Deck 19: Financial Statement Analysis

Question 1

If the interest rate on debt is higher than ROA, a firm will __________ by increasing the use of debt in the capital structure.

A)increase the ROE
B)not change the ROE
C)decrease the ROE
D)change the ROE in an indeterminable manner If ROA is less than the interest rate, then ROE will decline by an amount that depends on the debt to equity ratio.

Answer 1

C

Question 2

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's inventory turnover ratio for 2009 is

A)3.15.
B)3.63.
C)3.69.
D)2.58.

Answer 2

A

Question 3

If you wish to compute economic earnings and are trying to decide how to account for inventory,

A)FIFO is better than LIFO.
B)LIFO is better than FIFO.
C)FIFO and LIFO are equally good.
D)FIFO and LIFO are equally bad.

Answer 3

B

Question 4

A firm has a lower asset turnover ratio than the industry average, which implies

A)the firm has a lower P/E ratio than other firms in the industry.
B)the firm is less likely to avoid insolvency in the short run than other firms in the industry.
C)the firm is less profitable than other firms in the industry.
D)the firm is utilizing assets less efficiently than other firms in the industry.

Question 5

In periods of inflation, accounting depreciation is __________ relative to replacement cost, and real economic income is ________.

A)overstated; overstated
B)overstated; understated
C)understated; overstated
D)understated; understated

Question 6

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's fixed asset turnover ratio for 2009 is

A)2.04.
B)2.58.
C)2.97.
D)1.58.

Question 7

A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis,

A)the original and restated P/E ratios were quite similar.
B)the original and restated P/E ratios varied considerably.
C)most variation was explained by tax differences.
D)most firms were consistent in their treatment of goodwill. This study found that restated P/E ratios varied considerably from those originally reported.

Question 8

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's asset turnover ratio for 2009 is

A)1.79.
B)1.63.
C)1.34.
D)2.58.

Question 9

If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be

A)greater than the ROE.
B)equal to the ROE.
C)less than the ROE.
D)greater than zero, but it is impossible to determine how ROA will compare to ROE.

Question 10

A firm has a P/E ratio of 12, an ROE of 13%, and a market-to-book value of

A)0.64.
B)0.92.
C)1.08.
D)1.56.

Question 11

__________ is a summary of the profitability of the firm over a period of time, such as a year.

A)The balance sheet
B)The income statement
C)The statement of cash flows
D)The audit report

Question 12

__________ is a report of the cash flow generated by the firm's operations, investments, and financial activities.

A)The balance sheet
B)The income statement
C)The statement of cash flows
D)The auditor's statement of financial condition

Question 13

A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies

A)the firm has a higher P/E ratio than other firms in the industry.
B)the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C)the firm is more profitable than other firms in the industry.
D)the firm is utilizing its assets more efficiently than other firms in the industry. The relationship P/E = (P/B)/ROE indicates that A is possible.

Question 14

A firm has a higher asset turnover ratio than the industry average, which implies

A)the firm has a higher P/E ratio than other firms in the industry.
B)the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C)the firm is more profitable than other firms in the industry.
D)the firm is utilizing assets more efficiently than other firms in the industry.

Question 15

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's current ratio for 2009 is

A)2.31.
B)1.87.
C)2.22.
D)2.46.

Question 16

__________ provides a snapshot of the financial condition of the firm at a particular time.

A)The balance sheet
B)The income statement
C)The statement of cash flows
D)All of the options are correct.

Question 17

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's average collection period for 2009 is

A)59.31.
B)55.05.
C)61.31.
D)49.05.

Question 18

Over a period of 30 years or so, in managing investment funds, Benjamin Graham used the approach of investing in the stocks of companies where the stocks were trading at less than their working capital value.The average return from using this strategy was approximately

A)5%.
B)10%.
C)15%.
D)20%.

Question 19

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's times interest earned ratio for 2009 is

A)8.86.
B)7.17.
C)9.66.
D)6.86.

Question 20

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

A)increase the ROE
B)not change the ROE
C)decrease the ROE
D)change the ROE in an indeterminable manner If ROA is higher than the interest rate, then ROE will increase by an amount that depends on the debt to equity ratio.

Question 21

A firm has an ROE of -2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%.The firm's ROA is

A)2%.
B)4%.
C)6%.
D)8%.

Question 22

Return on total assets is the product of

A)interest rates and pre-tax profits.
B)the debt-equity ratio and P/E ratio.
C)the after-tax profit margin and the asset turnover ratio.
D)sales and fixed assets.

