Session 12 Handout: 10/1/14
Supplemental Instruction
IowaStateUniversity / Leader:
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True/False

  1. A small negative net profit margin does not usually cause a company to go out of business.
  2. Even when using ratio analysis, it is still difficult to company companies reporting in different currencies.
  3. Under GAAP assets are listed in increasing order of liquidity, while under IFRS that are listed in decreasing order of liquidity.
  4. The purpose of multiple step income statements is to display important measures of profit in addition to net income.
  5. When accounting information is used to assess stock prices, it is being used in a valuation role.
  6. When accounting information is used to manage the business, it is being used to fulfill a creditor function.

Multiple Choice

  1. If total assets increase but total liabilities remain the same, what is the impact on the debt-to-assets ratio?
  2. Increases
  3. Decreases
  4. Remains the same
  5. Cannot be determined without additional information
  6. What type of audit report does a company hope to include with its annual report?
  7. Conservative report
  8. Qualified report
  9. Comparable report
  10. Unqualified report
  11. The asset turnover ratio is directly affected by which of the following categories of business decisions?
  12. Operating and investing decisions
  13. Operating and financing decisions
  14. Investing and financing decisions
  15. Operating, investing, and financing decisions
  16. Which of the following describes the order in which the assets are reported under IFRS?
  17. Increasing order of liquidity
  18. Increasing time to maturity
  19. Decreasing order of liquidity
  20. Decreasing time to maturity
  1. Costco and Sam’s Club are two companies that offer low prices for items packages in bulk. This strategy increases total sales volume but generates less profit for each dollar of sales. Which of the following ratios is improved by this strategy?
  2. Net profit margin
  3. Asset turnover
  4. Debt-to-assets
  5. All of the above

Analyzing and Interpreting Asset Turnover and Net Profit Margin Ratios

Radio Shack reported the following amounts on their income statement and balance sheet (in thousands):

2008 / 2007 / 2006
Sales Revenue / $4225 / $4252 / $4778
Net Income / 192 / 237 / 73
Total Assets / 2284 / 1990 / 2070
Total Liabilities / 1466 / 1220 / 1416
  1. Compute the asset turnover and net profit margin ratios for 2008 and 2007.
  1. Would analysts be more likely to increase or decrease their estimates of stock value on the basis of these changes? Explain what the changes in these two ratios mean.
  1. Compute the debt-to-assets ratio for 2008 and 2007.
  1. Interpret what the change in this ratio means.