Deck 14: Financial Analysis and Long-Term Financial Planning

Question 1

Financial leverage ratios indicate the extent to which borrowed funds are used to finance assets.

Answer 1

True

Question 2

Ratio analysis is a financial technique that involves dividing various financial statements numbers into one another.

Answer 2

True

Question 3

Break-even analysis is used to estimate how many units of products must be sold in order for the firm to have a reasonable profit.

Answer 3

False

Question 4

The degree of operating leverage measures the sensitivity of operating income to changes in the level of output.

Question 5

Financial planning begins with a sales forecast for one or more years.

Question 6

Asset management ratios indicate the ability to meet short-term obligations to creditors as they come due.

Question 7

The average collection period is calculated as the year-end accounts receivable divided by the net sales.

Question 8

Cross-sectional analysis is used to evaluate a firm's performance over time.

Question 9

The operating profit margin is calculated as the firm's net income divided by net sales.

Question 10

Internally generated funds for financing new asset investments come from common stock issues.

Question 11

The price-to-book ratio measures the market's value of the firm relative to balance sheet equity.

Question 12

In employing DuPont analysis, the user would break the return on total assets into the profit margin, total asset turnover, and an equity multiplier.

Question 13

Higher levels of fixed costs result in lower levels of operating leverage.

Question 14

Market value ratios indicate the willingness of investors to value a firm in the marketplace relative to financial statement values.

Question 15

The interest coverage ratio indicates the ability of a firm to meet its contractual obligations for interest, leases, and debt principal repayments out of its operating income.

Question 16

The contribution margin represents contribution of each unit sold that first goes toward paying fixed costs.

Question 17

Budgets are written financial plans utilized in sales forecasts.

Question 18

It is possible that the results of financial statement analysis could reflect the non-financial operations of a firm.

Question 19

The net profit margin is an example of a market value ratio.

Question 20

Financial analysis using ratios can assist managers in the firm's long-term financial planning process.

Question 21

A cross-sectional analysis would be used to evaluate a firm's performance over time.

Question 22

The current ratio is computed by dividing the sum of cash, marketable securities, and accounts receivable by the current liabilities.

Question 23

The net profit margin is calculated as the firms earnings before interest and taxes divided by net sales.

Question 24

Using the percentage of sales technique, the remaining dollar amount of asset investments determines the external financing needs (EFN).

Question 25

Liquidity ratios indicate the ability to meet short-term obligations to creditors as they mature or come due.

Question 26

Potential creditors of a firm might analyze financial statements to gauge the firm's ability to make timely payments of interest and principal.

Question 27

Ratios standardize balance sheet and income statement numbers, thus minimizing the effect of firm size.

Question 28

The operating profit margin is calculated as the firms earnings before interest and taxes divided by net sales.

Question 29

A firm's efficiency in utilizing resources at its disposal in generating sales would be measured by profitability ratios.

Question 30

The five basic groups of ratios are liquidity ratios, asset management ratios, capital budgeting ratios, profitability ratios, and market value ratios.

Question 31

A firm's Price/Earnings ratio is always greater than its Price/Book ratio.
Not addressed in the chapter

Question 32

Because debt obligations are paid with cash, the firm's cash flows ultimately determine solvency.

Question 33

The market value ratios indicate the financial markets' assessment of the value of a firm's securities.

Question 34

The break-even quantity is inversely related to the level of a firm's variable costs.

Question 35

A high price-to-book value ratio would tend to indicate that investors are more optimistic about the market value of firm's asset, and its managers' abilities.

Question 36

Net working capital is current assets plus current liabilities.

Question 37

Financial analysis using ratios is not useful in the firm's financial planning process.

Question 38

The price/earnings ratio shows how much investors are willing to pay for each dollar of the firm's current earnings per share.

Question 39

In general, a firm's return on assets will be less than its return on equity.

Question 40

Trend or time series analysis is used to compare the performance of different firms at the same point in time.

Question 41

Find the average payment period if accounts payable is $20,000, cost of goods sold is $200,000, and sales are $500,000.

A)10
B)36.5
C)25
D)14.6

Question 42

Find the net profit margin if earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000.

A)40%
B)20%
C)10%
D)none of the above

Question 43

Profitability ratios indicate the extent to which assets are used to support sales.

Question 44

Which of the following is not considered to be a major financial management function? Not in chapter

A)financial planning and analysis
B)asset management
C)managing the firm's accounting system
D)raising funds

Question 45

The quick ratio is a stricter measure of liquidity compared to the current ratio.

Question 46

The interest coverage ratio is a stricter measure of a firm's ability to meet its fixed payment obligations than the fixed charge coverage ratio.

Question 47

The extent to which assets are used to support sales is indicated by which of the following ratios:

A)liquidity ratios
B)asset utilization ratios
C)financial leverage ratios
D)profitability ratios

Question 48

Financial analysis is designed to cover four areas or dimensions of the firm.Which one of the following does not belong to these four areas?

A)liquidity ratios
B)asset utilization ratios
C)financial leverage ratios
D)sources and uses of fund ratios

Question 49

The total asset turnover is computed as total assets divided by net sales.

Question 50

What would be the return on total assets of a firm if net income is $50,000, total sales are $100,000, and total assets are $175,000?

A)35%
B)28.6%
C)57.14%
D)not enough information available

Question 51

Assume a firm is developing, manufacturing, and selling a basic software package at $300 per copy.Raw material and direct labor total $100 per unit.Fixed costs are $150,000.If unit sales are 3,000 per year, what will be the break-even point in units?

A)375 units
B)500 units
C)750 units
D)800 units

Question 52

If the total asset turnover of a firm is 1.5, total assets are $500,000, and net income is $50,000, what is the profit margin?

