Unit 6: Ratio Analysis

Subunit 1: Qualities of Ratio Analysis

Source: CMA 0408 1-227

Question: 1 A chief financial officer has been tracking the activities of the company’s nearest competitor for several years.
Among other trends, the CFO has noticed that this competitor is able to take advantage of new technology and
bring new products to market more quickly than the CFO’s company. In order to determine the reason for this, the
CFO has been reviewing the following data regarding the two companies:
Company Competitor

Accounts receivable turnover 6.85 7.35

 Return on assets 15.34 14.74

Times interest earned 15.65 12.45

Current ratio 2.11 1.23

Debt/equity ratio 42.16 55.83

Degree of financial leverage 1.06 1.81

Price/earnings ratio 26.56 26.15

On the basis of this information, which one of the following is the best initial strategy for the CFO to follow in
attempting to improve the flexibility of the company?
A. Seek cost cutting measures that would increase the company’s profitability.
B. Investigate ways to improve asset efficiency and turnover times to improve liquidity.
C. Seek additional sources of outside financing for new product introductions.
D. Increase the company’s investment in short-term securities to increase the current ratio.
Source: CMA 0408 1-251

Question: 2 A bank has received loan applications from three companies in the plastics manufacturing business and
currently has the funds to grant only one of these requests. Specific data shown below has been selected from
these applications for review and comparison with industry averages.
S R H Industry

Total sales (millions) $4.27 $3.91 $4.86 $4.30

Net profit margin 9.55% 9.85% 10.05% 9.65%

Current ratio 1.82 2.02 1.96 1.95

Return on assets 12.0% 12.6% 11.4% 12.4%

 Debt/equity ratio 52.5% 44.6% 49.6% 48.3%

Financial leverage 1.30 1.02 1.56 1.33

Based on the information above, select the strategy that should be the most beneficial to the bank.
A. The bank should not grant any loans, as none of these companies represents a good credit risk.
B. Grant the loan to S, as all the company’s data approximate the industry average.
C. Grant the loan to R, as both the debt/equity ratio and degree of financial leverage are below the
industry average.
D. Grant the loan to H, as the company has the highest net profit margin and degree of financial leverage.
Source: Publisher

Question: 3 The capacity of the firm’s operations to produce cash inflows is

A. Earnings quality.
B. Earnings power.
C. Solvency.
D. Leverage.

Source: Publisher

Question: 4 When calculating ratios involving income, an adjustment is most likely to be made for
A. Gross profit.
B. Selling expenses.
C. Nonrecurring gains and losses.
D. Fixed overhead costs.
Source: Publisher

Question: 5 Which of the following is an item with high earnings persistence?

 A. Extraordinary gain.
B. Extraordinary loss.
C. Gain on disposal of old equipment.
D. Sales from a new product.

Source: CMA2 0313-(10)

Question: 6 A retail company has experienced rapid growth in sales during the current year. An analyst has
calculated the following ratios for this company.
Prior Year Current Year
Inventory turnover 5.4 9.3
Receivables turnover 4.2 3.5
Fixed asset turnover 2.4 3.6
Quick ratio 1.5 1.2
Based on the above, the analyst may conclude that sales increased due to more
A. Competitive pricing.
B. Favorable credit policies.
C. Stores opening in the current year.
D. Control over inventory levels.
Source: CMA 0314 2-41

Question: 7 The key difference between accounting profit and economic profit is that economic profit
A. Highlights the historical cost concept.
B. Calculates changes in supply using EOQ models.
C. Excludes income tax and interest expense.
 D. Considers the opportunity cost of equity.

Source: CMA 0913 2-56

Question: 8 A company could negatively affect its earnings quality if it frequently

A. Constructed plants in countries with unstable currency.
B. Invested long-term in an erratic stock or bond market.
C. Materially changed accounting estimates.
D. Offered significant sales discounts.

Subunit 2: Liquidity Ratios – Calculations

Source: Publisher

Fact Pattern:
Tosh Enterprises reported the following account information:
Accounts receivable $400,000 Inventory $800,000
Accounts payable 260,000 Land 500,000
Bonds payable, due in 10 years 600,000 Short-term prepaid expense 80,000
Cash 200,000
Interest payable, due in 3 months 20,000

Question: 9 The current ratio for Tosh Enterprises is

A. 1.68
 B. 2.14
C. 5.00
D. 5.29

Source: Publisher

Fact Pattern:
Tosh Enterprises reported the following account information:
Accounts receivable $400,000 Inventory $800,000
Accounts payable 260,000 Land 500,000
Bonds payable, due in 10 years 600,000 Short-term prepaid expense 80,000
Cash 200,000
Interest payable, due in 3 months 20,000

Question: 10 What is Tosh Enterprises’ quick (acid test) ratio?

A. 0.68
B. 1.68
C. 2.14
D. 2.31

Source: Publisher

Fact Pattern:
Tosh Enterprises reported the following account information:
Accounts receivable $400,000 Inventory $800,000
 Accounts payable 260,000 Land 500,000
Bonds payable, due in 10 years 600,000 Short-term prepaid expense 80,000
Cash 200,000
Interest payable, due in 3 months 20,000

Question: 11 Tosh Enterprises’ amount of working capital is

A. $600,000
B. $1,120,000
C. $1,200,000
D. $1,220,000

Source: CMA 0205 1-48

Question: 12 A financial analyst has obtained the following data from financial statements:
Cash $ 200,000

Marketable securities 100,000

Accounts receivable, net 300,000

Inventories, net 480,000

Prepaid expenses 120,000

Total current assets $1,200,000

 Accounts payable $250,000
Income taxes 50,000
Accrued liabilities 100,000
Current portion of
long-term debt 200,000

Total current liabilities $600,000

In order to determine ability to pay current obligations, the financial analyst would calculate the cash
ratio as
A. .50
B. .80
C. 1.00
D. 1.20

Source: CIA 590 IV-47

Question: 13 Given an acid test ratio of 2.0, current assets of $5,000, and inventory of $2,000, the value of current
liabilities is
A. $1,500
B. $2,500
C. $3,500
D. $6,000
Source: CMA 0205 1-47
 Question: 14 What is the acid test (or quick) ratio?
Cash $ 10,000

Marketable securities 18,000

Accounts receivable 120,000

Inventories 375,000

Prepaid expenses 12,000

Accounts payable 75,000

Long-term debt -- current portion 20,000

Long-term debt 400,000

Sales 1,650,000

A. 1.56
B. 1.97
C. 2.13
D. 5.63
Source: CIA 594 IV-33

Fact Pattern: A company has a current ratio of 1.4, a quick, or acid test, ratio of 1.2, and the
following partial summary balance sheet:
Cash $ 10
Accounts receivable ___
Inventory ___
 Fixed assets ___
Total assets $100
Current liabilities $___
Long-term liabilities 40
Stockholders’ equity 30
Total liabilities and equity $___

Question: 15 The company has an accounts receivable balance of

A. $26
B. $36
C. $66
D. $100

Source: CIA 1190 IV-40

Fact Pattern: The selected data pertain to Tilghman Company at December 31:
Quick assets $208,000

Acid test ratio 2.6 to 1

Current ratio 3.5 to 1

Net sales for the year $1,800,000

Cost of sales for the year $990,000

Average total assets for the year $1,200,000

 Question: 16 Tilghman Company’s current liabilities at December 31 equal
A. $59,429
B. $80,000
C. $134,857
D. $187,200
Source: CIA 1190 IV-41

Fact Pattern: The selected data pertain to Tilghman Company at December 31:
Quick assets $208,000

Acid test ratio 2.6 to 1

Current ratio 3.5 to 1

Net sales for the year $1,800,000

Cost of sales for the year $990,000

Average total assets for the year $1,200,000

Question: 17 Tilghman Company’s inventory balance at December 31 is

A. $72,000
B. $187,200
C. $231,111
D. $282,857
Source: CMA 697 2-13

Fact Pattern: The information below pertains to Devlin Company.

 Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year Year Year Year

2 1 2 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and 52 51
administrative
Accounts receivable (net) 68 48
Interest expense 8 9
Inventory 90 80
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Income taxes 36 34
Total current assets $255 $216
Investments, at equity 38 30 Net income $ 54 $ 51

Property, plant, and equipment (net) 375 400

Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Notes payable $ 35 $ 18
Accounts payable 70 42
Accrued expenses 5 4
Income taxes payable 15 16
 Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par value,
cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common
stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 18 Devlin Company’s acid test ratio at May 31, Year 2, was
A. 0.60 to 1.
B. 0.90 to 1.
C. 1.14 to 1.
D. 1.86 to 1.
Source: CMA 1296 2-18

Fact Pattern: The Statement of Financial Position for King Products Corporation for the fiscal
years ended June 30, Year 2, and June 30, Year 1, is presented below. Net sales and cost of goods
sold for the year ended June 30, Year 2, were $600,000 and $440,000, respectively.
King Products Corporation
Statement of Financial Position
(in thousands)
 June 30
Year 2 Year 1
Cash $ 60 $ 50
Marketable securities (at market) 40 30
Accounts receivable (net) 90 60
Inventories (at lower of cost or market) 120 100
Prepaid items 30 40
Total current assets $ 340 $280
Land (at cost) $ 200 $190
Building (net) 160 180
Equipment (net) 190 200
Patents (net) 70 34
Goodwill (net) 40 26
Total long-term assets $ 660 $630
Total assets $1,000 $910
Notes payable $ 46 $ 24
Accounts payable 94 56
Accrued interest 30 30
Total current liabilities $ 170 $110
Notes payable, 10% due 12/31/Year 7 $ 20 $ 20
Bonds payable, 12% due 6/30/Year 10 30 30
Total long-term debt $ 50 $ 50
Total liabilities $ 220 $160
Preferred stock -- 5% cumulative, $100 par, nonparticipating,
authorized, issued and outstanding, 2,000 shares $ 200 $200
Common stock -- $10 par, 40,000 shares authorized,
30,000 shares issued and outstanding 300 300
 Additional paid-in capital -- common 150 150
Retained earnings 130 100
Total equity $ 780 $750
Total liabilities & equity $1,000 $910

Question: 19 King Products Corporation’s quick (acid test) ratio at June 30, Year 2, was
A. 0.6
B. 1.1
C. 1.8
D. 2.0
Source: CMA 688 4-1

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal
year. McKeon’s controller is in the process of reviewing the Year 2 budget and calculating some key
ratios based on the budget. McKeon Company monitors yield or return ratios using the average
financial position of the company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
 Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Prepaid expenses 20,000 20,000

Question: 20 McKeon Company’s current ratio for Year 2 is

A. 1.373
B. 1.176
C. 2.118
D. 2.692
Source: CMA2 MM15

Question: 21 A corporation has decided to include certain financial ratios in its year-end annual report to
shareholders. Selected information relating to its most recent fiscal year is provided below.
Cash $10,000

Accounts receivable 20,000

Prepaid expenses 8,000

Inventory 30,000

Available-for-sale securities

At cost 9,000

Fair value at year end 12,000

Accounts payable 15,000

Notes payable (due in 90 days) 25,000

Bonds payable (due in 10 years) 35,000

The quick (acid-test) ratio at year end is
A. 2.00 to 1.
B. 1.925 to 1.
C. 1.80 to 1.
 D. 1.05 to 1.

