Question

Required Answer the following multiple-choice questions: a. Which of the following is not considered to be a nonrecurring item? P 8-13 1. Discontinued operations 2. Extraordinary items 3. Cumulative effect of change in accounting principle 4. Interest expense 5. None of the above. rm? b. Ideally,which of these ratios will indicate the highest return for an individual 1. Return on assets 2. Return on assets variation 3. Return on investments 4. Return on total equity S. Return on common equity c. If a firm's gross profit has declined substantially, this could be attributed to all but which of the following reasons? 1. The cost of buying inventory has increased more rapidly than selling prices. 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 m 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 Total asset turnover measures e. 1. Net income dollars generated by each dollar of sales. 2. The ability of the firm to generate sales through the use of the assets.

Answer 1

a. Interest Expense

Non-recurring items on company's income statement are items of gian or loss that are not expected to occur regularly or more often. Discontinued operations, Extraordinary items & cumulative effect of change in accounting principle do not occur regularly, hence are non-recurring in nature. Interest expenses is not an extraordinary item.

b. Return on Common equity

ROA is calculated as Operating profit/Average assets, where average of initial & investment at closing date is considered. In ROI, returns are calculated as a % of TOTAL INVESTMENTS made. Hence % of returns on average is higher than on total investments. Total Equity includes Common+preferred stock. Common equity does not include preferred stock. Therefore % of returns on common stock is higher than on total equity. Now, among all, common stock consists of least amount on which % of operating returns is highest.

c. Selling prices have increased due to competition.

Increase in revenue does not decline gross profit, in fact it increases gross profit.

d. Estimating Administrative Expenses.

Administrative expenses are not directly attributable to production of goods, rather these generally appear under operating expenses. Hence, gross profit could play no role in estimation of such costs.

e. The answer is 2

Asset Turnover ratio indicates company's revenues relative to its assets with the purpose to measure the comapny's efficiency in using its assets to generate revenue.