Fact Pattern:

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

1) Dividendosaurus has return on assets of

A. 21.1%
B. 39.2%
C. 42.1%
D. 45.3%

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

2) Dividendosaurus has a profit margin of

A. 6.67%
B. 13.33%
C. 14.33%
D. 46.67%

Question In Year 3, gross profit margin remained unchanged from Year 2. But, in Year 3, the
3) company’s net profit margin declined from the level reached in Year 2. This could have
happened because, in Year 3,

A. Corporate tax rates increased.

B. Cost of goods sold increased relative to sales.
C. Sales increased at a faster rate than operating expenses.
D. Common share dividends increased.

4) A firm is experiencing a growth rate of 9% with a return on assets of 12%. If the debt ratio is 36%
and the market price of the stock is $38 per share, what is the return on equity?

A. 7.68%
B. 9.0%
C. 12.0%
D. 18.75%

5) A company has sales of $100,000, cost of sales of $40,000, interest expense of $4,000, taxes of
$18,000, and operating expenses of $15,000. What is the company’s operating profit margin?

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

6) A corporation has a return on equity of 20%, a return on assets of 15%, and a dividend payout ratio
of 30%. The corporation’s sustainable equity growth rate is

A. 50.0%
B. 14.0%
C. 6.0%
D. 4.5%

7) A financial analyst has calculated gross profit margin and net profit margin for a company.
Economists are forecasting a reduction in the corporate income tax rate. This would

A. Increase the gross profit margin and increase the net profit margin.
B. Decrease the gross profit margin and increase the net profit margin.
C. Not change the gross profit margin and increase the net profit margin.
D. Increase the gross profit margin and not change the net profit margin.

8) 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?

A. 12.2%
B. 22.0%
C. 26.8%
D. 27.5%
Fact Pattern: The information below pertains to Devlin Company.
Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460
Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and administrative 52 51
Interest expense 8 9
Accounts receivable (net) 68 48
Income before taxes $ 90 $ 85
Inventory 90 80 Income taxes 36 34
Prepaid expenses 22 30 Net income $ 54 $ 51

Total current assets $255 $216

Investments, at equity 38 30
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45
Total assets $748 $691
Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital --
common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

9) Devlin Company’s rate of return on assets for the year ended May 31, Year 2, was

A. 7.2%
 B. 7.5%
C. 7.8%
D. 11.3%

10) Beechwood’s return on shareholders’ equity for the year just ended is

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

11) The president of a company is establishing performance goals for each of the company’s
manufacturing plants. The data below represent prior-year results for one of the plants.

Revenues $ 400,000

Variable costs 100,000

Fixed costs 200,000

Average assets 1,000,000

Average liabilities 200,000

The plant’s return on assets is

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

12) If the return on equity is 12% and the debt ratio is 40%, what is the return on assets?

A. 4.8%
 B. 7.2%
C. 12.0%
D. 20.0%

13) In the current year, a firm had $15 million in sales, while total fixed costs were held to $6 million.
The firm’s total assets averaged $20 million and the debt-to-equity ratio was calculated at 0.60. If
the firm’s EBIT is $3 million, the interest on all debt is 9%, and the tax rate is 40%, what is the
firm’s return on equity?

A. 11.16%
B. 14.4%
C. 18.6%
D. 24.0%

14) 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. 13% and 25%, respectively.
C. 14% and 26%, respectively.
D. 36% and 25%, respectively.
15) 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. 20%
B. 30%
C. 40%
D. 50%

15) 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. 20%
B. 30%
C. 40%
D. 50%

17) 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. 15%
B. 30%
C. 40%
D. 80%
18) When calculating ratios involving income, an adjustment is most likely to be made for

A. Gross profit.
B. Selling expenses.
C. Nonrecurring gains and losses.
D. Fixed overhead costs.

19) A financial analyst who works for Company Z has collected the following information on Company
Z and its three main competitors.

Company Z Company A Company B Company C

Net income $1,000,000 $ 5,000,000 $ 850,000 $2,545,000

Interest expense $ 200,000 $ 750,000 $ 100,000 $ 565,000

Average total assets $2,500,000 $10,000,000 $1,250,000 $7,750,000

Income tax rate 40% 45% 30% 50%

Based on the collected information, the financial analyst calculated each company’s return on
assets. Which one of the following statements is most correct?

A. Company C’s management is making the best use of the assets.

B. Company B’s management is operating more efficiently than Company A’s management.
C. Company A’s management is making the least use of the assets.
D. Company Z’s management is operating more efficiently than Company B’s management.

20) A company has net sales of $4,000,000 and net income of $800,000. It has operating income of
$1,200,000. Average total assets are $18,000,000 and average total equity is $10,000,000. The
company has a return on equity of

A. 8%
B. 10%
C. 12%
 D. 40%

21) A corporation’s return on equity can be calculated if you know its

A. Sustainable equity growth rate and dividend payout ratio.

B. Debt-equity ratio and market-to-book ratio.
C. Market-to-book ratio and equity multiplier.
D. Dividend yield and earnings yield.

