1. If a company sets its product price too high, the primary danger is that
a. Asset turnover will be too low.
b. Gross profit margin will be too low.
c. Inventory turnover will be too high.
d. Accounts receivable turnover will be reduced.

2. A company’s profit margin is the ratio of its earnings to its
a. Total assets.
b. Total liabilities.
c. Operating income.
d. Operating revenues.

3. A company that follows a product differentiation strategy tends to have
a. High profit margin and asset turnover.
b. Low profit margin and asset turnover.
c. High profit margin and low asset turnover.
d. Low profit margin and high asset turnover.

4. Chrysanthemum Company reported a profit margin of 5% and an asset turnover of 2.0 for the fiscal year. The company’s return on assets for the year was
a. 10%.
b. 3%.
c. 2.5%.
d. 2%.

5. Which company is likely to have the lowest ratio of cash flow from operations to net income?
a. A shrinking company that is reducing inventory and receivables
b. A growing company with increasing inventory and receivables
c. A company with new, expensive assets and high depreciation charges
d. A company with a growing deferred tax liability

6. High receivables turnover is evidence of
a. Extension of credit to customers who are poor credit risks.
b. High sales volume.
c. Low efficiency.
d. Rapid collection of cash from customers.

7. A tendency to sell products rapidly is evidenced by
a. Low asset turnover.
b. High inventory turnover.
c. High operating leverage.
d. A cost leadership operating strategy.

8. Which of the following is the strongest indicator of a high-value company?
a. High market to book value
b. High gross profit margin
c. High financial leverage
d. High ratio of operating cash flow to net income

9. The difference between a company’s return on assets and its return on equity can be explained by the company’s
a. Operating leverage.
b. Asset turnover.
c. Financial leverage.
d. Profit margin.

10. Accounting can best be defined as
a. A precise reporting system for giving decision makers a total picture of all events occurring in a business entity.
b. An information system for measuring the transformation process in a business entity and reporting results to decision makers.
c. A procedure for recording the transactions of a business entity, usually using a system of debits and credits.
d. A set of rules, developed by standard-setting bodies, for measuring and reporting.