Hock P2 2020

Section A - Financial Statement Analysis.

Questions

Section A - Financial Statement Analysis.

Comparative Financial Statement Analysis 11
Financial Statement Analysis Basics, Liquidity Ratios 45
Leverage and Coverage Ratios 36
Activity Ratios 36
Market Ratios 36
Profitability Ratios and Profitability Analysis 27
Special Issues 35
226

Comparative Financial Statement Analysis

1. Question ID: CMA 1295 2.21 (Topic: Comparative Financial Statement Analysis)
In assessing the financial prospects for a firm, financial analysts use various techniques.
An example of vertical, common-size analysis is

 A. A comparison in financial ratio form between two or more firms in the same industry.
 B. Advertising expense increased by 3% over the previous year.
 C. An assessment of the relative stability of a firm's level of vertical integration.
 D. Advertising expense is 4% of sales.

2. Question ID: ICMA 10.P2.001 (Topic: Comparative Financial Statement

Analysis)
Gordon 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

Gordon has analyzed these results using vertical common-size analysis to determine
trends. The performance of Gordon 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.
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Section A - Financial Statement Analysis.
Questions
 B. 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.
 C. The common-size trend in sales is increasing and 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.

3. Question ID: ICMA 1603.P2.048 (Topic: Comparative Financial Statement

Analysis)
Select information from a company’s year-end balance sheet is shown below.

Balance Sheet
As of December 31, Year 1
Cash $ 50,000
Accounts receivable 120,000
Inventory 75,000
Property, plant and equipment, net 250,000
Total assets $495,000

Accounts payable $ 35,000

Long-term debt 100,000
Total liabilities $135,000

Common stock $300,000

Retained earnings 60,000
Total equity $360,000
Total liabilities and equity $495,000
Based on the above information, a common-size balance sheet for the company will
show

 A. accounts receivable at 24%.

 B. retained earnings at 17%.
 C. long-term debt at 74%.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 D. property, plant and equipment, net at 69%.

4. Question ID: ICMA 13.P2.001 (Topic: Comparative Financial Statement

Analysis)
Bisbee Corporation's 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 expense 40% ?
Operating income 10% ?
Bisbee 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,
Bisbee should expect selling and administrative expenses in Year 2 to be

 A. 40% of sales.
 B. less than 40% of sales.
 C. greater than 40%, but no more than 42% of sales.
 D. greater than 42% of sales.

5. Question ID: ICMA 19.P2.047 (Topic: Comparative Financial Statement

Analysis)
A financial analyst is reviewing a competitor’s income statements for the past two years.

Year 1 Year 2
Sales £250,000 £275,000
Cost of goods sold 155,000 160,000
Gross profit 95,000 115,000
Selling expenses 35,000 40,000
General expenses 45,000 50,000
Operating income before income taxes 15,000 25,000
Taxes related to operations 2,500 3,500
Net income £ 12,500 £ 21,500
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Section A - Financial Statement Analysis.
Questions
The financial analyst is able to conclude that the competitor’s

 A. common base year income statements will show that selling expenses increased by
14% in Year 2 as compared to Year 1.
 B. common size income statements will show operating income before income taxes at
22% for Year 2.
 C. common base year income statements will show that gross profit increased by 17% in
Year 2 as compared to Year 1.
 D. common size income statements will show taxes related to operations at 16% for Year
2.

6. Question ID: ICMA 19.P2.048 (Topic: Comparative Financial Statement

Analysis)
A company’s financial statements from the past two years have the following values.

Previous year Current year

Sales revenue $6,000,000 $6,600,000
Net income 500,000 540,000
Total assets 10,000,000 10,500,000
Inventory 600,000 500,000
Using horizontal analysis, what account has the largest percentage change?

 A. Total assets.
 B. Inventory.
 C. Sales revenue.
 D. Net income.

7. Question ID: ICMA 19.P2.046 (Topic: Comparative Financial Statement

Analysis)
Shown below are components of a company’s financial statements.

Sales revenue $600,000

Cost of goods sold 300,000
Total assets 2,400,000
Total equity 1,500,000
Net income 120,000
What percentage value would net income be on a common size financial statement?
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Section A - Financial Statement Analysis.
Questions
 A. 8%
 B. 20%
 C. 40%
 D. 5%

8. Question ID: ICMA 1603.P2.051 (Topic: Comparative Financial Statement

Analysis)
The dollar value of a company’s ending inventory on its balance sheet was $500,000,
$600,000, and $400,000 for Years 1, 2, and 3, respectively. In preparing a horizontal
analysis with Year 1 as the base year, the percentage change shown for Year 3 would
be

 A. 20%.
 B. 80%.
 C. (25%).
 D. (20%).

9. Question ID: CMA 688 4.17 (Topic: Comparative Financial Statement Analysis)
In financial statement analysis, expressing all financial statement items as a percentage
of base-year figures is called

 A. market growth analysis.

 B. horizontal common size analysis.
 C. vertical common size analysis.
 D. ratio analysis.

10. Question ID: ICMA 13.P2.002 (Topic: Comparative Financial Statement

Analysis)
Baldwin 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 Baldwin

 A. is beginning to experience high growth.

 B. has inventory that is becoming obsolete.
 C. is a seasonal company with traditionally higher activity in the summer months.
 D. used a material amount of cash from selling its short-term investments to purchase
land.

11. Question ID: ICMA 14.P2.004 (Topic: Comparative Financial Statement

Analysis)
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
The following financial information is given for Niska Corporation.

Year 1 Year 2
Book value of assets $18,000 $26,000
Market value of equity 18,000 60,000

12 months 12 months
ended Year 1 ended 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 for Niska
increase or decrease?

 A. Operating income decreased; Net income decreased.

 B. Operating income increased; Net income increased.
 C. Operating income increased; Net income decreased.
 D. Operating income decreased; Net income increased.

Financial Statement Analysis Basics, Liquidity Ratios

12. Question ID: ICMA 10.P2.034 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
All of the following are included when calculating the acid test ratio except

 A. accounts receivable.
 B. six-month treasury bills.
 C. prepaid insurance.
 D. 60-day certificates of deposit.
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Section A - Financial Statement Analysis.
Questions

13. Question ID: ICMA 10.P2.022 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
All of the following are affected when merchandise is purchased on credit except

 A. current ratio.
 B. total current liabilities.
 C. total current assets.
 D. net working capital.

14. Question ID: CMA 1280 4.3 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Depoole Company is a manufacturer of industrial products and employs 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.
The collection of a current accounts receivable of $29,000 would

 A. Not affect the current or quick ratios.

 B. Increase the current ratio.
 C. Increase the quick ratio.
 D. Decrease the current ratio and the quick ratio.

15. Question ID: ICMA 1603.P2.044 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
A financial analyst has gathered the following select financial data on three companies.

Company A Company B Company C

Total current assets €500,000 €1,250,000 €870,000
Total current liabilities €445,000 € 970,000 €620,000
On the basis of the information provided above, the financial analyst is able to conclude
that

 A. Company B and Company C both have a higher liquidity than Company A.

 B. Company A and Company B both have a higher liquidity than Company C.
 C. Company A has the highest liquidity.
 D. Company B has the highest liquidity.
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Section A - Financial Statement Analysis.
Questions
16. Question ID: CMA 1289 P4 Q14 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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 ($0.60 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.
Landau Corporation's current ratio was

 A. Increased by the dividend declaration and unchanged by the dividend payment.

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

17. Question ID: CMA 695 2.2 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
CPZ Enterprises had the following account information.

Accounts receivable $200,000

Accounts payable 80,000
Bonds payable, due in ten years 300,000
Cash 100,000
Interest payable, due in three months 10,000
Inventory 400,000
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Section A - Financial Statement Analysis.
Questions
Land 250,000
Notes payable, due in six months 50,000
Prepaid expenses 40,000
The company has an operating cycle of five months.
What is the company's acid test (quick) ratio?

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

18. Question ID: CIA 593 IV.40 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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?

 A. (1) Decreased (2) Increased

 B. (1) Increased (2) Decreased
 C. (1) Decreased (2) Decreased
 D. (1) Increased (2) Increased
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Section A - Financial Statement Analysis.
Questions

19. Question ID: CIA 1193 IV.46 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
The following account balances represent the end-of-year balance sheet of a company.

Accounts payable $ 67,000

Accounts receivable (net) 115,000
Accumulated depreciation - building 298,500
Accumulated depreciation - equipment 50,500
Cash 27,500
Common stock ($10 par value) 100,000
Deferred tax liabilities 37,500
Equipment 136,000
Income taxes payable 70,000
Inventory 257,000
Land and building 752,000
Long-term notes payable 123,000
Marketable securities 64,000
Notes payable within 1 year 54,000
Other current liabilities 22,500
Paid-in capital in excess of par 150,000
Prepaid expenses 27,000
Retained earnings 403,500
The company's quick ratio is:

 A. 1.44
 B. 0.82
 C. 0.97
 D. 1.09

20. Question ID: CMA 1280 4.7 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Depoole Company is a manufacturer of industrial products and employs 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.
The early repayment (liquidation) of a long-term note payable with cash affects the

 A. Current and quick ratio to the same degree.

 B. Current ratio but not the quick ratio.
 C. Current ratio to a greater degree than the quick ratio.
 D. Quick ratio to a greater degree than the current ratio.

21. Question ID: ICMA 10.P2.027 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Shown below are selected data from Fortune Company's most recent financial
statements.

Marketable securities $10,000

Accounts receivable 60,000
Inventory 25,000
Supplies 5,000
Accounts payable 40,000
Short-term debt payable 10,000
Accruals 5,000
What is Fortune's net working capital?

 A. $50,000
 B. $35,000
 C. $45,000
 D. $80,000

22. Question ID: ICMA 19.P2.049 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
The balance sheet of a luggage manufacturer reports the following.

Cash $531,000
Accounts receivable 439,000
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Section A - Financial Statement Analysis.
Questions
Inventory 300,000
Marketable securities 200,000
Current liabilities 500,000
Long term liabilities 676,000
Based on the information provided, the luggage manufacturer’s quick ratio is

 A. 2.94
 B. 2.34
 C. 1.25
 D. 1.94

23. Question ID: ICMA 19.P2.050 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
A mobile home manufacturer has a quick ratio of 2.0. Assuming nothing else changes,
which of the following actions would decrease the firm’s quick ratio?

 A. Collecting cash from issuing stock.

 B. Buying inventory on credit with 30 day terms.
 C. Writing off obsolete inventory.
 D. Converting short-term debt into long-term debt.

24. Question ID: CMA 1280 4.4 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Depoole Company is a manufacturer of industrial products and employs 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.
Obsolete inventory of $125,000 was written off during the year. This transaction

 A. Increased net working capital.

 B. Decreased the quick ratio.
 C. Decreased the current ratio.
 D. Increased the quick ratio.

25. Question ID: CMA 1289 P4 Q13 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
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 ($0.60 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.
Landau Corporation's working capital was

 A. Unchanged by either the dividend declaration or the dividend payment.

 B. Decreased by the dividend declaration and increased by the dividend payment.
 C. Unchanged by the dividend declaration and decreased by the dividend payment.
 D. Decreased by the dividend declaration and unchanged by the dividend payment.

26. Question ID: ICMA 1603.P2.062 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
A company has the following account balances.

Cash $160,000
Equipment 50,000
Inventory 35,000
Accounts receivable 25,000
Accrued wages 10,000
Long-term debt 30,000
Accounts payable 5,000
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Section A - Financial Statement Analysis.
Questions
What is the company's net working capital?

 A. $225,000.
 B. $205,000.
 C. $220,000.
 D. $180,000.

27. Question ID: ICMA 10.P2.033 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
The acid test ratio shows the ability of a company to pay its current liabilities without
having to

 A. borrow additional funds.

 B. reduce its cash balance.
 C. liquidate its inventory.
 D. collect its receivables.

28. Question ID: ICMA 1603.P2.056 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
A company has a current ratio of 2.0. Cash is 20%, accounts receivable is 40%, and
inventory is 40% of total current assets. What is the acid-test ratio for the company?

 A. 1.6.
 B. 0.8.
 C. 1.2.
 D. 2.0.

29. Question ID: ICMA 10.P2.021 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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 20,000
Prepaid expenses 8,000
Inventory 30,000
Available-for-sale securities classified as current assets
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Section A - Financial Statement Analysis.
Questions
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
Net credit sales for year 220,000
Cost of goods sold 140,000
Broomall's working capital at year end is

 A. $37,000.
 B. $10,000.
 C. $28,000.
 D. $40,000.

30. Question ID: CMA 1285 4.23 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Windham Company has current assets of $400,000 and current liabilities of $500,000.
Windham Company's current ratio would be increased by

 A. Refinancing a $100,000 long-term loan with short-term debt.

 B. The payment of $100,000 of accounts payable.
 C. The purchase of $100,000 of inventory on account.
 D. The collection of $100,000 of accounts receivable.

31. Question ID: CMA 1287 4.1 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
When a balance sheet amount is related to an income statement amount in computing a
ratio,

 A. Both amounts should be converted to market value.

 B. The income statement amount should be converted to an average for the year.
 C. The balance sheet amount should be converted to an average for the year.
 D. Comparisons with industry ratios are not meaningful.

