Question 1

Anyone analyzing a firm's financial statements should:

Accepted Answer

A)  use audited financial statements. 
B)  do a trend analysis. 
C)  perform a benchmark analysis. 
D)  All of the above. 
A)  use audited financial statements. 
B)  do a trend analysis. 
C)  perform a benchmark analysis. 
D)  All of the above.

Question 2

Total asset turnover is more relevant for service-industry firms, while the fixed asset turnover ratio is more relevant for manufacturing industry firms.

Accepted Answer

A) True 
 B)False

Question 3

A firm's current ratio changed from 1.4 times in the previous year to 1.6 times in the current year. Based on this information, we can conclude that the firm's liquidity has improved.

Accepted Answer

A) True 
 B)False

Question 4

Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company? Round your final answers to one decimal place.

Accepted Answer

A)  19.4 times; 12.7 times 
B)  17.3 time; 11.4 times 
C)  13.8 times; 19.4 times 
D)  None of the above 
A)  19.4 times; 12.7 times 
B)  17.3 time; 11.4 times 
C)  13.8 times; 19.4 times 
D)  None of the above

Question 5

Compare how a firm's creditor would analyze a firm's financial statements relative to those of a firm's shareholders.

Accepted Answer

A firm's creditors' primary concern is t

Question 6

In a peer group analysis, the benchmark for financial statement analysis is the performance of a competitor that is roughly the same size and that offer a similar range of products.

Accepted Answer

A) True 
 B)False

Question 7

Jet, Inc., has net sales of $712,478 and accounts receivable of $167,435. What are the firm's accounts receivable turnover and day's sales outstanding? Round your accounts receivable turnover to two decimal places and day's sales outstanding to nearest day.

Accepted Answer

A)  0.24 times; 79 days 
B)  4.26 times; 86 days 
C)  5.2 times; 61 days 
D)  None of the above. 
A)  0.24 times; 79 days 
B)  4.26 times; 86 days 
C)  5.2 times; 61 days 
D)  None of the above.

Question 8

All else being equal, which of the following will decrease a firm's current ratio?

Accepted Answer

A)  A decrease in the net fixed assets 
B)  A decrease in depreciation expense 
C)  An increase in accounts payable 
D)  None of the above 
A)  A decrease in the net fixed assets 
B)  A decrease in depreciation expense 
C)  An increase in accounts payable 
D)  None of the above

Question 9

Which of the following is a limitation of ratio analysis?

Accepted Answer

A)  Ratios depend on accounting data based on historical costs. 
B)  Differences in accounting practices like FIFO versus LIFO make comparison difficult. 
C)  Trend analysis could be distorted by financial statements affected by inflation. 
D)  All of the above are limitations of ratio analysis. 
A)  Ratios depend on accounting data based on historical costs. 
B)  Differences in accounting practices like FIFO versus LIFO make comparison difficult. 
C)  Trend analysis could be distorted by financial statements affected by inflation. 
D)  All of the above are limitations of ratio analysis.

Question 10

Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of $378,454. What is the quick ratio? Round your final answer to two decimal places.

Accepted Answer

A)  1.65 
B)  0.64 
C)  1.01 
D)  None of the above 
A)  1.65 
B)  0.64 
C)  1.01 
D)  None of the above

Question 11

Which of the following is true of a firm that has no debt in its capital structure?

Accepted Answer

A)  Its return on equity (RO
E)  will be greater than its return on asset (RO
A) . 
B)  Its return on equity (RO
E)  will be lesser than its return on asset (RO
A) . 
C)  Its return on equity (RO
E)  will be equal to its return on asset (RO
A) . 
D)  None of the above. 
A)  Its return on equity (RO
E)  will be greater than its return on asset (RO
A) . 
B)  Its return on equity (RO
E)  will be lesser than its return on asset (RO
A) . 
C)  Its return on equity (RO
E)  will be equal to its return on asset (RO
A) . 
D)  None of the above.

Question 12

Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? Round your final answer to two decimal places.

Accepted Answer

A)  0.60 
B)  1.47 
C)  1.74 
D)  3.47 
A)  0.60 
B)  1.47 
C)  1.74 
D)  3.47

Question 13

If firm A has a higher debt-to-equity ratio than firm B, then:

Accepted Answer

A)  firm A has a lower equity multiplier than firm B. 
B)  firm B has a lower equity multiplier than firm A. 
C)  firm B has higher financial leverage than firm A. 
D)  None of the above. 
A)  firm A has a lower equity multiplier than firm B. 
B)  firm B has a lower equity multiplier than firm A. 
C)  firm B has higher financial leverage than firm A. 
D)  None of the above.

Question 14

For a given share price of a firm's stock, the lower the EPS the lower the price-earnings ratio.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is correct?

