Question 1

Which of the following would be most responsible for a company's average collection period being higher than the industry average?

Accepted Answer

A) If a company's growth in sales is greater than the growth of sales in the industry. 
B) Being more aggressive in collecting its accounts receivable than its competitors. 
C) Having credit policy standards that are more restrictive than its competitors. 
D) Being more lenient in extending credit to its customers than its competitors. 
A) If a company's growth in sales is greater than the growth of sales in the industry. 
B) Being more aggressive in collecting its accounts receivable than its competitors. 
C) Having credit policy standards that are more restrictive than its competitors. 
D) Being more lenient in extending credit to its customers than its competitors.

Question 2

A firm's average collection period has decreased significantly from the previous year.Which of the following could possibly explain the results?

Accepted Answer

A) Customers are paying off their accounts quicker. 
B) Customers are taking longer to pay for purchases. 
C) The firm has a stricter collection policy. 
D) Both A and C. 
A) Customers are paying off their accounts quicker. 
B) Customers are taking longer to pay for purchases. 
C) The firm has a stricter collection policy. 
D) Both A and C.

Question 3

Water Works,Inc.has a current ratio of 1.33,current liabilities of $540,000,and inventory of $400,000.What is Water Works,Inc.'s quick ratio?

Accepted Answer

A) 1.11 
B) 0.86 
C) 1.90 
D) 0.59 
A) 1.11 
B) 0.86 
C) 1.90 
D) 0.59

Question 4

By using common-size income statements,firms can determine how various expenses as a percentage of total sales changed from period to period.

Accepted Answer

A) True 
 B)False

Question 5

A small start-up company should choose an industry leader in the same industry as a benchmark.

Accepted Answer

A) True 
 B)False

Question 6

Heavy Load,Inc.has sales of $3,450,000,total assets of $1,240,000,and total liabilities of $275,000,which consist strictly of notes payable.The firm's operating profit margin is 16.1%,and it pays a 10% rate of interest on its notes payable.How much is the firm's interest coverage ratio?

Accepted Answer

A) 15.6 
B) 45.3 
C) 20.2 
D) 3.0 
A) 15.6 
B) 45.3 
C) 20.2 
D) 3.0

Question 7

A decrease in ________ will increase gross profit margin.

Accepted Answer

A) cost of goods sold 
B) depreciation expense 
C) interest expense 
D) both A and B 
A) cost of goods sold 
B) depreciation expense 
C) interest expense 
D) both A and B

Question 8

Differences in accounting practices limit the use of ratio analysis.

Accepted Answer

A) True 
 B)False

Question 9

When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry,it is called trend analysis.

Accepted Answer

A) True 
 B)False

Question 10

Firms that engage in multiple lines of business make it difficult to assign them to an industry category for ratio analysis.

Accepted Answer

A) True 
 B)False

Question 11

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

Accepted Answer

A) Liquidity 
B) Leverage 
C) Efficiency 
D) Profitability 
A) Liquidity 
B) Leverage 
C) Efficiency 
D) Profitability

Question 12

The DuPont method decomposes return on equity into

Accepted Answer

A) return on assets and the debt ratio. 
B) return on assets and the equity multiplier. 
C) operating income and inventory turnover. 
D) net profit margin and fixed asset turnover. 
A) return on assets and the debt ratio. 
B) return on assets and the equity multiplier. 
C) operating income and inventory turnover. 
D) net profit margin and fixed asset turnover.

Question 13

Lorna Dome,Inc.has an annual interest expense of $30,000.Lorna Dome's times-interest-earned ratio is 4.2.What is Lorna Dome's operating income?

Accepted Answer

A) $96,000 
B) $57,000 
C) $126,000 
D) $57,600 
A) $96,000 
B) $57,000 
C) $126,000 
D) $57,600

Question 14

Smart and Smiley Incorporated has an average collection period of 74 days.What is the accounts receivable turnover ratio for Smart and Smiley?

Accepted Answer

A) 4.93 
B) 2.47 
C) 2.66 
D) 1.68 
A) 4.93 
B) 2.47 
C) 2.66 
D) 1.68

Question 15

________ indicates management's effectiveness in managing the firm's income statement.

Accepted Answer

A) Gross profit margin 
B) Operating profit margin 
C) Net profit margin 
D) Return on assets 
A) Gross profit margin 
B) Operating profit margin 
C) Net profit margin 
D) Return on assets

Question 16

Millers Metalworks,Inc.has a total asset turnover of 2.5 and a net profit margin of 3.5%.The total debt ratio for the firm is 50%.Calculate Millers's return on equity.

Accepted Answer

A) 17.5% 
B) 19.5% 
C) 21.5% 
D) 23.5% 
A) 17.5% 
B) 19.5% 
C) 21.5% 
D) 23.5%

Question 17

On a common-size balance sheet,total assets are equal to 100%.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) The calculation of the accounts receivable average collection period (ACP)would generally produce a more realistic assessment of how a firm is managing its accounts receivable if the analyst were to calculate the ACP for each month and average the results,than if the analyst were to solely use the fiscal year-end accounts receivable value. 
B) If an analyst were to compare the inventory turnover of one firm to that of another,the comparison can be distorted if the two firms use different methods of valuing ending inventory. 
C) Assume that two firms are in the same industry and one reports a higher debt ratio than the other.We can safely say that the firm that has the highest debt ratio is the riskier of the two firms. 
D) A firm that has a current ratio that is significantly above the industry norm will,as a direct consequence,also have a significantly better return on assets than if its current ratio was below the industry norm. 
E) All of the above statements are true. 
A) The calculation of the accounts receivable average collection period (ACP)would generally produce a more realistic assessment of how a firm is managing its accounts receivable if the analyst were to calculate the ACP for each month and average the results,than if the analyst were to solely use the fiscal year-end accounts receivable value. 
B) If an analyst were to compare the inventory turnover of one firm to that of another,the comparison can be distorted if the two firms use different methods of valuing ending inventory. 
C) Assume that two firms are in the same industry and one reports a higher debt ratio than the other.We can safely say that the firm that has the highest debt ratio is the riskier of the two firms. 
D) A firm that has a current ratio that is significantly above the industry norm will,as a direct consequence,also have a significantly better return on assets than if its current ratio was below the industry norm. 
E) All of the above statements are true.