32. Question ID: ICMA 10.P2.023 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Birch Products Inc. has the following current assets.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Cash $ 250,000
Marketable securities 100,000
Accounts receivable 800,000
Inventories 1,450,000
Total current assets $2,600,000
If Birch's current liabilities are $1,300,000, the firm's

 A. current ratio will not change if a payment of $100,000 cash is used to pay $100,000 of
accounts payable.
 B. current ratio will decrease if a payment of $100,000 cash is used to pay $100,000 of
accounts payable.
 C. quick ratio will not change if a payment of $100,000 cash is used to purchase
inventory.
 D. quick ratio will decrease if a payment of $100,000 cash is used to purchase inventory.

33. Question ID: ICMA 19.P2.051 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
A banker is reviewing the bank’s current portfolio of outstanding loans and collected the
following financial data (in thousands) on four companies that the bank has loaned
money to.

Company Company Company Company

A B C D
Earnings before
interest and income ¥5,000 ¥12,500 ¥4,300 ¥2,450
taxes
Interest expense ¥3,950 ¥9,000 ¥2,675 ¥1,250
On the basis of the information provided above, which company has the highest relative
likelihood of defaulting on an outstanding loan?

 A. Company A.
 B. Company D.
 C. Company C.
 D. Company B.

34. Question ID: ICMA 10.P2.035 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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Section A - Financial Statement Analysis.
Questions
Dedham 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 classified as current assets
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
Dedham's quick (acid-test) ratio at year end is

 A. 1.925 to 1.
 B. 1.05 to 1.
 C. 2.00 to 1.
 D. 1.80 to 1.

35. Question ID: CMA 692 2.27 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
If a company decided to change from the first-in, first-out (FIFO) inventory method to the
last-in, first-out (LIFO) method during a period of rising prices, its

 A. Cash flow would be decreased.

 B. Current ratio would be reduced.
 C. Inventory turnover ratio would be reduced.
 D. Debt-to-equity ratio would be decreased.

36. Question ID: ICMA 10.P2.029 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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?
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. Quick or acid test ratio.
 B. Working capital.
 C. Current ratio.
 D. Price earnings ratio.

37. Question ID: CMA 1293 2.17 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Norton, Inc. has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if

 A. the company sold merchandise on open account that earned a normal gross margin.
 B. a previously declared stock dividend was distributed.
 C. the company purchased inventory on open account.
 D. the company wrote off an uncollectible receivable.

38. Question ID: CIA 590 IV.47 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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. $6,000
 B. $2,500
 C. $1,500
 D. $3,500

39. Question ID: ICMA 10.P2.025 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Davis Retail Inc. 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 lower than 2.3 times.
 C. be exactly 2.53 times.
 D. be higher than 2.3 times.

40. Question ID: ICMA 10.P2.024 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Shown below are beginning and ending balances for certain of Grimaldi Inc.'s accounts.

January 1 December 31
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Section A - Financial Statement Analysis.
Questions
Cash $ 48,000 $ 62,000
Marketable securities 42,000 35,000
Accounts receivable 68,000 47,000
Inventory 125,000 138,000
Plant & equipment 325,000 424,000
Accounts payable 32,000 84,000
Accrued liabilities 14,000 11,000
7% bonds payable 95,000 77,000
Grimaldi's acid test ratio or quick ratio at the end of the year is

 A. 0.83.
 B. 1.15.
 C. 1.52.
 D. 1.02.

41. Question ID: CMA 695 2.3 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
CPZ Enterprises had the following account information.

Accounts receivable $200,000

Accounts payable 80,000
Bonds payable, due in ten years 300,000
Cash 100,000
Interest payable, due in three months 10,000
Inventory 400,000
Land 250,000
Notes payable, due in six months 50,000
Prepaid expenses 40,000
The company has an operating cycle of five months.
What will happen to the current and quick ratios if CPZ Enterprises uses cash to pay 50
percent of the accounts payable?
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Section A - Financial Statement Analysis.
Questions
 A. Both ratios will decrease.
 B. The current ratio will increase and the quick ratio will decrease.
 C. Both ratios will increase.
 D. The current ratio will decrease and the quick ratio will increase.

42. Question ID: CMA 695 2.1 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
CPZ Enterprises had the following account information.

Accounts receivable $200,000

Accounts payable 80,000
Bonds payable, due in ten years 300,000
Cash 100,000
Interest payable, due in three months 10,000
Inventory 400,000
Land 250,000
Notes payable, due in six months 50,000
Prepaid expenses 40,000
The company has an operating cycle of five months.
The current ratio for CPZ Enterprises is

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

43. Question ID: ICMA 10.P2.036 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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. increase.
 B. remain unchanged.
 C. move closer to the quick ratio.
 D. decrease.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions

44. Question ID: CIA 1196 IV.34 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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 Current liabilities $

Accounts receivable ___ Long-term liabilities 40
Inventory ___ Shareholders' equity 30
Fixed Assets ___
Total assets $100 Total liabilities and equity $100
The company has an accounts receivable balance of:

 A. $26
 B. $12
 C. $66
 D. $36

45. Question ID: CMA 1280 4.6 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Depoole Company is a manufacturer of industrial products and employs 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.
The 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. Affects all of the answers as indicated.
 C. Decreases the quick ratio.
 D. Decreases the current ratio.

46. Question ID: ICMA 10.P2.032 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
The disparity between the current and quick ratios can be explained by which one of the
following?

 A. The accounts receivable balance has decreased.

 B. The cash balance is unusually low.
 C. The inventory balance is unusually high.
 D. The current portion of long-term debt has been steadily increasing.

47. Question ID: CMA 693 2.1 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Lisa, Inc.
Statement of Financial Position
December 31, 20X4
(in thousands)

20X4 20X3
Assets
Current assets:
Cash $ 30 $ 25
Marketable securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost or net realizable value) 60 50
Prepaid items 15 20
Total Current Assets $170 $140

Non-current assets:
Long-term investments:
Equity method securities $ 25 $ 20
Property, plant & equipment:
Land (at cost) 75 75
Building (net) 80 90
Equipment (net) 95 100
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Intangible assets:
Patents (net) 35 17
Goodwill (net) 20 13
Total Non-current Assets $330 $315
Total Assets $500 $455

Liabilities and Equity

Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest 15 15
Total Current Liabilities $ 85 $ 55

Non-current liabilities:
Long-term notes payable 10% due 12/31/20X6 $ 10 $ 10
Bonds payable 12% due 12/31/20X9 15 15
Total Non-current Liabilities $ 25 $ 25
Total Liabilities $110 $ 80

Shareholders' Equity
Preferred stock - $100 par, 5% cumulative nonparticipating,
1,000 shares authorized, issued and outstanding $100 $100
Common stock - $10 par, 20,000 shares authorized,
15,000 shares issued and outstanding 150 150
Additional paid-in capital - common 75 75
Retained earnings 65 50
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Total Equity $390 $375
Total Liabilities & Equity $500 $455
Lisa Inc.'s acid test (quick) ratio at December 31, 20X4 was

 A. 0.6
 B. 2.0
 C. 1.1
 D. 1.8

48. Question ID: CIA 1195 IV.36 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Which of the following financial ratios is used to assess the liquidity of a company?

 A. Current Ratio.
 B. Total Debt to Total Assets Ratio.
 C. Profit Margin on Sales.
 D. Days' Sales Outstanding.

49. Question ID: ICMA 10.P2.030 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Selected financial data for Boyd 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 & 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
Boyd's net income for the year was $96,000. Boyd's current ratio at the end of the year
is
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. 2.71.
 B. 1.56.
 C. 2.97.
 D. 1.71.

50. Question ID: ICMA 10.P2.031 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
When reviewing a credit application, the credit manager should be most concerned with
the applicant's

 A. price-earnings ratio and current ratio.

 B. profit margin and return on assets.
 C. working capital and return on equity.
 D. working capital and current ratio.

51. Question ID: ICMA 10.P2.026 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Markowitz Company increased its allowance for uncollectible accounts. This adjustment
will

 A. reduce debt-to-asset ratio.

 B. reduce the current ratio.
 C. increase the acid test ratio.
 D. increase working capital.

52. Question ID: CIA 1196 IV.35 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
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 Current liabilities $

Accounts receivable ___ Long-term liabilities 40
Inventory ___ Shareholders' equity 30
Fixed Assets ___
Total assets $100 Total liabilities and equity $100
The company has a fixed assets balance of:

 A. $64
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 B. $58
 C. $0
 D. $16

53. Question ID: CMA 1280 4.1 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Depoole Company is a manufacturer of industrial products and employs 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.
Payment of a trade account payable of $64,500 would

 A. Decrease both the current and quick ratios.

 B. Increase the quick ratio but the current ratio would not be affected.
 C. Increase the current ratio but the quick ratio would not be affected.
 D. Increase both the current and quick ratios.

54. Question ID: ICMA 13.P2.003 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
A company's cash ratio will decrease if the company

 A. receives cash by issuing a short-term note payable.

 B. purchases commercial paper.
 C. sells goods for cash at a selling price lower than cost.
 D. purchases materials on account.

55. Question ID: CMA 1280 4.2 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Depoole Company is a manufacturer of industrial products and employs 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.
The purchase of raw materials for $85,000 on open account would

 A. Increase the current ratio.

 B. Decrease the current ratio.
 C. Decrease net working capital.
 D. Increase net working capital.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions

56. Question ID: ICMA 10.P2.028 (Topic: Financial Statement Analysis Basics,
Liquidity Ratios)
Garstka Auto Parts 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. Purchasing marketable securities for cash.
 C. Making a payment to trade accounts payable.
 D. Selling auto parts on account.

Leverage and Coverage Ratios

57. Question ID: CMA 679 4.13 (Topic: Leverage and Coverage Ratios)
Stock options are frequently provided to officers of companies. Stock options that are
exercised improve

 A. The total asset turnover.

 B. The debt-to-equity ratio.
 C. Basic earnings per share.
 D. The ownership interest of existing stockholders.

58. Question ID: ICMA 10.P2.038 (Topic: Leverage and Coverage Ratios)
A summary of the Income Statement of Sahara Company is shown below.

Sales $15,000,000
Cost of sales 9,000,000
Operating expenses 3,000,000
Interest expense 800,000
Taxes 880,000
Net income $ 1,320,000
Based on the above information, Sahara's degree of financial leverage is

 A. 1.61.
 B. 2.27.
 C. 1.36.
 D. 0.96.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions

59. Question ID: ICMA 10.P2.041 (Topic: Leverage and Coverage Ratios)
The use of debt in the capital structure of a firm

 A. increases its operating leverage.

 B. increases its financial leverage.
 C. decreases its operating leverage.
 D. decreases its financial leverage.

60. Question ID: CMA 1295 2.13 (Topic: Leverage and Coverage Ratios)
All of the following financial indicators are measures of either liquidity or
activity except the

 A. Merchandise inventory turnover.

 B. Accounts receivable turnover.
 C. Average collection period in days.
 D. Times-interest-earned ratio.

61. Question ID: ICMA 10.P2.051 (Topic: Leverage and Coverage Ratios)
Marge Halifax, chief financial officer of Strickland Construction, has been tracking the
activities of the company's nearest competitor for several years. Among other trends,
Halifax has noticed that this competitor is able to take advantage of new technology and
bring new products to market more quickly than Strickland. In order to determine the
reason for this, Halifax has been reviewing the following data regarding the two
companies.

Strickland 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
Halifax to follow in attempting to improve the flexibility of Strickland?
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. Increase Strickland's investment in short-term securities to increase the current ratio.
 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. Seek cost cutting measures that would increase Strickland's profitability.

62. Question ID: ICMA 10.P2.048 (Topic: Leverage and Coverage Ratios)
The following information has been derived from the financial statements of Boutwell
Company.

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. 0.13 to 1.
 B. 0.37 to 1.
 C. 0.50 to 1.
 D. 0.33 to 1.

63. Question ID: ICMA 1603.P2.052 (Topic: Leverage and Coverage Ratios)
A company has $100,000 of sales, $60,000 of variable costs, and $30,000 of fixed
costs. The degree of operating leverage is

 A. 0.1.
 B. 0.3.
 C. 0.4.
 D. 4.0.

64. Question ID: CIA 595 IV.51 (Topic: Leverage and Coverage Ratios)
Everything else being equal, a <<_____>> highly leveraged firm will have <<_____>>
earnings per share.

 A. More; Less volatile

 B. Less; Higher
 C. More; Lower
 D. Less; Less volatile
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
65. Question ID: ICMA 10.P2.037 (Topic: Leverage and Coverage Ratios)
The capital structure of four corporations is as follows.

Corporation
Sterling Cooper Warwick Pane
Short-term debt 10% 10% 15% 10%
Long-term debt 40% 35% 30% 30%
Preferred stock 30% 30% 30% 30%
Common equity 20% 25% 25% 30%
Which corporation is the most highly leveraged?

 A. Sterling.
 B. Pane.
 C. Warwick.
 D. Cooper.

66. Question ID: HOCK MP1 E2 (Topic: Leverage and Coverage Ratios)
Ray Corporation has long-term debt of $1,200,000 and equity of $1,000,000. The board
of directors has set a goal of 1:1 for the company's debt-equity ratio. Which of the
following could the company employ to achieve this goal?

 A. Paying a stock dividend to the existing shareholders.

 B. Issuing new bonds.
 C. Issuing rights to purchase new common stock.
 D. Paying a dividend on its common stock.

67. Question ID: ICMA 10.P2.043 (Topic: Leverage and Coverage Ratios)
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. Financial leverage affects both EPS and EBIT, while operating leverage only affects
EBIT.
 C. A decrease in the financial leverage of a firm will increase the beta value of the firm.
 D. 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.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
68. Question ID: ICMA 10.P2.045 (Topic: Leverage and Coverage Ratios)
Borglum 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.

