Question 1

Which of the following statements is correct?

Accepted Answer

A) In the text, depreciation is regarded as a use of cash because it reduces fixed assets, which then must be replaced. 
B) If a company uses some of its cash to pay off short-term debt, then its current ratio will always decline, given the way ratio is calculated, other things held constant. 
C) During a recession, it is reasonable to think that most companies inventory turnover ratios will change while their fixed asset turnover ratio will remain fairly constant. 
D) During a recession, we can be confident that most companies' DSOs (or ACPs) will decline because their sales will probably decline. 
E) Each of the above statements is false. 
A) In the text, depreciation is regarded as a use of cash because it reduces fixed assets, which then must be replaced. 
B) If a company uses some of its cash to pay off short-term debt, then its current ratio will always decline, given the way ratio is calculated, other things held constant. 
C) During a recession, it is reasonable to think that most companies inventory turnover ratios will change while their fixed asset turnover ratio will remain fairly constant. 
D) During a recession, we can be confident that most companies' DSOs (or ACPs) will decline because their sales will probably decline. 
E) Each of the above statements is false.

Question 2

Which of the following statements is most correct?

Accepted Answer

A) firms with relatively low debt ratios have higher expected returns when the business is good. 
B) firms with relatively low debt ratios are exposed to risk of loss when the business is poor. 
C) firms with relatively high debt ratios have higher expected returns when the business is bad. 
D) firms with relatively high debt ratios have higher expected returns when the business is good. 
E) none of the above. 
A) firms with relatively low debt ratios have higher expected returns when the business is good. 
B) firms with relatively low debt ratios are exposed to risk of loss when the business is poor. 
C) firms with relatively high debt ratios have higher expected returns when the business is bad. 
D) firms with relatively high debt ratios have higher expected returns when the business is good. 
E) none of the above.

Question 3

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

Accepted Answer

A) True 
 B)False

Question 4

All other things constant, an increase in a firm's profit margin would

Accepted Answer

A) increase the additional funds needed for financing a growth in operations. 
B) decrease the additional funds needed for financing a growth in operations. 
C) have no effect on the additional funds needed for financing a growth in operations. 
D) decrease its taxes. 
E) none of the above. 
A) increase the additional funds needed for financing a growth in operations. 
B) decrease the additional funds needed for financing a growth in operations. 
C) have no effect on the additional funds needed for financing a growth in operations. 
D) decrease its taxes. 
E) none of the above.

Question 5

Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information.(Assume no other changes occurred during the past year.) $\begin{array} { l l l } 
\text { Decrease in marketable securities } & = & \$ 25 \
\text { Increase in accounts receivables } & = & \$ 56 \
\text { Increase in notes payable } & = & \$ 30 \
\text { Decrease in accounts payable } & = & \$ 20 \
\text { Increase in accrued wages and taxes } & = & \$ 35 \
\text { Increase in inventories } & = & \
\text { Retained earnings } & = & \
\end{array}$

a.- $ 50 
b. + $ 40 
c.  - $ 30 
d.  + $ 20 
e.  - $ 10

Accepted Answer

The answer of Determine the increase or decrease in cash...

Question 6

Which of the following actions will cause an increase in the quick ratio in the short run?

Accepted Answer

A) $1,000 worth of inventory is sold, and an account receivable is created.The receivable exceeds the inventory by the amount of profit of the sale, which is added to retained earnings. 
B) A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash.(Average company profits are 15 percent of assets.) 
C) Marketable securities are sold at cost. 
D) All of the above. 
E) Answers a and b above. 
A) $1,000 worth of inventory is sold, and an account receivable is created.The receivable exceeds the inventory by the amount of profit of the sale, which is added to retained earnings. 
B) A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash.(Average company profits are 15 percent of assets.) 
C) Marketable securities are sold at cost. 
D) All of the above. 
E) Answers a and b above.

Question 7

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

Accepted Answer

A) Fixed assets are sold for cash. 
B) Long-term debt is issued to pay off current liabilities. 
C) Accounts receivable are collected. 
D) Cash is used to pay off accounts payable. 
E) A bank loan is obtained, and the proceeds are credited to the firm's checking account. 
A) Fixed assets are sold for cash. 
B) Long-term debt is issued to pay off current liabilities. 
C) Accounts receivable are collected. 
D) Cash is used to pay off accounts payable. 
E) A bank loan is obtained, and the proceeds are credited to the firm's checking account.

Question 8

The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms must meet more than just their scheduled interest payments out of earnings.Therefore, the fixed charge coverage is more inclusive than the TIE ratio.

Accepted Answer

A) True 
 B)False

Question 9

When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

Accepted Answer

A) True 
 B)False

Question 10

In order to accurately estimate cash flow from operations, depreciation must be added back to net income.The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

Accepted Answer

A) True 
 B)False

Question 11

Yesterday, Bicksler Corporation purchased (and received) raw materials on credit from its supplier.All else equal, if Bicksler's current ratio was 2.0 before the purchase, what effect did this transaction have on Bicksler's current ratio?

