry

Total sales (millions) $4.27 $3.91 $4.86 $4.30

Net profit margin 9.55% 9.85% 10.05% 9.65%

Current ratio 1.82 2.02 1.96 1.95

Return on assets 12.0% 12.6% 11.4% 12.4%

Debt/equity ratio 52.5% 44.6% 49.6% 48.3%

Financial leverage 1.30 1.02 1.56 1.33

Based on the information above, select the strategy that should be the most beneficial
to the bank.
 A. Grant the loan to S, as all the company’s data approximate the industry average.

B. Grant the loan to H, as the company has the highest net profit margin and degree of
financial leverage.

C. Grant the loan to R, as both the debt/equity ratio and degree of financial leverage are
below the industry average.

D. The bank should not grant any loans, as none of these companies represents a good
credit risk.

Question: 4 A chief financial officer has been tracking the activities of the company’s nearest
competitor for several years. Among other trends, the CFO has noticed that this
competitor is able to take advantage of new technology and bring new products to
market more quickly than the CFO’s company. In order to determine the reason for
this, the CFO has been reviewing the following data regarding the two companies:

Company Competitor

Accounts receivable turnover 6.85 7.35

Return on assets 15.34 14.74

Times interest earned 15.65 12.45

Current ratio 2.11 1.23

Debt/equity ratio 42.16 55.83

Degree of financial leverage 1.06 1.81

Price/earnings ratio 26.56 26.15

On the basis of this information, which one of the following is the best initial strategy
for the CFO to follow in attempting to improve the flexibility of the company?

A. Seek cost cutting measures that would increase the company’s profitability.

B. Investigate ways to improve asset efficiency and turnover times to improve liquidity.

C. Seek additional sources of outside financing for new product introductions.

D. Increase the company’s investment in short-term securities to increase the current

ratio.
Question: 5 Which one of the following actions undertaken by a technology company’s
management will adversely impact the quality of its earnings?

A. Estimating a low rate of return on the company’s pension plan assets.

B. Using conservative estimates for the useful life of the company’s equipment.

C. Recording sales of software prior to installation and acceptance by customers.

D. Immediately expensing product research and development costs.

Question: 6A company could negatively affect its earnings quality if it frequently

A. Offered significant sales discounts.

B. Invested long-term in an erratic stock or bond market.

C. Materially changed accounting estimates.

D. Constructed plants in countries with unstable currency.

Question: 7 A corporation has the option to use either a shorter period or a longer period to amortize a
patent, and it can use either the declining-balance method or the straight-line method to
depreciate a fixed asset. The corporation would be considered to have better earnings quality if
it uses the

A. Shorter period to amortize the patent and the straight-line method to depreciate the
fixed asset.

B. Longer period to amortize the patent and the straight-line method to depreciate the
fixed asset.

C. Shorter period to amortize the patent and the declining-balance method to depreciate
the fixed asset.

D. Longer period to amortize the patent and the declining-balance method to depreciate
the fixed asset.
Question: 8 A corporation’s inventory expressed as a percentage of current assets increased from
25% last July to 35% this July. The factor that is least likely to cause this increase is
that the corporation

A. Has inventory that is becoming obsolete.

B. Used a material amount of cash from selling its short-term investments to purchase
land.

C. Is a seasonal company with traditionally higher activity in the summer months.

D. Is beginning to experience high growth.

Question: 9 The CFO of a company is concerned about the impact that inflation will have on the
company’s reported financial results and wonders whether sales will be comparable
from year to year. The company had sales of $500,000 in Year 3 and the price index
for its industry has risen from 200 in Year 3 to 220 in Year 4. The level of sales that the
company must reach in Year 4 to achieve a real growth of 15% is

A. $632,500

B. $690,000

C. $550,000

D. $575,000

Question: 10 A manufacturing company operates in an environment of significant inflationary

pressures. Which one of the following inventory methods should the company choose
to produce financial statements considered to be of the highest earnings quality?

A. First-in, first-out.

B. Average cost.

C. Specific identification.

D. Last-in, first-out.