Deck 12: Ratio Analysis and Operating Indicators

Question 1

The purpose of accounting ratios is to

A) Assess financial performance by relating one financial variable to another
B) Compare the performance of one organization to that of other organizations
C) Drill down into operations to identify the reason for poor financial performance
D) Determine why actual performance does not match the budget

Answer 1

A

Question 2

When assessing the profitability ratios of an organization's ratios, which of the following should be considered?

A) Assets employed, size of organization
B) Type of organization
C) Historical returns
D) Should earn
E) All of the above

Answer 2

E

Question 3

The category of ratios that assesses the ability to meet short-term obligation is

A) Profitability
B) Liquidity
C) Capital structure
D) Turnover

Answer 3

B

Question 4

Turnover ratio

A) Measures the ability of management to generate more revenues than expenses
B) Measures the productivity of assets
C) Measures the ability of the organization to meet its short-term financial obligations
D) Measures how assets are financed and the ability of the organization to meet all its financial obligations

Question 5

The profitability ratio that assesses the ability of the organization to create value for owners is

A) Operating margin
B) Total margin
C) Return on equity
D) Return on assets

Question 6

The formula for return on assets is

A) Profit/Equity
B) Profit/Total assets
C) Profit/Total revenue
D) Net operating income/Net operating revenue

Question 7

The liquidity ratio that measures the number of days an organization can meet its current expenses with its existing cash and marketable securities is

A) Current ratio
B) Acid ratio
C) Days in accounts receivable
D) Days cash on hand
E) Average payment period

Question 8

Average payment period measures

A) The number of days an organization can meet its current expenses with it existing cash and marketable securities
B) How quickly short-term liabilities are paid
C) The time lag between production of a good or service and receipt of payment for this work
D) The ability to meet short-term obligations with current assets

Question 9

The formula for days in accounts receivable are

A) Current assets/Current liabilities
B) (Cash + Marketable securities + Accounts receivable)/Current liabilities
C) (Cash + Marketable securities)/((Annual expenses - Depreciation)/365)
D) Accounts receivable/(Operating revenue/365)
E) Current liabilities/((Annual expense - Depreciation)/365)

Question 10

The formula for the acid ratio is

A) Current assets/Current liabilities
B) (Cash + Marketable securities + Accounts receivable)/Current liabilities
C) (Cash + Marketable securities)/((Annual expenses - Depreciation)/365)
D) Accounts receivable/(Operating revenue/365)
E) Current liabilities/((Annual expense - Depreciation)/365)

Question 11

Which of the following would indicate a reduced ability to meet short-term obligations?

A) An increase in the current ratio
B) A reduction in days in accounts receivable
C) An increase in average payment period
D) An increase in days cash on hand

Question 12

The capital structure ratio that measures ________ shows the proportion of total assets financed by the owners of the organization.

A) Long-term debt to equity
B) Equity financing ratio
C) Times interest earned
D) Debt coverage
E) Capital expense

Question 13

Debt service coverage measures

A) The proportion of total assets financed by the owners of the organization
B) How much of total expense the organization devotes to using funds
C) The ability of the organization to meet its an annual interest payments
D) The ability of the organization to meet its annual interest and principle payments
E) The percentage of assets permanently financed by debt and ignores short-term liabilities

Question 14

The formula for debt service coverage is

A) (Profit + Depreciation)/(Current liabilities + Long-term debt)
B) (Profit (Loss) + Interest expense + Depreciation)/(Interest expense + Principal)
C) (Interest expense + Depreciation + Amortization)/Total expense
D) Long-term debt/Equity
E) Equity/Total assets

Question 15

Which of the following indicates an improvement in an organization's capital structure?

A) A decrease in the equity financing ratio
B) A decrease in debt service coverage
C) A decrease in capital expense
D) A decrease in times interest earned
E) A decrease in total asset turnover

Question 16

The DuPont Analysis formula is

A) Total margin * Total asset turnover * Equity multiplier
B) Operating margin * Total asset turnover * Long-term debt to equity
C) Operating margin * Fixed asset turnover * Equity multiplier
D) Total margin * Fixed asset turnover * Long-term debt to equity
E) Total margin * Current asset turnover * Equity multiplier

Question 17

The product of the DuPont Analysis formula is

A) ROA
B) ROE
C) Operating margin
D) Total margin

Question 18

Which of the following scenarios would increase ROE using the DuPont formula?

A) An increase in profit, a decrease in total assets, and a reduction in equity
B) An increase in profit, an increase in total assets, and an increase in equity
C) An increase in profit, an increase in total assets, and a reduction in equity
D) A decrease in profit, a decrease in total assets, and a reduction in equity
E) A decrease in profit, a decrease in total assets, and an increase in equity

Question 19

The purpose of benchmarking is to

A) Determine if an organization's or department's performance is better or worse than referent
B) Determine if an organization's or department's performance is improving, deteriorating, or stable
C) Provide credible improvement targets
D) All of the above

Question 20

The easiest and fastest form of benchmarking is

A) Internal or historical
B) Industry average or best-in-class performance
C) Competitive
D) Functional

Question 21

The form of benchmarking that seeks to meet or exceed the performance of organizations pursuing the same customers is

A) Internal or historical
B) Industry average or best-in-class performance`
C) Competitive
D) Functional

Question 22

Which of the following is NOT essential to establishing an effective benchmarking program?

A) Senior management commitment
B) Consistency between the organization's goals and the benchmarking program
C) Clear improvement targets taken from a best-in-class performer
D) An open and willing desire to change organizational culture
E) Widespread understanding of customer desires and organizational processes

Question 23

Profitability ratios examine how much money is earned from operations based on invested equity, assets employed, and sales.

Question 24

Turnover ratios assess the overall effectiveness of management.

Question 25

The three major types of ratios included in the DuPont Analysis formula are profitability, turnover, and liquidity.

Question 26

The three major types of ratios included in the DuPont Analysis formula are profitability, turnover, and capital structure.

Question 27

Profit indicators identify the level of profit earned in inpatient and outpatient areas.

Question 28

Efficiency indicators examine the productivity of labor.

Question 29

Functional benchmarking identifies industry leaders to establish performance targets.

Question 30

Benchmarking is a one-time process to elevate an organization's performance to the industry average or level of the industry leader.