Source: CMA2 MM15

Question: 22 Selected financial data for a corporation are shown below.

January 1 December 31

Cash $ 48,000 $ 62,000

Accounts receivable (net) 68,000 47,000

Trading securities 42,000 35,000

Inventory 125,000 138,000

Plant and equipment (net) 325,000 424,000

Accounts payable 32,000 84,000

Accrued liabilities 14,000 11,000

Deferred taxes 15,000 9,000

Long-term bonds payable 95,000 77,000

Net income for the year was $96,000. The current ratio at the end of the year is
A. 1.55.
B. 1.71.
C. 2.71.
D. 2.97.
 Source: CIA 1193 IV-36

Question: 23 A service company’s working capital at the beginning of January of the current year was $70,000.
The following transactions occurred during January:
Performed services on account $30,000

Purchased supplies on account 5,000

Consumed supplies 4,000

Purchased office equipment for cash 2,000

Paid short-term bank loan 6,500

Paid salaries 10,000

Accrued salaries 3,500

What is the amount of working capital at the end of January?
A. $90,000
B. $80,500
C. $50,500
D. $47,500
Source: CMA 695 2-1

Fact Pattern:

CPZ Enterprises had the following account information.

Accounts receivable $200,000

 Accounts payable 80,000

Bonds payable, due in 10 years 300,000

Cash 100,000

Interest payable, due in 3 months 10,000

Inventory 400,000

Land 250,000

Notes payable, due in 6 months 50,000

Prepaid expenses 40,000

The company has an operating cycle of 5 months.

Question: 24 The current ratio for CPZ Enterprises is

A. 1.68
B. 2.14
C. 5.00
D. 5.29
Source: CMA 695 2-2

Fact Pattern:

CPZ Enterprises had the following account information.

 Accounts receivable $200,000

Accounts payable 80,000

Bonds payable, due in 10 years 300,000

Cash 100,000

Interest payable, due in 3 months 10,000

Inventory 400,000

Land 250,000

Notes payable, due in 6 months 50,000

Prepaid expenses 40,000

The company has an operating cycle of 5 months.

Question: 25 What is CPZ’s acid test (quick) ratio?

A. 0.68
B. 1.68
C. 2.14
D. 2.31
Source: CMA 693 2-1

Fact Pattern:
 Lisa, Inc.

Statement of Financial Position

December 31, Year 2

(000s)

Assets Year 2 Year 1

Current assets:

Cash $ 30 $ 25

Trading securities 20 15

Accounts receivable (net) 45 30

Inventories (at lower of cost or market) 60 50

Prepaid items 15 20

Total current assets 170 140

Long-term investments:

Securities (at cost) 25 20

Property, plant, & equipment:

Land (at cost) 75 75

Building (net) 80 90

Equipment (net) 95 100

Intangible assets

Patents (net) 35 17

Goodwill (net) 20 13

Total long-term assets 330 315

Total assets $500 $455

Liabilities & Shareholders’ Equity

Current liabilities:

Notes payable $ 23 $ 12

Accounts payable 47 28

Accrued interest 15 15

Total current liabilities 85 55

Long-term debt:

Notes payable 10% due 12/31/Year 9 10 10

Bonds payable 12% due 12/31/Year 8 15 15

 Total long-term debt 25 25

Total liabilities $110 $ 80

Shareholders’ equity:

Preferred -- 5% cumulative, $100 par,

non-participating, 1,000 shares

authorized, issued and outstanding $100 $100

Common -- $10 par 20,000 shares

authorized, 15,000 issued and

outstanding shares 150 150

Additional paid-in capital -- common 75 75

Retained earnings 65 50

Total shareholders’ equity $390 $375

Total liabilities & equity $500 $455

Question: 26 Lisa, Inc.’s acid test (quick) ratio at December 31, Year 2, was
A. 1.1:1.0
B. 1.8:1.0
C. 2.0:1.0
 D. 2.5:1.0
Source: CIA 594 IV-34

Fact Pattern: A company has a current ratio of 1.4, a quick, or acid test, ratio of 1.2, and the
following partial summary balance sheet:
Cash $ 10
Accounts receivable ___
Inventory ___
Fixed assets ___
Total assets $100
Current liabilities $___
Long-term liabilities 40
Stockholders’ equity 30
Total liabilities and equity $___

Question: 27 The company has a fixed assets balance of

A. $16
B. $58
C. $64
D. $84
Source: CIA 592 IV-41

Fact Pattern:
RST Corporation Comparative Income
 Statements for the Years 5 and 6

Year 6 Year 5
Sales (all are credit) $285,000 $200,000
Cost of goods sold 150,000 120,000

Gross profit $135,000 $ 80,000

Selling and administrative expenses 65,000 36,000

Income before interest and income taxes $ 70,000 $ 44,000

Interest expense 3,000 3,000

Income before income taxes $ 67,000 $ 41,000

Income tax expense 27,000 16,000

Net income $ 40,000 $ 25,000

RST Corporation
Comparative Balance Sheets
End of Years 5 and 6

Assets Year 6 Year 5

Current assets:
Cash $ 5,000 $ 4,000
Short-term marketable investments 3,000 2,000
Accounts receivable (net) 16,000 14,000
Inventory 30,000 20,000

Total current assets $ 54,000 $ 40,000

Noncurrent assets:
Long-term investments 11,000 11,000
Property, plant, and equipment 80,000 70,000
Intangibles 3,000 4,000

Total assets $148,000 $125,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 11,000 $ 7,000

Accrued payables 1,000 1,000

Total current liabilities $ 12,000 $ 8,000

Long-term Liabilities:

0% Bonds payable, due in Year 12 30,000 30,000

Total liabilities $ 42,000 $ 38,000

Stockholders’ equity:

Common stock, 2,400 shares, $10 par $ 24,000 $ 24,000

 Retained earnings 82,000 63,000

Total stockholders’ equity $106,000 $ 87,000

Total liabilities and stockholders’ equity $148,000 $125,000

The market value of RST’s common stock at the end of Year Six was $100.00 per share.

Question: 28 RST’s acid test (or quick) ratio at the end of Year 6 is
A. 2.40 to 1.
B. 2.18 to 1.
C. 2.00 to 1.
D. 1.50 to 1.
Source: CMA 0408 1-215

Fact Pattern: Broomall Corporation has decided to include certain financial ratios in its year-end
annual report to shareholders. Selected information relating to its most recent fiscal year is provided
below.

Cash $ 10,000

Accounts receivable:

– Beginning of year 24,000

– End of year 20,000

Prepaid expenses 8,000

Inventory:

– Beginning of year 26,000

– End of year 30,000

Available-for-sale securities:

– Historical cost 9,000

– Fair value at year end 12,000

Accounts payable 15,000

Notes payable (due in 90 days) 25,000

Bonds payable (due in 10 years) 35,000

 Net credit sales for year 220,000

Cost of goods sold 140,000

Question: 29 Broomall’s working capital at year end is

A. $40,000
B. $37,000
C. $28,000
D. $10,000
Source: CMA 0408 1-230

Fact Pattern: Broomall Corporation has decided to include certain financial ratios in its year-end
annual report to shareholders. Selected information relating to its most recent fiscal year is provided
below.

Cash $ 10,000

Accounts receivable:

– Beginning of year 24,000

– End of year 20,000

Prepaid expenses 8,000

Inventory:

– Beginning of year 26,000

– End of year 30,000

Available-for-sale securities:

– Historical cost 9,000

– Fair value at year end 12,000

Accounts payable 15,000

Notes payable (due in 90 days) 25,000

Bonds payable (due in 10 years) 35,000

 Net credit sales for year 220,000

Cost of goods sold 140,000

Question: 30 Broomall’s quick (acid test) ratio at year end is

A. 2.00 to 1.
B. 1.925 to 1.
C. 1.80 to 1.
D. 1.05 to 1.
Source: CMA 0408 1-218

Fact Pattern: Shown below are beginning and ending balances for certain of Grimaldi, Inc.’s
accounts.
January 1 December 31

Cash $ 48,000 $ 62,000

Marketable securities 42,000 35,000

Accounts receivable (net) 68,000 47,000

Inventory 125,000 138,000

Property, plant, and

equipment (net) 325,000 424,000

 Accounts payable 32,000 84,000

Accrued liabilities 14,000 11,000

Deferred taxes (noncurrent) 15,000 9,000

7% long-term bonds payable 95,000 77,000

Grimaldi’s net income for the year was $96,000.

Question: 31 Grimaldi’s acid test ratio or quick ratio at the end of the year is
A. 0.83
B. 1.02
C. 1.15
D. 1.52
Source: CMA 0408 1-223

Fact Pattern: Shown below are beginning and ending balances for certain of Grimaldi, Inc.’s
accounts.
January 1 December 31

Cash $ 48,000 $ 62,000

Marketable securities 42,000 35,000

Accounts receivable (net) 68,000 47,000

Inventory 125,000 138,000

Property, plant, and

 equipment (net) 325,000 424,000

Accounts payable 32,000 84,000

Accrued liabilities 14,000 11,000

Deferred taxes (noncurrent) 15,000 9,000

7% long-term bonds payable 95,000 77,000

Grimaldi’s net income for the year was $96,000.