Bond Rockland Western 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
Borglum's 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
Borglum's objective.

 A. Borglum should not acquire any of these firms as none of them represents a good risk.
 B. Acquire Bond as both the debt/equity ratio and degree of financial leverage exceed the
industry average.
 C. Acquire Western as the company has the highest net profit margin and degree of
financial leverage.
 D. Acquire Rockland as both the debt/equity ratio and degree of financial leverage are
below the industry average.

69. Question ID: CMA 687 4.27 (Topic: Leverage and Coverage Ratios)
When compared to a debt-to-assets ratio, a debt to equity ratio would

 A. Have no relationship at all to the debt to assets ratio.

 B. Be higher than the debt to assets ratio.
 C. Be about the same as the debt to assets ratio.
 D. Be lower than the debt to assets ratio.

70. Question ID: CMA 685 4.17 (Topic: Leverage and Coverage Ratios)
If the ratio of total liabilities to equity increases, a ratio that must also increase is

 A. Return on equity.
 B. The current ratio.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 C. Times interest earned.
 D. Total liabilities to total assets.

71. Question ID: ICMA 10.P2.044 (Topic: Leverage and Coverage Ratios)
The Liabilities and Shareholders' Equity section of Mica Corporation'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
Mica's debt/equity ratio is

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

72. Question ID: ICMA 10.P2.050 (Topic: Leverage and Coverage Ratios)
Marble Savings Bank has received long-term loan applications from three companies in
the auto parts 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.

Bailey Nutron Sonex 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%
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
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 Marble Savings.

 A. Marble Savings Bank should not grant any loans as none of these companies
represents a good credit risk.
 B. Grant the loan to Nutron as both the debt/equity ratio and degree of financial leverage
are below the industry average
 C. Grant the loan to Sonex as the company has the highest net profit margin and degree
of financial leverage.
 D. Grant the loan to Bailey as all the company's data approximate the industry average.

73. Question ID: ICMA 10.P2.046 (Topic: Leverage and Coverage Ratios)
Which one of the following is the best indicator of long-term debt paying ability?

 A. Working capital turnover.

 B. Current ratio.

 C. Debt-to-total assets ratio.

 D. Asset turnover.

74. Question ID: ICMA 10.P2.047 (Topic: Leverage and Coverage Ratios)
Easton Bank has received loan applications from three companies in the computer
service business and will grant a long-term loan to the company with the best prospect
of fulfilling the loan obligations. Specific data, shown below, has been selected from
these applications for review and comparison with industry averages.

CompGo Astor SysGen 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 would fulfill Easton's objective.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. Easton should not grant any loans as none of these companies represents a good
credit risk.
 B. Grant the loan to CompGo as all the company's data approximate the industry average.
 C. Grant the loan to SysGen as the company has the highest net profit margin and degree
of financial leverage.
 D. Grant the loan to Astor as both the debt/equity ratio and degree of financial leverage
are below the industry average.

75. Question ID: ICMA 13.P2.004 (Topic: Leverage and Coverage Ratios)
Financial information for Arbat Inc. for two 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 for Arbat Inc. is

 A. 4.09.
 B. 0.75.
 C. 2.00.
 D. 2.67.

76. Question ID: ICMA 13.P2.015 (Topic: Leverage and Coverage Ratios)
Since incorporating three years ago, Lawrence Inc. 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, Lawrence
determined that its estimate of bad debts should be increased to 4.5%. During this
fourth year, Lawrence recorded sales of $25,000,000 and had an ending accounts
receivable balance of $2,000,000. This change would decrease

 A. the current year's income by $375,000 and increase the firm's degree of operating
leverage.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 B. the current year's income by $30,000 and decrease the firm's financial leverage.
 C. the current year's income by $1,125,000 and decrease the firm's degree of operating
leverage.

 D. both degree of operating leverage and times interest earned.

77. Question ID: CIA 1190 IV.55 (Topic: Leverage and Coverage Ratios)
Assume that a company's debt to total assets ratio is currently 50%. It plans to purchase
fixed assets either by using borrowed funds for the purchase or by entering into a 4-year
operating lease. On the date the fixed assets are acquired, the company's debt to total
assets ratio will

 A. Increase whether the assets are purchased or leased.

 B. Increase if the assets are purchased, and decrease if the assets are leased.
 C. Increase if the assets are purchased, and remain unchanged if the assets are leased.
 D. Remain unchanged whether the assets are purchased or leased.

78. Question ID: CMA 691 2.8 (Topic: Leverage and Coverage Ratios)
Selected data from Ostrander Corporation's financial statements for the years indicated
are presented in thousands.
20X2 Operations

Net sales $4,175

Cost of goods sold 2,880
Interest expense 50
Income tax 120
Gain on disposal of a segment (net of tax) 210
Net income 385
December 31, 20X2

20X2 20X1
Cash $ 32 $ 28
Trading debt securities 169 172
Accounts receivable (net) 210 204
Merchandise inventory 440 420
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Tangible fixed assets 480 440
Total assets 1,397 1,320
Current liabilities 370 368
Total liabilities 790 750
Common stock outstanding 226 210
Retained earnings 381 360
The total debt-to-equity ratio for Ostrander Corporation in 20X2 is

 A. 2.07
 B. 1.85
 C. 1.30
 D. 3.49

79. Question ID: CMA 690 1.16 (Topic: Leverage and Coverage Ratios)
This year, Nelson Industries 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. 2.47.
 B. 4.20.
 C. 1.70.
 D. 5.90.

80. Question ID: CMA 1291 1.5 (Topic: Leverage and Coverage Ratios)
The purchase of treasury stock with a firm's surplus cash

 A. Increases a firm's financial leverage.

 B. Increases a firm's equity.
 C. Increases a firm's assets.
 D. Increases a firm's interest-coverage ratio.

81. Question ID: ICMA 10.P2.042 (Topic: Leverage and Coverage Ratios)
A financial analyst with Mineral Inc. calculated the company's degree of financial
leverage as 1.5. If net income before interest increases by 5%, earnings to shareholders
will increase by

 A. 7.50%.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 B. 1.50%.
 C. 3.33%.
 D. 5.00%.

82. Question ID: CIA 1193 IV.48 (Topic: Leverage and Coverage Ratios)
A company is considering the early retirement of its 10%, 10-year bonds payable.
Before retiring the bonds, the company's capital structure was

Current liabilities $125,000

Long-term liabilities: Notes payable (due in 5 years) 200,000
Bonds payable 300,000
Premium on bonds payable 25,000
Owner's equity: Common stock ($5 par value) 150,000
Paid-in capital in excess of par 50,000
Retained earnings 450,000
If the bonds can be retired at 103.5%, the

 A. Return on owner's equity will decrease.

 B. Asset turnover ratio will decrease.
 C. Debt-equity ratio will increase.
 D. Financial leverage will decrease.

83. Question ID: CIA 594 IV.52 (Topic: Leverage and Coverage Ratios)
The degree of operating leverage (DOL) is

 A. a measure of the change in earnings before interest and taxes (EBIT) resulting from a
given change in sales.
 B. lower if the degree of total leverage is higher, other things held constant.
 C. higher if the degree of total leverage is lower, other things held constant.
 D. a measure of the change in earnings available to common stockholders associated
with a given change in operating earnings.

84. Question ID: CMA 690 1.9 (Topic: Leverage and Coverage Ratios)
Sylvan Corporation has the following capital structure.

 Debenture bonds: $10,000,000

 Preferred equity: $1,000,000
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 Common equity: $39,000,000
The financial leverage of Sylvan Corporation would increase as a result of:

 A. Issuing common stock and using the proceeds to retire preferred stock.
 B. Financing its future investments with a higher percentage of equity funds.
 C. Maintaining the same dollar level of cash dividends as the prior year, even though
earnings have increased by 7%.
 D. Financing its future investments with a higher percentage of bonds.

85. Question ID: ICMA 10.P2.039 (Topic: Leverage and Coverage Ratios)
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 earnings before interest and taxes will cause a 3% change in sales.
 D. 1% change in sales will cause a 3% change in earnings before interest and taxes.

86. Question ID: CMA 688 4.11 (Topic: Leverage and Coverage Ratios)
A measure of its long-term debt-paying ability is a company's

 A. Return on assets.
 B. Inventory turnover.
 C. Times-interest-earned.
 D. Length of the operating cycle.

87. Question ID: ICMA 19.P2.052 (Topic: Leverage and Coverage Ratios)
An accountant has determined that last year a company had earnings before interest
and tax of $750,000, interest expense of $125,000, and an income tax rate of 40%.
What was the company’s degree of financial leverage last year?

 A. 1.20.
 B. 0.80.
 C. 2.00.
 D. 1.67.

88. Question ID: ICMA 1603.P2.059 (Topic: Leverage and Coverage Ratios)
A company has earnings before interest and taxes of $100,000, income taxes of
$30,000, and interest expense of $10,000. The company’s interest coverage ratio is

 A. 7.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 B. 6.
 C. 10.
 D. 9.

89. Question ID: ICMA 10.P2.040 (Topic: Leverage and Coverage Ratios)
Firms with high degrees of financial leverage would be best characterized as having

 A. high fixed-charge coverage.

 B. high debt-to-equity ratios.
 C. zero coupon bonds in their capital structures.
 D. low current ratios.

90. Question ID: CMA 695 1.1 (Topic: Leverage and Coverage Ratios)
A higher degree of operating leverage compared with the industry average implies that
the firm

 A. has profits that are more sensitive to changes in sales volume.

 B. is more profitable.
 C. has higher variable costs.
 D. is less risky.

91. Question ID: CMA 690 4.20 (Topic: Leverage and Coverage Ratios)
Assume the information below for Ramer Company, for Matson Company, and for their
common industry represents 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 --
The attitudes of both Ramer and Matson concerning risk are best explained by the
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. Debt/equity ratio and times interest earned.
 B. Current ratio and earnings per share.
 C. Dividend payout ratio and earnings per share.
 D. Current ratio, accounts receivable turnover, and inventory turnover.

92. Question ID: ICMA 10.P2.049 (Topic: Leverage and Coverage Ratios)
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. 0.6.
 B. 1.0.
 C. 2.0.
 D. 1.2.

Activity Ratios
93. Question ID: CMA 696 1.15 (Topic: Activity Ratios)
Spotech Co.'s budgeted sales and budgeted cost of sales for the coming year are
$212,000,000 and $132,500,000, respectively. Short-term interest rates are expected to
average 5%. If Spotech could increase inventory turnover from its current 8 times per
year to 10 times per year, its expected cost savings in the current year would be

 A. $250,000
 B. $331,250
 C. $82,812
 D. $165,625

94. Question ID: ICMA 1603.P2.046 (Topic: Activity Ratios)

A company had $6 million in credit sales last fiscal year. The company’s beginning
accounts receivable balance was $1 million and its ending receivable balance was
$1.25 million on its year-end financial statements. If the industry average period for the
collection of accounts receivables is 90 days, the company’s accounts receivable
collection period is less than the industry average by approximately

 A. 60 days.
 B. 68 days.
 C. 52 days.
 D. 22 days.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
95. Question ID: ICMA 10.P2.062 (Topic: Activity Ratios)
On its year-end financial statements, Caper Corporation showed sales of $3,000,000,
net fixed assets of $1,300,000, and total assets of $2,000,000. The company's fixed
asset turnover is

 A. 2.3 times.
 B. 66.7%.
 C. 43.3%.
 D. 1.5 times.

96. Question ID: ICMA 10.P2.058 (Topic: Activity Ratios)

Globetrade is a retailer that buys virtually all of its merchandise from manufacturers in a
country experiencing significant inflation. Globetrade is considering changing its method
of inventory costing from first-in, first-out (FIFO) to last-in, first-out (LIFO). What effect
would the change from FIFO to LIFO have on Globetrade’s current ratio and inventory
turnover ratio?

 A. The current ratio would increase but the inventory turnover ratio would decrease.
 B. Both the current ratio and the inventory turnover ratio would decrease.
 C. The current ratio would decrease but the inventory turnover ratio would increase.
 D. Both the current ratio and the inventory turnover ratio would increase.

97. Question ID: ICMA 10.P2.066 (Topic: Activity Ratios)

The assets of Moreland Corporation are presented below.

January 1 December 31
Cash $ 48,000 $ 62,000
Marketable securities 42,000 35,000
Accounts receivable 68,000 47,000
Inventory 125,000 138,000
Plant & equipment
(net of accumulated depreciation) 325,000 424,000
For the year just ended, Moreland had net income of $96,000 on $900,000 of sales.
Moreland's total asset turnover ratio is

 A. 1.50.
 B. 1.37.
 C. 1.27.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 D. 1.48.

98. Question ID: ICMA 13.P2.029 (Topic: Activity Ratios)

All other things being equal, which one of the following factors would result in an
increase in cash reported on the balance sheet from one period to the next?

 A. Reduction of days' sales outstanding of accounts receivable.

 B. Increase in the level of inventory held.
 C. Increase in the speed with which accounts payable invoices are paid.
 D. Decrease in the accrued vacation liability.

99. Question ID: CMA 688 4.5 (Topic: Activity Ratios)

The data presented below shows actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, 20X0, and selected budget figures for the
20X1 fiscal year. McKeon's controller is in the process of reviewing the 20X1 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.)

