Chapter 12 Textbook

Question 1

Company A has an accounts receivable turnover of 8.0. Company B has an accounts receivable turnover of 10.0. Which of the following is true?

Multiple choice question.

Company B collects its receivables faster than Company A.
Company B makes more sales on account than Company A.
Company A makes more sales on account than Company B.
Company B has more receivables than Company A.
Company A collects its receivables faster than Company B.

Answer 1

Company B collects its receivables faster than Company A.

Reason: The accounts receivable turnover measures how fast a company collects its receivables. Thus a higher turnover indicates the company is collecting its receivables faster.

Question 2

Select all that apply

Common types of analysis that help assess a specific company’s performance include comparisons:

over time
to the same industry
between companies
to another industry

Answer 2

over time
to the same industry
between companies

Question 3

Vertical analysis is also commonly known as _____ -size analysis

Answer 3

Common

Question 4

Which of these are the same as horizontal analysis?

Multiple select question.

Time-series analysis
Vertical analysis
Trend analysis
Ratio analysis

Answer 4

Time-series analysis
Trend analysis

Question 5

The group of ratios that measures a company’s ability to meet short-term and long-term obligations is known as

Multiple choice question.

credit risk management
return to shareholders
profitability
asset management

Answer 5

credit risk management

Question 6

the receivables turnover ratio offers an indication of how quickly a company is able to

Multiple choice question.

pay for its inventory.
generate revenue.
collect its accounts receivable.
generate cash from financing activities.

Answer 6

collect its accounts receivable.

Question 7

Mark wants to determine whether a specific company has become more profitable over time. Mark should compare the company’s performance to:

Multiple choice question.

its main competitor
its industry
its prior years’ performance

Answer 7

its prior years’ performance

Question 8

Common-size analysis is another term used for a ______ analysis

Multiple choice question.

vertical
horizontal

Answer 8

Vertical

Question 9

The formula for return on equity is ______ divided by average total shareholders’ equity. (Enter one word per blank)

Answer 9

Blank 1: net income

Question 10

The ______ profit ratio indicates the portion of each dollar of sales above the cost of goods sold.

Answer 10

gross

Question 11

The group of ratios that measures a company’s ability to use assets to generate sales is known as

Multiple choice question.

return to shareholders
profitability
credit risk management
asset management

Answer 11

asset management

Question 12

Which information regarding the receivables turnover ratio is true?

Multiple select question.

It shows the number of times during a period that the average accounts receivable balance is collected.
It provides an indication of a company’s efficiency in collecting receivables.
The lower the ratio, the better the company is performing.
It shows the number of days it takes to collect accounts receivable.

Answer 12

It shows the number of times during a period that the average accounts receivable balance is collected.

It provides an indication of a company’s efficiency in collecting receivables.

Question 13

Asset turnover ratio is net sales divided by

Multiple choice question.

average total assets.
average current assets.
average accounts receivable.
average noncurrent assets.

Answer 13

average total assets.

Question 14

What is the formula to compute return on stockholders’ equity?

Multiple choice question.

Net income divided by average total assets
Net income divided by average stockholders’ equity
Net income divided by net sales

Answer 14

Net income divided by average stockholders’ equity

Question 15

Which ratio indicates the portion of each sales dollar above its cost of goods sold?

Multiple choice question.

The profit ratio
The cost ratio
The gross profit ratio

Answer 15

The gross profit ratio

Question 16

Puffin Pastry, Inc. had Sales of $90,000 and Net income of $10,000 during year 2025. At December 31, 2024, its total assets were $100,000, and its net fixed assets were $40,000. At December 31, 2025, its total assets were $200,000, and its fixed assets were $80,000. Puffin’s asset turnover ratio for 2025 equals:

Multiple choice question.

0.45
0.60
1.50
0.13

Answer 16

Reason: Asset turnover ratio=$90,000/(($100,000+$200,000)/2)=0.60

Question 17

What is the formula for the receivables turnover ratio?

Multiple choice question.

Net credit sales divided by average total assets.
Net credit sales divided by average net accounts receivable.
Average net accounts receivable divided by net credit sales.

Answer 17

Net credit sales divided by average net accounts receivable.

Question 18

Net credit sales divided by average net accounts receivables equals the ______ turnover.