Question: 32 Grimaldi’s current ratio at the end of the year is

A. 1.55
B. 1.71
C. 2.71
D. 2.97
Source: CMA 0408 1-229

Question: 33 All of the following are included when calculating the acid test ratio except
A. Six-month treasury bills.
B. Prepaid insurance.
C. Accounts receivable.
D. 60-day certificates of deposit.
Source: CMA2 0313-(3)

Question: 34 A company’s cash ratio will decrease if the company

A. Purchases commercial paper.
B. Purchases materials on account.
 C. Sells goods for cash at a selling price lower than cost.
D. Receives cash by issuing a short-term note payable.
Source: CMA 0913 2-4

Question: 35 In analyzing the short-term liquidity of a firm, many analysts prefer to use the quick (or acid test)
ratio rather than the current ratio. The primary reason for this preference is that the
A. Quick ratio excludes account receivables.
B. Current ratio includes marketable securities that may be mispriced.
C. Pro-forma cash flow statements focus on cash only.
D. Conversion of inventory into cash is less reliable.
Source: CMA 0314 2-30

Question: 36 A firm has gathered financial statement data from three companies applying for credit as new
customers. The company extends credit to customers on the credit terms 2/10, net 30. Prior to
accepting the customers, a financial analyst with the firm performs a liquidity analysis. Summary
data is shown below:
Company F Company G Company H
Cash $ 20,000 $ 12,850 $ 130,000
Accounts receivable 40,000 74,500 100,000
Inventory 170,000 42,240 354,300
Current assets 230,000 129,590 584,300
Total assets 567,888 260,400 780,560
Current liabilities 175,000 63,800 142,100
Total liabilities 487,120 97,680 364,760
Total shareholders’ equity 80,768 162,720 415,800
 When evaluating the liquidity of the three potential customers, which one of the following
conclusions is correct?
A. Company H has the highest current ratio but the lowest acid-test ratio, so the firm should
not accept Company H as a new customer.
B. Company G has a low debt to total assets ratio, so the firm should accept Company G as a
new customer.
C. Company F has a low current ratio, so the firm should not accept Company F as a new
customer.
D. Company F has a high long-term debt to equity ratio, so the firm should accept Company F
as a new customer.
Source: CMA 0314 2-34

Question: 37 A corporation has $90 million in current assets. If the corporation has a current ratio of 1.2 and a
quick ratio of 0.9, what is net working capital?
A. $10 million.
B. $15 million.
C. $81 million.
D. $108 million.
Source: CMA 0408 3-059

Question: 38 A credit manager considering whether to grant trade credit to a new customer is most likely to place
primary emphasis on
A. Profitability ratios.
B. Valuation ratios.
C. Growth ratios.
D. Liquidity ratios.

Subunit 3: Liquidity Ratios – Effects of Transactions

Source: Publisher

Fact Pattern:
Tosh Enterprises reported the following account information:
Accounts receivable $400,000 Inventory $800,000
Accounts payable 260,000 Land 500,000
Bonds payable, due in 10 years 600,000 Short-term prepaid expense 80,000
Cash 200,000
Interest payable, due in 3 months 20,000

Question: 39 What will happen to the ratios below if Tosh Enterprises uses cash to pay 25% of the accounts
payable?
Current Ratio Quick Ratio
A. Increase Increase
B. Decrease Decrease
C. Increase Decrease
D. Decrease Increase
Source: CMA 690 4-11

Question: 40 A company uses the allowance method to account for uncollectible accounts. An account receivable
that was previously determined uncollectible and written off was collected during May. The effect of
the collection on the company’s current ratio and total working capital is
Current Ratio Working Capital
A. None None
B. Increase Increase
 C. Decrease Decrease
D. None Increase

Source: CMA 1280 4-1

Fact Pattern: Depoole Company is a manufacturer of industrial products that uses a calendar year
for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both
before and after the transaction described. Further assume that Depoole has positive profits during
the year and a credit balance throughout the year in its retained earnings account.

Question: 41 Depoole’s payment of a trade account payable of $64,500 will

A. Increase the current ratio, but the quick ratio would not be affected.
B. Increase the quick ratio, but the current ratio would not be affected.
C. Increase both the current and quick ratios.
D. Decrease both the current and quick ratios.
Source: CMA 1280 4-2

Fact Pattern: Depoole Company is a manufacturer of industrial products that uses a calendar year
for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both
before and after the transaction described. Further assume that Depoole has positive profits during
the year and a credit balance throughout the year in its retained earnings account.

Question: 42 Depoole’s purchase of raw materials for $85,000 on open account will
A. Increase the current ratio.
B. Decrease the current ratio.
C. Increase net working capital.
D. Decrease net working capital.
Source: CMA 1280 4-3
 Fact Pattern: Depoole Company is a manufacturer of industrial products that uses a calendar year
for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both
before and after the transaction described. Further assume that Depoole has positive profits during
the year and a credit balance throughout the year in its retained earnings account.

Question: 43 Depoole’s collection of a current accounts receivable of $29,000 will

A. Increase the current ratio.
B. Decrease the current ratio and the quick ratio.
C. Increase the quick ratio.
D. Not affect the current or quick ratios.
Source: CMA 1280 4-4

Fact Pattern: Depoole Company is a manufacturer of industrial products that uses a calendar year
for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both
before and after the transaction described. Further assume that Depoole has positive profits during
the year and a credit balance throughout the year in its retained earnings account.

Question: 44 Obsolete inventory of $125,000 was written off by Depoole during the year. This transaction
A. Decreased the quick ratio.
B. Increased the quick ratio.
C. Increased net working capital.
D. Decreased the current ratio.
Source: CMA 1280 4-6

Fact Pattern: Depoole Company is a manufacturer of industrial products that uses a calendar year
for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both
before and after the transaction described. Further assume that Depoole has positive profits during
the year and a credit balance throughout the year in its retained earnings account.
 Question: 45 Depoole’s issuance of serial bonds in exchange for an office building, with the first installment of the
bonds due late this year,
A. Decreases net working capital.
B. Decreases the current ratio.
C. Decreases the quick ratio.
D. Affects all of the answers as indicated.

Source: CMA 1280 4-7

Fact Pattern: Depoole Company is a manufacturer of industrial products that uses a calendar year
for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both
before and after the transaction described. Further assume that Depoole has positive profits during
the year and a credit balance throughout the year in its retained earnings account.

Question: 46 Depoole’s early liquidation of a long-term note with cash affects the
A. Current ratio to a greater degree than the quick ratio.
B. Quick ratio to a greater degree than the current ratio.
C. Current and quick ratio to the same degree.
D. Current ratio but not the quick ratio.
Source: CMA 1285 4-23

Question: 47 A company has current assets of $400,000 and current liabilities of $500,000. The company’s current
ratio will be increased by
A. The purchase of $100,000 of inventory on account.
B. The payment of $100,000 of accounts payable.
C. The collection of $100,000 of accounts receivable.
D. Refinancing a $100,000 long-term loan with short-term debt.
Source: CMA 1288 4-4
 Question: 48 A company has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if
A. A previously declared stock dividend were distributed.
B. The company wrote off an uncollectible receivable.
C. The company sold merchandise on open account that earned a normal gross margin.
D. The company purchased inventory on open account.
Source: CMA 1285 4-24

Question: 49 A corporation has a current ratio of 2 to 1 and a quick ratio (acid test) of 1 to 1. A transaction that
would change the quick ratio but not the current ratio is the
A. Sale of inventory on account at cost.
B. Collection of accounts receivable.
C. Payment of accounts payable.
D. Purchase of a patent for cash.
Source: CMA 690 4-12

Question: 50 A company uses the direct write-off method to account for uncollectible accounts receivable. If the
company subsequently collects an account receivable that was written off in a prior accounting
period, the effect of the collection of the account receivable on the current ratio and total working
capital would be
Current Ratio Working Capital
A. None None
B. Increase Increase
C. Increase None
D. None Decrease
Source: CMA 1289 4-13

Fact Pattern: Excerpts from the statement of financial position for Landau Corporation as of
 September 30 of the current year are presented as follows.
Cash $ 950,000

Accounts receivable (net) 1,675,000

Inventories 2,806,000

Total current assets $5,431,000

Accounts payable $1,004,000

Accrued liabilities 785,000

Total current liabilities $1,789,000

The board of directors of Landau Corporation met on October 4 of the current year and declared the
regular quarterly cash dividend amounting to $750,000 ($.60 per share). The dividend is payable on
October 25 of the current year to all shareholders of record as of October 12 of the current year.
Assume that the only transactions to affect Landau Corporation during October of the current year
are the dividend transactions and that the closing entries have been made.

Question: 51 Landau Corporation’s working capital was

A. Unchanged by the dividend declaration and decreased by the dividend payment.
B. Decreased by the dividend declaration and increased by the dividend payment.
C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and unchanged by the dividend payment.

Source: CMA 1289 4-14

Fact Pattern: Excerpts from the statement of financial position for Landau Corporation as of
September 30 of the current year are presented as follows.
 Cash $ 950,000

Accounts receivable (net) 1,675,000

Inventories 2,806,000

Total current assets $5,431,000

Accounts payable $1,004,000

Accrued liabilities 785,000

Total current liabilities $1,789,000

The board of directors of Landau Corporation met on October 4 of the current year and declared the
regular quarterly cash dividend amounting to $750,000 ($.60 per share). The dividend is payable on
October 25 of the current year to all shareholders of record as of October 12 of the current year.
Assume that the only transactions to affect Landau Corporation during October of the current year
are the dividend transactions and that the closing entries have been made.