Question 23

A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%.The firm's asset turnover is

A)0.3.
B)1.3.
C)2.3.
D)3.3. 17.82% = 0.625 *0.9 * 8% * asset turnover * 1.2; asset turnover = 3.3.

Question 24

Which of the following ratios gives information on the amount of profits reinvested in the firm over the years?

A)Sales/total assets
B)Debt/total assets
C)Debt/equity
D)Retained earnings/total assets Only retained earnings reflect profits reinvested over the years.

Question 25

__________ is a false statement.

A)During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used
B)During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used
C)During periods of inflation, LIFO overstates earnings relative to FIFO
D)During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used, and LIFO overstates earnings relative to FIFO

Question 26

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average.These ratios suggest that the firm

A)utilizes assets effectively.
B)has too much equity in the capital structure.
C)has relatively high current liabilities.
D)has a relatively low dividend-payout ratio.

Question 27

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense.During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

A)understate; overstate
B)understate; understate
C)overstate; understate
D)overstate; overstate

Question 28

A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%.The firm's ROE is

A)11.18%.
B)8.97%.
C)11.54%.
D)12.62%.

Question 29

__________ is a true statement.

A)During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used
B)During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used
C)After inflation ends, distortion due to LIFO will disappear as inventory is sold
D)During periods of inflation, LIFO overstates earnings relative to FIFO During periods of inflation, the use of LIFO results in lower priced inventory remaining in stock; thus the balance sheet understates the actual inventory values.

Question 30

A firm's current ratio is above the industry average.However, the firm's quick ratio is below the industry average.These ratios suggest that the firm

A)has relatively more total current assets and even more inventory than other firms in the industry.
B)is very efficient at managing inventories.
C)has liquidity that is superior to the average firm in the industry.
D)is near technical insolvency.

Question 31

During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes

A)higher reported sales.
B)higher incomes taxes.
C)lower ending inventory.
D)higher incomes taxes and lower ending inventory.

Question 32

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's market-to-book value for 2009 is

A)1.13.
B)1.62.
C)1.00.
D)1.26.

Question 33

A measure of asset utilization is

A)sales divided by working capital.
B)return on total assets.
C)return on equity capital.
D)operating profit divided by sales.

Question 34

Fundamental analysis uses

A)earnings and dividends prospects.
B)relative strength.
C)price momentum.
D)earnings, dividend prospects, and relative strength.

Question 35

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's return on equity ratio for 2009 is

A)16.88%.
B)15.63%.
C)14.00%.
D)15.00%.

Question 36

Ferris Corp.wants to increase its current ratio from the present level of 1.5 when it closes the books next week.The action of __________ will have the desired effect.

A)payment of current payables from cash
B)sales of current marketable securities for cash
C)write-down of impaired assets
D)delay of next payroll

Question 37

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) ________current ratio than a firm using FIFO, and the difference will tend to __________ as time passes.

A)higher; increase
B)higher; decrease
C)lower; decrease
D)lower; increase

Question 38

A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%.The firm's ROE is

A)4.2%.
B)5.2%.
C)6.2%.
D)7.2%.

Question 39

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's return on sales ratio for 2009 is

A)15.5%.
B)14.6%.
C)14.0%.
D)15.0%.

Question 40

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company.The firm's P/E ratio for 2009 is

A)8.88.
B)7.63.
C)7.88.
D)7.32.

Question 41

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average.

A)The firm expanded plant and equipment in the past few years
B)The firm makes less efficient use of assets than competing firms
C)The firm has a substantial amount of old plant and equipment
D)The firm uses straight-line depreciation If the firm has more old plant and equipment than competing firms, the denominator is deflated, thus producing a higher than average ratio.

Question 42

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's times interest earned ratio for 2009 is

A)2.897.
B)2.719.
C)3.375.
D)3.462.

Question 43

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's asset turnover ratio for 2009 is

A)1.86.
B)0.63.
C)0.83.
D)1.63.

Question 44

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's inventory turnover ratio for 2009 is

A)2.86.
B)1.23.
C)5.96.
D)4.42.

Question 45

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's P/E ratio for 2009 is

A)20.53.
B)6.63.
C)5.21.
D)5.00.

Question 46

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's market-to-book value for 2009 is

A)0.24.
B)0.95.
C)0.71.
D)1.12.

Question 47

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's return on sales ratio for 2009 is

A)20.2%.
B)21.6%.
C)22.4%.
D)18.0%.

Question 48

Comparability problems arise because

A)firms may use different generally accepted accounting principles.
B)inflation may affect firms differently due to accounting conventions used.
C)financial analysts do not know how to compare financial statements.
D)firms may use different generally accepted accounting principles, and inflation may affect firms differently due to accounting conventions used.