Question 19

Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition,this firm's current ratio and fixed asset turnover ratio also meet industry standards.Based on this information,we can conclude that this firm must have excessive

Accepted Answer

A) accounts receivable. 
B) fixed assets. 
C) debt. 
D) inventory. 
A) accounts receivable. 
B) fixed assets. 
C) debt. 
D) inventory.

Question 20

A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined.This may be due to

Accepted Answer

A) an increase in sales. 
B) an increase in cost of goods sold. 
C) an increase in inventory purchases. 
D) a decrease in inventory purchases. 
A) an increase in sales. 
B) an increase in cost of goods sold. 
C) an increase in inventory purchases. 
D) a decrease in inventory purchases.

Which of the following would be most responsible for a company's average collection period being higher than the industry average?

A firm's average collection period has decreased significantly from the previous year.Which of the following could possibly explain the results?

Water Works,Inc.has a current ratio of 1.33,current liabilities of $540,000,and inventory of $400,000.What is Water Works,Inc.'s quick ratio?

By using common-size income statements,firms can determine how various expenses as a percentage of total sales changed from period to period.

A small start-up company should choose an industry leader in the same industry as a benchmark.

Heavy Load,Inc.has sales of $3,450,000,total assets of $1,240,000,and total liabilities of $275,000,which consist strictly of notes payable.The firm's operating profit margin is 16.1%,and it pays a 10% rate of interest on its notes payable.How much is the firm's interest coverage ratio?

A decrease in ________ will increase gross profit margin.

Differences in accounting practices limit the use of ratio analysis.

When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry,it is called trend analysis.

Firms that engage in multiple lines of business make it difficult to assign them to an industry category for ratio analysis.

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

The DuPont method decomposes return on equity into

Lorna Dome,Inc.has an annual interest expense of $30,000.Lorna Dome's times-interest-earned ratio is 4.2.What is Lorna Dome's operating income?

Smart and Smiley Incorporated has an average collection period of 74 days.What is the accounts receivable turnover ratio for Smart and Smiley?

________ indicates management's effectiveness in managing the firm's income statement.

Millers Metalworks,Inc.has a total asset turnover of 2.5 and a net profit margin of 3.5%.The total debt ratio for the firm is 50%.Calculate Millers's return on equity.

On a common-size balance sheet,total assets are equal to 100%.

Which of the following statements is FALSE?

Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition,this firm's current ratio and fixed asset turnover ratio also meet industry standards.Based on this information,we can conclude that this firm must have excessive

A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined.This may be due to

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes and Cash Flows

Time Value of Money - the Basics

The Time Value of Money - Annuities and Other Topics

An Introduction to Risk and Return - History of Financial Market Returns

Risk and Return - Capital Market Theory

Debt Valuation and Interest Rates

Share Valuation

Investment Decision Criteria

Analysing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 4: Financial Analysis - Sizing up Firm Performance

Which of the following would be most responsible for a company's average collection period being higher than the industry average?

A firm's average collection period has decreased significantly from the previous year.Which of the following could possibly explain the results?

Water Works,Inc.has a current ratio of 1.33,current liabilities of $540,000,and inventory of $400,000.What is Water Works,Inc.'s quick ratio?

By using common-size income statements,firms can determine how various expenses as a percentage of total sales changed from period to period.

A small start-up company should choose an industry leader in the same industry as a benchmark.

Heavy Load,Inc.has sales of $3,450,000,total assets of $1,240,000,and total liabilities of $275,000,which consist strictly of notes payable.The firm's operating profit margin is 16.1%,and it pays a 10% rate of interest on its notes payable.How much is the firm's interest coverage ratio?

A decrease in ________ will increase gross profit margin.

Differences in accounting practices limit the use of ratio analysis.

When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry,it is called trend analysis.

Firms that engage in multiple lines of business make it difficult to assign them to an industry category for ratio analysis.

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

The DuPont method decomposes return on equity into

Lorna Dome,Inc.has an annual interest expense of $30,000.Lorna Dome's times-interest-earned ratio is 4.2.What is Lorna Dome's operating income?

Smart and Smiley Incorporated has an average collection period of 74 days.What is the accounts receivable turnover ratio for Smart and Smiley?

________ indicates management's effectiveness in managing the firm's income statement.

Millers Metalworks,Inc.has a total asset turnover of 2.5 and a net profit margin of 3.5%.The total debt ratio for the firm is 50%.Calculate Millers's return on equity.

On a common-size balance sheet,total assets are equal to 100%.

Which of the following statements is FALSE?

Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition,this firm's current ratio and fixed asset turnover ratio also meet industry standards.Based on this information,we can conclude that this firm must have excessive

A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined.This may be due to

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes and Cash Flows

Time Value of Money - the Basics

The Time Value of Money - Annuities and Other Topics

An Introduction to Risk and Return - History of Financial Market Returns

Risk and Return - Capital Market Theory

Debt Valuation and Interest Rates

Share Valuation

Investment Decision Criteria

Analysing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters