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Accounting: What the Numbers Mean, 5/e

David H. Marshall, Millikin University
Wayne W. McManus, International College of the Cayman Islands
Daniel F. Viele, Webster University

Fundamental Interpretations Made from Financial Statement Data

Multiple Choice Quiz

Please answer all questions


1	Return on Investment (ROI) can be described or computed in each of the following ways, except:
		A)	Amount Invested / Amount of Return = ROI
		B)	Net Income / Average Total Assets = ROI
		C)	(Net Income / Sales) x (Sales / Average Total Assets) = ROI
		D)	Turnover x Margin = ROI
		E)	All of the above describe ROI.


2	Working capital includes all of the following accounts except:
		A)	Accounts Payable
		B)	Cash
		C)	Retained Earnings
		D)	Merchandise Inventory
		E)	Accounts Receivable


3	Which of the following would not decrease working capital?
		A)	A decrease in Cash.
		B)	An increase in Accounts Payable.
		C)	An increase in Merchandise Inventory.
		D)	A decrease in Accounts Receivable.
		E)	All of the above decrease working capital.


4	Assume that Kulpa Company has a current ratio of 0.7. Which of the following transactions would increase this ratio?
		A)	Paying off Long-term Debt with Cash.
		B)	Selling Merchandise Inventory at cost for Cash.
		C)	Collecting Accounts Receivable in Cash.
		D)	Paying off Accounts Payable with Cash.
		E)	Purchasing Merchandise Inventory on credit.


5	Financial statement ratios support informed judgments and decision making most effectively when:
		A)	viewed for a single year.
		B)	viewed as a trend of entity data.
		C)	compared to an industry average for the most recent year.
		D)	the trend of entity data is compared to the trend of industry data.
		E)	the trend of entity data is compared to industry data for the most recent year.


6	The return on investment measure of performance is:
		A)	relevant only to business enterprises.
		B)	used by individuals to compare investment performance.
		C)	calculated using sales as the amount of return.
		D)	calculated using total assets at the beginning of the period as the amount of investment.
		E)	calculated using average owners' equity as the amount of investment.


7	An advantage of the DuPont model for calculating ROI is that it:
		A)	focuses on asset utilization as well as net income.
		B)	is easier to use than the straightforward ROI formula.
		C)	uses average assets whereas the straightforward ROI formula does not.
		D)	uses owners' equity.
		E)	breaks ROI into its margin and return components.


8	Return on equity:
		A)	Will be the same as return on investment.
		B)	Relates dividends and turnover.
		C)	Relates dividends and owners' equity.
		D)	Relates net income and owners' equity.
		E)	Uses net cash flows as the measure of return.


9	Which of the following accounts is part of working capital?
		A)	Retained Earnings
		B)	Sales
		C)	Merchandise Inventory
		D)	Common Stock
		E)	Long-Term Debt


10	For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is:
		A)	Raises the current ratio.
		B)	Lowers the current ratio.
		C)	Doesn't affect the current ratio.
		D)	Depends on the amount paid.
		E)	Not determinable based on the facts given.

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