May 31, May 31,

20X1 20X0
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
20X1 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 20X1 60,000
Administrative expense 67,000
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
*All sales are credit sales.
Composition of Current Assets

May 31, May 31,

20X1 20X0
Cash $ 20,000 $ 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000 $180,000
McKeon Company's total asset turnover for 20X1 is

 A. 0.805
 B. 0.761
 C. 0.348
 D. 0.722

100. Question ID: HOCK MP1 E21 (Topic: Activity Ratios)

The annual sales revenue of an enterprise is $3,000,000. Half of the sales are on credit
terms; half are cash sales. Accounts receivable at the balance sheet date are $165,000.
What is the average receivables collection period, to the nearest day, using a 365 day
year?

 A. 20 days
 B. 9 days
 C. 18 days
 D. 40 days

101. Question ID: ICMA 10.P2.061 (Topic: Activity Ratios)

The following financial information is given for Anjuli Corporation (in millions of dollars).

Prior Year Current Year

Sales $10 $11
Cost of goods sold 6 7
Current Assets:
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Cash 2 3
Accounts receivable 3 4
Inventory 4 5
Between the prior year and the current year, did the days' sales in inventory and days'
sales in receivables for Anjuli increase or decrease? Assume a 365-day year.

 A. Days' sales in inventory increased; days' sales in receivables increased.

 B. Days' sales in inventory decreased; days' sales in receivables decreased.
 C. Days' sales in inventory increased; days' sales in receivables decreased.
 D. Days' sales in inventory decreased; days' sales in receivables increased.

102. Question ID: ICMA 10.P2.052 (Topic: Activity Ratios)

Lowell 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 (end of year) 20,000
Accounts receivable (beginning of year) 24,000
Inventory (end of year) 30,000
Inventory (beginning of year) 26,000
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
Using a 365-day year, compute Lowell's accounts receivable turnover in days.

 A. 33.2 days.
 B. 39.8 days.
 C. 26.1 days.
 D. 36.5 days.

103. Question ID: CMA 1294 2.23 (Topic: Activity Ratios)

The following inventory and sales data are available for the current year for Volpone
Company. Volpone uses a 365-day year when computing ratios.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
November 30, 20X2 November 30, 20X1
Net credit sales $6,205,000
Gross receivables 350,000 320,000
Inventory 960,000 780,000
Cost of goods sold 4,380,000
Volpone Company's average number of days to sell inventory for the current year is

 A. 65.00 days.
 B. 72.50 days.
 C. 80.00 days.
 D. 51.18 days.

104. Question ID: CMA 1293 2.16 (Topic: Activity Ratios)

The ratio that measures a firm's ability to generate earnings from its resources is

 A. Sales to working capital.

 B. Days' sales in inventory.
 C. Days' sales in receivables.
 D. Asset turnover.

105. Question ID: CMA 693 2.3 (Topic: Activity Ratios)

Lisa, Inc.
Statement of Financial Position
December 31, 20X4
(in thousands)

20X4 20X3
Assets
Current assets:
Cash $ 30 $ 25
Marketable securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost or net realizable value) 60 50
Prepaid items 15 20
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Total Current Assets $170 $140

Non-current assets:
Long-term investments:
Equity method investments $ 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 Non-current Assets $330 $315
Total Assets $500 $455

Liabilities and Equity

Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest 15 15
Total Current Liabilities $ 85 $ 55

Non-current liabilities:
Long-term notes payable 10% due 12/31/20X6 $ 10 $ 10
Bonds payable 12% due 12/31/20X9 15 15
Total Non-current Liabilities $ 25 $ 25
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Total Liabilities $110 $ 80

Shareholders' Equity
Preferred stock - $100 par, 5% cumulative nonparticipating,
1,000 shares authorized, issued and outstanding $100 $100
Common stock - $10 par, 20,000 shares authorized,
15,000 shares issued and outstanding 150 150
Additional paid-in capital - common 75 75
Retained earnings 65 50
Total Equity $390 $375
Total Liabilities & Equity $500 $455
Assume net credit sales and cost of goods sold for 20X4 were $300,000 and $220,000
respectively. Lisa Inc.'s average collection period for 20X4, using a 360-day year, was

 A. 45 days.
 B. 36 days.
 C. 61 days.
 D. 54 days.

106. Question ID: CMA 688 4.3 (Topic: Activity Ratios)

The data presented below shows actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, 20X0, and selected budget figures for the
20X1 fiscal year. McKeon's controller is in the process of reviewing the 20X1 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.)

May 31, May 31,

20X1 20X0
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
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
20X1 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 20X1 60,000
Administrative expense 67,000
*All sales are credit sales.
Composition of Current Assets

May 31, May 31,

20X1 20X0
Cash $ 20,000 $ 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000 $180,000
The 20X1 accounts receivable turnover for McKeon Company is

 A. 3.500
 B. 5.000
 C. 1.882
 D. 4.118

107. Question ID: CMA 688 4.12 (Topic: Activity Ratios)

Using the data presented below, calculate the cost of sales for the Beta Corporation for
the past year.

Current ratio 3.5

Acid test ratio 3.0
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Current liabilities at year end $600,000
Beginning inventory $500,000
Inventory turnover 8.0

 A. $3,200,000
 B. $2,400,000
 C. $6,400,000
 D. $1,600,000

108. Question ID: ICMA 10.P2.056 (Topic: Activity Ratios)

Garland Corporation's Income Statement for the year just ended is shown below.

Net sales $900,000

Cost of goods sold:
Inventory - beginning $125,000
Purchases 540,000
Goods available for sale 665,000
Inventory - ending 138,000
Cost of goods sold 527,000
Gross profit 373,000
Operating expenses 175,000
Income from operations $198,000
Garland's average inventory turnover ratio is

 A. 3.82.
 B. 6.52.
 C. 6.84.
 D. 4.01.

109. Question ID: CMA 1293 2.13 (Topic: Activity Ratios)

In computing inventory turnover, the base to use is the

 A. Sales base because it provides turnover rates that are considerably higher.
 B. Sales base because it more clearly represents operational activity.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 C. Cost of sales base because it eliminates any changes due solely to sales price
changes.
 D. Sales base because it is more likely to reflect a change in trend.

110. Question ID: CMA 688 4.4 (Topic: Activity Ratios)

The data presented below shows actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, 20X0, and selected budget figures for the
20X1 fiscal year. McKeon's controller is in the process of reviewing the 20X1 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.)

May 31, May 31,

20X1 20X0
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
20X1 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 20X1 60,000
Administrative expense 67,000
*All sales are credit sales.
Composition of Current Assets

May 31, May 31,

20X1 20X0
Cash $ 20,000 $ 10,000
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000 $180,000
Using a 365-day year, McKeon's days' sales in inventory is

 A. 160 days.
 B. 171 days.
 C. 78 days.
 D. 183 days.

111. Question ID: ICMA 10.P2.054 (Topic: Activity Ratios)

Zubin Corporation experiences a decrease in sales and the cost of good sold, an
increase in accounts receivable, and no change in inventory. If all else is held constant,
what is the total effect of these changes on the receivables turnover and inventory
ratios?

 A. Inventory turnover increased; receivables turnover decreased.

 B. Inventory turnover decreased; receivables turnover decreased.
 C. Inventory turnover increased; receivables turnover increased.
 D. Inventory turnover decreased; receivables turnover increased.

112. Question ID: ICMA 19.P2.054 (Topic: Activity Ratios)

A financial analyst is analyzing the accounts receivable period for three companies by
comparing their days’ sales in receivables. The financial analyst has collected the
following information for the companies.

Company Company Company

A B C
Net credit sales $175,000 $145,000 $225,000
Average accounts receivable, net 10,000 20,000 11,500
Average allowance for uncollectible
3,500 6,500 4,500
accounts
If each of the companies has credit terms of net 30 days, the financial analyst is most
likely to conclude which one of the following?

 A. Company A is the most efficient in collecting payment.

 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 B. Company B is the least efficient in collecting payment.
 C. Company C is less efficient than Company A in collecting payment.
 D. Company B is more efficient than Company C in collecting payment.

113. Question ID: CMA 693 2.4 (Topic: Activity Ratios)

Lisa, Inc.
Statement of Financial Position
December 31, 20X4
(in thousands)

20X4 20X3
Assets
Current assets:
Cash $ 30 $ 25
Trading securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost of market) 60 50
Prepaid items 15 20
Total Current Assets $170 $140

Non-current assets:
Long-term investments:
Available-for-sale investments $ 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
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Total Non-current Assets $330 $315
Total Assets $500 $455

Liabilities and Equity

Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest 15 15
Total Current Liabilities $ 85 $ 55

Non-current liabilities:
Long-term Notes payable 10% due 12/31/20X6 $ 10 $ 10
Bonds payable 12% due 12/31/20X9 15 15
Total Non-current Liabilities $ 25 $ 25
Total Liabilities $110 $ 80

Shareholders' Equity
Preferred stock - 5% cumulative, $100 par, nonparticipating
authorized, issued and outstanding, 1,000 shares $100 $100
Common stock - $10 par 20,000 shares authorized, 15,000
shares issued and outstanding 150 150
Additional paid-in capital - common 75 75
Retained earnings 65 50
Total Equity $390 $375
Total Liabilities & Equity $500 $455
Assume sales and cost of goods sold for 20X4 were $300,000 and $220,000,
respectively. Lisa Inc.'s inventory turnover, using a 360-day year, was
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. 4.0 times.
 B. 3.7 times.
 C. 4.4 times.
 D. 5.0 times.

114. Question ID: CIA 596 IV.53 (Topic: Activity Ratios)

A growing company is assessing current working capital requirements. An average of
58 days is required to convert raw materials into finished goods and to sell them. Then
an average of 32 days is required to collect on receivables. If the average time the
company takes to pay for its raw materials is 15 days after they are received, then the
total cash conversion cycle for this company is:

 A. 90 days.
 B. 75 days.
 C. 11 days.
 D. 41 days.

115. Question ID: ICMA 10.P2.053 (Topic: Activity Ratios)

Maydale Inc.'s financial statements show the following information.

Accounts receivable, end of Year 1 $ 320,000

Credit sales for Year 2 3,600,000
Accounts receivable, end of Year 2 400,000
Maydale's accounts receivable turnover ratio is

 A. 0.10.
 B. 9.00.
 C. 10.00.
 D. 11.25.

116. Question ID: ICMA 10.P2.063 (Topic: Activity Ratios)

The following information was obtained from a company’s financial statements.

Beginning of the Year End of the Year

Inventory $6,400 $7,600
Accounts receivable 2,140 3,060
Accounts payable 3,320 3,680
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Total sales for the year were $85,900, of which $62,400 were credit sales. The cost of
goods sold was $24,500. The company's payable turnover was

 A. 16.9 times.
 B. 7.0 times.
 C. 17.8 times.
 D. 6.7 times.

117. Question ID: CMA 688 4.15 (Topic: Activity Ratios)

The days' sales in receivables ratio may be understated if the company

 A. Does not use average receivables in the ratio calculation.

 B. Uses a calendar year for its accounting period.
 C. Uses a natural business year for its accounting period.
 D. Uses average receivables in the ratio calculation.

118. Question ID: ICMA 10.P2.060 (Topic: Activity Ratios)

Cornwall Corporation's net accounts receivable were $68,000 and $47,000 at the
beginning and end of the year, respectively. Cornwall's condensed Income Statement is
shown below.

Sales $900,000
Cost of goods sold 527,000
Operating expenses 175,000
Operating income 198,000
Income tax 79,000
Net income $119,000
Cornwall's average number of days' sales in accounts receivable (using a 360-day year)
is

 A. 19 days.
 B. 13 days.
 C. 23 days.
 D. 8 days.

119. Question ID: ICMA 19.P2.053 (Topic: Activity Ratios)

A wholesale supplier has collected the following financial data on three companies that
only purchase their products for resale to retail consumers.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Company A Company B Company C
Sales £1,000,000 £1,250,000 £2,450,000
Gross profit margin 20% 30% 25%
Beginning inventory £35,000 £80,000 £155,000
Ending inventory £65,000 £225,000 £175,000
On the basis of the information provided above, the supplier is able to conclude that

 A. Company B is turning the product inventory the fastest.

 B. Companies B and C are both turning the product inventory faster than Company A.
 C. Companies A and C are both turning the product inventory faster than Company B.
 D. Company C is turning the product inventory the fastest.