Question: 52 Landau Corporation’s current ratio was

A. Decreased by the dividend declaration and increased by the dividend payment.
B. Unchanged by either the dividend declaration or the dividend payment.
C. Decreased by the dividend declaration and unchanged by the dividend payment.
D. Increased by the dividend declaration and unchanged by the dividend payment.
Source: CMA 694 2-1

Fact Pattern: Excerpts from the statement of financial position for Markham Corporation as of
April 30 of the current year are presented as follows:
Cash $ 725,000
 Accounts receivable (net) 1,640,000

Inventories 2,945,000

Total current assets $5,310,000

Accounts payable $1,236,000

Accrued liabilities 831,000

Total current liabilities $2,067,000

The board of directors of Markham met on May 5 of the current year and declared a quarterly cash
dividend in the amount of $800,000 ($.50 per share). The dividend was paid on May 28 of the
current year to shareholders of record as of May 15 of the current year. Assume that the only
transactions that affected Markham during May of the current year were the dividend transactions
and that the closing entries have been made.

Question: 53 Markham’s working capital would be

A. Decreased by the dividend declaration and increased by the dividend payment.
B. Unchanged by either the dividend declaration or the dividend payment.
C. Decreased by the dividend declaration and unchanged by the dividend payment.
D. Increased by the dividend declaration and unchanged by the dividend payment.
Source: CMA 694 2-2

Fact Pattern: Excerpts from the statement of financial position for Markham Corporation as of
April 30 of the current year are presented as follows:
Cash $ 725,000

Accounts receivable (net) 1,640,000

 Inventories 2,945,000

Total current assets $5,310,000

Accounts payable $1,236,000

Accrued liabilities 831,000

Total current liabilities $2,067,000

The board of directors of Markham met on May 5 of the current year and declared a quarterly cash
dividend in the amount of $800,000 ($.50 per share). The dividend was paid on May 28 of the
current year to shareholders of record as of May 15 of the current year. Assume that the only
transactions that affected Markham during May of the current year were the dividend transactions
and that the closing entries have been made.

Question: 54 Markham’s current ratio would be

A. Decreased by the dividend declaration and increased by the dividend payment.
B. Increased by the dividend declaration and unchanged by the dividend payment.
C. Unchanged by either the dividend declaration or the dividend payment.
D. Unchanged by the dividend declaration and decreased by the dividend payment.
Source: CIA 593 IV-28

Question: 55 The following transactions occurred during a company’s first year of operations:

I. Purchased a delivery van for cash

II. Borrowed money by issuance of short-term debt
III. Purchased treasury stock
Which of the items above caused a change in the amount of working capital?
A. I only.
 B. I and II only.
C. II and III only.
D. I and III only.
Source: CMA 695 2-3

Fact Pattern:

CPZ Enterprises had the following account information.

Accounts receivable $200,000

Accounts payable 80,000

Bonds payable, due in 10 years 300,000

Cash 100,000

Interest payable, due in 3 months 10,000

Inventory 400,000

Land 250,000

Notes payable, due in 6 months 50,000

Prepaid expenses 40,000

The company has an operating cycle of 5 months.

 Question: 56 What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of the accounts
payable?
Current Ratio Quick Ratio
A. Increase Increase
B. Decrease Decrease
C. Increase Decrease
D. Decrease Increase
Source: CMA 685 4-23

Fact Pattern: Jensen Corporation’s board of directors met on June 3 and declared a regular
quarterly cash dividend of $.40 per share for a total value of $200,000. The dividend is payable on
June 24 to all stockholders of record as of June 17. Excerpts from the statement of financial position
for Jensen Corporation as of May 31 are presented as follows.
Cash $ 400,000

Accounts receivable (net) 800,000

Inventories 1,200,000

Total current assets $2,400,000

Total current liabilities $1,000,000

Assume that the only transactions to affect Jensen Corporation during June are the dividend
transactions.

Question: 57 Jensen’s working capital would be

A. Unchanged by the dividend declaration and decreased by the dividend payment.
B. Decreased by the dividend declaration and increased by the dividend payment.
 C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and unchanged by the dividend payment.
Source: CMA 685 4-24

Fact Pattern: Jensen Corporation’s board of directors met on June 3 and declared a regular
quarterly cash dividend of $.40 per share for a total value of $200,000. The dividend is payable on
June 24 to all stockholders of record as of June 17. Excerpts from the statement of financial position
for Jensen Corporation as of May 31 are presented as follows.
Cash $ 400,000

Accounts receivable (net) 800,000

Inventories 1,200,000

Total current assets $2,400,000

Total current liabilities $1,000,000

Assume that the only transactions to affect Jensen Corporation during June are the dividend
transactions.

Question: 58 Jensen’s current ratio would be

A. Unchanged by the dividend declaration and decreased by the dividend payment.
B. Decreased by the dividend declaration and increased by the dividend payment.
C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and unchanged by the dividend payment.
Source: CMA 685 4-25

Fact Pattern: Jensen Corporation’s board of directors met on June 3 and declared a regular
quarterly cash dividend of $.40 per share for a total value of $200,000. The dividend is payable on
 June 24 to all stockholders of record as of June 17. Excerpts from the statement of financial position
for Jensen Corporation as of May 31 are presented as follows.
Cash $ 400,000

Accounts receivable (net) 800,000

Inventories 1,200,000

Total current assets $2,400,000

Total current liabilities $1,000,000

Assume that the only transactions to affect Jensen Corporation during June are the dividend
transactions.

Question: 59 Jensen’s quick (acid test) ratio would be

A. Unchanged by the dividend declaration and decreased by the dividend payment.
B. Decreased by the dividend declaration and increased by the dividend payment.
C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and unchanged by the dividend payment.
Source: CMA 0408 1-213

Question: 60 All of the following are affected when merchandise is purchased on credit except
A. Total current assets.
B. Net working capital.
C. Total current liabilities.
D. Current ratio.
Source: CMA 0408 1-219
 Question: 61 An entity has total assets of $7,500,000 and a current ratio of 2.3 times before purchasing $750,000
of merchandise on credit for resale. After this purchase, the current ratio will
A. Remain at 2.3 times.
B. Be higher than 2.3 times.
C. Be lower than 2.3 times.
D. Be exactly 2.53 times.
Source: CMA 0408 1-220

Question: 62 If allowance for uncollectible accounts is increased, this adjustment will

A. Increase the acid test ratio.
B. Increase working capital.
C. Reduce debt-to-asset ratio.
D. Reduce the current ratio.
Source: CMA 0408 1-221

Question: 63 A firm must increase its acid test ratio above the current 0.9 level in order to comply with the terms
of a loan agreement. Which one of the following actions is most likely to produce the desired
results?
A. Expediting collection of accounts receivable.
B. Selling auto parts on account.
C. Making a payment to trade accounts payable.
D. Purchasing marketable securities for cash.
Source: CMA 0408 1-222

Question: 64 The owner of a chain of grocery stores has bought a large supply of mangoes and paid for the fruit
with cash. This purchase will adversely impact which one of the following?
A. Working capital.
 B. Current ratio.
C. Quick or acid test ratio.
D. Price earnings ratio.
Source: CMA 0408 1-225

Question: 65 Both the current ratio and the quick ratio for Spartan Corporation have been slowly decreasing. For
the past two years, the current ratio has been 2.3-to-1 and 2.0-to-1. During the same time period, the
quick ratio has decreased from 1.2-to-1 to 1.0-to-1. The disparity between the current and quick
ratios can be explained by which one of the following?
A. The current portion of long-term debt has been steadily increasing.
B. The cash balance is unusually low.
C. The accounts receivable balance has decreased.
D. The inventory balance is unusually high.
Source: CMA 0408 1-226

Question: 66 The acid test ratio shows the ability of a company to pay its current liabilities without having to
A. Reduce its cash balance.
B. Borrow additional funds.
C. Collect its receivables.
D. Liquidate its inventory.
Source: CMA 0408 1-231

Question: 67 If a company has a current ratio of 2.1 and pays off a portion of its accounts payable with cash, the
current ratio will
A. Decrease.
B. Increase.
C. Remain unchanged.
 D. Move closer to the quick ratio.
Source: CIA 593 IV-40

Question: 68 A condensed comparative balance sheet for a company appears below:

12/31/Year 1 12/31/Year 2

Cash $ 40,000 $ 30,000

Accounts receivable 120,000 100,000

Inventory 200,000 300,000

Property, plant, & equipment 500,000 550,000

Accumulated depreciation (280,000) (340,000)

Total assets $ 580,000 $ 640,000

Current liabilities $ 60,000 $ 100,000

Long-term liabilities 390,000 420,000

Stockholders’ equity 130,000 120,000

Total liabilities and equity $ 580,000 $ 640,000

In looking at liquidity ratios at both balance sheet dates, what happened to the (1) current ratio and
(2) acid test (quick) ratio?
(1) (2)
 Current Ratio Acid Test Ratio
A. Increased Increased
B. Increased Decreased
C. Decreased Increased
D. Decreased Decreased
Source: CMA 0913 2-57

Question: 69 A firm has the following current assets.

Cash € 250,000

Marketable securities 100,000

Accounts receivable 800,000

Inventories 1,450,000

Total current assets € 2,600,000

If current liabilities are €1,300,000, the firm’s

A. Current ratio will decrease if a payment of €100,000 cash is used to pay €100,000 of accounts
payable.
B. Current ratio will not change if a payment of €100,000 is used to pay €100,000 of accounts payable.
C. Acid-test (quick) ratio will decrease if a payment of €100,000 cash is used to purchase inventory.
D. Acid-test (quick) ratio will not change if a payment of €100,000 cash is used to purchase
inventory.

