Deck 3: Financial Statements Analysis and Long-Term Planning

Question 1

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____ ratios.

A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)market value

Answer 1

asset management

Question 2

The financial ratio measured as total assets minus total equity,divided by total assets,is the:

A)total debt ratio.
B)equity multiplier.
C)debt-equity ratio.
D)current ratio.
E)times interest earned ratio.

Answer 2

total debt ratio.

Question 3

Projected future financial statements are called:

A)plug statements.
B)pro forma statements.
C)reconciled statements.
D)aggregated statements.
E)none of the above.

Answer 3

pro forma statements.

Question 4

The financial ratio days' sales in inventory is measured as:

A)365 days divided by the inventory turnover.
B)inventory times 365 days.
C)365 days divided by the inventory.
D)inventory plus cost of goods sold, divided by 365 days.
E)inventory turnover plus 365 days.

Question 5

The current ratio is measured as:

A)current assets minus current liabilities.
B)current assets divided by current liabilities.
C)current liabilities minus inventory, divided by current assets.
D)cash on hand divided by current liabilities.
E)current liabilities divided by current assets.

Question 6

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios.

A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)market value

Question 7

The equity multiplier ratio is measured as total:

A)equity plus total debt.
B)equity divided by total assets.
C)assets divided by total equity.
D)assets plus total equity, divided by total debt.
E)assets minus total equity, divided by total assets.

Question 8

The quick ratio is measured as:

A)current assets divided by current liabilities.
B)current assets minus inventory, divided by current liabilities.
C)current assets minus inventory minus current liabilities.
D)cash on hand plus current liabilities, divided by current assets.
E)current liabilities divided by current assets, plus inventory.

Question 9

Relationships determined from a firm's financial information and used for comparison purposes are known as:

A)scenario analysis.
B)solvency analysis.
C)dimensional analysis.
D)financial ratios.
E)comparison statements.

Question 10

The debt-equity ratio is measured as total:

A)debt plus total equity.
B)debt minus total assets, divided by total equity.
C)debt divided by total equity.
D)equity minus total debt.
E)equity divided by total debt.

Question 11

The financial ratio measured as earnings before interest and taxes,plus depreciation,divided by interest expense,is the:

A)cash coverage ratio.
B)debt-equity ratio.
C)times interest earned ratio.
D)gross margin.
E)total debt ratio.

Question 12

The receivables turnover ratio is measured as:

A)sales plus accounts receivable.
B)sales divided by accounts receivable.
C)sales minus accounts receivable, divided by sales.
D)accounts receivable times sales.
E)accounts receivable divided by sales.

Question 13

A _____ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets,respectively.

A)tax reconciliation statement
B)statement of standardization
C)statement of cash flows
D)common-base year statement
E)common-size statement

Question 14

The percentage of sales method:

A)requires that all accounts grow at the same rate.
B)separates accounts that vary with sales and those that do not vary with sales.
C)allows the analyst to calculate how much financing the firm will need to support the predicted sales level.
D)Both A and B.
E)Both B and C.

Question 15

One key reason a long-term financial plan is developed is because:

A)the plan determines your financial policy.
B)the plan determines your investment policy.
C)there are direct connections between achievable corporate growth and the financial policy.
D)there is unlimited growth possible in a well-developed financial plan.
E)None of the above.

Question 16

The inventory turnover ratio is measured as:

A)total sales minus inventory.
B)cost of goods sold divided by inventory.
C)inventory times total sales.
D)inventory plus cost of goods sold.
E)inventory times cost of goods sold.

Question 17

The cash ratio is measured as:

A)current assets divided by current liabilities.
B)current assets minus cash on hand, divided by current liabilities.
C)current liabilities plus current assets, divided by cash on hand.
D)cash on hand plus inventory, divided by current liabilities.
E)cash on hand divided by current liabilities.

Question 18

The financial ratio days' sales in receivables is measured as:

A)receivables turnover plus 365 days.
B)accounts receivable times 365 days.
C)365 days divided by the accounts receivable.
D)accounts receivable plus sales, divided by 365 days.
E)365 days divided by the receivables turnover.