120. Question ID: CMA 693 2.2 (Topic: Activity Ratios)

Lisa, Inc.
Statement of Financial Position
December 31, 20X4
(in thousands)

20X4 20X3
Assets
Current assets:
Cash $ 30 $ 25
Marketable securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost or net realizable value) 60 50
Prepaid items 15 20
Total Current Assets $170 $140

Non-current assets:
Long-term investments:
Equity method investments $ 25 $ 20
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
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 Non-current Assets $330 $315
Total Assets $500 $455

Liabilities and Equity

Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest 15 15
Total Current Liabilities $ 85 $ 55

Non-current liabilities:
Long-term notes payable 10% due 12/31/20X6 $ 10 $ 10
Bonds payable 12% due 12/31/20X9 15 15
Total Non-current Liabilities $ 25 $ 25
Total Liabilities $110 $ 80

Shareholders' Equity
Preferred stock - $100 par, 5% cumulative nonparticipating,
1,000 shares authorized, issued and outstanding $100 $100
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Common stock - $10 par, 20,000 shares authorized,
15,000 shares issued and outstanding 150 150
Additional paid-in capital - common 75 75
Retained earnings 65 50
Total Equity $390 $375
Total Liabilities & Equity $500 $455
Assume net credit sales and cost of goods sold for 20X4 were $300,000 and $220,000
respectively. Lisa Inc.'s accounts receivable turnover for 20X4 was

 A. 4.9 times.
 B. 8.0 times.
 C. 5.9 times.
 D. 6.7 times.

121. Question ID: ICMA 10.P2.059 (Topic: Activity Ratios)

Lancaster Inc. had net accounts receivable of $168,000 and $147,000 at the beginning
and end of the year, respectively. The company’s net income for the year was $204,000
on $1,700,000 in total sales. Cash sales were 6% of total sales. Lancaster's average
accounts receivable turnover ratio for the year is

 A. 9.51.
 B. 10.15.
 C. 10.87.
 D. 10.79.

122. Question ID: ICMA 10.P2.055 (Topic: Activity Ratios)

Peggy Monahan, controller, has gathered the following information regarding Lampasso
Company.

Beginning of the year End of the year

Inventory $6,400 $7,600
Accounts receivable $2,140 $3,060
Accounts payable $3,320 $3,680
Total sales for the year were $85,900, of which $61,400 were credit sales. The cost of
goods sold was $24,500.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Lampasso's inventory turnover ratio for the year was

 A. 3.5 times.
 B. 8.2 times.
 C. 8.9 times.
 D. 3.2 times.

123. Question ID: CMA 690 4.14 (Topic: Activity Ratios)

Accounts receivable turnover will normally decrease as a result of

 A. A change in credit policy to lengthen the period for cash discounts.

 B. The write-off of an uncollectible account (assume the use of the allowance for doubtful
accounts method).
 C. An increase in cash sales in proportion to credit sales.
 D. A significant sales volume decrease near the end of the accounting period.

124. Question ID: ICMA 10.P2.057 (Topic: Activity Ratios)

Makay 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 (end of year) 20,000
Accounts receivable (beginning of year) 24,000
Inventory (end of year) 30,000
Inventory (beginning of year) 26,000
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
Makay's average inventory turnover for the year was

 A. 4.7 times.
 B. 5.0 times.
 C. 5.4 times.
 D. 7.9 times.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions

125. Question ID: ICMA 10.P2.160 (Topic: Activity Ratios)

Locar Corporation had net sales last year of $18,600,000 (of which 20% were
installment sales). It also had an average accounts receivable balance (including the
installment receivables) of $1,380,000. Credit terms are 2/10, net 30. Based on a 360-
day year, Locar’s average collection period last year was

 A. 26.2 days.
 B. 26.7 days.
 C. 33.4 days.
 D. 27.3 days.

126. Question ID: CMA 690 4.13 (Topic: Activity Ratios)

To determine the operating cycle for a wholesaler, which one of the following pairs of
items is needed?

 A. Days' sales in accounts receivable and average merchandise inventory.

 B. Cash turnover and net sales.
 C. Asset turnover and return on sales.
 D. Accounts receivable turnover and inventory turnover.

127. Question ID: CMA 1294 2.22 (Topic: Activity Ratios)

The following inventory and sales data are available for the current year for Volpone
Company. Volpone uses a 365-day year when computing ratios.

November 30, 20X2 November 30, 20X1

Net credit sales $6,205,000
Gross receivables 350,000 320,000
Inventory 960,000 780,000
Cost of goods sold 4,380,000
Volpone Company's average number of days to collect accounts receivable for the
current year is

 A. 19.44 days.
 B. 19.71 days.
 C. 18.82 days.
 D. 20.59 days.
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Section A - Financial Statement Analysis.
Questions
128. Question ID: ICMA 13.P2.010 (Topic: Activity Ratios)
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. control over inventory levels.

 B. competitive pricing.
 C. favorable credit policies.
 D. stores open in current year.

Market Ratios
129. Question ID: CIA 596 4.12 (Topic: Market Ratios)
A company has common and preferred shares outstanding with the following
characteristics:

Common Preferred

Number of shares outstanding 50,000 25,000

Dividends paid during the year $100,000 $ 50,000
Year-end market price per share $10 $5
Book value of equity $500,000 $250,000
For the year just ended, the company had the following statement of income:

Sales revenue $1,000,000

Cost of goods sold 300,000
Gross profit $ 700,000
Depreciation expense 100,000
Earnings before interest and taxes $ 600,000
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Interest expense 100,000
Earnings before taxes $ 500,000
Taxes 250,000
Net income 250,000
The company has basic earnings per share (BEPS) of:

 A. 5.00.
 B. 2.67.
 C. 3.33.
 D. 4.00.

130. Question ID: ICMA 10.P2.076 (Topic: Market Ratios)

Devlin Inc. has 250,000 shares of $10 par value common stock outstanding. For the
current year, Devlin paid a cash dividend of $3.50 per share and had earnings per share
of $4.80. The market price of Devlin's stock is $34 per share. Devlin's price/earnings
ratio is

 A. 7.08.
 B. 2.08.
 C. 9.71.
 D. 2.85.

131. Question ID: ICMA 1603.P2.061 (Topic: Market Ratios)

The common stock of a company has a market price of $36. The company has
50,000,000 common shares outstanding and net income of $200,000,000. At the end of
the fiscal year, the company declared common dividends of $1 per share. What is the
price/earnings ratio of the stock?

 A. 9.
 B. 12.
 C. 36.
 D. 4.

132. Question ID: ICMA 10.P2.084 (Topic: Market Ratios)

Selected information regarding Dyle Corporation’s outstanding equity is shown below.

Common stock, $10 par value,

350,000 shares outstanding $3,500,000
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Preferred stock, $100 par value,
10,000 shares outstanding 1,000,000
Preferred stock dividend paid 60,000
Common stock dividend paid 700,000
Earnings per common share 3
Market price per common share 18
Dyle's yield on common stock is

 A. 20.00%.
 B. 16.66%.
 C. 11.11%.
 D. 16.88%.

133. Question ID: ICMA 10.P2.082 (Topic: Market Ratios)

On January 1, Esther Pharmaceuticals had a balance of 10,000 shares of common
stock outstanding. On June 1, the company issued an additional 2,000 shares of
common stock for cash. A total of 5,000 shares of 6%, $100 par, nonconvertible
preferred stock was outstanding all year. Esther's net income was $120,000 for the
year. The basic earnings per share for the year were

 A. $8.06.
 B. $10.75.
 C. $10.00.
 D. $7.50.

134. Question ID: CMA 1291 P2 Q22 (Topic: Market Ratios)

Sands, Inc. uses a calendar year for financial reporting. The company is authorized to
issue 5,000,000 shares of $10 par common stock. At no time has Sands issued any
potentially dilutive securities. Listed below is a summary of Sands' common stock
activities.

Number of common shares issued and outstanding at Dec. 31, 20X6: 1,000,000
Shares issued as a result of a 10% stock dividend on Sept. 30, 20X7: 100,000
Shares issued for cash on March 31, 20X8: 1,000,000
Number of common shares issued and outstanding at Dec. 31, 20X8: 2,100,000
A two-for-one stock split of Sands' common stock took place on March 31, 20X9.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
The weighted-average number of common shares used in computing earnings per
common share for 20X9 on the 20X9 comparative income statement is:

 A. 3,675,000.
 B. 2,100,000.
 C. 3,150,000.
 D. 4,200,000.

135. Question ID: CMA 0688 P4 Q19 (Topic: Market Ratios)

Which one of the following items would likely increase earnings per share (EPS) of a
corporation?

 A. Declaration of a stock split.

 B. Declaration of a stock dividend.
 C. Purchase of treasury stock.
 D. An increase in the common stock shares authorized to be issued.

136. Question ID: ICMA 10.P2.088 (Topic: Market Ratios)

The following information concerning Arnold Company's common stock was included in
the company's financial reports for the last two years.

Year 2 Year 1
Market price per share on December 31 $60 $50
Par value per share 10 10
Earnings per share 3 3
Dividends per share 1 1
Book value per share on December 31 36 34
Arnold's dividend yield in Year 2

 A. has declined compared to Year 1.

 B. has increased compared to Year 1.
 C. is indicative of the company's failure to provide a positive return to the investors.
 D. is the same as Year 1.

137. Question ID: CFM Sample Q. 1 (Topic: Market Ratios)

The following information is provided about the common stock of Evergreen Inc. at the
end of the fiscal year:
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Number of shares outstanding 1,800,000
Par value per share $10.00
Dividends paid per share (last 12 months) 12.00
Market price per share 108.00
Basic earnings per share 36.00
Diluted earnings per share 24.00
The price/earnings ratio for Evergreen's common stock is

 A. 10.8.
 B. 4.5.
 C. 9.0.
 D. 3.0.

138. Question ID: CMA 692 2.26 (Topic: Market Ratios)

Information concerning Hamilton's common stock is presented below for the fiscal year
ended May 31, 2005.
Common shares outstanding: 750,000
Stated value per share: $15.00
Market price per share: $45.00
Year 1 dividends paid per share: $4.50
Year 2 dividends paid per share: $7.50
Basic earnings per share: $11.25
Diluted earnings per share: $9.00
The price-earnings ratio for Hamilton's common stock is

 A. 3.0 times.
 B. 5.0 times.
 C. 6.0 times.
 D. 4.0 times.

139. Question ID: CMA 685 4.20 (Topic: Market Ratios)

Baylor Company paid out one-half of last year's earnings in dividends. This year,
Baylor's earnings increased by 20%, and the amount of its dividends increased by 15%.
Baylor's dividend payout ratio for the current year is

 A. 78%
 B. 47.9%
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 C. 57.5%
 D. 50%

140. Question ID: ICMA 13.P2.007 (Topic: Market Ratios)

Mayson Ltd. reported net income of £3,500,000 for last year. The company had 100,000
shares of common stock outstanding with a par value of £1 and 5,000 shares of
common stock in treasury during the year. Mayson declared and paid dividends of £1
per share on its common stock. The market price per common share at the end of last
year was £30, while the book value per common share was £10. The company’s
dividend yield for the year was

 A. 2.71%
 B. 3.33%
 C. 10.00%
 D. 5.00%

141. Question ID: ICMA 10.P2.069 (Topic: Market Ratios)

At the end of its fiscal year on December 31, 20X0, Merit Watches had total
shareholders' equity of $24,209,306. Of this total, $3,554,405 was preferred equity.
During the 20X1 fiscal year, Merit's net income after tax was $2,861,003. During 20X1,
Merit paid preferred share dividends of $223,551 and common share dividends of
$412,917. At December 31, 20X1, Merit had 12,195,799 common shares outstanding
and the company did not sell any common shares during the year. What was Merit
Watch's book value per share on December 31, 20X1?

 A. $2.20.
 B. $1.88.
 C. $1.91.
 D. $2.17.

142. Question ID: CMA 0681 P3 Q17 (Topic: Market Ratios)

James Corporation reported earnings for calendar year 20X6 of $3 per common share
based on net income of $3,000,000 and 1,000,000 average shares of common stock
outstanding. There were 1,000,000 common shares outstanding on December 31,
20X6. In 20X7 the common stock was split on a two-for-one basis, and a 20% stock
dividend was distributed in 20X8. The Basic EPS reported for 20X6 in the 20X9 annual
report should be reported as:

 A. $1.50.
 B. $1.25.
 C. $3.00.
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Section A - Financial Statement Analysis.
Questions
 D. $2.50.

143. Question ID: ICMA 10.P2.077 (Topic: Market Ratios)

At year-end, Appleseed Company reported net income of $588,000. The company has
10,000 shares of $100 par value, 6% preferred stock and 120,000 shares of $10 par
value common stock outstanding and 5,000 shares of common stock in treasury. There
are no dividend payments in arrears, and the market price per common share at the end
of the year was $40. Appleseed's price-earnings ratio is

 A. 9.47.
 B. 9.09.
 C. 8.16.
 D. 8.50.

144. Question ID: ICMA 10.P2.085 (Topic: Market Ratios)

For the most recent fiscal period, Oakland Inc. paid a regular quarterly dividend of $0.20
per share and had earnings of $3.20 per share. The market price of Oakland stock at
the end of the period was $40.00 per share. Oakland's dividend yield was

 A. 0.50%.
 B. 6.25%.
 C. 2.00%.
 D. 1.00%.

145. Question ID: CIA 0592 P4 Q25 (Topic: Market Ratios)

A company issues financial statements in which conversion of warrants and options into
common stock is assumed. This scenario is most closely associated with which of the
following?

 A. Retrospective application and common stock equivalents.

 B. Application of the if-converted method.
 C. Unusual items and prospective adjustments.
 D. Computation of diluted earnings per share.

146. Question ID: CMA 1293 2.18 (Topic: Market Ratios)

An increase in the market price of a company's common stock will immediately affect its

 A. Dividend yield.
 B. Debt to equity ratio.
 C. Dividend payout ratio.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 D. Basic earnings per share.

147. Question ID: CMA 1291 P2 Q19 (Topic: Market Ratios)

Sands, Inc. uses a calendar year for financial reporting. The company is authorized to
issue 5,000,000 shares of $10 par common stock. At no time has Sands issued any
potentially dilutive securities. Listed below is a summary of Sands' common stock
activities.