Source: CMA 0314 2-8

 Question: 70 A company has $80 million in current assets, comprised of $30 million in inventory and $50 million
in cash and marketable securities. The company’s current liabilities total $50 million. If the company
purchases an additional $10 million in inventory with $10 million in cash, the effect of this
transaction on the company would be to
A. Decrease the current ratio and increase the quick ratio.
B. Decrease the quick ratio while the current ratio remains unchanged.
C. Leave both the current ratio and the quick ratio unchanged.
D. Decrease the current ratio and decrease the quick ratio.
Source: CIA 1196 IV-53

Question: 71 All else being equal, a company with a higher dividend-payout ratio will have a <List A> debt-to-
assets ratio and a <List B> current ratio.
List A List B
A. Higher Higher
B. Higher Lower
C. Lower Higher
D. Lower Lower

Subunit 4: Profitability Ratios – Calculations

Source: Publisher

Question: 72 A firm is experiencing a growth rate of 9% with a return on assets of 12%. If the debt ratio is 36%
and the market price of the stock is $38 per share, what is the return on equity?
A. 7.68%
B. 9.0%
C. 12.0%
 D. 18.75%
Source: CIA 596 IV-38

Fact Pattern: The financial statements for Dividendosaurus, Inc., for the current year are as
follows:
Balance Sheet Statement of Income and Retained Earnings
Cash $100 Sales $ 3,000
Accounts receivable 200 Cost of goods sold (1,600)
Inventory 50 Gross profit $ 1,400
Net fixed assets 600 Operations expenses (970)
Total $950 Operating income $ 430
Accounts payable $140 Interest expense (30)
Long-term debt 300 Income before tax $ 400
Capital stock 260 Income tax (200)
Retained earnings 250 Net income $ 200
Total $950 Add: Jan. 1 retained earnings 150
Less: dividends (100)
Dec. 31 retained earnings $ 250

Question: 73 Dividendosaurus has return on assets of

A. 21.1%
B. 39.2%
C. 42.1%
D. 45.3%
Source: CIA 596 IV-40

Fact Pattern: The financial statements for Dividendosaurus, Inc., for the current year are as
 follows:
Balance Sheet Statement of Income and Retained Earnings
Cash $100 Sales $ 3,000
Accounts receivable 200 Cost of goods sold (1,600)
Inventory 50 Gross profit $ 1,400
Net fixed assets 600 Operations expenses (970)
Total $950 Operating income $ 430
Accounts payable $140 Interest expense (30)
Long-term debt 300 Income before tax $ 400
Capital stock 260 Income tax (200)
Retained earnings 250 Net income $ 200
Total $950 Add: Jan. 1 retained earnings 150
Less: dividends (100)
Dec. 31 retained earnings $ 250

Question: 74 Dividendosaurus has a profit margin of

A. 6.67%
B. 13.33%
C. 14.33%
D. 46.67%
Source: CMA 688 4-8

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal
year. McKeon’s controller is in the process of reviewing the Year 2 budget and calculating some key
ratios based on the budget. McKeon Company monitors yield or return ratios using the average
financial position of the company. (Round all calculations to three decimal places if necessary.)
 5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000
 Inventory 70,000 80,000
Prepaid expenses 20,000 20,000

Question: 75 The Year 2 return on equity for McKeon Company is

A. 0.040
B. 0.221
C. 0.240
D. 0.361
Source: Publisher

Question: 76 The following information pertains to the year ended December 31:
Sales $720,000

Net income 120,000

Average total assets 480,000

Which one of the following formulas depicts the use of the DuPont model to calculate return on
assets?
A. (720,000 ÷ 480,000) × (720,000 ÷ 120,000)
B. (480,000 ÷ 720,000) × (720,000 ÷ 120,000)
C. (720,000 ÷ 480,000) × (120,000 ÷ 720,000)
D. (480,000 ÷ 720,000) × (120,000 ÷ 720,000)
Source: CMA 0408 1-262

Question: 77 A firm expects to report net income of at least $10 million annually for the foreseeable future. The
firm could increase its return on equity by taking which of the following actions with respect to its
inventory turnover and the use of equity financing?
 Inventory Turnover Use of Equity Financing
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease
Source: CMA 0205 1-44

Question: 78 In Year 3, gross profit margin remained unchanged from Year 2. But, in Year 3, the company’s net
profit margin declined from the level reached in Year 2. This could have happened because, in Year
3,
A. Corporate tax rates increased.
B. Cost of goods sold increased relative to sales.
C. Sales increased at a faster rate than operating expenses.
D. Common share dividends increased.
Source: CMA 0913 2-6

Question: 79 Selected financial data for the year is shown below:

Beginning of Year End of Year

Assets $9,600,000 $10,000,000

Liabilities $6,200,000 $6,800,000
Shares outstanding 1,400,000 1,500,000
Market price per share $2.40 $2.50
Sales $22,000,000
Earnings before interest and taxes $1,700,000
Interest expense $500,000
 Tax rate 40%
Using the above data the firm’s return on equity using the DuPont model is
A. 15%
B. 19%
C. 22%
D. 36%
Source: CMA 697 2-17

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year Year Year Year

2 1 2 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and 52 51
administrative
Accounts receivable (net) 68 48
Interest expense 8 9
Inventory 90 80
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Income taxes 36 34
Total current assets $255 $216
Investments, at equity 38 30 Net income $ 54 $ 51

Property, plant, and equipment (net) 375 400

 Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Notes payable $ 35 $ 18
Accounts payable 70 42
Accrued expenses 5 4
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par value,
cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common
stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 80 Devlin Company’s rate of return on assets for the year ended May 31, Year 2, was
A. 7.2%
B. 7.5%
C. 7.8%
 D. 11.3%
Source: CMA 0408 1-259

Fact Pattern: For the year just ended, Beechwood Corporation had income from operations of
$198,000 and net income of $96,000. The liabilities and shareholders’ equity section of
Beechwood’s statement of financial position is shown below.
January 1 December 31

Accounts payable $ 32,000 $ 84,000

Accrued liabilities 14,000 11,000
7% bonds payable 95,000 77,000
Common stock ($10 par value) 300,000 300,000
Reserve for bond retirement 12,000 28,000
Retained earnings 155,000 206,000

Total liabilities and shareholders’ equity $608,000 $706,000

Question: 81 Beechwood’s return on shareholders’ equity for the year just ended is
A. 19.2%
B. 19.9%
C. 32.0%
D. 39.5%
Source: CMA2 0313-(6)

Question: 82 The president of a company is establishing performance goals for each of the company’s
manufacturing plants. The data below represent prior-year results for one of the plants.
Revenues $ 400,000
 Variable costs 100,000
Fixed costs 200,000
Average assets 1,000,000
Average liabilities 200,000
The plant’s return on assets is
A. 37.5%
B. 30.0%
C. 12.5%
D. 10.0%
Source: CMA2 0313-(12)

Question: 83 A company has sales of $100,000, cost of sales of $40,000, interest expense of $4,000, taxes of
$18,000, and operating expenses of $15,000. What is the company’s operating profit margin?
A. 60%
B. 45%
C. 41%
D. 23%
Source: CMA Sample Q 02/2005 1-49

Question: 84 If the return on equity is 12% and the debt ratio is 40%, what is the return on assets?
A. 4.8%
B. 7.2%
C. 12.0%
D. 20.0%
Source: Publisher

Question: 85 In the current year, a firm had $15 million in sales, while total fixed costs were held to $6 million.
 The firm’s total assets averaged $20 million and the debt-to-equity ratio was calculated at 0.60. If the
firm’s EBIT is $3 million, the interest on all debt is 9%, and the tax rate is 40%, what is the firm’s
return on equity?
A. 11.16%
B. 14.4%
C. 18.6%
D. 24.0%
Source: CIA 1194 IV-14

Question: 86 If Company A has a higher rate of return on assets than Company B, the reason may be that
Company A has a <List A> profit margin on sales, a <List B> asset turnover ratio, or both.
List A List B
A. Higher Higher
B. Higher Lower
C. Lower Higher
D. Lower Lower
Source: CMA 1295 2-13

Question: 87 All of the following financial indicators are measures of liquidity and activity except the
A. Average collection period in days.
B. Merchandise inventory turnover.
C. Accounts receivable turnover.
D. Times interest earned ratio.

Subunit 5: Profitability Ratios – Effects of transactions

Source: CMA 2013 2-8

Question: 88 A corporation experienced the following year-over-year changes:

Net profit margin Increased 25%

Total asset turnover Increased 40%

Total assets Decreased 10%

Total equity Increased 40%

Using DuPont analysis, what is the year-over-year change in return on equity (ROE)?
A. Increased 95.0%.
B. Increased 63.0%.
C. Increased 12.5%.
D. Increased 10.0%.
Source: CMA Sample Q 02/2005 1-43

Question: 89 For a given level of sales and holding all other financial statement items constant, a company’s
return on equity (ROE) will
A. Increase as their debt ratio decreases.
B. Decrease as their cost of goods sold as a percent of sales decrease.
C. Decrease as their total assets increase.
D. Increase as their equity increases.
Source: CMA 0408 1-261

Question: 90 A firm has decided to make an additional investment in its operating assets that are financed by debt.
Assuming all other factors remain constant, this increase in investment will have which one of the
 following effects?
Operating Operating Return on
Income Asset Operating
Margin Turnover Assets
A. Increase No change Increase
B. No change Decrease Decrease
C. No change Increase Decrease
D. Decrease Decrease Decrease
Source: CMA2 0313-(1)

Question: 91 An abbreviated common-size income statements for Year 1’s actual results and Year 2’s anticipated
results are shown below.
Year 1 Year 2
Sales 100% 100%
Cost of goods sold 50% 50%
Selling and administrative expenses 40% ?
Operating Income 10% ?
The corporation estimates that units sold will increase by 5% in Year 2 with no price increase to its
customers and no anticipated cost increases from its vendors. Assume selling and administrative
expenses are 5% variable and 95% fixed. If all predictions materialize, the corporation should expect
selling and administrative expenses in Year 2 to be
A. Less than 40% of sales.
B. 40% of sales.
C. Greater than 40% but no more than 42% of sales.
D. Greater than 42% of sales.
Source: CMA 0314 2-35

Question: 92 Last year, a corporation had a total asset turnover ratio of 1.5, a profit margin of 10%, and an equity
multiplier of 2. This year, if the profit margin is 8%, but the return on equity stays the same, then
what could be true?
A. The equity multiplier remains 2.0, and the total asset turnover increases to 1.7.
B. The equity multiplier remains 2.0, and the total asset turnover increases to 3.5.
C. The equity multiplier increases to 2.2, and the total asset turnover remains 1.5.
D. The equity multiplier increases to 3.0, and the total asset turnover decreases to 1.25.
Source: CMA 0314 2-36

Question: 93 A corporation’s return on equity can be calculated if you know its

A. Sustainable equity growth rate and dividend payout ratio.
B. Debt-equity ratio and market-to-book ratio.
C. Market-to-book ratio and equity multiplier.
D. Dividend yield and earnings yield.
Source: CMA 0314 2-31