Accepted Answer

A) increased 
B) decreased 
C) stayed the same 
D) There is not enough information to answer this question. 
E) None of the above is a correct answer. 
A) increased 
B) decreased 
C) stayed the same 
D) There is not enough information to answer this question. 
E) None of the above is a correct answer.

Question 12

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

Accepted Answer

A) balance sheet 
B) income statement 
C) statement of retained earnings 
D) statement of cash flows 
E) proxy statement 
A) balance sheet 
B) income statement 
C) statement of retained earnings 
D) statement of cash flows 
E) proxy statement

Question 13

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period.Last year, total sales were $1 million, and
$250,000 of these sales were on credit.During the year, the accounts receivable account averaged $41,664.It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent.If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need?

Accepted Answer

A) $41,664 
B) $52,086 
C) $47,359 
D) $106,471 
E) $93,750 
A) $41,664 
B) $52,086 
C) $47,359 
D) $106,471 
E) $93,750

Question 14

If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.

Accepted Answer

A) True 
 B)False

Question 15

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

Accepted Answer

A) Fixed assets are sold for cash. 
B) Cash is used to purchase inventories. 
C) Cash is used to pay off accounts payable. 
D) Accounts receivable are collected. 
E) Long-term debt is issued to payoff a short-term bank loan. 
A) Fixed assets are sold for cash. 
B) Cash is used to purchase inventories. 
C) Cash is used to pay off accounts payable. 
D) Accounts receivable are collected. 
E) Long-term debt is issued to payoff a short-term bank loan.

Question 16

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

Accepted Answer

A) True 
 B)False

Question 17

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

Accepted Answer

A) True 
 B)False

Question 18

A liquid asset is an asset that can be easily converted into cash without a significant loss of its original value.

Accepted Answer

A) True 
 B)False

Question 19

Selzer Inc.sells all its merchandise on credit.It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64.What is the firm's return on equity (ROE)?

Accepted Answer

A) 7.1% 
B) 33.3% 
C) 3.3% 
D) 71.0% 
E) 8.1% 
A) 7.1% 
B) 33.3% 
C) 3.3% 
D) 71.0% 
E) 8.1%

Question 20

Which of the following ratios measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs?

Accepted Answer

A) fixed charge coverage ratio 
B) debt ratio 
C) times-interest-earned ratio 
D) return on equity 
E) profit margin 
A) fixed charge coverage ratio 
B) debt ratio 
C) times-interest-earned ratio 
D) return on equity 
E) profit margin

Which of the following statements is correct?

Which of the following statements is most correct?

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

All other things constant, an increase in a firm's profit margin would

Which of the following actions will cause an increase in the quick ratio in the short run?

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms must meet more than just their scheduled interest payments out of earnings.Therefore, the fixed charge coverage is more inclusive than the TIE ratio.

When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

In order to accurately estimate cash flow from operations, depreciation must be added back to net income.The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

Yesterday, Bicksler Corporation purchased (and received) raw materials on credit from its supplier.All else equal, if Bicksler's current ratio was 2.0 before the purchase, what effect did this transaction have on Bicksler's current ratio?

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

A liquid asset is an asset that can be easily converted into cash without a significant loss of its original value.

Selzer Inc.sells all its merchandise on credit.It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64.What is the firm's return on equity (ROE)?

Which of the following ratios measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs?

An Overview of Managerial Finance

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Socks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk Appendix

The Cost of Capital

Capital Structure

Distribution of Retained Earrings: Dividends and Stock Repurchases

Working Capital Policy

Managing Short- Term Assets

Managing Short-Term Liabilities Financing

Financial Planning and Control

Filters

Exam 2: Analysis of Financial Statements

Which of the following statements is correct?

Which of the following statements is most correct?

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

All other things constant, an increase in a firm's profit margin would

Which of the following actions will cause an increase in the quick ratio in the short run?

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms must meet more than just their scheduled interest payments out of earnings.Therefore, the fixed charge coverage is more inclusive than the TIE ratio.

When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

In order to accurately estimate cash flow from operations, depreciation must be added back to net income.The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

Yesterday, Bicksler Corporation purchased (and received) raw materials on credit from its supplier.All else equal, if Bicksler's current ratio was 2.0 before the purchase, what effect did this transaction have on Bicksler's current ratio?

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

A liquid asset is an asset that can be easily converted into cash without a significant loss of its original value.

Selzer Inc.sells all its merchandise on credit.It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64.What is the firm's return on equity (ROE)?

Which of the following ratios measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs?

An Overview of Managerial Finance

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Socks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk Appendix

The Cost of Capital

Capital Structure

Distribution of Retained Earrings: Dividends and Stock Repurchases

Working Capital Policy

Managing Short- Term Assets

Managing Short-Term Liabilities Financing

Financial Planning and Control

Filters