Deck 3: Evaluation of Financial Performance

Question 1

The data from is especially useful when analyzing small firms.

A)Prentice-Hall
B)Robert Morris Associates
C)Dan Bradbury Ltd.
D)Securities and Exchange Commission

Answer 1

B

Question 2

The earnings per share figure

A)is a comparative ratio
B)is the best measure of a firm's profitability
C)can only be computed if a firm has no debt
D)is only one measure of a firm's profitability

Answer 2

D

Question 3

Financial ratios can be used to analyze a firm's performance from

A)day to day
B)period to period
C)purchase to purchase
D)sale to sale

Answer 3

B

Question 4

The greater the amount of financial leverage used by a firm, the greater its , all other things being equal.

A)profitability
B)liquidity
C)risk
D)size

Question 5

The primary weakness of the current ratio is

A)it is difficult to calculate
B)it includes some items, such as inventory, that may not be readily liquid
C)it requires many years of past data
D)it includes many non-current items in its calculation

Question 6

A firm wants to receive cash earnings. Management's viewpoint is that cash earnings are:

A)stock dividends.
B)high quality earnings.
C)retained earnings.
D)debt retirement.

Question 7

Which of the following financial ratios are market-based ratios?

A)debt-to-equity
B)price-to-earnings
C)return on investment
D)gross profit margin

Question 8

The quick ratio is the same as current ratio except it does not consider

A)cash
B)accounts receivable
C)prepaid items
D)inventories

Question 9

If a firm wanted to report high profits, it would choose which method of inventory accounting in inflationary times?

A)FIFO
B)LIFO
C)FILO
D)GIGO

Question 10

Financial ratio analysis is most often performed as a

A)comparative analysis
B)trend analysis
C)point in time analysis
D)comparative analysis and a trend analysis

Question 11

In an inflationary period, a firm is likely to show temporary profit increases because

A)accounts receivable collections increase
B)cash balances decline
C)inventory profits are realized
D)all of these

Question 12

The fixed asset turnover ratio is influenced by

A)the age of the assets employed
B)the depreciation method used by the firm
C)the firm's choice of a production technology
D)all of these

Question 13

indicate the ability of the firm to meet its short-term financial obligations

A)Activity ratios
B)Liquidity ratios
C)Leverage ratios
D)Profitability ratios

Question 14

Primary sources of comparative financial data include

A)Dun and Bradstreet
B)New York Times
C)Richard Moore, Inc.
D)Framingham Financial Library

Question 15

Which ratio is frequently used in conjunction with the analysis of a bond's quality?

A)times interest earned
B)deferred liability ratio
C)receivables turnover
D)dividend coverage ratio

Question 16

indicate the firm's capacity to meet its debt obligations, both short-term and long-term.

A)Liquidity ratios
B)Activity ratios
C)Financial leverage ratios
D)Profitability ratios

Question 17

A firm's return on equity is a function of its net profit margin, and equity multiplier.

A)current ratio
B)cost of goods
C)total asset turnover
D)fixed asset turnover

Question 18

The best accounting-based measure of a firm's profitability is

A)gross profit margin
B)net profit margin
C)return on fixed assets
D)return on total assets

Question 19

The current ratio would normally be increased by

A)paying off some current liabilities with cash
B)selling bonds and investing the proceeds in marketable securities
C)buying treasury stock
D)paying off some current liabilities with cash and selling bonds and investing the proceeds in marketable securities

Question 20

The appropriate standard which should be used for the comparison of financial ratios probably should be the

A)best firm in the industry
B)worst firm in the industry
C)industry average
D)better performing firms in the industry

Question 21

Christy would like to improve the current ratio of her firm, which is now 0.5, so that she will have a better chance of obtaining a working capital loan.Which of the following options would improve her current ratio?

A)use cash to pay off notes payable
B)collect some of her accounts receivables
C)purchase additional inventory on credit
D)borrow short-term funds to pay off some payables

Question 22

A common-size income statement shows the firm's income and expense items as a percentage of .