Question: 94 A construction company is preparing to finalize the financial statements for the most recent year.
Results are sales of $690,000, cost of sales of $378,900, and administrative expenses of $120,800.
The controller has just found a sales invoice for a job completed on the last day of the year. The
revenue and related costs for the job have not yet been recorded in the accounting system. The job’s
revenues are $95,000 with costs totaling $65,000. What is the impact of this job on year-end
profitability?
A. A decrease in the company’s gross profit margin and an increase in the net profit margin.
B. Increases in the company’s gross profit margin and net profit margin.
C. Decreases in the company’s gross profit margin and net profit margin.
D. An increase in the company’s gross profit margin and a decrease in the net profit margin.
Source: CMA 0913 2-51

Question: 95 Which one of the following actions may increase a company’s return on assets?
A. Purchase of a new corporate headquarters.
B. An increase in inventory levels for a future store expansion.
C. Replacement of capital equipment via an operating lease.
D. Reduction of long-term debt through the issuance of common stock.
Source: CMA 0913 2-52

Question: 96 The DuPont formula involves which combination of financial elements in its computation?
A. Net profit margin, total asset turnover, and equity multiplier.
B. Total asset turnover and sales turnover profitability.
C. Profit margin, sales turnover, and asset-use efficiency.
D. Total asset turnover, sales turnover, and equity multiplier.
Source: CMA 0913 2-76

Question: 97 According to the DuPont formula, which one of the following will not increase a profitable firm’s
return on equity?
A. Increasing total asset turnover.
B. Increasing net profit margin.
C. Lowering corporate income taxes.
D. Lowering equity multiplier.
Source: CMA 0408 1-228

Question: 98 When a fixed asset is sold for less than book value, which one of the following will decrease?
A. Total current assets.
B. Current ratio.
 C. Net profit.
D. Net working capital.

Subunit 6: factors Affecting Reporting profitability

Source: CMA 0313 2-2

Question: 99 A corporation’s inventory expressed as a percentage of current assets increased from 25% last July to
35% this July. The factor that is least likely to cause this increase is that the corporation
A. Is a seasonal company with traditionally higher activity in the summer months.
B. Is beginning to experience high growth.
C. Has inventory that is becoming obsolete.
D. Used a material amount of cash from selling its short-term investments to purchase land.
Source: CMA 0313 2-9

Question: 100 Which one of the following ratios would be most affected by miscellaneous or non-recurring
income?
A. Net profit margin.
B. Operating profit margin.
C. Gross profit margin.
D. Debt-to-equity ratio.
Source: CMA 0314 2-3

Question: 101 A company bought a new machine and estimated that the machine will have a useful life of 10 years
and a salvage value of $5,000. After the machine has been put in service for 2 years, the company
has decided to change the estimate of the useful life to 7 years. Which one of the following
statements describes the proper way to revise a useful life estimate?
A. Revisions in useful life are permitted only if approved by the SEC.
 B. Retroactive changes must be made to correct previously recorded depreciation.
C. Only future years will be affected by the revision.
D. Both current and future years will be affected by the revision.
Source: CMA 0913 2-3

Question: 102 At the beginning of last year, a manufacturing company increased its selling price by $10 per unit.
This price increase has no effect on the volume of sales. As a result, operating profit margin will
A. Increase as a result of the price increase.
B. Decline as a result of the price increase.
C. Remain unchanged.
D. Change as a result of the price increase, but the direction of such change cannot be
determined.
Source: CMA 0913 2-8

Question: 103 An analyst is reviewing the financial statements of a company whose operating income has declined
from the prior year. The following ratios have been calculated.
Prior Year Current Year

Gross profit margin 15% 20%

Operating profit margin 12% 10%
Inventory turnover 10.4 9.8
Based on the above, the analyst could infer that the decrease in operating income may be due to
A. Lower revenue per unit sold.
B. Accumulation of unused inventory.
C. Higher interest expense.
D. An increase in advertising expense.
Source: CMA 0913 2-10
 Question: 104 If gross profit margin has decreased substantially over the past 3 years, which one of the
following best explains this decrease?
A. The cost of merchandise inventory has decreased while sales prices have remained the
same.
B. Ending merchandise inventory is higher than expected.
C. A physical count of merchandise inventory showed missing inventory higher than expected.
D. Cost of goods sold has remained steady while total expenses have increased.
Source: CMA 0913 2-80

Question: 105 If gross profit margin has remained fairly constant for the past several years, which one of the
following is the best explanation?
A. The cost of goods sold and sales have decreased by the same percentage.
B. The cost of goods sold and sales have decreased by the same dollar amount.
C. Net sales and net income have remained constant.
D. The cost of goods has remained steady.
Source: CMA 0913 2-77

Question: 106 A large arithmetic error was made in the preparation of its year-end financial statements by improper
placement of an extra digit in the calculation of bad debt expense allowance. The error caused the net
income to be reported at almost half of the proper amount. In accordance with GAAP, correction of
the error when discovered in the next year should be treated as
A. An increase in bad debt expense for the year in which the error is discovered.
B. A component of income for the year in which the error is discovered, but separately listed
on the income statement and fully explained in a note to the financial statements.
C. An extraordinary item for the year in which the error was made.
D. A prior-period adjustment to the opening retained earnings balance.
Source: CMA 0913 2-79
 Question: 107 The accounting manager of a manufacturer of farming equipment was asked by the CFO to analyze
the company’s last 5 years of operations. The accounting manager prepared the following analysis:
Common Base Year Income Statement
Base Year = December 31, Year 1
Year 2 Year 3 Year 4 Year 5 Year 6
Sales 1.01 1.03 1.05 1.07 1.10
Cost of goods sold 1.05 1.03 1.02 1.00 0.98
Selling and administrative expenses 1.01 1.01 1.01 1.02 1.03
Research and development 1.00 0.98 0.99 1.00 1.01
Income from operations 1.02 1.02 1.03 1.05 1.09
Which one of the following statements is consistent with this analysis?
A. The company should decrease the sales force.
B. The new marketing strategy has been unsuccessful.
C. The company should decrease research and development expenses.
D. The new production process has successfully reduced manufacturing expenses.
Source: CMA 0913 2-7

Question: 108 A construction company has signed $1,000,000 in new contracts. During the current year, 10% of
the required work for these contracts was performed. Historically, the controller has recognized
revenue when the contract work was completed using the completed contract method. This year, the
company’s auditors are requiring the new contracts to be recognized under the percentage of
completion method. The change in revenue recognition methods will result in a revenue change of
A. $0
B. $(900,000)
C. $100,000
D. $1,000,000
 Subunit 7: Solvency

Source: CMA 688 4-21

Question: 109 The relationship of the total debt to the total equity of a corporation is a measure of
A. Liquidity.
B. Profitability.
C. Creditor risk.
D. Solvency.
Source: CMA 685 4-17

Question: 110 If the ratio of total liabilities to equity increases, a ratio that must also increase is
A. Times interest earned.
B. Total liabilities to total assets.
C. Return on equity.
D. The current ratio.
Source: CMA 691 2-7

Fact Pattern:
Selected data from Ostrander Corporation’s financial statements for the years indicated are
presented in thousands.

Year 2 Operations December 31

Net credit sales $4,175 Year 2 Year 1
Cost of goods sold 2,880 Cash $ 32 $ 28
Interest expense 50 Trading securities 169 172
 Income tax 120 Accounts receivable (net) 210 204
Gain on disposal of a segment Merchandise inventory 440 420
(net of tax) 210 Tangible fixed assets 480 440
Administrative expense 950 Total assets 1,397 1,320
Net income 385 Current liabilities 370 368
Total liabilities 790 750
Common stock outstanding 226 210
Retained earnings 381 360

Question: 111 The times interest earned ratio for Ostrander Corporation for Year 2 is
A. .57 times.
B. 7.70 times.
C. 3.50 times.
D. 6.90 times.
Source: CMA 691 2-8

Fact Pattern:
Selected data from Ostrander Corporation’s financial statements for the years indicated are
presented in thousands.

Year 2 Operations December 31

Net credit sales $4,175 Year 2 Year 1
Cost of goods sold 2,880 Cash $ 32 $ 28
Interest expense 50 Trading securities 169 172
Income tax 120 Accounts receivable (net) 210 204
Gain on disposal of a segment Merchandise inventory 440 420
 (net of tax) 210 Tangible fixed assets 480 440
Administrative expense 950 Total assets 1,397 1,320
Net income 385 Current liabilities 370 368
Total liabilities 790 750
Common stock outstanding 226 210
Retained earnings 381 360

Question: 112 The total debt to equity ratio for Ostrander Corporation in Year 2 is
A. 3.49
B. 0.77
C. 2.07
D. 1.30
Source: CMA 690 4-19

Fact Pattern: Assume the following information pertains to Ramer Company, Matson Company,
and for their common industry for a recent year.
Industry

Ramer Matson Average

Current ratio 3.50 2.80 3.00

Accounts receivable turnover 5.00 8.10 6.00

Inventory turnover 6.20 8.00 6.10

Times interest earned 9.00 12.30 10.40

 Debt to equity ratio 0.70 0.40 0.55

Return on investment 0.15 0.12 0.15

Dividend payout ratio 0.80 0.60 0.55

Earnings per share $3.00 $2.00 --

Question: 113 Which one of the following is correct if both companies have the same total assets and the same
sales?
A. Ramer has more cash than Matson.
B. Ramer has fewer current liabilities than Matson.
C. Matson is more effectively using financial leverage.
D. Matson has a shorter operating cycle than Ramer.
Source: CMA 690 4-20

Fact Pattern: Assume the following information pertains to Ramer Company, Matson Company,
and for their common industry for a recent year.
Industry