Accepted Answer

A)  The lower the level of a firm's debt, the higher the firm's leverage. 
B)  The lower the level of a firm's debt, the lower the firm's equity multiplier. 
C)  The lower the level of a firm's debt, the higher the firm's equity multiplier. 
D)  The tax benefit from using debt financing reduces a firm's risk. 
A)  The lower the level of a firm's debt, the higher the firm's leverage. 
B)  The lower the level of a firm's debt, the lower the firm's equity multiplier. 
C)  The lower the level of a firm's debt, the higher the firm's equity multiplier. 
D)  The tax benefit from using debt financing reduces a firm's risk.

Question 16

A financial statement analysis conducted over a period of time is called trend analysis.

Accepted Answer

A) True 
 B)False

Question 17

The DuPont equation shows that a firm's (return on equity) ROE is determined by three factors:

Accepted Answer

A)  net profit margin, total asset turnover, and the equity multiplier. 
B)  operating profit margin, return on assets (RO
A) , and the total assets turnover. 
C)  net profit margin, total asset turnover, the return on assets (RO
A) . 
D)  return on assets (RO
A) , total assets turnover, and the equity multiplier. 
A)  net profit margin, total asset turnover, and the equity multiplier. 
B)  operating profit margin, return on assets (RO
A) , and the total assets turnover. 
C)  net profit margin, total asset turnover, the return on assets (RO
A) . 
D)  return on assets (RO
A) , total assets turnover, and the equity multiplier.

Question 18

Which of the following is NOT true of liquidity ratios?

Accepted Answer

A)  They measure the ability of a firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. 
B)  There are two commonly used ratios to measure liquidity-current ratio and quick ratio. 
C)  For manufacturing firms, quick ratios will tend to be much larger than current ratios. 
D)  The higher the liquidity ratios, the more liquid the firm and the better its ability to pay its short-term bills. 
A)  They measure the ability of a firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. 
B)  There are two commonly used ratios to measure liquidity-current ratio and quick ratio. 
C)  For manufacturing firms, quick ratios will tend to be much larger than current ratios. 
D)  The higher the liquidity ratios, the more liquid the firm and the better its ability to pay its short-term bills.

Question 19

Which one of the following statements is NOT true?

Accepted Answer

A)  The accounts receivables turnover ratio measures how quickly the firm collects its credit sales. 
B)  One ratio that measures the efficiency of a firm's collection policy is day's sales outstanding. 
C)  The more days that it takes a firm to collect on its receivables, the more efficient the firm is. 
D)  Day's sales outstanding measures in days, the time a firm takes to convert its receivables into cash. 
A)  The accounts receivables turnover ratio measures how quickly the firm collects its credit sales. 
B)  One ratio that measures the efficiency of a firm's collection policy is day's sales outstanding. 
C)  The more days that it takes a firm to collect on its receivables, the more efficient the firm is. 
D)  Day's sales outstanding measures in days, the time a firm takes to convert its receivables into cash.

Question 20

Managers' decisions regarding financing, investment, and working capital are reflected in the financial statements.

Accepted Answer

A) True 
 B)False

Exam 4: Analyzing Financial Statements

Anyone analyzing a firm's financial statements should:

Total asset turnover is more relevant for service-industry firms, while the fixed asset turnover ratio is more relevant for manufacturing industry firms.

A firm's current ratio changed from 1.4 times in the previous year to 1.6 times in the current year. Based on this information, we can conclude that the firm's liquidity has improved.

Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company? Round your final answers to one decimal place.

Compare how a firm's creditor would analyze a firm's financial statements relative to those of a firm's shareholders.

In a peer group analysis, the benchmark for financial statement analysis is the performance of a competitor that is roughly the same size and that offer a similar range of products.

Jet, Inc., has net sales of $712,478 and accounts receivable of $167,435. What are the firm's accounts receivable turnover and day's sales outstanding? Round your accounts receivable turnover to two decimal places and day's sales outstanding to nearest day.

All else being equal, which of the following will decrease a firm's current ratio?

Which of the following is a limitation of ratio analysis?

Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of $378,454. What is the quick ratio? Round your final answer to two decimal places.

Which of the following is true of a firm that has no debt in its capital structure?

Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? Round your final answer to two decimal places.

If firm A has a higher debt-to-equity ratio than firm B, then:

For a given share price of a firm's stock, the lower the EPS the lower the price-earnings ratio.

Which of the following statements is correct?

A financial statement analysis conducted over a period of time is called trend analysis.

The DuPont equation shows that a firm's (return on equity) ROE is determined by three factors:

Which of the following is NOT true of liquidity ratios?

Which one of the following statements is NOT true?

Managers' decisions regarding financing, investment, and working capital are reflected in the financial statements.

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Bond Valuation and the Structure of Interest Rates

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

Filters