Multiple choice question.

accounts payable
asset
receivables
inventory

Answer 18

receivables
Reason: The receivables turnover equals net sales revenue divided by average net receivables. Inventory turnover equals the cost of sales divided by average inventory.

Question 19

The _________ profit ratio indicates the portion of each dollar of sales above the cost of goods sold.

Answer 19

gross

Question 20

The group of ratios that measures a company’s ability to use assets to generate sales is known as

Multiple choice question.

profitability
return to shareholders
asset management
credit risk management

Answer 20

asset management

Question 21

The average collection period is calculated as 365 divided by

Multiple choice question.

average accounts receivable.
average total assets.
the receivable turnover ratio.
net credit sales.

Answer 21

the receivable turnover ratio.

Question 22

Compute the asset turnover ratio using the following information: net sales is $100,000 for the year, last year’s total assets were $900,000 and this year’s total assets are $1,100,000. Receivables for both years are $50,000.

Multiple choice question.

11%
20%
9%
10%

Answer 22

10%

Reason: Net sales/average total assets = $100,000/[($900,000 + $1,100,000)/2] = 10%

Question 23

The formula to compute the receivables turnover ratio is net credit sales divided by

Multiple choice question.

cost of goods sold.
average net accounts receivable.
average total assets.
the receivable turnover ratio.

Answer 23

average net accounts receivable.

Question 24

Receivable turnover equals:

Multiple choice question.

net credit sales divided by average net accounts receivable
average net accounts receivable divided by net sales
365 divided by net sales and average net accounts receivable
cost of sales divided by average inventory

Answer 24

net credit sales divided by average net accounts receivable

Question 25

The formula for the inventory turnover ratio is

Multiple choice question.

cost of goods sold divided by average inventory.
sales divided by cost of goods sold.
average accounts receivable divided by average inventory.
cost of goods sold divided by average accounts receivable.

Answer 25

cost of goods sold divided by average inventory.

Question 26

What is the formula for the receivables turnover ratio?

Multiple choice question.

Net credit sales divided by average net accounts receivable.
Net credit sales divided by average total assets.
Average net accounts receivable divided by net credit sales.

Answer 26

Net credit sales divided by average net accounts receivable.

Question 27

Recipes, Inc. had sales of $120,000 and cost of goods sold of $80,000 for the year. All sales were credit sales. Net accounts receivable was $10,000 at the beginning of the year and $14,000 at the end. Inventory was $18,000 at the beginning of the year and $22,000 at the end. Recipes’ accounts receivables turnover equals:

Multiple choice question.

6.7
8.6
12.0
10.0
4.0

Answer 27

10.0

Question 28

Which of the following would be the best current ratio, assuming the company had excellent liquidity and an ability to generate positive income?

Multiple choice question.

0.90
1.5
1.0
2.4

Answer 28

2.4

Question 28

What is the formula for the inventory turnover ratio?

Multiple choice question.

365 divided by average inventory.
Cost of goods sold divided by net sales.
Cost of goods sold divided by average inventory.
Average inventory multiplied by cost of goods sold.

Answer 28

Cost of goods sold divided by average inventory.

Question 29

Net sales divided by average total assets equals ______.

Multiple choice question.

return on equity
debt-to-assets
quality of income
asset turnover
fixed asset turnover

Answer 29

asset turnover

Question 29

If Currants & Jams, Inc.’s current ratio equals 2.0, current liabilities are $10,000, and long-term liabilities are $30,000, then its current assets equal:

Multiple choice question.

$80,000
$30,000
$20,000
$5,000
$60,000

Answer 29

$20,000

Reason: 2.0 = x/$10,000. Solve for x.

Question 30

Which of the following is the formula for the current ratio?

Multiple choice question.

Current assets times current liabilities.
Current assets divided by current liabilities.
Current liabilities divided by current assets.
Current assets plus current liabilities.

Answer 30

Current assets divided by current liabilities.

Question 31

The formula to compute the receivables turnover ratio is net credit sales divided by

Multiple choice question.

cost of goods sold.
average net accounts receivable.
the receivable turnover ratio.
average total assets.

Answer 31

average net accounts receivable.

Question 31

What is the formula to compute the average days in inventory?

Multiple choice question.

