Fall 2013
Copyright © School of Accountancy, Arizona State University
These practice questions are intended to provide a useful (but not necessarily comprehensive) review of the
“new” concepts we have discussed since Exam 3. It is NOT intended to be your primary source of review for
the exam. To get the most benefit from this material, you should work this with CLOSED notes and books (but
should use along with the posted Exam 4/Final Exam formula page).
1.______ Both Alpha Corporation and Omega Company are in the smart phone business. Alpha Corp has a PE
ratio that is twice as large as Omega Company. What does this imply about these companies?
a.
Alpha has a larger Return on Equity (ROE) than Omega
b.
Alpha has higher leverage than Omega
c.
Alpha has higher expected earnings growth than Omega
d.
Alpha had a higher stock price per share than Omega
e.
Alpha has a higher earnings per share (EPS) than Omega
2.______ Dupont analysis recognizes that return on equity can be broken down into three important aspects of
return, which are
a.
Net profit margin, asset turnover and return on assets
b.
Net profit margin, asset turnover and assets-to-equity
c.
Net profit margin, return on assets and assets-to-equity
d.
Asset turnover, return on assets and assets-to-equity
3.______ Pisa Company wants to increase earnings per share (EPS) next year. While they could increase EPS
by increasing net income, they could also increase EPS by
a.
Issuing more shares of common stock
b.
Issuing more long-term debt
c.
Reducing their liabilities
d.
Repurchasing shares of common stock
4.______ When analyzing a company's financial leverage ratio, if the ratio has a value that is greater than 2.0,
then the company has:
a. less debt than equity
b. more debt than equity
c. equal amounts of debt and equity
d. none of these choices are correct
ACC231-Fall 2013 –Practice Questions for Exam 4/Final Exam - Solutions
This practice focuses on Financial Analysis and Statement of Cash Flows
Fall 2013
Copyright © School of Accountancy, Arizona State University
Sun Devils Corporation
Sun Devils Corporation
Wildcats Inc.
2013
2012
2013
Debt Ratio
38.5%
47.1%
61.0%
Debt-to-Equity Ratio
0.63
0.89
1.564
Financial Leverage
1.626
1.89
2.564
Total Assets Turnover
1.11
1.25
1.90
Current Ratio
2.15
2.30
1.60
ROA
19.87%
24.0%
16.15%
ROE
32.3%
45.4%
41.4%
Times Interest Earned
12.88
8.52
7.54
Divided payout ratio
18.8%
20.8%
11.2%
Net Profit Margin
17.9%
19.2%
8.5%
5.______ Refer to Sun Devils Corporation. Which of the following statement is correct?
a.
In 2013, creditors had greater claim on assets than shareholders did.
b.
In 2012, shareholders had greater claim on assets than creditors did.
c.
Efficiency increased from 2012 to 2013.
d.
Liquidity increased from 2012 to 2013.
Debt-to-equity<1, so shareholders had greater claim on assets than creditors did.
Efficiency decreased (Total assets turnover and ROA decreased)
Liquidity decreased (Current Ratio decreased)
6.______ Refer to Sun Devils Corporation. From year 2012 to 2013, Sun Devils Corporation’s
a.
profitability improved
b.
efficiency improved
c.
creditor's Interest payments were more secure
d.
shareholders received a greater percentage of income as dividends
Profitability decreased (ROA, ROE, Net Profit Margin decreased)
Efficiency decreased (Total assets turnover and ROA decreased)
Times Interest Earned improved
Divided payout ratio decreased
7.______ Refer to Sun Devils Corporation. In 2013, compared to its peer Wildcats Inc., Sun Devils Corporation
a.
has higher risk level
b.
has higher ability to pay back short-term debts
c.
has lower ability to pay interests on its debts
d.
more efficiently used its assets in generating sales
Debt-to-equity: Sun Devils < ABC Inc Sun Devils has lower risk level
Current ratio: Sun Devils > ABC Inc Sun Devils has higher ability to pay back short-term debts
Times Interest Earned: Sun Devils > ABC Inc Sun Devils has higher ability to pay interests on its debts
Total assets turnover: Sun Devils < ABC Inc Sun Devils less efficiently used its assets in generating sales
8.______ Refer to Sun Devils Corporation and its peer Wildcats Inc. In 2013, which company is more likely to
have adopted a “product differentiator” operating strategy?
a.
Sun Devils Corporation
b.
Wildcats Inc.
c.
Cannot tell
Fall 2013
Copyright © School of Accountancy, Arizona State University
9.______Horizontal analysis is analysis
a. of all ratios that increased or decreased over past accounting periods.
b. in which a percentage is calculated for the relationship between two different items on a single
financial statement or for two items to each other on two different financial statements
c. in which all items are presented as a percentage of one selected/specific item on a financial
statement.
d. of percentage changes in an account from one year to another.
10. ______ Use the following selected data from the financial statements of Padua's Hardware Company.
