Multiple Choice Chap. 3

Question 1

Company A and Company B both report the same level of sales and net income. Therefore,
A) both A and B will report the same Earnings Per Share.
B) both A and B will report the same Gross Profit Margin.
C) both A and B will report the same Net Profit Margin.
D) both A and C are true.

Answer 1

Answer: C

Question 2

The A corporation has an operating profit margin of 20%, operating expenses of $500,000, and financing costs of $15,000. Therefore,
A) the corporation’s gross profit margin is less than 20%.
B) the corporation’s net profit margin is greater than 20%.
C) the corporation’s gross profit margin is greater than 20%.
D) the corporation’s gross profit margin is equal to 20% because gross profit is not affected by operating expenses or financing costs.

Answer 2

Answer: C

Question 3

The basic format of an income statement is 
A) Sales - Expenses = Profits.
B) Income - Expenses = EBIT.
C) Sales - Liabilities = Profits.
D) Assets - Liabilities = Profits.

Answer 3

Answer: A

Question 4

Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000.  Li's gross profit is equal to 
A) $770,000.
B) $1,070,000.
C) $1,100,000.
D) $1,500,000.

Answer 4

Answer: D
Explanation: Sales - Cost of Goods Sold = $3,000,000 - $1,500,000 = $1,500,000
AACSB: Analytic skills

Question 5

Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000.  Li's operating income is equal to 
A) $770,000.
B) $1,070,000.
C) $1,100,000.
D) $1,500,000.

Answer 5

Answer: C
Explanation: Sales - Cost of Goods Sold - Depreciation Expense - Administrative Expenses - Marketing Expenses = EBIT = $3,000,000 - 1,500,000 - 170,000 - 150,000 - 80,000 = $1,100,000

Question 6

Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000.  Li's net profit margin is equal to 
A) 25.67%.
B) 35.67%.
C) 36.67%.
D) 50.00%.

Answer 6

Answer: A
Explanation: Sales - Cost of Goods Sold - Depreciation Expense - Administrative Expenses - Marketing Expenses = EBIT = $3,000,000 - 1,500,000 - 170,000 - 150,000 - 80,000 = $1.100,000); (EBIT - Interest Expense - Taxes = Net Income = $1,100,000 - 30,000 - 300,000 = $770,000); (Net Profit Margin = Net Income / Sales = $770,000 / $3,000,000 = 25.67%)

Question 7

Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000;  Li's operating profit margin is equal to 
A) 25.67%
B) 35.67%
C) 36.67%
D) 50.00%

Answer 7

Answer: C
Explanation: Operating Profit Margin = EBIT/Sales = $1,100,000/$3,000,000 = 36.67%
AACSB: Analytic skills

Question 8

Use the following information to calculate the company’s accounting net income for the year.

Credit Sales $800,000
Cash Sales $500,000
Operating Expenses on Credit $200,000
Cash Operating Expenses $700,000
Accounts Receivable (Beg. of Year) $ 50,000
Accounts Receivable (End of Year) $ 80,000
Accounts Payable (Beg. of Year) $ 50,000
Accounts Payable (End of Year) $100,000
Corporate Tax Rate 40%

A) $300,000
B) $240,000
C) $125,000
D) $120,000

Answer 8

Answer: B
Explanation: Sales - Operating Expenses - Taxes = $1,300,000 - $900,000 - $160,000 = $240,000

Question 9

A corporation's operating profit margin is equal to 
A) Net Income divided by Sales.
B) EBIT divided by Sales.
C) EBIT divided by Net Income.
D) Sales divided by EBIT.

Answer 9

Answer: B

Question 10

Which of the following statements concerning net income is most correct?
A) Net income represents cash available to pay dividends.
B) Net income represents sales minus operating expenses at a specific point in time.
C) Negative net income reduces a company’s cash balance.
D) Net income represents income that may be reinvested in the firm or distributed to its owners.