Question 19

The financial ratio measured as earnings before interest and taxes,divided by interest expense is the:

A)cash coverage ratio.
B)total debt ratio.
C)gross margin.
D)times interest earned ratio.
E)debt-equity ratio.

Question 20

Ratios that measure a firm's financial leverage are known as _____ ratios.

A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)market value

Question 21

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?

A)Accounts payable
B)Cash
C)Inventory
D)Accounts receivable
E)Fixed assets

Question 22

Which of the following are liquidity ratios?
I.cash coverage ratio
II.current ratio
III.quick ratio
IV.inventory turnover

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

Question 23

The market-to-book ratio is measured as:

A)market value of equity per share divided by book value of equity per share.
B)market price per share of stock divided by earnings per share.
C)net income divided by market price per share of stock.
D)net income times market price per share of stock.
E)total equity divided by total assets.

Question 24

A firm has a total debt ratio of .47.This means that,that firm has 47 cents in debt for every:

A)$.53 in equity.
B)$.53 in total assets.
C)$1 in current assets.
D)$.1 in equity.
E)$1 in total sales.

Question 25

The total asset turnover ratio is measured as:

A)sales minus total assets.
B)total assets divided by sales.
C)total assets plus sales.
D)sales divided by total assets.
E)sales times total assets.

Question 26

To calculate sustainable growth rate without using return on equity,the analyst needs the:

A)profit margin.
B)payout ratio.
C)debt-to-equity ratio.
D)total asset turnover.
E)All of the above.

Question 27

The _____ breaks down return on equity into three component parts.

A)Du Pont identity
B)return on assets
C)statement of cash flows
D)asset turnover ratio
E)equity multiplier

Question 28

The financial ratio measured as net income divided by total assets is known as the firm's:

A)profit margin.
B)return on assets.
C)return on equity.
D)asset turnover.
E)earnings before interest and taxes.

Question 29

The External Funds Needed (EFN)equation does not measure the:

A)additional asset requirements given a change in sales.
B)rate of return to shareholders given the change in sales.
C)additional total liabilities raised given the change in sales.
D)net income expected to be earned given the change in sales.
E)None of the above.

Question 30

Which of the following will increase sustainable growth?

A)Buy back existing stock
B)Increase profit margin
C)Decrease debt
D)Increase dividend payout ratio
E)Increase asset requirement or asset turnover ratio

Question 31

The main objective of long-term financial planning models is to:

A)determine the asset requirements given the investment activities of the firm.
B)plan for contingencies or uncertain events.
C)determine the external financing needs.
D)All of the above.
E)None of the above.

Question 32

The financial ratio measured as the price per share of stock divided by earnings per share is known as the:

A)debt-equity ratio.
B)return on equity.
C)return on assets.
D)Du Pont identity.
E)price-earnings ratio.

Question 33

A supplier,who requires payment within ten days,is most concerned with which one of the following ratios when granting credit?

A)Current
B)Cash
C)Debt-equity
D)Quick
E)Total debt

Question 34

Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as _____ ratios.

A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)market value

Question 35

The financial ratio measured as net income divided by total equity is known as the firm's:

A)profit margin.
B)return on equity.
C)return on assets.
D)earnings before interest and taxes.
E)asset turnover.

Question 36

The financial ratio measured as net income divided by sales is known as the firm's:

A)profit margin.
B)return on assets.
C)return on equity.
D)asset turnover.
E)earnings before interest and taxes.

Question 37

On a common-size balance sheet,all _____ accounts are shown as a percentage of ____.

A)income; total assets
B)liability; net income
C)asset; sales
D)liability; total assets
E)equity; sales

Question 38

Growth can be reconciled with the goal of maximizing firm value:

A)because greater growth always adds to value.
B)because growth of any type cannot decrease value.
C)because growth and wealth maximization are the same.
D)because growth must be an outcome of decisions that maximize NPV.
E)None of the above.