Number of common shares issued and outstanding at Dec. 31, 20X6: 1,000,000
Shares issued as a result of a 10% stock dividend on Sept. 30, 20X7: 100,000
Shares issued for cash on March 31, 20X8: 1,000,000
Number of common shares issued and outstanding at Dec. 31, 20X8: 2,100,000
A two-for-one stock split of Sands' common stock took place on March 31, 20X9.
The weighted-average number of common shares used in computing earnings per
common share for 20X7 on the 20X8 comparative income statement was:

 A. 2,100,000.
 B. 1,025,000.
 C. 1,050,000.
 D. 1,100,000.

148. Question ID: ICMA 10.P2.080 (Topic: Market Ratios)

Collins Company reported net income of $350,000 for the year. The company had
10,000 shares of $100 par value, non-cumulative, 6% preferred stock and 100,000
shares of $10 par value common stock outstanding. There were also 5,000 shares of
common stock in treasury during the year. Collins declared and paid all preferred
dividends as well as a $1 per share dividend on common stock. Collins' basic earnings
per share of common stock for the year was

 A. $2.90.
 B. $2.76.
 C. $3.33.
 D. $3.50.

149. Question ID: CIA 0594 P4 Q31 (Topic: Market Ratios)

A company has net income for the current year of $120,000 and pays $5,000 in
dividends to its preferred shareholders and $20,000 in dividends to its common
shareholders. The weighted average number of common shares outstanding for the
year is 1,500, and the weighted average number of preferred shares outstanding for the
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
year is 2,500. Basic earnings per share for this company for the current year, to the
nearest cent, is

 A. $76.67
 B. $66.67
 C. $60.00
 D. $40.00

150. Question ID: CMA 693 2.5 (Topic: Market Ratios)

Lisa, Inc.
Statement of Financial Position
December 31, 20X4
(in thousands)

20X4 20X3
Assets
Current assets:
Cash $ 30 $ 25
Trading securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost of market) 60 50
Prepaid items 15 20
Total Current Assets $170 $140

Long-term assets:
Long-term investments:
Available-for-sale investments $ 25 $ 20
Property, plant & equipment:
Land (at cost) 75 75
Building (net) 80 90
Equipment (net) 95 100
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Intangible assets:
Patents (net) 35 17
Goodwill (net) 20 13
Total Long-Term Assets $330 $315
Total Assets $500 $455

Liabilities and Equity

Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest $ 15 $ 15
Total current liabilities $ 85 $ 55

Long-term liabilities:
Long-term Notes payable 10% due 12/31/20X6 $ 10 $ 10
Bonds payable 12% due 12/31/20X9 15 15
Total long-term debt $ 25 $ 25
Total liabilities $110 $ 80

Shareholders' Equity
Preferred stock - 5% cumulative, $100 par, nonparticipating
authorized, issued and outstanding, 1,000 shares $100 $100
Common stock - $10 par 20,000 shares authorized, 15,000
shares issued and outstanding 150 150
Additional paid-in capital - common 75 75
Retained earnings 65 50
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Total Equity $390 $375
Total Liabilities & Equity $500 $455
Assuming that there are no preferred stock dividends in arrears, Lisa Inc.'s book value
per share of common stock at December 31, 20X4 was

 A. $14.50.
 B. $19.33.
 C. $18.33.
 D. $10.00.

151. Question ID: CMA 685 4.16 (Topic: Market Ratios)

A drop in the market price of a firm's common stock will immediately affect its

 A. Dividend payout ratio.

 B. Debt to net worth ratio.
 C. Dividend yield.
 D. Return on equity.

152. Question ID: CMA 1291 P2 Q21 (Topic: Market Ratios)

Sands, Inc. uses a calendar year for financial reporting. The company is authorized to
issue 5,000,000 shares of $10 par common stock. At no time has Sands issued any
potentially dilutive securities. Listed below is a summary of Sands' common stock
activities.

Number of common shares issued and outstanding at Dec. 31, 20X6: 1,000,000
Shares issued as a result of a 10% stock dividend on Sept. 30, 20X7: 100,000
Shares issued for cash on March 31, 20X8: 1,000,000
Number of common shares issued and outstanding at Dec. 31, 20X8: 2,100,000
A two-for-one stock split of Sands' common stock took place on March 31, 20X9.
The weighted-average number of common shares used in computing earnings per
common share for 20X8 on the 20X9 comparative income statement was:

 A. 3,700,000.
 B. 2,100,000.
 C. 4,200,000.
 D. 1,850,000.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
153. Question ID: CMA 1291 P2 Q20 (Topic: Market Ratios)
Sands, Inc. uses a calendar year for financial reporting. The company is authorized to
issue 5,000,000 shares of $10 par common stock. At no time has Sands issued any
potentially dilutive securities. Listed below is a summary of Sands' common stock
activities.

Number of common shares issued and outstanding at Dec. 31, 20X6: 1,000,000
Shares issued as a result of a 10% stock dividend on Sept. 30, 20X7: 100,000
Shares issued for cash on March 31, 20X8: 1,000,000
Number of common shares issued and outstanding at Dec. 31, 20X8: 2,100,000
A two-for-one stock split of Sands' common stock took place on March 31, 20X9.
The weighted-average number of common shares used in computing earnings per
common share for 20X8 on the 20X8 comparative income statement was

 A. 1,600,000.
 B. 1,850,000.
 C. 2,100,000.
 D. 3,700,000.

154. Question ID: CMA 0694 P2 Q15 (Topic: Market Ratios)

At the beginning of the fiscal year, June 1, 20X0, Boyd Corporation had 80,000 shares
of common stock outstanding. Also outstanding was $200,000 of 8% convertible bonds
that had been issued at $1,000 par. The bonds were convertible into 20,000 shares of
common stock; however, no bonds were converted during the year. The company's tax
rate is 34%, and the Aa bond interest rate has been 10%. Boyd's net income for the
year was $107,000. The diluted earnings per share (DEPS - rounded to the nearest
cent) of Boyd common stock for the fiscal year ended May 31, 20X1 was:

 A. $1.20
 B. $1.18
 C. $1.07
 D. $1.12

155. Question ID: CMA 1280 4.5 (Topic: Market Ratios)

Depoole Company is a manufacturer of industrial products and employs 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.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
The issuance of new shares in a five-for-one split of common stock

 A. Increases total shareholders' equity.

 B. Decreases the book value per share of common stock.
 C. Decreases total shareholders' equity.
 D. Increases the book value per share of common stock.

156. Question ID: ICMA 10.P2.071 (Topic: Market Ratios)

The following information concerning Arnold Company's common stock was included in
the company's financial reports for the last two years.

Year 2 Year 1
Market price per share on December 31 $60 $50
Par value per share 10 10
Earnings per share 3 3
Dividends per share 1 1
Book value per share on December 31 36 34
Based on the price-earnings information, investors would most likely consider Arnold's
common stock to

 A. show a positive trend in growth opportunities in Year 2 compared to Year 1.

 B. be overvalued at the end of Year 2.
 C. indicate inferior investment decisions by management in Year 2.
 D. show a decline in growth opportunities in Year 2 compared to Year 1.

157. Question ID: CIA 1195 IV.32 (Topic: Market Ratios)

A company has 100,000 outstanding common shares with a market value of $20 per
share. Dividends of $2 per share were paid in the current year and the company has a
dividend payout ratio of 40%. The price to earnings ratio of the company is:

 A. 4
 B. 50
 C. 2.5
 D. 10

158. Question ID: ICMA 10.P2.083 (Topic: Market Ratios)

Roy Company had 120,000 common shares and 100,000 preferred shares outstanding
at the close of the prior year. During the current year Roy repurchased 12,000 common
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
shares on March 1, sold 30,000 common shares on June 1, and sold an additional
60,000 common shares on November 1. No change in preferred shares outstanding
occurred during the year. The number of shares of stock outstanding to be used in the
calculation of basic earnings per share at the end of the current year is

 A. 298,000.
 B. 198,000.
 C. 100,000.
 D. 137,500.

159. Question ID: ICMA 10.P2.081 (Topic: Market Ratios)

Ray Company has 530,000 common shares outstanding at year-end. At December 31,
for basic earnings per share purposes, Ray computed its weighted average number of
shares as 500,000. Prior to issuing its annual financial statements, but after year-end,
Ray split its stock 2 for 1. Ray's weighted average number of shares to be used for
computing annual basic earnings per share is

 A. 530,000.
 B. 500,000.
 C. 1,060,000.
 D. 1,000,000.

160. Question ID: ICMA 10.P2.070 (Topic: Market Ratios)

Donovan Corporation recently declared and issued a 50% stock dividend. This
transaction will reduce the company's

 A. debt-to-equity ratio.
 B. current ratio.
 C. return on operating assets.
 D. book value per common share.

161. Question ID: CMA 685 4.21 (Topic: Market Ratios)

Watson Corporation computed the following items from its financial records for the year
just ended:

Price-earnings ratio 12
Payout ratio 0.6
Asset turnover 0.9
The dividend yield on Watson's common stock is
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. 7.2%
 B. 5.0%
 C. 10.8%
 D. 7.5%

162. Question ID: CMA 685 4.13 (Topic: Market Ratios)

Which one of the following statements about the price-earnings (P-E) ratio is correct?

 A. A P-E ratio expresses the relationship between a firm's market price and its net sales.
 B. A P-E ratio has more meaning when a firm has abnormally low profits in relation to its
asset base.
 C. A company with high growth opportunities ordinarily has a high P-E ratio.
 D. A P-E ratio has more meaning when a firm has losses than when it has profits.

163. Question ID: ICMA 10.P2.086 (Topic: Market Ratios)

The dividend yield ratio is calculated by which one of the following methods?

 A. Dividends per share divided by earnings per share

 B. Earnings per share divided by dividends per share.
 C. Market price per share divided by dividends per share.
 D. Dividends per share divided by market price per share.

164. Question ID: ICMA 10.P2.079 (Topic: Market Ratios)

A steady drop in a firm's price/earnings ratio could indicate that

 A. both earnings per share and the market price of the stock are rising.
 B. earnings per share has been increasing while the market price of the stock has held
steady.
 C. earnings per share has been steadily decreasing.
 D. the market price of the stock has been steadily rising.

Profitability Ratios and Profitability Analysis

165. Question ID: ICMA 19.P2.055 (Topic: Profitability Ratios and Profitability
Analysis)
A company had $450,000 in assets, $250,000 in liabilities, and $200,000 in common
equity at the beginning of the fiscal year. The company’s management is projecting that
net income for the current fiscal year will be $55,000 and common equity at the end of
the fiscal year will be $210,000. How much will the company’s return on equity be at the
end of the fiscal year?
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. 26.8%
 B. 27.5%
 C. 22.0%
 D. 12.2%

166. Question ID: CMA 1293 2.14 (Topic: Profitability Ratios and Profitability
Analysis)
Selected data from Sheridan Corporation's year end financial statements are presented
below. The difference between average and ending inventory is immaterial.

Current ratio 2.0

Quick ratio 1.5
Current liabilities $120,000
Inventory turnover (based on cost of goods sold) 8 times
Gross profit margin 40%
Sheridan's net sales for the year were

 A. $1,200,000
 B. $800,000
 C. $480,000
 D. $240,000

167. Question ID: ICMA 19.P2.063 (Topic: Profitability Ratios and Profitability
Analysis)
A company’s Year 4 gross profit margin remained unchanged from Year 3. However,
the company’s Year 4 net profit margin increased from Year 3. Which one of the
following could explain the change from Year 3 to Year 4?

 A. Preferred dividends increased.

 B. Cost of goods sold decreased relative to sales.
 C. Sales decreased at a faster rate than operating expenses.
 D. Corporate income tax rates decreased.

168. Question ID: HOCK MP1 E5 (Topic: Profitability Ratios and Profitability
Analysis)
A company's capital structure is as follows (in millions of dollars):

12/31/X6 12/31/X7
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Section A - Financial Statement Analysis.
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Long-term debt @ 6% 100 90
Common stock 380 390
Retained earnings 120 135
600 615
The following items appear on the company's income statement for the year ended
December 31, December 20X7 (in millions of dollars):

Income Before Interest & Taxes 50

Interest Expense ( 6)
Income before Taxes 44
Income Tax (14)
30
Dividends (15)
Increase to retained earnings for the year 15
What is the company's return on equity for 20X7?

