Deck 17: Financial Statement Analysis

Question 1

A company having earnings per share of $5.67 is more profitable than a company having earnings per share of $4.32.

Answer 1

False

Question 2

A company has set its gross margin target range at 40% to 42%. An increase in the ratio from 38% to 39% is a positive trend.

Answer 2

True

Question 3

An accounts receivable ratio above the target range may indicate that ThreeGreen is too liberal in extending credit to its customers.

Answer 3

True

Question 4

Investors are willing to pay a higher P/E ratio for growth stocks than for income stocks.

Question 5

Managers who want to control operating expenses will be more interested in the operating margin than the total operating expense ratio.

Question 6

The ratio that measures the relationship between cash and current assets is the quick ratio.

Question 7

Modifying a benchmark is an option for a business that fails to achieve its benchmark.

Question 8

The gross profit margin gives investors the best indication of how effectively a business is earning a profit from its normal business operations.

Question 9

Alpha Company's target range for its total operating expense ratio is between 32.0% and 34.0%. A decline in its operating expense ratio from thus, from 35.1% to 34.2% is a favorable trend.

Question 10

A business with operating expenses that exceed its target range should always begin by reducing the number of employees, the largest operating expense for most businesses.

Question 11

A company has done everything possible to control rising merchandise costs. To maintain its gross margin, its only alternative is to increase sales.

Question 12

Income stocks typically have a higher dividend yield than growth stocks.

Question 13

Quick assets include cash and merchandise inventory.

Question 14

The gross profit ratio is also referred to as the gross margin.

Question 15

The dividend ratio is the most widely recognized measure of a corporation's financial performance.

Question 16

A corporation should compare its working capital to industry standards.

Question 17

A corporation's earnings per share can only be compared to its earnings per share during prior fiscal years.

Question 18

The current ratio assumes a business could sell its merchandise inventory quickly.

Question 19

Operating margin is also referred to as

A) rate of return on sales.
B) operating income.
C) gross margin.
D) earnings per share.

Question 20

The price-earnings ratio is an example of a

A) solvency ratio.
B) profitability ratio.
C) liquidity ratio.
D) market ratio.

Question 21

To rate the ability of a business to pay its current and long-term liabilities, investors use

A) solvency ratios.
B) profitability ratios.
C) liquidity ratios.
D) market ratios.

Question 22

Gross margin can be increased by

A) selling more merchandise.
B) buying less merchandise.
C) increasing unit sales prices.
D) reducing operating expenses.

Question 23

Vertical analysis ratios are an example of a

A) solvency ratio.
B) profitability ratio.
C) liquidity ratio.
D) market ratio.

Question 24

The least likely factor a business will use to determine a benchmark is

A) government economic standards.
B) actual ratios from the prior year.
C) industry standards.
D) its business plan.

Question 25

The ratio that gives the best indication of how effectively a business is earning a profit from its normal business operations is the

A) debt ratio.
B) rate of return on sales.
C) gross margin.
D) operating margin.

Question 26

The debt ratio is an example of a

A) solvency ratio.
B) profitability ratio.
C) liquidity ratio.
D) market ratio.

Question 27

Gross margin is also referred to as

A) operating margin.
B) gross profit margin.
C) rate of return on sales.
D) earnings per share.

Question 28

A company's cost of merchandise sold increased by 6.7% over the prior year. Management

A) considers this to be an unfavorable trend.
B) cannot evaluate this change without knowing the change in sales.
C) should reduce the amount of merchandise purchased during the next year.
D) should reduce operating costs to maintain a constant operating margin.