Ramer Matson Average

Current ratio 3.50 2.80 3.00

Accounts receivable turnover 5.00 8.10 6.00

Inventory turnover 6.20 8.00 6.10

Times interest earned 9.00 12.30 10.40

 Debt to equity ratio 0.70 0.40 0.55

Return on investment 0.15 0.12 0.15

Dividend payout ratio 0.80 0.60 0.55

Earnings per share $3.00 $2.00 --

Question: 114 The attitudes of both Ramer and Matson concerning risk are best explained by the
A. Current ratio, accounts receivable turnover, and inventory turnover.
B. Dividend payout ratio and earnings per share.
C. Current ratio and earnings per share.
D. Debt to equity ratio and times interest earned.
Source: CMA 690 4-21

Fact Pattern: Assume the following information pertains to Ramer Company, Matson Company,
and for their common industry for a recent year.
Industry

Ramer Matson Average

Current ratio 3.50 2.80 3.00

Accounts receivable turnover 5.00 8.10 6.00

Inventory turnover 6.20 8.00 6.10

Times interest earned 9.00 12.30 10.40

Debt to equity ratio 0.70 0.40 0.55

 Return on investment 0.15 0.12 0.15

Dividend payout ratio 0.80 0.60 0.55

Earnings per share $3.00 $2.00 --

Question: 115 Some of the ratios and data for Ramer and Matson are affected by income taxes. Assuming no
interperiod income tax allocation, which of the following items would be directly affected by income
taxes for the period?
A. Current ratio and debt to equity ratio.
B. Accounts receivable turnover and inventory turnover.
C. Return on investment and earnings per share.
D. Debt to equity ratio and dividend payout ratio.
Source: CMA 687 4-27

Question: 116 A debt to equity ratio is

A. About the same as the debt to assets ratio.
B. Higher than the debt to assets ratio.
C. Lower than the debt to assets ratio.
D. Not correlated with the debt to assets ratio.
Source: CMA 688 4-11

Question: 117 A measure of long-term debt-paying ability is a company’s

A. Length of the operating cycle.
B. Return on assets.
C. Inventory turnover ratio.
D. Times interest earned ratio.
Source: CMA 697 2-18

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year Year Year Year

2 1 2 1

Assets Net sales $480 $460

Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and 52 51
administrative
Accounts receivable (net) 68 48
Interest expense 8 9
Inventory 90 80
Prepaid expenses 22 30 Income before taxes $ 90 $ 85
Income taxes 36 34
Total current assets $255 $216
Investments, at equity 38 30 Net income $ 54 $ 51

Property, plant, and equipment (net) 375 400

Intangible assets (net) 80 45

Total assets $748 $691

Liabilities
Current liabilities
Notes payable $ 35 $ 18
Accounts payable 70 42
 Accrued expenses 5 4
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par value,
cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital -- common
stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

Question: 118 Devlin Company’s times interest earned ratio for the year ended May 31, Year 2, was
A. 6.75 times.
B. 11.25 times.
C. 12.25 times.
D. 18.75 times.
Source: CMA 688 4-2

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal
year. McKeon’s controller is in the process of reviewing the Year 2 budget and calculating some key
ratios based on the budget. McKeon Company monitors yield or return ratios using the average
financial position of the company. (Round all calculations to three decimal places if necessary.)
 5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000
 Inventory 70,000 80,000
Prepaid expenses 20,000 20,000

Question: 119 McKeon Company’s debt ratio for Year 2 is

A. 0.352
B. 0.315
C. 0.264
D. 0.237
Source: CMA 688 4-7

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal
year. McKeon’s controller is in the process of reviewing the Year 2 budget and calculating some key
ratios based on the budget. McKeon Company monitors yield or return ratios using the average
financial position of the company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
Year 2
Operations
 Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Prepaid expenses 20,000 20,000
Question: 120 McKeon Company’s times interest earned ratio in Year 2 is
A. 41
B. 40
C. 25
D. 24
Source: CMA 0205 1-48

Question: 121 A bondholder would be most concerned with which one the following ratios?
A. Inventory turnover.
 B. Times interest earned.
C. Quick ratio.
D. Earnings per share.
Source: CMA 1288 1-11

Question: 122 A firm earned $10,000 before interest and taxes, has a 36% tax rate, and has the following debt
outstanding:
First mortgage bond, 9.0% $ 5,000

Debenture, 10.2% 10,000

Subordinated bond, 12.0% 6,000

Total long-term debt $21,000

The annual coverage of the firm’s debt is

A. 4.57 times.
B. 2.92 times.
C. 11.85 times.
D. 3.57 times.
Source: CMA 1291 1-9

Question: 123 Which one of the following factors would likely cause a firm to increase its use of debt financing as
measured by the debt to total capital ratio?
A. Increased economic uncertainty.
B. An increase in the degree of operating leverage.
C. An increase in the price-earnings ratio.
D. An increase in the corporate income tax rate.
Source: CIA 592 IV-44
Fact Pattern:
RST Corporation Comparative Income
Statements for the Years 5 and 6

Year 6 Year 5

Sales (all are credit) $285,000 $200,000

Cost of goods sold 150,000 120,000

Gross profit $135,000 $ 80,000

Selling and administrative expenses 65,000 36,000

Income before interest and income taxes $ 70,000 $ 44,000

Interest expense 3,000 3,000

Income before income taxes $ 67,000 $ 41,000

Income tax expense 27,000 16,000

Net income $ 40,000 $ 25,000

RST Corporation
Comparative Balance Sheets

End of Years 5 and 6

Assets Year 6 Year 5

Current assets:
Cash $ 5,000 $ 4,000
Short-term marketable investments 3,000 2,000
Accounts receivable (net) 16,000 14,000
Inventory 30,000 20,000

Total current assets $ 54,000 $ 40,000

Noncurrent assets:
Long-term investments 11,000 11,000
Property, plant, and equipment 80,000 70,000
Intangibles 3,000 4,000

Total assets $148,000 $125,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 11,000 $ 7,000

Accrued payables 1,000 1,000

Total current liabilities $ 12,000 $ 8,000

Long-term Liabilities:

0% Bonds payable, due in Year 12 30,000 30,000

Total liabilities $ 42,000 $ 38,000

Stockholders’ equity:
 Common stock, 2,400 shares, $10 par $ 24,000 $ 24,000

Retained earnings 82,000 63,000

Total stockholders’ equity $106,000 $ 87,000

Total liabilities and stockholders’ equity $148,000 $125,000

The market value of RST’s common stock at the end of Year Six was $100.00 per share.

Question: 124 RST’s times interest earned ratio at the end of Year 6 is
A. 23.33 times.
B. 14.67 times.
C. 14.33 times.
D. 13.33 times.
Source: CIA 590 IV-59

Question: 125 Which of the outcomes represented in the following table would result from a company’s retirement
of debt with excess cash?

Following Period’s
Total Assets Times Interest
Turnover Ratio Earned Ratio
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
 D. Decrease Decrease
Source: CIA 1192 IV-60

Question: 126 A company issued long-term bonds and used the proceeds to repurchase 40% of the outstanding
shares of its stock. This financial transaction will likely cause the
A. Total assets turnover ratio to increase.
B. Current ratio to decrease.
C. Times interest earned ratio to decrease.
D. Fixed charge coverage ratio to increase.

Source: CMA 0408 1-253

Question: 127 Which one of the following is the best indicator of long-term debt paying ability?
A. Working capital turnover.
B. Asset turnover.
C. Current ratio.
D. Debt to total assets ratio.
Source: CMA 0408 1-255

Question: 128 The following information has been derived from a company’s financial statements:
Current assets $640,000

Total assets 990,000

Long-term liabilities 130,000

 Current ratio 3.2
The company’s debt to equity ratio is
A. 0.50
B. 0.37
C. 0.33
D. 0.13
Source: CMA 0408 1-257

Question: 129 The interest expense for a company is equal to its earnings before interest and taxes (EBIT). The
company’s tax rate is 40%. The company’s times interest earned ratio is equal to
A. 2.0
B. 1.0
C. 0.6
D. 1.2
Source: CMA2 MM15

Question: 130 The Liabilities and Shareholders’ Equity section of a Statement of Financial Position is shown
below.
January 1 December 31

Accounts payable $ 32,000 $ 84,000

Accrued liabilities 14,000 11,000

7% bonds payable 95,000 77,000

Common stock ($10 par value) 300,000 300,000

 Reserve for bond retirement 12,000 28,000

Retained earnings 155,000 206,000

Total liabilities and shareholders’ equity $608,000 $706,000

The debt/equity ratio is

A. 25.1%.
B. 25.6%.
C. 32.2%.
D. 33.9%.
Source: CMA2 MM15

Question: 131 A corporation is considering the acquisition of one of its parts suppliers and has been reviewing the
pertinent financial statements. Specific data, shown below, has been selected from these statements
for review and comparison with industry averages.
B R W Industry

Total sales (millions) $4.27 $3.91 $4.86 $4.30

Net profit margin 9.55% 9.85% 10.05% 9.65%

Current ratio 1.32 2.02 1.96 1.95

Return on assets 11.0% 12.6% 11.4% 12.4%

Debt/equity ratio 62.5% 44.6% 49.6% 48.3%

Financial leverage 1.40 1.02 1.86 1.33

The objective for this acquisition is assuring a steady source of supply from a stable company. Based
 on the information above, select the strategy that would fulfill the objective.
A. The corporation should not acquire any of these firms as none of them represents a good
risk.
B. Acquire B as both the debt/equity ratio and degree of financial leverage exceed the industry
average.
C. Acquire R as both the debt/equity ratio and degree of financial leverage are below the
industry average.
D. Acquire Was the company has the highest net profit margin and degree of financial
leverage.
Source: CMA 0314 2-38

Question: 132 A company has interest expense of $4 million, sales revenue of $50 million, earnings before interest
and taxes of $20 million, and an income tax rate of 35%. This company has a times-interest-earned
ratio of
A. 12.5
B. 7.5
C. 5.0
D. 0.2
Source: CMA 0408 1-249

Fact Pattern: For the year just ended, Beechwood Corporation had income from operations of
$198,000 and net income of $96,000. The liabilities and shareholders’ equity section of
Beechwood’s statement of financial position is shown below.
January 1 December 31

Accounts payable $ 32,000 $ 84,000

Accrued liabilities 14,000 11,000
7% bonds payable 95,000 77,000
 Common stock ($10 par value) 300,000 300,000
Reserve for bond retirement 12,000 28,000
Retained earnings 155,000 206,000

Total liabilities and shareholders’ equity $608,000 $706,000

Question: 133 Beechwood’s debt to equity ratio at year end is

A. 25.1%
B. 25.6%
C. 32.2%
D. 33.9%

Subunit 8: leverage
Source: CMA 688 4-9

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal
year. McKeon’s controller is in the process of reviewing the Year 2 budget and calculating some key
ratios based on the budget. McKeon Company monitors yield or return ratios using the average
financial position of the company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
 Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Prepaid expenses 20,000 20,000

Question: 134 The degree of financial leverage to be employed by McKeon Company in Year 2 is
 A. 1.640
B. 1.600
C. 1.025
D. 0.600
Source: CIA 594 IV-52

Question: 135 The degree of operating leverage (DOL) is

A. A measure of the change in earnings available to common stockholders associated with a
given change in operating earnings.
B. A measure of the change in operating income resulting from a given change in sales.
C. Lower if the degree of total leverage is higher, other things held constant.
D. Higher if the degree of total leverage is lower, other things held constant.

