Question

Mason Electronics determined that it generated $1.40 of cash by operating activities compared to each $1.00 of net income. What did Mason calculate?

A) Profit margin
B) Quality of earnings
C) Returns on assets
D) Gross profit rate

Answer 1

Mason Electronics calculated the 'quality of earnings' by comparing the cash generated from operations to net income, resulting in a figure that indicates high-quality earnings.

Step-by-step explanation:

Mason Electronics calculated the quality of earnings. This calculation is made by comparing the cash generated from operating activities to the company's net income. A ratio higher than 1.0, as in this case, where Mason Electronics generated $1.40 in cash for every $1.00 in net income, suggests that the company has high-quality earnings, meaning that its net income is supported by cash received from actual business operations rather than non-operational sources or accounting adjustments.

Regarding the self-check questions: The firm's accounting profit is calculated by subtracting the explicit costs from the total revenues. Using the figures provided, the firm's accounting profit would be $1,000,000 (sales revenue) minus ($600,000 (labor) + $150,000 (capital) + $200,000 (materials)) which equals $50,000.