22) The following data pertain to Canova, Inc., for the year ended December 31:

Net sales $ 600,000

Net income 150,000

Total assets, January 1 2,000,000

Total assets, December 31 3,000,000

What was Canova’s rate of return on assets for the year?

A. 5%
B. 6%
C. 20%
D. 24%

23) A corporation had sales of $2,000,000, a profit margin of 11%, and assets of $2,500,000. Spear
decided to reduce its debt ratio to 0.40 from 0.50 by selling new common stock and using the
proceeds to repay principal on some outstanding long-term debt. After the refinancing, what is
Spear’s return on equity (ROE)?

A. 3.5%
B. 5.3%
C. 14.7%
 D. 22.9%

24) Based on potential sales of 500 units per year, a new product has estimated traceable costs of
$990,000. What is the target price to obtain a 15% profit margin on sales?

A. $2,329
B. $2,277
C. $1,980
D. $1,935

25) 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 A Company B Company C Company D

Earnings before interest and income taxes ¥5,000 ¥12,500 ¥4,300 ¥2,450

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 B.
C. Company C.
D. Company D.

26) 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. $4,750,000
B. $4,250,000
C. $3,750,000
 D. $3,250,000

27) 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

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

28) For a given level of sales and holding all other financial statement items constant, a company’s
return on equity (ROE) will

A. Increase as their debt ratio decreases.

B. Decrease as their cost of goods sold as a percent of sales decrease.
C. Decrease as their total assets increase.
D. Increase as their equity increases.

29) A construction company is preparing to finalize the financial statements for the most recent year.
Results are sales of $690,000, cost of sales of $378,900, and administrative expenses of
$120,800. The controller has just found a sales invoice for a job completed on the last day of the
year. The revenue and related costs for the job have not yet been recorded in the accounting
system. The job’s revenues are $95,000 with costs totaling $65,000. What is the impact of this job
on year-end profitability?

A. A decrease in the company’s gross profit margin and an increase in the net profit margin.
B. Increases in the company’s gross profit margin and net profit margin.
 C. Decreases in the company’s gross profit margin and net profit margin.
D. An increase in the company’s gross profit margin and a decrease in the net profit margin.

30) Which one of the following actions may increase a company’s return on assets?

A. Purchase of a new corporate headquarters.

B. An increase in inventory levels for a future store expansion.
C. Gain recorded on the sale of capital equipment.
D. Reduction of long-term debt through the issuance of common stock.

31) When a fixed asset is sold for less than book value, which one of the following will decrease?

A. Total current assets.

B. Current ratio.
C. Net profit.
D. Net working capital.

32) Company ABC’s profit margin declined between 2014 and 2015 as shown below.

2015 2014

Sales price $20 100% $20 100%

Cost of goods sold $ 5 25% $ 4 20%

Gross profit $15 75% $16 80%

Which one of the following is the best explanation for the decline?

A. There was a write-down of inventory in 2015.

B. There was an increase in advertising expenses.
C. There was a decrease in depreciation of the manufacturing equipment.
D. There was a decrease in sales.
33) 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 increased by the same dollar amount as expenses and total assets.
C. Sales remained the same and expenses and total assets decreased.
D. Sales remained the same and ending inventory decreased.

34) 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 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. 13%
C. 17%
D. 20%

35) According to its public financial statements, a company’s gross profit margin decreased by 5%
while its operating profit margin increased by 3%. Which one of the following factors could cause
both of these changes?

A. An increase in the cost per unit of the goods purchased from a supplier.
B. A change to the variable costing income statement format.
C. A lowered selling price to increase quantities sold.
D. Sale of fully-depreciated production machinery at a gain and replacement of the machines with newer models.
36) 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. Sales decreased at a slower rate than operating expenses.

B. Corporate income tax rates decreased.
C. Preferred dividends increased.
D. Cost of goods sold decreased relative to sales.

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

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000

Long-term debt 75,000 30,000

Common stock ($30 par value) 300,000 300,000

Retained earnings 32,000 20,000

Year 2
Operations

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

*All sales are credit sales.

Current Assets

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

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000

Inventory 70,000 80,000

Prepaid expenses 20,000 20,000

37) The Year 2 return on equity for McKeon Company is

A. 0.040
B. 0.221
C. 0.240
D. 0.361

38) Which of the outcomes represented in the following table would result from a company’s retirement
of debt with excess cash?
Following Period’s
Total Assets Times Interest
Turnover Ratio Earned Ratio

A. Increase Increase

B. Increase Decrease

C. Decrease Increase

D. Decrease Decrease

39) If Day Company has a higher rate of return on assets than Night Company, the reason may be that
Day has a <List A> profit margin on sales, or a <List B> asset turnover ratio, or both.
List A List B

A. Higher Higher

B. Higher Lower

C. Lower Higher

D. Lower Lower