Inventory turnover ratio/365 days
365 days/inventory turnover ratio
365 days/receivables turnover ratio

Answer 31

365 days/inventory turnover ratio

Question 32

The sum of cash, current investments, and accounts receivable divided by current liabilities equals the

Multiple choice question.

current ratio
asset turnover ratio
acid-test ratio

Answer 32

acid-test ratio

Question 33

If a company has a current ratio of 1.2, which of the following is true?

Multiple choice question.

The company has $1.20 in current liabilities greater than its current assets.
The company has $1.20 in current assets for each dollar of current liabilities.
The company has $1.20 in current assets for each dollar of equity.
The company has 1.2 times more current assets than its competitors.

Answer 33

The company has $1.20 in current assets for each dollar of current liabilities.

Question 33

The ______ ratio provides a more conservative measure of a company’s ability to pay its current liabilities from current sources.

Answer 33

acid test

Question 34

The times interest earned formula is net income divided by interest expense.

True
False

Answer 34

False

Reason: The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense.

Question 34

Mathematically, the current ratio is expressed as current assets divided by ____________

Answer 34

current liabilities

Question 35

The debt to equity ratio is calculated as total interest-bearing debt divided by common stock.

True
False

Answer 35

False

Reason: The debt to equity ratio is total liabilities divided by total owners’ equity.

Question 36

Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio?

Multiple select question.

Inventory
Prepaid expenses
Short-term trading securities
Accounts receivable

Answer 36

Inventory
Prepaid expenses

Question 37

The PE ratio is calculated by ______.

Multiple choice question.

dividing net income by average stockholders’ equity
dividing stockholders’ equity by net income
dividing the stock price by EPS
dividing EPS by the stock price

Answer 37

dividing the stock price by EPS

Question 38

Which of the following ratios provides the most conservative measure of a firm’s ability to pay its current liabilities?

Multiple choice question.

The current ratio
The acid-test ratio

Answer 38

The acid-test ratio

Question 39

An item that requires separate disclosure on the income statement after income from continuing operations is

Multiple choice question.

discontinued operations.
interest expense.
restructuring costs.
research and development costs.

Answer 39

discontinued operations.

Question 39

_____________ refers to how managers use assumptions, estimates, and discretion to manipulate reported earnings. (Enter one word per blank.)

Answer 39

Earnings Management

Question 40

The times interest earned formula is calculated as earnings before interest and taxes divided by __________.

Answer 40

Interest Expense

Question 41

The debt to equity ratio is calculated as

Multiple choice question.

total interest-bearing debt divided by total stockholders’ equity.
current liabilities divided by total stockholders’ equity.
noncurrent liabilities divided by the sum of total liabilities and stockholders’ equity.
total liabilities divided by total assets.

Answer 41

total interest-bearing debt divided by total stockholders’ equity.

Question 42

Identify what is needed to calculate the PE ratio.

Multiple select question.

Average stockholders’ equity
Earnings per share
Common stock dividends declared
Return on equity
Stock price

Answer 42

Earnings per share
Stock price

Question 43

Which of the following are incentives to engage in earnings management?

Multiple select question.

To report EPS that meets or exceeds analyst expectations
To gain market share
To achieve a performance target linked to a monetary bonus

Answer 43

To report EPS that meets or exceeds analyst expectations
To achieve a performance target linked to a monetary bonus

Question 44

Select all that apply

Which of the following are incentives to engage in earnings management?

Multiple select question.

To meet or beat analyst forecast EPS
To avoid violating debt covenants
To expand into other industries

Answer 44

To meet or beat analyst forecast EPS
To avoid violating debt covenants

Question 45

Compute the asset turnover ratio using the following information: net sales is $100,000 for the year, last year’s total assets were $900,000 and this year’s total assets are $1,100,000. Receivables for both years are $50,000.

Multiple choice question.

20%
11%
9%
10%

Answer 45

10%

Question 46

The formula for return on equity is ________ divided by average total shareholders’ equity.

Answer 46

net income

Question 47

What is the formula to compute return on stockholders’ equity?

Multiple choice question.

Net income divided by net sales
Net income divided by average stockholders’ equity
Net income divided by average total assets

Answer 47

Net income divided by average stockholders’ equity