2013
2012
Accounts receivable
$ 60,000
$ 38,000
Merchandise inventory
12,000
16,000
Total assets
450,000
380,000
Net sales
380,000
270,000
Cost of goods sold
160,000
210,000
Gross Profit
220,000
60,000
Which of the following results would be found through a vertical analysis of the balance sheet OR
the income statement of Padua's Hardware? (You do not need to determine if the % stated in each
answer is correct - assume that they all are. You just need to decide which statement regarding
vertical analysis is correct “overall”.)
a. Cost of goods sold increased 23.8% from 2012 to 2013.
b. Gross profit is 57.9% of net sales for 2013.
c. Total assets increased 18.4% from 2012 to 2013.
d. Accounts receivable increased 57.9% from 2012 to 2013.
11. ______ Which of the following ratios is not a debt management ratio?
a. times interest earned
b. debt-to-equity ratio
c. long-term debt-to-equity ratio
d. return on equity ratio
12. ______ Proceeds from issuance of long-term debt would appear on the statement of cash flows as
a.
Cash outflow from operating activities
b.
Cash inflow from operating activities
c.
Cash outflow from investing activities
d.
Cash inflow from investing activities
e.
Cash outflow from financing activities
f.
Cash inflow from financing activities
13. ______ The purchase of treasury stock will have what impact on the statement of cash flows?
a.
Cash outflow from operating activities
b.
Cash inflow from operating activities
c.
Cash outflow from investing activities
d.
Cash inflow from investing activities
e.
Cash outflow from financing activities
f.
Cash inflow from financing activities
Fall 2013
Copyright © School of Accountancy, Arizona State University
14. ______ Cash inflows or outflows from investing activities would involve all of the following EXCEPT
a.
Purchase of marketable securities
b.
Receipt of interest income on short-term investments
c.
Proceeds from the sale of equipment
d.
Purchase of buildings and land
15. ______ Which of the following transactions has an effect on the statement of cash flows?
a.
A four-for-one stock split
b.
A 20% stock dividend
c.
The declaration of a cash dividend
d.
The issuance of preferred stock
16. ______ The following information is available from the financial statements of Cinque Terre Corporation
for the year ended December 31, 2013.
Net Income
$400,000
Increase in Accounts Payable
$10,000
Depreciation Expense
$20,000
Payment of Dividends
$5,000
Decrease in Accounts Receivable
$15,000
Increase in inventories
$10,000
Decrease in income taxes payable
$20,000
What is Cinque Terre’s net cash flows from operating activities?
a.
$385,000
b.
$395,000
c.
$405,000
d.
$415,000
e.
$425,000
f.
$435,000
17. ______ Payment of dividends would appear on the Statement of Cash Flows as
a. an investing activity
b. a financing activity
c. an operating activity
d. payment of dividends would not appear on the Statement of Cash Flows
18. ______ A company purchases equipment for $29,000 cash. This transaction should be shown on the
statement of cash flows under
a. none (this does not appear on the statement of cash flows)
b. financing activities
c. operating activities
d. investing activities
19. ______ A decrease in inventory on the balance sheet causes what impact on the Statement of Cash Flows?
a. a decrease in cash flows in the investing activities section of the SCF
b. an increase in cash flows in the investing activities section of the SCF
c. an increase in cash flows in the operating activities section of the SCF
d. a decrease in cash flows in the operating activities section of the SCF
Fall 2013
Copyright © School of Accountancy, Arizona State University
20. ______ The Statement of Cash Flows
a. - along with the Balance Sheet and Income Statement - is prepared on the accrual basis.
b. is prepared as of a point in time.
c. - along with the Balance Sheet - is used to analyze a company’s liquidity.
d. ties the Balance Sheet to the Statement of Stockholders’ Equity.
21. ______ Upon reviewing Roma’s Statement of Cash Flows, the following was noted:
Cash flows from operating activities
$ 35,000
Cash flows from investing activities
75,000
Cash flows from financing activities
(125,000)
From this information, the most likely explanation is that Roma is
a. using cash from operations and selling long-term assets to pay back debt.
b. using cash from operations and borrowing to purchase long-term assets.
c. using its profits to expand growth.
d using cash from investors to provide for operations.
22. ______ Appian Way, Inc.’s cash ratio has decreased in 2013 compared to 2012. In order to ascertain
the PRIMARY cause of the ratio’s decrease, an analyst should
a. Look at the dollar amount change in the numerator and the dollar amount change in the
denominator. The primary cause of the ratio’s decrease will be from whichever one had the
highest dollar amount change.
b. Look at the company’s Statement of Cash Flows to see if the net change in cash indicates that the
company had an overall outflow of cash. A net decrease in cash would indicate that that this is
what caused the cash ratio to decrease.
c. Look at the company’s Statement of Cash Flows to see if cash flow from operating activities has
increased or decreased. A decrease in the cash flows from operating activities would have
caused the cash ratio to decrease.
d. Look at the growth rate change in the numerator and the growth rate change in the denominator.
The primary cause of the ratio’s decrease will be from whichever one had the highest growth rate
change.