Question 39

Sustainable growth can be determined by the:

A)profit margin,total asset turnover and the price to earnings ratio.
B)profit margin,the payout ratio,the debt-to-equity ratio,and the asset requirement or asset turnover ratio.
C)Total growth less capital gains growth.
D)Either A or B.
E)None of the above.

Question 40

Which one of the following statements is correct concerning ratio analysis?

A)A single ratio is often computed differently by different individuals.
B)Ratios do not address the problem of size differences among firms.
C)Only a very limited number of ratios can be used for analytical purposes.
D)Each ratio has a specific formula that is used consistently by all analysts.
E)Ratios can not be used for comparison purposes over periods of time.

Question 41

Which one of the following statements is correct?

A)Book values should always be given precedence over market values.
B)Financial statements are frequently the basis used for performance evaluations.
C)Historical information has no value when predicting the future.
D)Potential lenders place little value on financial statement information.
E)Reviewing financial information over time has very limited value.

Question 42

The only difference between Joe's and Moe's is that Joe's has old,fully depreciated equipment.Moe's just purchased all new equipment which will be depreciated over eight years.Assuming all else equal:

A)Joe's will have a lower profit margin.
B)Joe's will have a lower return on equity.
C)Moe's will have a higher net income.
D)Moe's will have a lower profit margin.
E)Moe's will have a higher return on assets.

Question 43

Which one of the following sets of ratios applies most directly to shareholders?

A)Return on assets and profit margin
B)Quick ratio and times interest earned
C)Price-earnings ratio and debt-equity ratio
D)Market-to-book ratio and price-earnings ratio
E)Cash coverage ratio and times equity multiplier

Question 44

Puffy's Pastries generates five cents of net income for every $1 in sales.Thus,Puffy's has a _____ of 5%.

A)return on equity
B)return on assets
C)Du Pont measure
D)profit margin
E)total asset turnover

Question 45

The long-term debt ratio is probably of most interest to a firm's:

A)credit customers.
B)employees.
C)suppliers.
D)mortgage holder.
E)shareholders.

Question 46

Vinnie's Motors has a market-to-book ratio of 3.The book value per share is $4.00.Holding market-to-book constant,a $1 increase in the book value per share will:

A)cause the accountants to increase the equity of the firm by an additional $2.
B)increase the market price per share by $1.
C)increase the market price per share by $12.
D)tend to cause the market price per share to rise.
E)only affect book values but not market values.

Question 47

If shareholders want to know how much profit a firm they are making on their entire investment in the firm,the shareholders should look at the:

A)profit margin.
B)return on assets.
C)return on equity.
D)equity multiplier.
E)earnings per share.

Question 48

From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?

A)Times interest earned ratio
B)Cash coverage ratio
C)Cash ratio
D)Quick ratio
E)Interval measure

Question 49

Turner's Inc.has a price-earnings ratio of 16.Alfred's Co.has a price-earnings ratio of 19.Thus,you can state with certainty that one share of stock in Alfred's:

A)has a higher market price than one share of stock in Turner's.
B)has a higher market price per dollar of earnings than does one share of Turner's.
C)sells at a lower price per share than one share of Turner's.
D)represents a larger percentage of firm ownership than does one share of Turner's stock.
E)earns a greater profit per share than does one share of Turner's stock.

Question 50

The three parts of the Du Pont identity can be generally described as:
I.operating efficiency,asset use efficiency and firm profitability.
II.financial leverage,operating efficiency and asset use efficiency.
III.the debt-equity ratio,the capital intensity ratio and the profit margin.
IV.the equity multiplier,the profit margin and the total asset turnover.

A)I and II only
B)II and III only
C)I and IV only
D)II and IV only
E)III and IV only

Question 51

Which one of the following statements is correct if a firm has a receivables turnover measure of 10?

A)It takes a firm 36.5 days to pay its creditors.
B)It takes a firm 36.5 days to sell its inventory and collect the payment from the sale.
C)It takes a firm 10 days to collect payment from its customers.
D)The firm has ten times more in accounts receivable than it does in cash.
E)The firm has an average collection period of 36.5 days.