 A. 5.71%
 B. 2.44%
 C. 5.85%
 D. 4.94%

169. Question ID: ICMA 1603.P2.047 (Topic: Profitability Ratios and Profitability
Analysis)
Two companies have identical return on assets. Company X purchased most of its
assets many years ago when prices were relatively low. Company Y purchased most of
its assets in recent years when prices were relatively high. Both companies have
identical debt levels, and record their assets at historical cost. The return on assets ratio
is most likely

 A. accurate for both companies.

 B. overstated for Company X.
 C. overstated for both companies.
 D. overstated for Company Y.

170. Question ID: CMA 693 2.6 (Topic: Profitability Ratios and Profitability
Analysis)
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Section A - Financial Statement Analysis.
Questions
Lisa, Inc.
Statement of Financial Position
December 31, 20X4
(in thousands)

20X4 20X3
Assets
Current assets:
Cash $ 30 $ 25
Trading securities 20 15
Accounts receivable (net) 45 30
Inventories (at lower of cost of market) 60 50
Prepaid items 15 20
Total Current Assets $170 $140

Long-term assets:
Long-term investments:
Available-for-sale investments $ 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
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Liabilities and Equity
Current liabilities:
Notes payable $ 23 $ 12
Accounts payable 47 28
Accrued interest $ 15 $ 15
Total current liabilities $ 85 $ 55

Long-term liabilities:
Long-term Notes payable 10% due 12/31/20X6 $ 10 $ 10
Bonds payable 12% due 12/31/20X9 15 15
Total long-term debt $ 25 $ 25
Total liabilities $110 $ 80

Shareholders' Equity
Preferred stock - 5% cumulative, $100 par, nonparticipating
authorized, issued and outstanding, 1,000 shares $100 $100
Common stock - $10 par 20,000 shares authorized, 15,000
shares issued and outstanding 150 150
Additional paid-in capital - common 75 75
Retained earnings 65 50
Total Equity $390 $375
Total Liabilities & Equity $500 $455
Assuming that Lisa Inc.'s net income for 20X4 was $35,000 and there were no preferred
stock dividends in arrears, Lisa's return on common equity for 20X4 was

 A. 10.9%
 B. 10.6%
 C. 12.4%
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Section A - Financial Statement Analysis.
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 D. 7.8%

171. Question ID: ICMA 13.P2.005 (Topic: Profitability Ratios and Profitability
Analysis)
Transnational Motors has decided to make an additional investment in its operating
assets which are financed by debt. Assuming all other factors remain constant, this
increase in investment will have which of the following effects?

Operating Total Asset Return on

Profit Margin Turnover Assets
I. Increase No Change Increase
II. No Change Decrease Decrease
III. No Change Increase Decrease
IV. Decrease Decrease Decrease

 A. II.
 B. I.
 C. III.
 D. IV.

172. Question ID: CMA 688 4.6 (Topic: Profitability Ratios and Profitability
Analysis)
The data presented below shows actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, 20X0, and selected budget figures for the
20X1 fiscal year. McKeon's controller is in the process of reviewing the 20X1 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.)

May 31, May 31,

20X1 20X0
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
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Section A - Financial Statement Analysis.
Questions
Retained earnings 32,000 20,000
20X1 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 20X1 60,000
Administrative expense 67,000
*All sales are credit sales.
Composition of Current Assets

May 31, May 31,

20X1 20X0
Cash $ 20,000 $ 10,000
Accounts receivable 100,000 70,000
Inventory 70,000 80,000
Other 20,000 20,000
$210,000 $180,000
The 20X1 return on assets for McKeon Company is

 A. 0.156
 B. 0.166
 C. 0.261
 D. 0.148

173. Question ID: ICMA 19.P2.061 (Topic: Profitability Ratios and Profitability
Analysis)
A company’s finished goods inventory was miscounted, and the correct balance is
$130,000 lower. Management is concerned about correcting the error because bonuses
are only earned if the minimum gross profit margin is 45%. Selected financial
information is shown below.

Revenues $1,000,000
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Section A - Financial Statement Analysis.
Questions
Cost of goods sold 500,000
Salaries 57,000
Accounts receivable 22,000
Cash 43,000
With the corrected inventory, will the bonus target be met?

 A. No, the working capital will decrease.

 B. Yes, the gross profit margin will not change.
 C. Yes, the gross profit margin will increase.
 D. No, the cost of goods sold will increase.

174. Question ID: ICMA 10.P2.065 (Topic: Profitability Ratios and Profitability
Analysis)
For the year just ended, Beechwood Corporation had income from operations of
$198,000 and net income of $96,000. Additional financial information is given below.

January 1 December 31
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
Beechwood has no other equity issues outstanding. Beechwood's return on
shareholders' equity for the year just ended is

 A. 19.2%.
 B. 32.0%.
 C. 19.9%.
 D. 39.5%.

175. Question ID: ICMA 19.P2.064 (Topic: Profitability Ratios and Profitability
Analysis)
Selected items from the equity section of a company’s balance sheet are shown below.

Year 2 Year 1
Common stock, 5,000,000 shares $ 50,000,000 $ 50,000,000
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Total equity 200,000,000 182,500,000
The increase in equity was caused by $20,000,000 in net income less a common stock
dividend payment of $0.50 per share. The company’s sustainable growth rate is

 A. 9.15%.
 B. 8.75%.
 C. 9.59%.
 D. 10.46%.

176. Question ID: ICMA 13.P2.009 (Topic: Profitability Ratios and Profitability
Analysis)
Which one of the following ratios would be most affected by miscellaneous or non-
recurring income?

 A. Operating profit margin.

 B. Net profit margin.
 C. Debt-to-equity ratio.
 D. Gross profit margin.

177. Question ID: ICMA 13.P2.011 (Topic: Profitability Ratios and Profitability
Analysis)
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 percentage increase in the sales price exceeded the percentage increase in the
cost per unit sold during year 2.
 C. The dollar amount of gross profit increased by 3% during year 2.
 D. The cost per unit increased during year 2, in line with the increase in unit sales.

178. Question ID: CIA 1194 IV.16 (Topic: Profitability Ratios and Profitability
Analysis)
A company has a 50% gross margin, general and administrative expenses of $50,
interest expense of $20, and net income of $10 for the year just ended. If the corporate
tax rate is 50%, the level of sales revenue for the year just ended was
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. $90
 B. $135
 C. $180
 D. $150

179. Question ID: ICMA 1603.P2.060 (Topic: Profitability Ratios and Profitability
Analysis)
A company reported the following financial data.

Sales $2,000,000
Cost of goods sold 800,000
Operating expenses 400,000
Interest expense 200,000
Income tax 300,000
The company’s operating profit margin percentage is

 A. 30%.
 B. 80%.
 C. 15%.
 D. 40%.

180. Question ID: ICMA 1603.P2.006 (Topic: Profitability Ratios and Profitability
Analysis)
A company’s year-end selected financial data is shown below.

Year 2 Year 1
Current assets $250,000 $175,000
Total assets 600,000 500,000
Total liabilities 300,000 225,000
Net sales 200,000 150,000
Net income 75,000 60,000
The company’s rate of return on assets and rate of return on equity for Year 2 are

 A. 12% and 22%, respectively.

 B. 36% and 25%, respectively.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 C. 13% and 25%, respectively.
 D. 14% and 26%, respectively.

181. Question ID: ICMA 19.P2.059 (Topic: Profitability Ratios and Profitability
Analysis)
A company is currently reviewing the most recent fiscal year’s results of operations and
noted an increase in the return on assets ratio when compared to the prior year. Which
one of the following could have caused the increase?

 A. Sales decreased by the same dollar amount that expenses increased.

 B. Sales remained the same and expenses and total assets decreased.
 C. Sales increased by the same dollar amount as expenses and total assets.
 D. Sales remained the same and ending inventory increased.

182. Question ID: ICMA 19.P2.060 (Topic: Profitability Ratios and Profitability
Analysis)
At the end of Year 1, a company had average total assets of ¥450 million, average total
liabilities of ¥150 million, and net income of ¥135 million. The company’s management
projects average total assets to increase by ¥50 million in Year 2 due to the planned
purchase of a new manufacturing plant. The company will issue ¥30 million in new debt
at the beginning of Year 2. No debt was paid down during Year 1. If the company’s
management projects net income to increase by 25% in Year 2, by approximately how
much does the company’s return on total assets increase between Year 1 and Year 2?

 A. 11%
 B. 20%
 C. 13%
 D. 17%

183. Question ID: ICMA 13.P2.006 (Topic: Profitability Ratios and Profitability
Analysis)
The president of Reading Manufacturing, Inc. is establishing performance goals for
each of the company's manufacturing plants. The data below represent prior year
results for one of the plants.

Revenue $ 400,000
Variable costs 100,000
Fixed costs 200,000
Average assets 1,000,000
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
Average liabilities 200,000
The plant's return on assets is

 A. 30.0%
 B. 12.5%
 C. 10.0%
 D. 37.5%

184. Question ID: HOCK MP1 E8 (Topic: Profitability Ratios and Profitability
Analysis)
Below are highlights from XYZ Company's financial statements for the year ended
December 31, 20X7 (in 000’s).

Balance Sheet Income Statement

Long-term debt @ 6% $1,000 Net income from operations $400

Common Stock 200 Interest expense 60
Additional paid in capital 600 Net income before tax $340
Retained Earnings 600 Income tax @ 40% 136
Net income after interest & taxes $204
No common stock was issued or repurchased during 20X7, and no dividends were paid
during the year. What is the return on equity, based on these figures?

 A. 28.57%
 B. 15.71%
 C. 8.50%
 D. 14.57%

185. Question ID: ICMA 10.P2.068 (Topic: Profitability Ratios and Profitability
Analysis)
Colonie Inc. expects to report net income of at least $10 million annually for the
foreseeable future. Colonie 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?

 A. Increase inventory turnover; increase use of equity financing.

 B. Decrease inventory turnover; decrease use of equity financing.
 C. Decrease inventory turnover; increase use of equity financing.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 D. Increase inventory turnover; decrease use of equity financing.

186. Question ID: ICMA 19.P2.056 (Topic: Profitability Ratios and Profitability
Analysis)
A company has a net profit margin of 5%, an operating profit margin of 10%, and a
gross profit margin of 25%. Sales revenue is $5,000,000. Selling, general, and
administrative expenses are $750,000. What is the cost of goods sold?

 A. $3,750,000.
 B. $4,250,000.
 C. $3,250,000.
 D. $4,750,000.

187. Question ID: ICMA 19.P2.058 (Topic: Profitability Ratios and Profitability
Analysis)
A company’s financial data for the recent fiscal year follows. Common stock: 5,000,000
shares outstanding Preferred stock: 1,000,000 shares Net income: $50,000,000
Common stock dividends: $8,000,000 Preferred stock dividends: $2,000,000 The
company would have reported basic and diluted earnings per share of

 A. $10.00 and $9.60, respectively.

 B. $10.00 and $6.67, respectively.
 C. $9.60 and $8.00, respectively.
 D. $9.60 and $9.60, respectively.

188. Question ID: ICMA 1603.P2.045 (Topic: Profitability Ratios and Profitability
Analysis)
A company had $5 million in sales, $3 million in cost of goods sold, and $1 million in
selling and administrative expenses during the last fiscal year. If the company’s income
tax rate was 25%, what was the company’s gross profit margin percentage?

 A. 30%.
 B. 50%.
 C. 40%.
 D. 20%.

189. Question ID: ICMA 19.P2.057 (Topic: Profitability Ratios and Profitability
Analysis)
A corporation had 250,000 shares of common stock outstanding on January 1. The
financial manager of the corporation on September 30 is projecting net income of
$750,000 for the current year. If the management of the corporation is planning on
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
declaring a $55,000 preferred stock dividend and a 2-for-1 common stock split on
December 31, earnings per common share on December 31 is expected to equal

 A. $1.50.
 B. $1.39.
 C. $2.78.
 D. $3.00.

190. Question ID: ICMA 10.P2.064 (Topic: Profitability Ratios and Profitability
Analysis)
Douglas Company purchased 10,000 shares of its common stock at the beginning of
the year for cash. This transaction will affect all of the following except the

 A. earnings per share.

 B. debt-to-equity ratio.
 C. net profit margin.
 D. current ratio.

191. Question ID: ICMA 13.P2.012 (Topic: Profitability Ratios and Profitability
Analysis)
Acme 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 Acme's
operating profit margin?

 A. 45%.
 B. 60%.
 C. 23%.
 D. 41%.

Special Issues
192. Question ID: ICMA 19.P2.070 (Topic: Special Issues)
A manufacturing company operates in an environment of significant inflationary
pressures. Which one of the following inventory methods should the company choose to
produce financial statements considered to be of the highest earnings quality?

 A. Average cost.
 B. Last-in, first-out.
 C. Specific identification.
 D. First-in, first-out.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
193. Question ID: ICMA 10.P2.104 (Topic: Special Issues)
Finer Foods Inc., a chain of supermarkets specializing in gourmet food, has been using
the average cost method to value its inventory. During the current year, the company
changed to the first-in, first-out method of inventory valuation. The president of the
company reasoned that this change was appropriate since it would more closely match
the flow of physical goods. The correct method of reporting this change on the financial
statements is

 A. prospectively.
 B. disclosed in a note to the financial statements.
 C. retrospective application.
 D. restatement.

194. Question ID: CMA 689 1.5 (Topic: Special Issues)

The equity section of Allen Corporation's statement of financial position is presented as
follows.

Preferred stock ($100 par value) $ 8,000,000

Common stock ($5 par value) 5,000,000
Paid-in capital in excess of par 12,000,000
Retained earnings 6,000,000
Net worth $31,000,000
The book value of Allen Corporation's common stock is

 A. $5.00.
 B. $31.00.
 C. $23.00.
 D. $17.00.

195. Question ID: CMA 0693 P2 Q7 (Topic: Special Issues)

When reporting a change in accounting principle,

 A. the change is recognized by including the cumulative effect of the change in the net
income of the period of change.
 B. the change is recognized by retrospectively adjusting the financial statements.
 C. it is reported as part of income from continuing operations in the year of the change
reflecting the application of the new principle, but on a basis that includes the cumulative
adjustment.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 D. the pro forma effects of retroactive application of the new principle upon income from
continuing operations and net income are not to be disclosed on the face of the income
statement or in the notes to the financial statements.