A)stockholders' equity
B)net sales
C)industry averages
D)total assets

Question 23

The analysis of financial statements is affected by inflation because

A)the value of long-term debt will increase
B)the value of fixed assets may be understated
C)the life of long-term assets are decreased
D)inventory increases

Question 24

The following ratio(s) that would probably not be used to assess the profitability of a firm is:

A)return on stockholders' equity
B)return on total assets
C)times interest earned
D)both return on stockholders' equity and return on total assets

Question 25

When considering the quality of a firm's earnings, high quality earnings tend to be

A)cash earnings
B)earnings derived from regularly recurring transactions
C)cash earnings and earnings derived from regularly recurring transactions
D)earnings per share

Question 26

In general, firm's with risk and earnings growth prospects will have higher P/E multiples.

A)low, low
B)high, low
C)low, high
D)high, high

Question 27

The fixed charge coverage ratio includes all of the following except in the denominator.

A)lease payments
B)preferred dividends before tax
C)before tax sinking fund
D)common stock dividends

Question 28

ratios indicate how efficiently a firm is using its assets to generate sales.

A)Liquidity
B)Asset management
C)Financial leverage
D)Equity

Question 29

The ratio, sometimes called the "acid test," is a more stringent measure of than the current ratio.

A)quick;liquidity
B)fixed-asset turnover;activity
C)net profit margin;gross profit margin
D)equity, activity

Question 30

Financial leverage ratios measure the

A)amount of interest paid by the firm
B)firm's use of fixed-charge financing
C)amount of equity funds retired by the firm
D)static ratio

Question 31

The following policy that is consistent with an increase in a firm's return on total assets is:

A)costs increase more than revenues
B)the firm's net working capital (current assets minus current liabilities) position declines
C)the firm sells off some unused assets and pays the proceeds to existing stockholders in the form of an extra dividend
D)the firm's net working capital (current assets minus current liabilities) position declines, and the firm sells off some unused assets and pays the proceeds to existing stockholders in the form of an extra dividend

Question 32

An increase in the average collection period may suggest all of the following except

A)easing of credit terms
B)customers are not paying their bills on time
C)sales have decreased
D)firm could have a liquidity problem in the future

Question 33

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must

A)decrease its equity multiplier
B)increase its equity multiplier
C)increase sales and increase assets
D)reduce sales and increase assets

Question 34

The ratio group most likely to be used to indicate a firm's ability to meet short-term financial obligations would be

A)liquidity ratios
B)financial leverage ratios
C)activity ratios
D)profitability ratios

Question 35

A common-size balance sheet shows the firm's assets and liabilities as a percentage of:

A)stockholders' equity
B)industry averages
C)total assets
D)net sales

Question 36

The ratio is a more severe measure of a firm's ability to meet fixed financial obligations than is the times interest earned ratio.

A)acid test
B)debt
C)fixed charge coverage
D)debt to equity

Question 37

Asset management ratios indicate

A)how well a firm is using its assets to support sales
B)how efficiently a firm is allocating its liabilities
C)the return on assets
D)the profitability of the firm

Question 38

Return on stockholders' equity is equal to times times .

A)net profit margin;fixed asset turnover;equity multiplier ratio
B)gross profit margin;total asset turnover;equity multiplier ratio
C)net profit margin;total asset turnover;equity multiplier ratio
D)net profit margin;total asset turnover;debt-to-equity ratio

Question 39

A fresh fruit wholesaler would normally be expected to have

A)high profit margin and high asset turnover
B)low profit margin and low asset turnover
C)low profit margin and high asset turnover
D)high profit margin and low asset turnover

Question 40

The major types of financial ratios include all of the following except

A)market-based
B)liquidity
C)financial leverage
D)equity

Question 41

Stocks with dividend yield often indicate expected future growth.

A)high, high
B)low, low
C)low, high
D)high, low

Question 42

The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:

A)an accurate picture of the company's market position
B)based on the company's accounting information system (AIS)
C)constructed in conformity with generally accepted accounting principles
D)developed using management's choice of accounting enhancement techniques

Question 43

The ratio indicates the percentage of a firm's earnings that are distributed as dividends.

