Deck 3: Financial Analysis

Question 1

Total asset turnover indicates the firm's:

A) liquidity.
B) debt position.
C) ability to use its assets to generate sales.
D) profitability.

Answer 1

C

Question 2

Asset utilization ratios:

A) relate the balance sheet assets to the income statement sales.
B) measure how much cash is available for reinvestment into current assets.
C) are most important to shareholders.
D) measures the firm's ability to generate a profit on sales.

Answer 2

A

Question 3

Ratio analysis is not useful for:

A) historical trend analysis within a firm.
B) comparison of ratios within a single industry.
C) measuring the effects of financing.
D) measuring employee satisfaction.

Answer 3

D

Question 4

Which two ratios are used in the DuPont system to create return on assets?

A) Return on assets and asset turnover
B) Profit margin and asset turnover
C) Return on total capital and the profit margin
D) Inventory turnover and return on capital assets

Question 5

A quick ratio much smaller than the current ratio reflects:

A) a small portion of current assets is in inventory.
B) a large portion of current assets is in inventory.
C) that the firm will have a high inventory turnover.
D) that the firm will have a high return on assets.

Question 6

A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's capital asset turnover is:

A) 3.0x.
B) 12.0x.
C) 2.4x.
D) 5.0x.

Question 7

Income can be distorted by factors other than inflation. The most important causes of distortion for inter-industry comparisons are:

A) accounting trends.
B) application of IFRS.
C) timing of revenue receipts and nonrecurring gains or losses.
D) cash reinvestment.

Question 8

In addition to comparison with industry ratios, it is also helpful to analyze ratios using:

A) ethical behaviour.
B) comparison of industry benchmarks.
C) focus groups.
D) trend analysis.

Question 9

ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,285,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.)

A) $54,750
B) $109,500
C) $540,000
D) $547,500

Question 10

If a firm has both interest expense and lease payments:

A) times interest earned will be smaller than fixed charge coverage.
B) times interest earned will be greater than fixed charge coverage.
C) times interest earned will be the same as fixed charge coverage.
D) fixed charge coverage cannot be compute

Question 11

In examining the liquidity ratios, the primary emphasis is the firm's:

A) ability to effectively employ its resources.
B) overall debt position.
C) ability to pay short-term obligations on time.
D) ability to earn an adequate return.

Question 12

During inflation, replacement cost accounting will:

A) decrease the value of assets.
B) raise the debt to asset ratio.
C) increase incomes.
D) reduce incomes.

Question 13

Industries most sensitive to inflation-induced profits are those with:

A) seasonal products.
B) cyclical products.
C) consumer products.
D) high-profit products.

Question 14

A firm has operating profit of $120,000 after deducting lease payments of $20,000. Interest expense is $40,000. What is the firm's fixed charge coverage?

A) 6.00x
B) 4.00x
C) 3.50x
D) 2.33x

Question 15

A short-term creditor would be most interested in:

A) profitability ratios.
B) asset utilization ratios.
C) liquidity ratios.
D) debt utilization ratios.

Question 16

Replacement cost accounting (current cost method) will usually:

A) increase assets, decrease net income before taxes, and lower the return on equity.
B) increase assets, increase net income before taxes, and increase the return on equity.
C) decrease assets, increase net income before taxes, and increase the return on equity.
D) increase assets, increase net income before taxes, and lower the return on equity.

Question 17

Disinflation may cause:

A) an increase in the value of gold, silver, and gems.
B) a reduced required return demanded by investors on financial assets.
C) increased return demanded by investors on non-financial assets.
D) additional profits through rising inventory costs.

Question 18

Which of the following is a potential problem of utilizing ratio analysis?

A) Trends and industry averages are futuristic in nature
B) Financial data is identical due to price-level changes
C) Firms within an industry use similar accounting principles and application
D) Firms within an industry may not use similar accounting methods

Question 19

Which of the following is not an asset utilization ratio?

A) Inventory turnover
B) Return on assets
C) Capital asset turnover
D) Average collection period

Question 20

Using ASPE, the ______________ method of inventory costing is most likely to lead to inflation-induced profits.

A) FIFO
B) Specific item
C) Weighted average
D) Lower of cost or market

Question 21

-Megaframe's current ratio is:

A) 1.9:1.
B) 0.6:1.
C) 1:1.
D) 0.86:1.

Question 22

Investors and financial analysts wanting to evaluate the operating efficiency of a firm's, managers would probably look primarily at the firm's:

A) debt utilization ratios.
B) liquidity ratios.
C) asset utilization ratios.
D) profitability ratios.

Question 23

-Times interest earned for Megaframe Computer is:

A) 2x.
B) 5x.
C) 4x.
D) 10x.

Question 24

A firm's long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000. Calculate the current ratio and quick ratio.