196. Question ID: CMA 693 P2 Q21 (Topic: Special Issues)

When converting financial statements originally recorded in a foreign currency,

 A. income taxes are ignored in calculating and disclosing the results of foreign currency
translations.
 B. the financial statements should be adjusted for a rate change that occurs after the
financial statement date but prior to statement issuance.
 C. an analysis of the changes in Accumulated Other Comprehensive Income due to
translation gains/losses is to be provided in the financial statements or in the notes to the
financial statements.
 D. a component of annual net income, "Adjustment from Foreign Currency Translation,"
should be presented in the notes to the financial statements or in a separate schedule.

197. Question ID: ICMA 19.P2.068 (Topic: Special Issues)

During the current year, an entity changed its method of accounting for depreciation
because it believed that the result would provide more reliable and relevant information.
In its financial statements for the year, how should the entity report the adjustment
resulting from the change in accounting principle?

 A. Report as an adjustment to beginning retained earnings of the earliest period presented

in the financial statements.
 B. Not disclose in the financial statements.
 C. Include in the determination of profit or loss for the current period as a cumulative effect
adjustment.
 D. Disclose as a separate type of depreciation expense, directly following depreciation
expense in the current year.

198. Question ID: ICMA 1603.P2.030 (Topic: Special Issues)

Which one of the following is the most relevant evidence suggesting that the quality of a
company’s earnings is weak?

 A. A significant portion of the company's business is located in a country where it is

difficult for multinational corporations to repatriate profits.
 B. Inventory levels are rising during a period of falling prices.
 C. The company's choice of accounting policies appears aggressive.
 D. The company's days-sales-outstanding ratio has fallen during an economic downturn.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
199. Question ID: CIA 597 4.35 (Topic: Special Issues)
Which of the following is true about the impact of price inflation on financial ratio
analysis?

 A. Inflation has no impact on financial ratio analysis.

 B. Inflation impacts comparative analysis of firms of different ages, but not financial ratio
analysis for one firm over time.
 C. Inflation impacts financial ratio analysis for one firm over time, as well as comparative
analysis of firms of different ages.
 D. Inflation impacts financial ratio analysis for one firm over time, but not comparative
analysis of firms of different ages.

200. Question ID: ICMA 10.P2.109 (Topic: Special Issues)

The financial statements of Lark Inc. for last year are shown below.

Income Statement ($000)

Revenue $4,000
Cost of sales 2,900
Gross margin 1,100
General & administrative 500
Interest 100
Taxes 150
Net income $ 350
Balance Sheet ($000)
Current assets $ 800 Current liabilities $ 500
Plant & equipment 3,200 Long-term debt $1,000
Common equity 2,500
Totals $4,000 Totals $4,000
If Lark's book values approximate market values and if the opportunity costs of debt and
equity are 10% and 15%, respectively, what was the economic profit for Lark last year?

 A. $350,000.
 B. ($125,000).
 C. ($25,000).
 D. $0.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions

201. Question ID: CMA 0697 P2 Q25 (Topic: Special Issues)

A change from the sum-of-the-years'-digits depreciation method to the straight-line
depreciation method is an example of a(n)

 A. accounting principle change.

 B. accounting estimate change.
 C. prior-period adjustment.
 D. error correction.

202. Question ID: CMA 692 P2 Q16 (Topic: Special Issues)

If an entity's books of account are not maintained in its functional currency, the
FASB Accounting Standards Codification® requires remeasurement into the functional
currency prior to the translation process. An item that should be remeasured by use of
the current exchange rate is

 A. a plant asset and the associated accumulated depreciation.

 B. the revenue from a long-term construction contract.
 C. an investment in bonds to be held until maturity.
 D. inventories.

203. Question ID: ICMA 10.P2.103 (Topic: Special Issues)

A change in the allowance for credit losses should be

 A. handled retroactively.
 B. considered an unusual or infrequent item.
 C. treated as an error.
 D. treated as affecting only the period of the change.

204. Question ID: CIA 593 P4 Q41 (Topic: Special Issues)

The financial statements of a foreign subsidiary are to be measured by use of the
subsidiary's functional currency. The functional currency of an entity is defined as the
currency of the

 A. geographic location in which the entity's headquarters are located.

 B. parent company.
 C. United States.
 D. primary economic environment in which the entity operates.

205. Question ID: CIA 1193 P4 Q45 (Topic: Special Issues)

 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
At December 31, a company has total assets at book value of $300,000. Liabilities are
$120,000. Also, on December 31, the stock is selling at $20 per share, and there are
10,000 shares outstanding. As a result, the company should take the difference
between the carrying amount and market value of the stock and

 A. not capitalize any asset, record any revenue, or change equity at this time.
 B. capitalize it as an asset (and amortize over the estimated useful life not to exceed 40
years), with the offset to equity.
 C. capitalize it as an asset (and amortize over 5 years), with the offset to equity.
 D. capitalize it as an asset (and amortize over the estimated useful life), with the offset to
revenue.

206. Question ID: CMA 692 P2 Q15 (Topic: Special Issues)

The FASB Accounting Standards Codification® provides specific guidelines for
translating foreign currency financial statements. The translation process begins with a
determination of whether a foreign affiliate's functional currency is also its local reporting
currency. Which one of the following factors indicates that a foreign affiliate's functional
currency is the U.S. dollar?

 A. Labor, materials, and other costs consist primarily of local costs to the foreign affiliate.
 B. Sales prices are responsive to short-term changes in exchange rates and worldwide
competition.
 C. Financing is primarily obtained from local foreign sources and from the affiliate's
operations.
 D. Cash flows are primarily in foreign currency and do not affect the parent's cash flows.

207. Question ID: CMA 690 1.27 (Topic: Special Issues)

A corporation's net income as presented on its income statement is usually

 A. more than its economic profits because economists do not consider interest payments
to be costs.
 B. equal to its economic profits.
 C. more than its economic profits because opportunity costs are not considered in
calculating net income.
 D. less than its economic profits because accountants include labor costs, while
economists exclude labor costs.

208. Question ID: ICMA 10.P2.107 (Topic: Special Issues)

Which of the following costs, when subtracted from total revenue, yields economic
profit?
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 A. Opportunity costs of all inputs.
 B. Fixed and variable costs.
 C. Variable costs.
 D. Recurring operating costs.

209. Question ID: CMA 1292 1.12 (Topic: Special Issues)

The definition of economic cost is

 A. the opportunity cost of all inputs minus the dollar cost of those inputs.
 B. the sum of all explicit and implicit costs of the business firm.
 C. all the dollar costs employers pay for all inputs purchased.
 D. the difference between all implicit and explicit costs of the business firm.

210. Question ID: ICMA 13.P2.018 (Topic: Special Issues)

A major difference between economic profit and accounting profit is that economic profit

 A. minimizes the impact of accounting estimates.

 B. reduces profits by associated cost of capital.
 C. allows for more accurate expense accruals.
 D. adjusts accounting profit by depreciation.

211. Question ID: CMA 685 4.14 (Topic: Special Issues)

Book value per common share represents the amount of shareholders' equity assigned
to each outstanding share of common stock. Which one of the following statements
about book value per common share is correct?

 A. A market price per common share that is greater than book value per common share is
an indication of an overvalued stock.
 B. Book value per common share is the amount that would be paid to shareholders if the
company were sold to another company.
 C. Book value per common share can be misleading because it is based on historical
cost.
 D. Market price per common share usually approximates book value per common share.

212. Question ID: CMA 0692 P2 Q14 (Topic: Special Issues)

A change in the liability for warranty costs is an example of a(n)

 A. accounting method change.

 B. accounting principle change.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
 C. accounting estimate change.
 D. prior period adjustment.

213. Question ID: ICMA 10.P2.108 (Topic: Special Issues)

Williams makes $35,000 a year as an accounting clerk. He decides to quit his job to
enter an MBA program full-time. Assume Williams doesn't work in the summer or hold
any part-time jobs. His tuition, books, living expenses, and fees total $25,000 a year.
Given this information, the annual total economic cost of Williams' MBA studies is

 A. $10,000.
 B. $60,000.
 C. $25,000.
 D. $35,000.

214. Question ID: CIA 1188 P4 Q45 (Topic: Special Issues)

A change from one generally accepted accounting principle to another generally
accepted accounting principle should be accounted for in comparative reports by

 A. retrospective application: a cumulative adjustment to carrying amounts of assets and

liabilities as of the beginning of the first period presented, an offsetting adjustment to the
opening balance of retained earnings of the same period, and by adjusting prior periods'
statements presented for the effects of the change in each period.
 B. a line item below income from continuing operations on the current income statement.
 C. only a footnote disclosure in the current period.
 D. pro forma amounts for key figures shown supplementary on the income statement for
all periods presented.

215. Question ID: CMA 688 P4 Q20 (Topic: Special Issues)

Foreign currency gains and losses included in the other comprehensive income section
of a consolidated balance sheet represent

 A. accounting not in accordance with generally accepted accounting principles.

 B. remeasurement gains and losses.
 C. the amount resulting from translating foreign currency financial statements into the
reporting currency.
 D. foreign currency transaction gains and losses.

216. Question ID: CMA 1291 P2 Q5 (Topic: Special Issues)

Transaction gains and losses have direct cash flow effects when foreign-denominated
monetary assets are settled in amounts greater or less than the functional currency
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
equivalent of the original transactions. These transaction gains and losses should be
reflected in income

 A. in the period the exchange rate changes.

 B. only at the year-end balance sheet date.
 C. on a retroactive basis.
 D. at the date the transaction originated.

217. Question ID: CMA 0697 P2 Q26 (Topic: Special Issues)

A change in the liability for warranty costs requires

 A. reporting an adjustment to the beginning retained earnings balance in the statement of

retained earnings.
 B. presenting the effect of pro forma data on income and earnings per share for all prior
periods presented.
 C. reporting current and future financial statements on the new basis.
 D. restating prior-period financial statements.

218. Question ID: ICMA 2013.2.P2.009 Adapted (Topic: Special Issues)

Which one of the following statements best reflects the relationship between the results
of financial ratios calculated in a local currency versus those calculated after the local
statements have been remeasured or translated into the reporting currency?

 A. Financial ratio results are different under translation and remeasurement, and ratios
under translation are also often different from those in the local currency.
 B. Finacial ratio results are similar under translation and remeasurement, but ratios under
translation are often different from those in the local currency.
 C. Financial ratio results are similar under translation and remeasurement, and ratios
under translation are also often similar to those in the local currency.
 D. Financial ratio results are different under translation and remeasurement, but ratios
under translation are often similar to those in the local currency.

219. Question ID: ICMA 19.P2.069 (Topic: Special Issues)

A company with a lower quality of earnings is most likely to

 A. present an operating profit margin lower than the industry average.

 B. manage the recognition of revenues, expenses, gains, and losses.
 C. rely on a few large customers to generate a large portion of its sales.
 D. hire lower-skilled workers or purchase lower-quality materials.
 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
220. Question ID: CMA 689 1.21 (Topic: Special Issues)
The measurement of the benefit lost by using resources for a given purpose is

 A. opportunity cost.
 B. economic efficiency.
 C. comparative advantage.
 D. absolute advantage.

221. Question ID: CMA 688 4.16 (Topic: Special Issues)

Which one of the following inventory cost flow assumptions will result in a higher
inventory turnover ratio in an inflationary economy?

 A. Weighted average.
 B. Specific identification.
 C. LIFO.
 D. FIFO.

222. Question ID: ICMA 19.P2.065 (Topic: Special Issues)

A U.S. based publicly-traded company has a Swedish subsidiary. For the Swedish
subsidiary, the Euro impacts the cost of goods sold and revenue. The primary source of
long-term debt financing for the U.S. company is Canadian investors. The functional
currency of the Swedish subsidiary is the

 A. Canadian dollar.
 B. U.S. dollar.
 C. Swedish krona.
 D. Euro.

223. Question ID: CMA 1288 P3 Q30 (Topic: Special Issues)

Foreign currency transaction gains and losses should usually be included in income

 A. if they are foreign currency transactions that are designated as economic hedges of a
net investment in a foreign entity.
 B. for the period in which the transaction originated.
 C. if they are intercompany foreign currency transactions that are of a long-term
investment nature.
 D. for the period in which the exchange rate changes.

224. Question ID: ICMA 1603.P2.010 (Topic: Special Issues)

 Hock P2 2020
Section A - Financial Statement Analysis.
Questions
A corporation has the option to use either a shorter period or a longer period to amortize
a patent, and it can use either the declining-balance method or the straight-line method
to depreciate a fixed asset. The corporation would be considered to have better
earnings quality if it uses the

 A. shorter period to amortize the patent and the straight-line method to depreciate the
fixed asset.
 B. longer period to amortize the patent and the straight-line method to depreciate the fixed
asset.
 C. longer period to amortize the patent and the declining-balance method to depreciate
the fixed asset.
 D. shorter period to amortize the patent and the declining-balance method to depreciate
the fixed asset.

225. Question ID: CMA 1288 P3 Q28 (Topic: Special Issues)

The FASB requires that, in a highly inflationary economy, the financial statements of a
foreign entity be remeasured as if the functional currency were the reporting currency.
For this requirement, a highly inflationary economy is one that has

 A. an inflation rate of at least 50% in the most recent past year.

 B. an inflation rate of at least 100% in the most recent past year.
 C. an inflation rate of at least 33% in the most recent past year.
 D. a cumulative inflation rate of at least 100% over a 3-year period.

226. Question ID: CMA 1293 P2 Q21 (Topic: Special Issues)

A change in the allowance for credit losses on accounts receivable is an example of
a(n)

 A. accounting principle change.

 B. prior period adjustment.
 C. accounting estimate change.
 D. accounting method change.