A)dividend yield
B)payout
C)return on earnings
D)earnings

Question 44

If a firm's current ratio is 1.5,

A)its current liabilities exceed its current assets
B)it is possible for its quick ratio to be 2.0
C)it is possible for its quick ratio to be 1.0
D)its current assets equal its current liabilities

Question 45

If a firm's total asset turnover ratio is 2.0,

A)its annual sales are less than its total assets
B)it is possible that its fixed asset turnover ratio is 1.5
C)its total assets are two times its annual sales
D)its annual sales are two times its total assets

Question 46

The analysis of the financial performance and condition of a firm with sizable international operations is generally more complicated than analyzing a firm whose operations are largely domestic for all of the following reasons except:

A)problems with the translation of foreign operating results
B)problems with definition of capital
C)fluctuating exchange rates
D)all of these are correct reasons

Question 47

If a firm's price to earnings (P/E) ratio is 10,

A)it is not possible for it to be paying dividends also
B)its market to book ratio has to be at least 2.0
C)its net profit margin is positive
D)its return on stockholders' equity is negative

Question 48

Deferred taxes may occur due to the use of

A)different tax schedules
B)different depreciation methods for taxes and financial reporting
C)long-term equipment
D)different cash flow methods

Question 49

If a firm's return on investment, i.e., earnings after taxes divided by total assets, is 7%, and the firm has no preferred stock financing, it is

A)possible that its return on stockholders' equity is 10%.
B)possible that its return on stockholders' equity is 5%.
C)not possible for its debt-to-equity ratio to be 1.0.
D)not possible for its net profit margin to be 7%.

Question 50

The Market Value Added (MVA) is the .

A)indicator of how successful a firm has been at increasing its financing its assets
B)return on total capital minus cost of capital
C)indication of an increase in operating efficiency
D)positively related to the present value of all expected future EVA.

Question 51

To increase the return on stockholders' equity, management could increase the .

A)current ratio
B)price-to-earnings ratio
C)dividend yield
D)equity multiplier

Question 52

Although ratios can provide valuable information, they can also be misleading for the following reason(s):

A)ratios are only as reliable as the accounting data on which they are based.
B)compilation of industry norms often do not report information about the distribution of values.
C)comparative analysis depends on the availability of data for appropriately defined industries.
D)all of these are correct.

Question 53

Firms with growth rates would be expected to have payout ratios.

A)high, low
B)high, high
C)low, low
D)low, high

Question 54

Nuking Gnats Pest Service, Inc.has a debt ratio of 50% and an equity multiplier of 2.What is Nuking Gnats' stockholders' equity if total debt is $100,000?

A)$100,000
B)$150,000
C)$200,000
D)$50,000

Question 55

A component of earnings that recognizes the return that the firm is expected to earn on assets that have not been placed in services is called .

A)earnings allowance
B)allowance for funds used during construction
C)capital budgeted
D)budgeted earnings

Question 56

Economic value added (EVA) is a measure of operating performance that indicates how successful a firm has been at:

A)increasing the growth in earnings
B)increasing the MVA of the enterprise in any given year
C)increasing the rate of return on investment
D)all of these

Question 57

Companies can avoid paying income taxes on inventory profits by using the inventory valuation method.

A)LIFO
B)FIFO
C)Priced out
D)Priced in

Question 58

A firm with an equity multiplier of 4.0, will have a debt ratio of

A)0.25
B)1.00
C)0.75
D)4.00

Question 59

Given the following information, calculate the inventory for Big Show Videos: Quick ratio = 1.2;Current assets = $12,000;Current ratio = 2.5

A)$4,800
B)$6,240
C)$7,200
D)$5,660

Question 60

Firms with a positive economic value added (EVA):

A)have increasing growth in earnings
B)have an increasing rate of return on investment
C)have a return on capital greater than their cost of capital
D)have a high return on book value

Question 61

A firm with a debt ratio of 0.75, will have an equity multiplier of

A)0.25
B)1.00
C)0.75
D)4.00

Question 62

If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm's times interest earned ratio?