A) Current ratio = 0.5; Quick ratio = 1.5
B) Current ratio = 1.0; Quick ratio = 2.0
C) Current ratio = 1.5; Quick ratio = 2.0
D) Current ratio = 2.5; Quick ratio = 2.0

Question 25

-Megaframe's debt to asset ratio is:

A) 56.1%.
B) 75.61%.
C) 80.49%.
D) 90.62%

Question 26

-Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately:

A) 15%.
B) 25%.
C) 29%.
D) 20%.

Question 27

XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the sales figure for the year?

A) $60,000
B) $6,000,000
C) $7,200,000
D) $6,600,000

Question 28

A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is:

A) 60%
B) 15%
C) 30%
D) not enough information.

Question 29

A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity.

A) 60%
B) 20%
C) 26%
D) Not enough information

Question 30

-Megaframe's quick ratio is:

A) 1:1.
B) 1:2.
C) 1.6:1.
D) 3:1.

Question 31

The Bubba Corp. had net income before taxes of $300,000 and sales of $2,000,000. If it is in the 50% tax bracket its after tax profit margin is:

A) 7.5%
B) 10%
C) 12.5%
D) 15%

Question 32

A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders' equity is $900,000. What is the total debt to asset ratio?

A) 45%
B) 40%
C) 55%
D) 100%

Question 33

Which industry places the most value on intangible assets?

A) Professional services
B) Manufacturing industry
C) Production facility
D) Assembly facility

Question 34

The higher a firm's debt utilization ratios, excluding debt-to-total assets, the:

A) less risky the firm's financial position.
B) more risky the firm's financial position.
C) more easily the firm will be able to pay dividends.
D) less easily the firm will be able to pay dividends.

Question 35

For a given level of profitability as measured by profit margin, the firm's return on equity will:

A) increase as its debt-to-assets ratio decreases.
B) decrease as its current ratio increases.
C) increase as its debt-to assets ratio increases.
D) decrease as its times-interest-earned ratio decreases.

Question 36

Which of the following is not considered to be a profitability ratio?

A) Profit margin
B) Times interest earned
C) Return on equity
D) Return on assets (investment)

Question 37

-What is Megaframe Computer's total asset turnover?

A) 3.68x.
B) 3.18x.
C) 2.00x.
D) 1.71x.

Question 38

If government bonds pay 8.5% interest and CDIC insured savings accounts pay 5.5% interest, shareholders in a moderately risky firm would expect return-on-equity values of:

A) 5.5%.
B) 8.5%.
C) 12.0%.
D) above 8.5%, but the exact amount is uncertain.

Question 39

The most rigorous test of a firm's ability to pay its short-term obligations is its:

A) current ratio.
B) quick ratio.
C) debt-to-assets ratio.
D) times-interest-earned ratio.

Question 40

-The firm's average collection period is: (Use 365 days in a year.)

A) 31 days.
B) 25 days.
C) 12 days.
D) 20 days.

Question 41

Return on assets (ROA) can be distorted by:

A) current liabilities.
B) noncurrent liabilities.
C) bond principle payments.
D) bond interest payments.

Question 42

-Megaframe's return on equity is:

A) 44.44%.
B) 80.00%.
C) 50.05%.
D) 100.0%.

Question 43

Historical cost based amortization tends to ________ immediately when there is inflation.

A) lower taxes
B) decrease profits
C) increase profits
D) increase assets

Question 44

If accounts receivable stays the same, and credit sales go up:

A) the average collection period will go up.
B) the average collection period will go down.
C) accounts receivable turnover will decrease.
D) no changes will occur.

Question 45

What do coverage ratios demonstrate?

A) How a firm is expected to handle current asset balances.
B) Debt management of the firm and ability to meet financial obligations.
C) Profit margin of the firm.
D) The return on assets of the firm.

Question 46

In examining the debt utilization ratios, the primary purpose is to measure:

A) ability to effectively employ its resources.
B) overall debt position.
C) ability to pay short-term obligations on time.
D) ability to generate timely cash flows.

Question 47

-Megaframe's receivable turnover is:

A) 4.4x.
B) 10x.
C) 11.67x.
D) 14.4x.

Question 48

Which of the following is an asset utilization ratio?

A) Profit margin
B) Inventory turnover
C) Return on equity
D) Return on assets

Question 49

According the DuPont system, which of the following is not a factor in achieving a satisfactory return on assets?

A) Use of debt
B) Low inventory levels
C) Rapid turnover of assets
D) High profit margins

Question 50

An increasing average collection period indicates:

A) the firm is generating more income.
B) accounts receivable is going down.
C) the company is becoming more efficient in its collection policy.
D) the company is becoming less efficient in its collection policy.