Answer 10

Answer: D

Question 11

Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period? 
A) Balance Sheet
B) Statement of Cash Flows
C) Income Statement
D) Sources and Uses of Funds Statement

Answer 11

Answer: C

Question 12

What information does a firm’s income statement provide to the viewing public?
A) an itemization of all of a firm’s assets and liabilities for a defined period of time
B) a complete listing of all of a firm’s cash receipts and cash expenditures for a defined period of time
C) a report of revenues and expenses for a defined period of time
D) a report of investments made and their cost for a specific period of time

Answer 12

Answer: C

Question 13

PDQ Corp. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. What is PDQ's EBIT? 
A) $850,000
B) $875,000
C) $900,000
D) $1,300,000

Answer 13

Answer: C

Question 14

PDQ Corp. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is PDQ's net income? 
A) $288,000
B) $350,000
C) $377,000
D) $390,000

Answer 14

Answer: D

Question 15

Corporation B reported earnings per share of $10.  Corporation B has 100,000 shares of common stock outstanding and reported an increase in owners equity of $400,000 for the period.  Corporation B paid $50,000 in interest expense during the period.  Corporation B paid dividends per share of
A) $6.00.
B) $5.50.
C) $6.50.
D) $14.003.

Answer 15

Answer: A

Question 16

The increase in owners equity for a given period is equal to
A) positive net cash flow minus dividends.
B) net income minus dividends.
C) sales minus dividends.
D) gross profit minus distributions to shareholders.

Answer 16

Answer: B

Question 17

A firm's financing costs include
A) depreciation expense.
B) interest exposure.
C) costs of goods sold.
D) both A and B.

Answer 17

Answer: B

Question 18

Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock. The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased. Therefore,
A) Corporation A’s operating income will decrease due to higher interest expense.
B) Corporation A’s net income will increase due to the tax deductibility of interest expense.
C) Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment.
D) Corporation A’s gross profit will decrease.

Answer 18

Answer: B

Question 19

Gross profit is equal to 
A) profits plus depreciation. 
B) revenues - expenses.
C) earnings before taxes minus taxes payable.
D) sales - cost of goods sold.

Answer 19

Answer: D

Question 20

An income statement may be represented as follows:
A) Sales - Liabilities = Profits.
B) Revenues - Liabilities = Net Income.
C) Sales - Expenses = Retained Earnings.
D) Sales - Expenses = Profits.

Answer 20

Answer: D

Question 21

Jones Company
Financial Information
December 2009 December 2010

Net Income $2,000 $4,000
Accounts receivable 750 950
Accumulated depreciation 1,000 1,500
Common stock 4,500 5000
Paid-in capital 7,500 8500
Retained earnings 1,500 3,500
Accounts payable 750 750

Based on the information in Table 3-1, calculate the amount of dividends paid by Jones Company in 2010 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable). 
A) $2,000
B) $2,500
C) $3,500
D) $4,000

Answer 21

Answer: A

Question 22

Jones Company
Financial Information
December 2009 December 2010

Net Income $2,000 $4,000
Accounts receivable 750 950
Accumulated depreciation 1,000 1,500
Common stock 4,500 5000
Paid-in capital 7,500 8500
Retained earnings 1,500 3,500
Accounts payable 750 750

Based on the information in Table 3-1, assuming that no assets were disposed of during 2010, the amount of depreciation expense was
A) $375.
B) $500.
C) $2,500.
D) $3,500.

Answer 22

Answer: B

Question 23

Jones Company
Financial Information
December 2009 December 2010

Net Income $2,000 $4,000
Accounts receivable 750 950
Accumulated depreciation 1,000 1,500
Common stock 4,500 5000
Paid-in capital 7,500 8500
Retained earnings 1,500 3,500
Accounts payable 750 750

Based on the information in Table 3-1, assuming that no common stock was repurchased during the year, the firm issued how much new common stock during 2010? 
A) $500
B) $1,000
C) $1,500
D) $2,000

Answer 23

Answer: C

Question 24

The December 31, 2009 balance sheet shows net fixed assets of $150,000 and the December 31, 2010 balance sheet shows net fixed assets of $250,000.  Depreciation expense for 2009 is $25,000 and depreciation expense for 2010 is $35,000.  Based on this information, the cost of fixed assets purchased during 2010 is 
A) $100,000.
B) $110,000.
C) $135,000.
D) $160,000.

Answer 24

Answer: C