This assignment is part of the instructor designated points. A hardcopy must be submitted at the
beginning of your class. Late submissions will not be accepted. The assignment is late (1) after the
assignment is collected, (2) your professor asks if there are any more submissions, and (3) no one
offers a submission. No assignment will be accepted by email or any electronic method. This
assignment is due on Monday (April 21, 2014). Circle the letter of the best answer. This assignment is
worth eight (8) points. GIVING OR RECEIVING ANY ASSISTANCE ON THIS ASSIGNMENT IS CHEATING.
1.
Preparation of a common-size income statement requires the use of a “base amount.” The base
amount is usually
a.
Net income.
b.
Gross profit.
c.
Net sales.
d.
Total assets.
C is the correct answer.
See page 612.
2.
Which of the statements about the cost of goods sold percentage and operating expenses
percentage is the correct statement?
a.
A decrease in the cost of goods sold percentage increases the gross profit percentage
but does not affect the net profit percentage.
b.
An increase in the cost of goods sold percentage increases both the gross profit (margin)
percentage and the net profit margin percentage.
c.
A decrease in the operating expenses percentage decreases the net profit percentage
and the gross profit percentage.
d.
An increase in the operating expenses percentage decreases the net profit percentage
but does not affect the gross profit percentage.
D is the correct answer.
Assume the following numbers:
Amount
$1,000
1,000/1,000
Percentage
100.0%
700
700/1,000
70.0%
$ 300
300/1,000
30.0%
Operating Expenses
200
200/1,000
20.0%
Income Tax Expense
30
30/1,000
3.0%
70
70/1,000
7.0%
Net Sales Revenue
Cost of Sales (Cost of Goods Sold)
Gross Profit
Net Income
$
1
To decrease the cost of goods sold percentage you must decrease cost of goods sold and/or
increase net sales revenue. Either or both increases both the gross profit percentage and the
net income percentage. Therefore A is not correct.
To increase the cost of goods sold percentage requires an increase in cost of goods sold
and/or a decrease in net sales revenue. Either or both decreases both the gross profit
percentage and the net profit percentage. Therefore B is not correct.
A decrease in the operating expenses percentage decreases net profit percentage but has no
effect on the gross profit percentage. Therefore C is not correct.
3.
DMG Company currently has a current ratio of 5. Which of the following transactions would
increase the current ratio?
a.
Using cash to pay an accounts payable.
b.
Collecting an accounts receivable.
c.
Accruing an expense.
d.
Receiving cash from signing a six-month note payable.
A is correct.
If current assets are 500 and current liabilities are 100 the current ratio is 5 (500/100 = 5).
Transaction A would be:
Accounts Payable
Cash
1
1
The current ratio would now be (500 – 1)/(100 – 1) = 5.04 An increase
Transaction B would be:
Cash
1
Accounts Receivable
1
The current ratio would now be (500 + 1 – 1)/100 = 5 No change
Transaction C would be:
Salary Expense
Salary Payable
1
1
The current ratio would now be (500)/(100 + 1) = 4.95 A decrease
2
Transaction D would be:
Cash
1
Note Payable (current)
1
The current ratio would now be:
(500 + 1)/(100 + 1) = 4.96 a Decrease
4.
DMG Company’s current assets exceed its current liabilities by $100,000. Total current liabilities
are 30% of the difference between current assets and current liabilities. What is DMG
Company’s current ratio?
a.
1:1
b.
3:1
c.
4.33:1
d.
5.13:1
e.
6:1
C is correct.
Current liabilities = .3 ($100,000) = $30,000
Current assets = Current liabilities plus $100,000 = $30,000 + $100,000 = $130,000
Current ratio = current assets/current liabilities = $130,000/$30,000 = 4.3333333333.
5.
DMG Company reported the following for 2014:
Net Income
Total Assets
Total Stockholders’ Equity
$150,000
$900,000
$500,000
What is DMG Company’s debt-to-asset ratio?
a.
16.67%
b.
30.0%
c.
37.5%
d.
44.44%
e.
55.56%
D is correct.
3
Total Liabilities (Debt) = Total Assets – Total Stockholders’ Equity = $900,000 - $500,000 =
$400,000
Debt-to-assets ratio = Total Debt/Total Assets = $400,000/$900,000 = 44.44%
6.
DMG Company had net income of $1,000,000 in 2014 and $800,000 in 2013. The year-to-year
percentage change in net income is:
a.
20% decrease
b.
25% decrease
c.
20% increase
d.
25% increase
D is the correct answer.
($1,000,000 - $800,000)/$800,000 = 0.25 or 25% It is an increase because net income went
from $800,000 in 2013 to $1,000,000 in 2014.
See page 609 and Exhibit 13.2 on page 610.
7.
Which of the following is not used to compute the quick ratio?
a.
Cash
b.
Accounts receivable, net
c.
Short-term investments
d.
Current liabilities
e.
Inventory
E is the correct answer.
See formula in Exhibit 13.5 on page 613.
8.
If everything else remains the same (everything else is equal), when a company’s net income
increases
a.
earnings per share decreases and return on equity increases.
b.
earnings per share and return on equity both decrease.
c.
earnings per share increases and return on equity decreases.
d.
earnings per share and return on equity both increase.
D is the correct answer.
Earnings per share = Net income/Average number of common shares outstanding
4
Return on Equity = Net Income/Average Stockholders’ Equity
Assume the following:
EPS = $100/100 shares = $1 per share
ROE = $100/$400 = .25
If net income rises to $110 and everything else remains the same then:
EPS = $110/100 shares = $1.10 per share
ROE = $110/$400 = .275 or 27.5%
Both EPS and ROE increase.
5