Question 51

-Compute Megaframe's after tax profit margin.

A) 10.0%
B) 14.29%
C) 11.43%
D) 46.34%

Question 52

A large extraordinary loss has what effect on cost of goods sold?

A) It raises it.
B) It lowers it.
C) It has no effect.
D) Need more information.

Question 53

What happens if lease payments are reduced?

A) Times interest earned goes up.
B) Fixed charge coverage goes up.
C) Fixed charge coverage stays the same.
D) Fixed charge coverage goes down.

Question 54

Which of the following is a profitability ratio?

A) Quick ratio
B) Return on assets
C) Inventory turnover
D) Capital asset turnover

Question 55

If a company's accounts receivable turnover is increasing, the average collection period:

A) is going up slightly.
B) is going down.
C) could be moving in either direction.
D) is going up by a significant amount.

Question 56

Which of the following is not a debt utilization ratio?

A) Debt to total assets
B) Times interest earned
C) Current ratio
D) Fixed charge coverage

Question 57

A decreasing average collection period could be associated with:

A) increasing sales.
B) decreasing sales.
C) increasing accounts receivable.
D) increasing profits.

Question 58

A non-Canadian company experiencing rapid price increases for its product would take the most conservative approach by using:

A) FIFO accounting.
B) LIFO accounting.
C) average cost accounting.
D) weighted average.

Question 59

A firm has current assets of $150,000 and total assets of $750,000. The firm's sales are $1,800,000. The firm's capital asset turnover is:

A) 3.0x
B) 12.0x
C) 2.4x
D) 5.0x

Question 60

Disinflation as compared to inflation would normally be good for investments in:

A) bonds.
B) gold.
C) collectible antiques.
D) text books.

Question 61

Ratios are used to compare different firms in the same industry.

Question 62

A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is $60,000. What is the firm's fixed charge coverage?

A) 5.00x
B) 4.00x
C) 3.33x
D) 2.40x

Question 63

If a company has a return on investment of 17%, and its equity multiplier is 1.75, its ROE would be _______.

A) 64.75%
B) 29.75%
C) 18.25%
D) 16.50%

Question 64

Heavy use of long-term debt can be of benefit to a firm.

Question 65

The stock market tends to move up when inflation goes up.

Question 66

A firm has a Debt-to-Asset ratio of 35% and Total Assets of $350,000. What is the firm's Total Debt?

A) $122,500
B) $650,000
C) $100,000
D) $60,000

Question 67

Absolute values taken from financial statements are more useful than relative values.

Question 68

A current ratio of 2 to 1 is always acceptable, for a company in any industry.

Question 69

As long as prices continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise.

Question 70

Jones and Co., reported average receivables of $550,000 in its most recent annual report. If total credit sales were $3,000,000 what was Jones and Co.'s average collection period? (Use 365 days in a year.)

A) 67 days
B) 29 days
C) 82 days
D) 21 days

Question 71

Juniper, Ltd. report total sales of $10,000,000 in the prior year. If these sales were 15.50X total capital assets what was the company's capital asset position in the year?

A) $15,000,000
B) $155,000,000
C) $645,161
D) $6,451,613

Question 72

If the company's accounts receivable turnover is decreasing, the average collection period:

A) is going up.
B) is going down.
C) could be moving in either direction.
D) is going down slightly.

Question 73

To compute the quick ratio, accounts receivable are not included in current assets.

Question 74

If a company's profit margin was 32%, what were its reported sales if its reported net income was $650,000?

A) $10,000,000
B) $9,758,982
C) $1,008,332
D) $2,031,250

Question 75

A firm's long term assets = $150,000, total assets = $400,000, inventory = $50,000, and current liabilities = $100,000. Calculate the current ratio and quick ratio.

A) Current ratio = 0.5; Quick ratio = 1.5
B) Current ratio = 1.0; Quick ratio = 2.0
C) Current ratio = 1.5; Quick ratio = 2.0
D) Current ratio = 2.5; Quick ratio = 2.0

Question 76

An increasing average collection period could be associated with:

A) decreasing average daily cash sales.
B) increasing average daily credit sales.
C) decreasing accounts receivable.
D) increasing accounts receivable.

Question 77

Flounders Co. has an average collection period of 60 days. Total credit sales for the year were $9,855,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.)

A) $164,250
B) $328,500
C) $1,620,000
D) $1,642,500

Question 78

A decreasing average collection period indicates:

A) the firm is generating more income.
B) accounts receivable is going up.
C) the company is becoming more efficient in its collection policy.
D) the company is becoming less efficient in its collection policy.

Question 79

In analyzing ratios, the age of the firm's assets need not be considered.

Question 80

Under International Financial Reporting Standards, two companies with identical operating results may not report identical net incomes.