Question 52

A banker considering loaning a firm money for ten years would most likely prefer the firm have a debt ratio of _____ and a times interest earned ratio of ______.

A).35; 3.00
B).50; 1.00
C).45; 1.75
D).40; 2.50
E).75; .75

Question 53

If a firm produces a 10% return on assets and also a 10% return on equity,then the firm:

A)has no debt of any kind.
B)is using its assets as efficiently as possible.
C)has no net working capital.
D)also has a current ratio of 10.
E)has an equity multiplier of 2.

Question 54

A total asset turnover measure of 1.03 means that a firm has $1.03 in:

A)sales for every $1 in total assets.
B)total assets for every $1 in total debt.
C)total assets for every $1 in equity.
D)total assets for every $1 in cash.
E)long-term assets for every $1 in short-term assets.

Question 55

It is easier to evaluate a firm using its financial statements when the firm:

A)is a conglomerate.
B)is global in nature.
C)uses the same accounting procedures as other firms in its industry.
D)has a different fiscal year than other firms in its industry.
E)tends to have one-time events such as asset sales and property acquisitions.

Question 56

If a firm decreases its operating costs,all else constant,then:

A)the profit margin increases while the equity multiplier decreases.
B)the return on assets increases while the return on equity decreases.
C)the total asset turnover rate decreases while the profit margin increases.
D)both the profit margin and the equity multiplier increase.
E)both the return on assets and the return on equity increase.

Question 57

The higher the inventory turnover measure,the:

A)longer it takes a firm to sell its inventory.
B)faster a firm collects payment on its sales.
C)faster a firm sells its inventory.
D)lesser the amount of inventory held by a firm.
E)greater the amount of inventory held by a firm.

Question 58

Which two of the following are most apt to cause a firm to have a higher price-earnings ratio?
I.slow industry outlook
II.high prospect of firm growth
III.very low current earnings
IV.investors with a low opinion of the firm

A)I and II only
B)II and III only
C)II and IV only
D)I and III only
E)III and IV only

Question 59

Last year,Alfred's Automotive had a price-earnings ratio of 15.This year,the price earnings ratio is 18.Based on this information,it can be stated with certainty that:

A)the price per share increased.
B)the earnings per share decreased.
C)investors are paying a higher price for each share of stock purchased.
D)investors are receiving a higher rate of return this year.
E)either the price per share, the earnings per share, or both changed.

Question 60

BGL Enterprises increases its operating efficiency such that costs decrease while sales remain constant.As a result,given all else constant,the:

A)return on equity will increase.
B)return on assets will decrease.
C)profit margin will decline.
D)equity multiplier will decrease.
E)price-earnings ratio will increase.

Question 61

Marcie's Mercantile wants to maintain its current dividend policy,which is a payout ratio of 40%.The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio.Given these requirements,the maximum rate at which Marcie's can grow is equal to:

A)60% of the internal rate of growth.
B)40% of the internal rate of growth.
C)the sustainable rate of growth.
D)the internal rate of growth.
E)60% of the sustainable rate of growth.

Question 62

A firm has a debt-equity ratio of .40.What is the total debt ratio?

A).29
B).33
C).67
D)1.40
E)1.50

Question 63

Financial planning,when properly executed:

A)ignores the normal restraints encountered by a firm.
B)ensures that the primary goals of senior management are fully achieved.
C)reduces the necessity of daily management oversight of the business operations.
D)helps ensure that proper financing is in place to support the desired level of growth.
E)eliminates the need to plan more than one year in advance.

Question 64

A firm has sales of $2,000,net income of $125,total assets of $1,100,and total equity of $750.Interest expense is $75.What is the common-size statement value of the interest expense?

A)3.0%
B)3.75%
C)7.1%
D)16.7%
E)50.0%

Question 65

A firm has total debt of $1,500 and a debt-equity ratio of .30.What is the value of the total assets?

A)$1,560
B)$3,000
C)$3,600
D)$6,500
E)$7,200

Question 66

A firm has sales of $3,600,costs of $2,800,interest paid of $100,and depreciation of $400.The tax rate is 34%.What is the value of the cash coverage ratio?