A)8.17
B)4.90
C)13.25
D)9.17

Question 63

Determine the cost of sales for a firm with the following financial ratios and data:
Current ratio = 3.0;Quick ratio = 2.0;Current liabilities $1,000,000;Inventory turnover 6 times

A)$2,000,000
B)$6,000,000
C)$3,000,000
D)$1,000,000

Question 64

What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

A)2.65
B)1.1
C)2.1
D)1.2

Question 65

Given the following information, determine Salem Company's fixed assets.
Sales = $10,000,000
Total asset turnover = 4 times Current ratio = 2.40
Current liabilities = $500,000
Total assets = current assets + fixed assets

A)$1,200,000
B)$4,800,000
C)$1,300,000
D)Cannot be determined

Question 66

Newfangled Dangle Systems had earnings after tax of $1,000,000 last year.Included in its expenses were $50,000 of interest, $100,000 of deferred taxes, and $150,000 of depreciation.In addition, the company paid dividends of $200,000 to its stockholders last year.What was Newfangled's after­tax cash flow last year?

A)$1,500,000
B)$1,300,000
C)$1,150,000
D)$1,250,000

Question 67

What is the cost of sales for a firm with a gross profit margin of 30 percent, a net profit margin of 4 percent, and earnings after taxes of $20,000?

A)$200,000
B)$350,000
C)$150,000
D)$125,000

Question 68

AK, Inc.is considering issuing additional long-term debt to finance an expansion.The company currently has $20 million in 5% debt outstanding.Its earnings after-tax (EAT) are $3.0 million, and its marginal and average tax rate is 40 percent.The company is required by the debt holders to maintain its times interest earned ratio at 3.0 or greater.How much additional 10 percent debt can the company issue now and maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest and taxes remains at its present level.

A)$10 million
B)$ 6 million
C)$ 1 million
D)$5 million

Question 69

What is the return on investment for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4?

A)26.0%
B)16.9%
C)6.5%
D)4.6%

Question 70

A firm's price to earnings ratio is 8 and its market to book ratio is 2.If its earnings per share are $4.00, what is the book value per share?

A)$ 8.00
B)$32.00
C)$64.00
D)$16.00

Question 71

Flash In The Pan Cooking School is considering the issuance of additional long-term debt to finance expansion.At the present time the company has $160 million of 10% debentures outstanding.Its after-tax net income is $48 million, and the company's (marginal) income tax rate is 40%.The company is required by the debenture holders to maintain its coverage ratio at 4.0 or greater.Determine Flash's present coverage ratio.

A)3.33
B)2.78
C)5.00
D)6.00

Question 72

Stepping Out Shoe Mfg.has inventory purchases of $2,200 during the month of June.If the June 1 accounts payable was $1,700 and June 30 accounts payable was $1,900, what was the cash payment?

A)$3,900
B)$2,000
C)$1,900
D)$1,700

Question 73

If a firm has a total asset turnover of 8 times and a return on total assets of 15%, its net profit margin must be

A)1.875%
B)1.95%
C)2.05%
D)2.25%

Question 74

How much cash and marketable securities does Gray Day Computer Co.have if the firm has a current ratio of 2.5, a quick ratio of 1.2, and current liabilities of $12,000? Gray's credit sales are $98,000 and its average collection period is 40 days.(Assume 365 days per year.)

A)$3,660
B)$14,440
C)$10,740
D)$12,660

Question 75

A firm's current ratio is 1.5 and its quick ratio is 1.0.If its current liabilities are $10,000, what are its inventories?

A)$ 5,000
B)$10,000
C)$15,000
D)$20,000

Question 76

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

A)$16.80
B)$42
C)$3
D)$28

Question 77

Last year, Monroe Bro Products had $25,000 net cash provided by its operating activities.Its investing activities used $30,000, and its financing activities provided $10,000.Its cash and cash equivalents balance at the beginning of the year was $15,000.By how much did Monroe's cash and cash equivalents increase?

A)-$10,000
B)$0
C)$5,000
D)$15,000

Question 78

What is the return on stockholders' equity for a firm with a net profit margin of 5.2 percent, sales of $620,000, an equity multiplier of 1.8, and total assets of $380,000?

A)8.48%
B)5.74%
C)15.27%
D)9.36%

Question 79

If Power-On Inc.has a total asset turnover of 1.8, a fixed asset turnover of 3.2, a debt ratio of 0.5 and a total debt of $200,000, then fixed assets are

A)$56,250
B)$711,111
C)$225,000
D)$62,250

Question 80

What is the market price per share of Big Whoop, Inc.if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market to book ratio of 1.5?

A)$16.20
B)$10.80
C)$7.20
D)$12.40