Reference no: EM131693941

Assignment: PROFITABILITY Quiz

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.