A)2
B)4
C)6
D)8
E)10

Question 67

If a firm bases its growth projection on the rate of sustainable growth,and shows positive net income,then the:

A)fixed assets will have to increase at the same rate, regardless of the current capacity level.
B)number of common shares outstanding will increase at the same rate of growth.
C)debt-equity ratio will have to increase.
D)debt-equity ratio will remain constant while retained earnings increase.
E)fixed assets, debt-equity ratio, and number of common shares outstanding will all increase.

Question 68

A firm's market capitalization is equal to:

A)total book value of assets less book value of debt.
B)par value of common equity.
C)firm's stock price multiplied by number of shares outstanding.
D)firm's stock price multiplied by the number of shares authorized.
E)the maximum value an acquirer would pay for a firm in an acquisition.

Question 69

Jessica's Boutique has cash of $50,accounts receivable of $60,accounts payable of $200,and inventory of $150.What is the value of the quick ratio?

A).30
B).55
C).77
D)1.30
E)1.82

Question 70

Enterprise value focused on:

A)market values of debt and equity.
B)book values of debt and equity.
C)market value of equity and book value of debt.
D)book value if debt and market value of equity.
E)Average value of book and market values of debt.

Question 71

A firm's sustainable growth rate in sales directly depends on its:

A)debt to equity ratio.
B)profit margin.
C)dividend policy.
D)asset efficiency.
E)all of the above.

Question 72

Which two of the following represent the most effective methods of directly evaluating the financial performance of a firm?
I.comparing the financial statements of the firm to the financial statements of similar firms operating in other countries
II.comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations
III.comparing the current financial ratios to those of the same firm from prior time periods
IV.comparing the financial ratios of the firm to the average ratios of all firms located in the same geographic area

A)I and II only
B)II and III only
C)III and IV only
D)I and IV only
E)I and III only

Question 73

Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?
I.Either one,or both,of the firms may be conglomerates and thus have unrelated lines of business.
II.The operations of the two firms may vary geographically.
III.The firms may use differing accounting methods for inventory purposes.
IV.The two firms may be seasonal in nature and have different fiscal year ends.

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

Question 74

One of the primary weaknesses of many financial planning models is that they:

A)rely too much on financial relationships and too little on accounting relationships.
B)are iterative in nature.
C)ignore the goals and objectives of senior management.
D)are based solely on best case assumptions.
E)ignore the size, risk, and timing of cash flows.

Question 75

In the financial planning model,external funds needed (EFN)is equal to changes in

A)assets - (liabilities - equity).
B)assets - equity.
C)(assets + liabilities - equity).
D)(assets + equity - liabilities).
E)assets - (liabilities + equity).

Question 76

The sustainable growth rate:

A)assumes there is no external financing of any kind.
B)is normally higher than the internal growth rate.
C)assumes the debt-equity ratio is variable.
D)is based on receiving additional external debt and equity financing.
E)assumes that 100% of all income is retained by the firm.

Question 77

When examining the EBITDA ratio,lower numbers are:

A)considered good.
B)considered mediocre.
C)considered poor.
D)indifferent to higher numbers.
E)it is impossible to garner information from this ratio.

Question 78

The sustainable growth rate will be equivalent to the internal growth rate when:

A)net income is greater than zero.
B)the plowback ratio is positive but less than 1.
C)the growth rate is positive.
D)a firm has a debt-equity ratio exactly equal to 1.
E)a firm has no debt.

Question 79

Rosita's Resources paid $250 in interest and $130 in dividends last year.The times interest earned ratio is 3.8 and the depreciation expense is $60.What is the value of the cash coverage ratio?

A)2.40
B)3.52
C)3.80
D)4.04
E)4.28

Question 80

A firm has sales of $1,700,net income of $200,net fixed assets of $600,and current assets of $400.The firm has $150 in inventory.What is the common-size statement value of inventory?

A)8.3%
B)12.5%
C)15.0%
D)33.3%
E)50.0%