MULTIPLE CHOICE
1. Which of the following is not a base against which profits are measured?
|
a. |
Owners’ equity |
|
b. |
Owners’ and creditors’ funds provided |
|
c. |
Intangibles |
|
d. |
Revenues |
|
e. |
Productive assets |
2. Return on assets cannot fall under which of the following circumstances?
|
Net Profit Margin |
Total Asset Turnover |
|
|
I. |
decline |
rise |
|
II. |
rise |
decline |
|
III. |
rise |
rise |
|
IV. |
decline |
decline |
|
a. |
I |
|
b. |
II |
|
c. |
III |
|
d. |
IV |
|
e. |
The ratio could fall under all of the answers. |
3. Which of the following circumstances will cause sales to fixed assets to be abnormally high?
|
a. |
A recent purchase of land. |
|
b. |
A labor-intensive industry. |
|
c. |
A highly mechanized facility. |
|
d. |
High direct labor costs from a new union contract. |
|
e. |
The use of units-of-production depreciation. |
4. Income tax expense in interim reporting should:
|
a. |
be based on the quarterly income only. |
|
b. |
contain a judgment estimation of the annual effective tax rate. |
|
c. |
be based on the income year-to-date. |
|
d. |
exclude extraordinary items in earlier quarters of the year. |
|
e. |
disregard year-end adjustments. |
5. Which of the following expresses DuPont analysis?
|
a. |
Net profit margin = total asset turnover times return on assets |
|
b. |
Total asset turnover = operating asset turnover times financial leverage |
|
c. |
Return on assets = net profit margin times total asset turnover |
|
d. |
Return on investment = return on equity (1 tax rate) |
|
e. |
Dividend yield = dividend payout times earnings per share |
TRUE/FALSE
1. Profitability is the ability of the firm to generate earnings.
2. High fixed costs in a period of low activity can cause a low net profit margin.
3. The operating ratios may give significantly different results from net earnings ratios if a firm has large amounts of nonoperating assets generating income.
4. Redeemable preferred stock is best considered as equity for ratio analysis.
5. An interim period is a fiscal period less than one year.
6. The SEC requires interim financial data on Form 10-Q.
PROBLEM
1. DuBois, Inc., experienced the following trend in operating profit ratios for the five years ended in 2012.
|
Operating Income |
Return on |
|
|
Margin |
Operating Assets |
|
|
2012 |
9.7% |
12.2% |
|
2011 |
9.3% |
11.5% |
|
2010 |
9.1% |
11.2% |
|
2009 |
8.8% |
10.6% |
|
2008 |
8.6% |
10.1% |
Required:
Using the DuPont analysis, determine whether the trend in turnover increased the return on operating assets or lowered it.
2. Fluctuation, Inc., recorded the following profit figures in 2010-2012.
|
2012 |
2011 |
2010 |
|
|
Net sales |
$30,500 |
$25,600 |
$22,900 |
|
Costs and expenses: |
|||
|
Cost of products sold |
$12,600 |
$10,300 |
$ 8,350 |
|
Selling |
7,875 |
5,025 |
4,580 |
|
General |
2,950 |
2,325 |
2,150 |
|
Research and development |
4,100 |
3,190 |
2,840 |
|
$27,525 |
$20,840 |
$17,920 |
|
|
Operating income |
$ 2,975 |
$ 4,760 |
$ 4,980 |
|
Other income (expense) |
525 |
(300) |
(400) |
|
Earnings before tax |
$ 3,500 |
$ 4,460 |
$ 4,580 |
|
Income tax |
1,480 |
1,990 |
2,100 |
|
Net income |
$ 2,020 |
$ 2,470 |
$ 2,480 |
Required:
|
a. |
Compute the net profit margin for 2010-2012. |
|
b. |
Compute the gross profit margin for 2010-2012. |
|
c. |
Describe the trend in profitability and pinpoint its causes. |