23. ______ When using the Indirect Method for Preparing the Statement of Cash Flows, how is the gain from
selling a long-term fixed asset reported?
a. As a separate line item increase in the Investing activities section.
b. As a separate line item decrease to Net Income in the Operating activities section.
c. As a separate line item decrease in the Financing activities section.
d. As a separate line item increase to Net Income in the Operating activities section.
e. Not reported as a separate line item anywhere on the Statement of Cash Flows.
24. ______ Almost all current liabilities affect the operating activities section of the Statement of Cash
Flows, but a current liability that would not affect cash provided by operating activities is
a. accounts payable
b. interest payable
c. notes payable related to borrowing money for financing the business
d. taxes payable
e. notes payable related to purchasing inventory from a vendor
Fall 2013
Copyright © School of Accountancy, Arizona State University
25. ______ Tuscany Inc. reported the following information for 2013 and 2012:
2013
2012
Accounts receivable
$57,000
$51,000
Inventories
39,000
42,000
Accounts payable
48,000
43,000
Net income
60,000
40,000
Depreciation expense
8,000
4,000
If Tuscany uses the Indirect Method to prepare the operating activities section of the Statement of Cash
Flows, what amount will be reported as net cash inflow from operating activities for 2013?
a. $62,000
b. $66,000
c. $26,000
d. $70,000
Ciao Company
Use the selected data from Ciao Company’s financial Statements to answer the questions that follow.
2013
2012
Current liabilities
$ 230,000
$ 160,000
Long-term debt
120,000
320,000
Stockholders’ equity
420,000
540,000
Cash payments for additions to plant and equipment
45,000
32,000
Net cash flow from operating activities
80,000
51,000
Bond Principal payments
12,000
8,000
Net operating cash flows before interest and taxes payments
68,000
43,000
Net income
90,000
72,000
Interest expense
8,500
11,500
Income tax expense
16,000
14,500
Dividends paid
15,000
30,000
26. ______ Refer to Ciao Company. The cash flow adequacy ratio for 2013 is an indicator that Ciao Company
a. has been effectively able to use operations to finance its acquisitions of productive assets.
b. has increased profits by $13,000.
c. has decreased cash, but this has been offset by the increase in net income.
d. has net income that is more than it would have been had dividends of $30,000 been paid.
27. ______ Refer to Ciao Company. Their debt-to-equity ratio for 2013 is
a. an indicator that Ciao Company's ability to meet current interest payments to creditors is
increasing.
b. an indicator that for every $1 of capital that stockholders provided, creditors provided $0.83.
c. increasing slightly from 2012 to 2013.
d. an indicator that Ciao Company relied on stockholders for funds more in 2012 than they did in
2013.
Debt-to-equity ratio=total liabilities/total stockholders’ equity
FY 2013: (230,000+120,000)/ 420,000=0.83
FY 2012: (160,000+320,000)/ 540,000=0.89
28. ______ Refer to Ciao Company. The company’s times interest earned ratio for 2013 is
a. shows an increase in the company's ability to pay its current debt principal obligations when they
come due.
b. indicates the company cannot meet its current year interest payments out of current year earnings.
c. increased, which indicates the company's ability to meet its future interest expense obligations.
Fall 2013
Copyright © School of Accountancy, Arizona State University
30. ______ Trenitalia Company declared and paid $1,000,000 in dividends to the common stockholders. The
effect of this transaction is that the
a. earnings per share decreased.
b. current ratio increased.
c. both the debt-to-equity and debt ratios increased.
d. earnings per share increased.
Dr. Dividend 1,000,000
Cr. Cash 1000,000
Assets
Liabilities
Equity
D $1000,000 Cash
NE
D $1000,000 Retained Earnings because Dividends
will be closed to Retained Earnings
(A&D) EPS=Net Income/# of common shares outstanding not effected
(B) Current Ratio=Current Assets / Current Liabilities decreased because the decrease in Cash decreases current assets
but current liabilities remains the same
(C) Debt to Equity ratio=Total liabilities/ Total Equity increased because Total liabilities remains the same and Total
Equity decreases (Same logic for Debt Ratio = Total liabilities / Total Assets since denominator decreases)
31. ______ Euro Company purchased $1,000 of inventory on credit. The effect of this transaction is that the
a. earnings per share decreased.
b. debt ratio decreased
c. debt ratio increased
d. debt ratio will change in most cases, but cannot tell if it will increase or decrease without looking
at the balances in the impacted accounts prior to the inventory purchase
Dr. Inventory xxx
Cr. A/P xxx
Assets
Liabilities
Equity
I (inventory)
I (A/P)
NE
(A) EPS=Net Income/# of common shares outstanding not effected
(B) Debt Ratio =Total liabilities – Total Assets In general, numerator would be lower than denominator, so change
would not cause ratio to decrease
(C and D) Debt Ratio = Total liabilities – Total Assets In general, since the numerator balance for TL would be lower
than the denominator balance for TA, the ratio would increase.
(however, if there was a situation where the TL = TA (ie, $0
S/E), the ratio would remain the same
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