Question 49

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's average collection period for 2009 is

A)69.35.
B)69.73.
C)68.53.
D)67.77.

Question 50

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's return on equity ratio for 2009 is

A)12.24%.
B)14.63%.
C)15.50%.
D)14.50%.

Question 51

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average?

A)The firm's net profit margin is higher than the industry average.
B)The firm's asset turnover is higher than the industry average.
C)The firm's equity multiplier must be lower than the industry average.
D)The firm's debt ratio is higher than the industry average.

Question 52

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company.The firm's return on sales ratio for 2009 is

A)0.0133.
B)0.1325.
C)1.325.
D)1.260.

Question 53

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's fixed asset turnover ratio for 2009 is

A)1.45.
B)1.63.
C)1.20.
D)1.58.

Question 54

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's leverage ratio for 2009 is

A)1.62.
B)1.56.
C)2.00.
D)2.42.

Question 55

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is higher than the industry average?

A)The firm pays lower interest on long-term debt than the average firm.
B)The firm has more short-term debt than average.
C)The firm has a high ratio of current assets/current liabilities.
D)The firm has a high ratio of total cash flow/long term debt.

Question 56

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company.The firm's fixed asset turnover ratio for 2009 is

A)4.60.
B)3.61.
C)3.16.
D)5.46.

Question 57

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's current ratio for 2009 is

A)1.82.
B)1.03.
C)1.30.
D)1.65.

Question 58

One problem with comparing financial ratios prepared by different reporting agencies is

A)some agencies receive financial information later than others.
B)agencies vary in their policies as to what is included in specific calculations.
C)some agencies are careless in their reporting.
D)some firms are more conservative in their accounting practices.

Question 59

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours.The firm's quick ratio for 2009 is

A)1.71.
B)0.78.
C)0.85.
D)1.56.

Question 60

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company.The firm's asset turnover ratio for 2009 is

A)1.60.
B)3.16.
C)3.31.
D)4.64.

Question 61

Which of the following are issues when dealing with the financial statements of international firms? I) Many countries allow firms to set aside larger contingency reserves than the amounts allowed for Canadian firms.
II) Many firms outside Canada use accelerated depreciation methods for reporting purposes, whereas most U.S.firms use straight-line depreciation for reporting purposes.
III) Intangibles, such as goodwill, may be amortized over different periods or may be expensed rather than capitalized.
IV) There is no way to reconcile the financial statements of non-U.S.firms to GAAP.

A)I and II
B)II and IV
C)I, II, and III
D)I, III, and IV

Question 62

Which of the financial statements recognizes only transactions in which cash changes hands?

A)Balance sheet
B)Income statement
C)Statement of cash flows
D)Balance sheet and income statement

Question 63

Fair value accounting is also known as

A)fundamental analysis.
B)technical analysis.
C)GAAP accounting.
D)mark-to-market accounting.

Question 64

Suppose that Chicken Express, Inc.has an ROA of 7% and pays a 6% coupon on its debt.Chicken Express has a capital structure that is 70% equity and 30% debt.Relative to a firm that is 100% equity-financed, Chicken Express's net profit will be ________, and its ROE will be ________.

A)lower; lower
B)higher; higher
C)higher; lower
D)lower; higher

Question 65

Proceeds from a company's sale of stock to the public are included in

A)par value.
B)additional paid-in capital.
C)retained earnings.
D)par value and additional paid-in capital.

Question 66

Critics of fair value accounting argue that:

A)It ignores GAAP principles.
B)It relies too much on ratio analysis.
C)It ignores mark-to-market accounting.
D)It relies too heavily on estimates.

Question 67

Common size income statements make it easier to compare firms

A)That use different inventory valuation methods ( FIFO vs.LIFO ).
B)In different industries.
C)With different degrees of leverage.
D)Of different sizes.

Question 68

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company.The firm's return on equity ratio for 2009 is

A)0.1235.
B)0.0296.
C)0.2960.
D)2.2960.

Question 69

The dollar value of a firm's return in excess of its opportunity costs is called its

A)profitability measure.
B)excess return.
C)economic value added.
D)prospective capacity.

Question 70

The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM) because

A)the DDM uses a different price in the numerator.
B)the DDM uses different earnings measures in the denominator.
C)the prices reported are not accurate.
D)the people who construct the ratio from financial statements have inside information.

Question 71

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company.The firm's market-to-book value for 2009 is

A)0.7256.
B)1.5294.
C)2.9400.
D)3.6142.