Source: Publisher

Question: 136 For a firm with a degree of operating leverage of 3.5, an increase in sales of 6% will
A. Increase pre-tax profits by 3.5%.
B. Decrease pre-tax profits by 3.5%.
C. Increase pre-tax profits by 21%.
D. Increase pre-tax profits by 1.71%.
Source: CMA 690 1-16

Question: 137 This year, an entity increased earnings before interest and taxes (EBIT) by 17%. During the same
period, net income after tax increased by 42%. The degree of financial leverage that existed during
the year is
A. 1.70
B. 4.20
 C. 2.47
D. 5.90
Source: CMA 695 1-1

Question: 138 A firm with a higher degree of operating leverage when compared to the industry average implies
that the
A. Firm has higher variable costs.
B. Firm’s profits are more sensitive to changes in sales volume.
C. Firm is more profitable.
D. Firm is less risky.
Source: CMA 0408 1-243

Question: 139 A summary of an income statement is shown below.

Sales $15,000,000

Cost of goods sold (9,000,000)

Operating expenses (3,000,000)

Interest expense (800,000)

Taxes (880,000)
Based on the above information, the degree of financial leverage is
A. 0.96
B. 1.36
C. 1.61
D. 2.27
Source: CMA 0408 1-244
 Question: 140 A degree of operating leverage of 3 at 5,000 units means that a
A. 3% change in earnings before interest and taxes will cause a 3% change in sales.
B. 3% change in sales will cause a 3% change in earnings before interest and taxes.
C. 1% change in sales will cause a 3% change in earnings before interest and taxes.
D. 1% change in earnings before interest and taxes will cause a 3% change in sales.
Source: CMA 0408 1-245

Question: 141 Firms with high degrees of financial leverage would be best characterized as having
A. High debt-to-equity ratios.
B. Zero coupon bonds in their capital structures.
C. Low current ratios.
D. High fixed-charge coverage.
Source: CMA 0408 1-246

Question: 142 The use of debt in the capital structure of a firm

A. Increases its financial leverage.
B. Increases its operating leverage.
C. Decreases its financial leverage.
D. Decreases its operating leverage.
Source: CMA 0408 1-247

Question: 143 A financial analyst calculated the company’s degree of financial leverage as 1.5. If income before
interest increases by 5%, earnings to shareholders will increase by
A. 1.50%
B. 3.33%
C. 5.00%
 D. 7.50%
Source: CMA 0408 1-248

Question: 144 Which one of the following statements concerning the effects of leverage on earnings before interest
and taxes (EBIT) and earnings per share (EPS) is correct?
A. For a firm using debt financing, a decrease in EBIT will result in a proportionally larger
decrease in EPS.
B. A decrease in the financial leverage of a firm will increase the beta value of the firm.
C. If Firm A has a higher degree of operating leverage than Firm B and Firm A offsets this by
using less financial leverage, then both firms will have the same variability in EBIT.
D. Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT.
Source: CMA2 0313-(4)

Question: 145 Financial information for 2 years of operation is shown below.

Year 1 Year 2
Sales $4,000,000 $4,400,000
Total operating costs 3,200,000 3,440,000
Earnings before interest and taxes $ 800,000 $ 960,000
Interest payments 320,000 275,000
Income taxes 245,000 354,000
Net income $ 235,000 $ 331,000
Earnings per share $ 2.35 $ 3.31
The degree of operating leverage (DOL) is
A. 4.09
B. 2.67
C. 2.00
D. 0.75
Source: CMA2 0313-(15)

Question: 146 Since incorporating 3 years ago, a company has estimated bad debts at a rate of 3% using the income
statement approach. During its fourth year in business, after recording the uncollectible accounts
expense based on its previous estimate, the company determined that its estimate of bad debts should
be increased to 4.5%. During this fourth year, the company recorded sales of $25,000,000 and had an
ending accounts receivable balance of $2,000,000. This change would decrease
A. Both operating leverage and times interest earned.
B. The current year’s income by $1,125,000 and decrease the firm’s operating leverage.
C. The current year’s income by $375,000 and increase the firm’s operating leverage.
D. The current year’s income by $30,000 and decrease the firm’s financial leverage.

Subunit 9: Common-Size Financial Statements

Source: CMA 688 4-17

Question: 147 In financial statement analysis, expressing all financial statement items as a percentage of base-year
amounts is called
A. Horizontal common-size analysis.
B. Vertical common-size analysis.
C. Trend analysis.
D. Ratio analysis.
Source: CMA 0313 2-11

Question: 148 A company has provided the following data pertaining to one of its products.
Year Unit Sales Unit Sales Price Gross Profit Margin

1 1,000 $50 45%

 2 1,200 $55 48%
Which one of the following statements is correct?
A. The cost per unit sold decreased 3% during Year 2.
B. The dollar amount of gross profit increased by 3% during Year 2.
C. The percentage increase in the sales price exceeded the percentage increase in the cost per
unit sold during Year 2.
D. The cost per unit increased during Year 2, in line with the increase in unit sales.
Source: CMA 0913 2-45

Question: 149 An enterprise is in the process of comparing its current financial performance for Year 3 with the
prior 2 years. The enterprise experienced exceptionally strong growth between Years 1 and 2, with a
slight decrease in sales between Years 2 and 3.
Year 1 Year 2 Year 3

Net sales $4,560,000 $30,980,400 $26,583,220

Cost of goods sold 2,378,900 24,655,340 21,444,985
Selling expenses 490,000 1,289,466 2,099,800
General and administrative expenses 290,500 500,000 600,000
Which one of the following statements is correct when using common-size analysis to compare the
results?
A. The enterprise’s profitability increased each year due to more efficient production
processes.
B. The enterprise experienced the highest proportion of selling expenses in Year 2, which led
to the high net sales.
C. The enterprise increased the percentage of general and administrative expenses each year in
order to manage the company’s growth.
D. The enterprise’s proportion of gross profit was lowest in Year 3 due to high production
 costs.
Source: CMA 0314 2-4

Question: 150 The following financial information is given.

Year 1 Year 2
Book value of assets $18,000 $26,000
Market value of equity 18,000 60,000
12 months ended 12 months ended
Year 1 Year 2
Sales $ 1,000 $ 1,300
Cost of goods sold 500 700
Operating income 500 600
Depreciation expense 200 200
Interest expense 100 100
Pretax income 200 300
Income tax expense 80 120
Net income $ 120 $ 180

Using a common-size income statement, did operating income and net income increase or decrease?
Operating income Net income
A. Increased Increased
B. Increased Decreased
C. Decreased Increased
D. Decreased Decreased
Source: CMA 1295 2-21
 Question: 151 In assessing the financial prospects for a firm, financial analysts use various techniques. An example
of vertical, common-size analysis is
A. An assessment of the relative stability of a firm’s level of vertical integration.
B. A comparison in financial ratio form between two or more firms in the same industry.
C. Advertising expense is 2% greater compared with the previous year.
D. Advertising expense for the current year is 2% of sales.
Source: CMA2 MM15

Question: 152 A company has had the following financial results for the last four years.
Year 1 Year 2 Year 3 Year 4

Sales $1,250,000 $1,300,000 $1,359,000 $1,400,000

Cost of goods sold 750,000 785,000 825,000 850,000

Gross profit 500,000 515,000 534,000 550,000

Inflation factor 1.00 1.03 1.07 1.10
The company has analyzed these results using vertical common-size analysis to determine trends.
The performance of the company can best be characterized by which one of the following
statements?
A. The common-size gross profit percentage has decreased as a result of an increasing
common-size trend in cost of goods sold.
B. The common-size trend in sales is increasing and is resulting in an increasing trend in the
common-size gross profit margin.
C. The common-size trend in cost of goods sold is decreasing which is resulting in an
increasing trend in the common-size gross profit margin.
D. The increased trend in the common-size gross profit percentage is the result of both the
 increasing trend in sales and the decreasing trend in cost of goods sold.

Subunit 10: Effects of Off-Balance-Sheet Financing

Source: Publisher

Question: 153 Leases should be classified by the lessee as either operating leases or capital leases. Which of the
following statements best characterizes operating leases?
A. The benefits and risks of ownership are transferred from the lessor to the lessee.
B. The lessee records leased property as an asset and the present value of the lease payments as
a liability.
C. Operating leases transfer ownership to the lessee, contain a bargain purchase option, are for
more than 75% of the leased asset’s useful life, or have minimum lease payments with a
present value in excess of 90% of the fair value of the leased asset.
D. The lessor records lease revenue, asset depreciation, maintenance, etc., and the lessee
records lease payments as rental expense.
Source: CMA 1295 2-6

Question: 154 Careful reading of an annual report will reveal that off-balance-sheet debt includes
A. Amounts due in future years under operating leases.
B. Transfers of accounts receivable without recourse.
C. Current portion of long-term debt.
D. Amounts due in future years under capital leases.
Source: CMA 0314 2-32

Question: 155 Which one of the following is not a form of off-balance-sheet financing?
A. Sale of receivables.
B. Foreign currency translations.
C. Operating leases.
D. Special purpose entities.