Question

P 8-13 Required Answer the following multiple-choice questions: Which of the following is not considered to be a nonrecurring itema 1. Discontinued operations 2. Extraordinary items 3. Cumulative effect of change in accounting principle 4. Interest expense 5. None of the above. a. b. Ideally, which of these ratios will indicate the highest return for an indi 1. Return on assets 2. Return on assets variation 3. Return on investments 4. Return on total equity 5. Return on common equity c. If a firm's gross profit has declined substantially, this could be attributed which of the following reasons? 1. The cost of buying inventory has increased more rapidly than selling 2. Selling prices have declined due to competition. 3. Selling prices have increased due to competition. 4. The mix of goods has changed to include more products with lower ma 5. Theft is occurring. d. Gross profit analysis could be of value for all but which of the following 1. Projections of profitability 2. Estimating administrative expenses 3. Inventory for interim statements 4. Estimating inventory for insurance claims 5. Replacing the physical taking of inventory on an annual basis e. Total asset turnover measures 1. Net income dollars generated by each dollar of sales. 2. The ability of the firm to generate sales through the use of the a

Answer 1

P 8-13

1. Solution: The correct option is “4” i.e Interest expense

A non recurring expense is an expense that is not likely to be incurred again in the normal course of business whereas the recurring expense is an expense that is incurred on a regular basis. Interest is an expense that is incurred on a regular basis every year.

2. Solution: The correct option is “5” i.e Return on common equity

Return on common equity calculates the ability of the firm to generate profit from its shareholders investments in the company. It shows the profit earned for each dollar of common stockholders equity generates.

   

c. The correct option is “3” i.e Selling Prices have increased due to competition

When the selling price is increased due to the competition then it results in an increase in the gross profit margin . On the other hand cost of buying has increased, selling price has declined, Theft has occurred or mix of the products has changed to include products with lower gross profit margin will all lead to a fall in the gross profit margin.

               

4. Solution: The correct option is “2” i.e Estimating the administrative expenses

Gross profit analysis is not of value for determining the administrative expenses

As these items are given effect after calculating the gross profit figure.