When a balance sheet amount is related to an income statement amount in computing a ratio,

a. The income statement amount should be converted to an average for the year.
b. Comparisons with industry ratios are not meaningful.
c. The balance sheet amount should be converted to an average for the year.
d. The ratio loses its historical perspective because a beginning-of-the-year amount is combined with an end-of-the-
year amount.

2. How are financial ratios used in decision making?

a. They can help identify the reasons for success and failure in business, but decision making requires information
beyond the ratios.
b. They remove the uncertainty of the business environment.
c. They aren’t useful because decision making is too complex.
d. They give clear signals about the appropriate action to take.

3. A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the
financial analyst to do?
a. Evaluate financial statements of companies within a given industry of approximately the same value.
b. Determine which companies in the same industry are at approximately the same stage of development.
c. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between
companies within a given industry without respect to relative size.
d. Ascertain the relative potential of companies of similar size in different industries.

4. Which of the following is not revealed on a common size balance sheet?

a. The debt structure of a firm.
b. The capital structure of a firm.
c. The peso amount of assets and liabilities.
d. The distribution of assets in which funds are invested.

5. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what change if any, will occur
in total assets?
a. Assets will be increased. c. No change in total assets.
b. Assets will be decreased. d. None of the above.

Which of the following actions will increase a company’s quick ratio?

a. Reduce inventories and use the proceeds to reduce long-term debt.
b. Reduce inventories and use the proceeds to reduce current liabilities.
c. Issue short-term debt and use the proceeds to purchase inventory.
d. Issue long-term debt and use the proceeds to purchase fixed assets.
e. Issue equity and use the proceeds to purchase inventory.

6. On December 31, 1991, Northpark Co. collected a receivable due from a major customer. Which of the following
ratios would be increased by this transaction?
a. Inventory turnover ratio. c. Current ratio.
b. Receivable turnover ratio. d. Quick ratio.

7. Jack & Sons, Inc. has a 2 to 1 acid test (quick) ratio. This ratio would decrease to less than 2 to 1 if the company
a. Purchased inventory on open account.
b. Sold merchandise on open account that earned a normal gross margin.
c. Collected an account receivable.
d. Paid an account payable.

8. The ratio that measures a firm's ability to generate earnings from its resources is
A. Days' sales in inventory. C. Days' sales in receivables.
B. Sales to working capital. D. Asset turnover.

9. In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current
ratio is the better company?
a. The current ratio includes assets other than cash.
b. A high current ratio may indicate inadequate inventory on hand.
c. A high current ratio may indicate inefficient use of various assets and liabilities.
d. The two companies may define working capital in different terms.

10. Mabuhay Corp. has current assets of P180,000 and current liabilities of P360,000. Which of the following transactions
would improve Mabuhay’s current ratio?
a. Refinancing a P60,000 long-term mortgage with a short-term note.
 b. Collecting P20,000 of short-term accounts receivable.
c. Purchasing P100,000 of merchandise inventory with a short-term accounts payable.
d. Paying P40,000 of short-term accounts payable.

True/False

1. One of the advantages of the corporate form of organization is that there is no double taxation.
2. The partnership form of organization has easy transferability of ownership.
3. One of the disadvantages of the sole proprietorship form of organi-zation is that there is unlimited liability.
4. One disadvantage of forming a corporation is that your shareholders have limited liability.
5. Relative to sole proprietorships, corporations generally face more regulations, but find it easier to raise capital.
6. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation
does not protect the firm’s managers in the same way.
7. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and
managers, that is, the owners and managers are the corporation.
8. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business
organization.
9. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in
financial markets than other organizational forms.
10. Sole proprietorships are subject to more regulations than corporations.

1. The working capital of Regalado Co. is P600,000 and its current ratio is 3 to 1. The amount of current assets is
a. P900,000 b. P1,200,000 c. P600,000 d. P1,800,000

2. Blasso Co.’s net accounts receivable were $500,000 at December 31, 2000 and $600,000 at December 31, 2001.
Net cash sales for 2001 were $200,000. The accounts receivable turnover for 2001 was 5.0. What were Blasso’s
total net sales for 2001?
a. $2,950,000 b. $3,000,000 c. $3,200,000 d. $5,500,000

3. During 1989, Rand Co. purchased $960,000 of inventory. The cost of goods sold for 1989 was $900,000, and the
ending inventory at December 31, 1989 was $180,000. What was the inventory turnover for 1989?
a. 6.4 b. 6.0 c. 5.3 d. 5.0

4. Last year's asset turnover ratio for Wuerffel Airlines was 2.5. This year, sales increased by 20% and average total
assets increased by 10%. What is the new asset turnover ratio?
A. 2.50 B. 2.59 C. 2.73 D. 3.00

5. Perry Technologies Inc. had the following financial information for the past year:
Sales $860,000 Inventory turnover 8x
Quick ratio 1.5 Current ratio 1.75
What were Perry’s current liabilities?
a. $430,000 b. $500,000 c. $107,500 d. $ 61,429

6. Last year, Quayle Energy had sales of $200 million and its inventory turnover ratio was 5.0. The company’s
current assets totaled $100 million and its current ratio was 1.2. What was the company’s quick ratio?
a. 1.20 b. 1.39 c. 0.72 d. 0.55

7. Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The company has $2 million in
sales and its current liabilities are $1 million. What is the company’s inventory turnover ratio?
a. 5.0 b. 5.2 c. 5.5 d. 6.0
8. Vance Motors has current assets of $1.2 million. The company’s current ratio is 1.2, its quick ratio is 0.7, and its
inventory turnover ratio is 4. The company would like to increase its inventory turnover ratio to the industry
average, which is 5, without reducing its sales. Any reductions in inventory will be used to reduce the company’s
current liabilities. What will be the company’s current ratio, assuming that it is successful in improving its
inventory turnover ratio to 5?
a. 1.33 b. 1.67 c. 1.22 d. 0.75

9. The following ratios and data were computed from the 1997 financial statements of Star Co.:
Current ratio 1.5
Working capital P20,000
Debt/equity ratio .8
Return on equity .2
 If net income for 1997 is P40,000, the balance sheet at the end of 1997 total assets of
a. P340,000 b. P360,000 c. P300,000 d. P400,000

10. An enterprise has total asset turnover of 3.5 times and a total debt to total assets ratio of 70%. If the enterprise
has total debt of $1,000,000, it has a sales level of
A. $5,000,000.00 B. $2,450,000.00 C. $408,163.26 D. $200,000.00

Problems:

Selected data from 3KM Corporation’s year-end financial statements are presented below. The difference between
average and ending inventory is immaterial. COGS was used in computing inventory turnover ratio.
Current ratio 2.0
Quick ratio 1.5
Current Liabilities P120,000
Inventory turnover 8 times
Gross profit margin 40% on sales

1. 3KM’s sales for the year was?

2. 3KM’s current asset was reported at?

3. 3KM’s COGS for the year was?

4. 3KM’s gross profit for the year was?

5. 3KM’s inventory was reported at?