A)1%
B)5%
C)6.7%
D)not enough information available

Question 53

The ability of a firm to meet its short-term debt obligations as they come due is indicated by which of the following ratios:

A)liquidity ratios
B)asset utilization ratios
C)financial leverage ratios
D)profitability ratios

Question 54

Assume a firm is developing, manufacturing, and selling a basic software package at $500 per copy.Raw materials and direct labor total $200 per copy.Fixed costs are $250,000.If the firm sells 5,000 units per year, what will be the operating profit?

A) $1,250,000
B) $1,500,000
C) $2,250,000
D) $2,500,000

Question 55

The quick ratio of a firm with current assets of $300,000, current liabilities of $100,000 and inventory of $100,000 is:

A)1:1
B)2:1
C)3:1
D)4:1

Question 56

Net working capital indicates the percentage of current liabilities to current assets.

Question 57

The current ratio of a firm with current assets of $300,000, current liabilities of $100,000, and inventory of $100,000 is:

A) 1
B) 2
C) 3
D) 4

Question 58

A current ratio of 2.0 is desirable and it means that a firm has twice as many current liabilities as current assets.

Question 59

The extent to which assets are financed by borrowed funds and other liabilities is indicated by:

A)liquidity ratios
B)asset utilization ratios
C)financial leverage ratios
D)profitability ratios

Question 60

Which one of the following financial statements reports a firm's assets and the claims on assets?

A)balance sheet
B)income statement
C)statement of changes in financial position
D)cash flow statement

Question 61

The price/earnings ratio (P/E) is calculated as:

A)stock price divided by earnings per share
B)stock price times earnings per share
C)earnings per share divided by stock price
D)stock price divided by the difference between earnings per share and cash dividends per share

Question 62

Which of the following statements is false?

A)time series analysis evaluates a firm's performance over time.
B)industry comparative analysis compares a firm's ratios against average ratios against average ratios for other companies in the industry.
C)the average collection period is calculated as the year-end accounts receivable divided by the net sales.
D)all the above statements are correct.

Question 63

As part of the measurement of financial leverage, the total debt ratio is calculated as:

A)total liabilities divided by total assets
B)total liabilities times total assets
C)current liabilities divided by total assets
D)total assets minus current liabilities divided by total liabilities divided by total liabilities

Question 64

Given the following financial data: net income/sales = 6%; sales/total assets = 3.5; debt/total assets = 30%.The return on total assets is:

A)15%
B)21%
C)30%
D)not enough information available

Question 65

The equity multiplier is calculated as:

A)total assets divided by owners' equity
B)net income divided by owners' equity
C)net income divided by total assets
D)net sales divided by total assets

Question 66

The method of evaluating the firm's performance over time is known as:

A)trend analysis
B)cross-sectional analysis
C)industry comparative analysis
D)Due Pont analysis

Question 67

Asset management ratios do not measure which of the following:

A)productivity of fixed assets in terms of sales
B)how current assets are used in the generation of sales
C)how efficiently inventory is being managedearnings generated by efficient asset management
D)all of the above are measured by asset management ratios

Question 68

If a firm’s inventories on hand are $200,000, its cost of goods sold is $600,000, and its sales are $800,000, what is the inventory turnover?

A) 2 times
B) 3 times
C) 4 times
D) 5 times

Question 69

The primary purpose of the liquidity ratios is to determine:

A)the extent to which borrowed funds are used to finance assets
B)the ability of the firm to meet short-term obligations to creditors
C)the extent to which assets are used to support sales
D)none of the above

Question 70

In cost-volume-profit analysis, a firm "breaks even" when its total revenues:

A)equal variable costs
B)equal total costs
C)equal fixed costs
D)are less than the sum of variable and fixed costs

Question 71

If a firm's sales are $2,000,000, its cost of goods sold is $1,500,000, and its total assets are $1,000,000, what is total asset turnover?

A)2.0 times
B)1.5 times
C)0.5 times
D).67 times

Question 72

Which item is not included in the calculation for both the quick ratio and the current ratio?

A)accounts receivable
B)current assets
C)inventories
D)current liabilities

Question 73

If a firm has an after-tax profit margin of 5%, an asset turnover of 2.5 times, and no debt, the return on equity is:

A)2%
B)8.5%
C)12.5%
D)not enough information available

Question 74

The method of calculating return on assets which highlights the importance of sales, profit margin, and asset turnover is known as:

A)the Gordon model
B)cost-volume profit analysis
C)DuPont analysis
D)break-even analysis

Question 75

If a firm's sales are $2,000,000, its cost of goods sold is $1,500,000, and its fixed assets are $1,000,000, what is fixed asset turnover?

A)2.0 times
B)1.5 times
C)0.5 times
D).67 times

Question 76

Which of the following statements is most correct?

A)larger values of the equity multiplier imply a greater use of leverage by the firm.
B)the receivables turnover is computed by dividing annual sales by the year-end accounts receivables.
C)the operating return on assets is computed as the earnings before interest and taxes divided by total assets.
D)all the above statements are correct.

Question 77

Which of the following statements about liquidity ratios is true?

A)the lower the quick ratio relative to the current ratio, the safer a firm is in terms of liquidity.
B)the higher the current ratio, the more likely a firm is able to pay its short-term obligations.
C)the quick ratio is always between 0 and 1.
D)all the above statements are true.

Question 78

Which of the following statements is most correct?

A)higher levels of fixed costs result in lower levels of operating leverage.
B)higher variable costs result in larger contribution margin.
C)higher fixed costs result in larger break-even quantity.
D)each of the above statements is false.

Question 79

Management of current assets does not involve which one of the following areas?

A)cash and marketable securities
B)accounts receivable
C)inventory
D)plant and equipment

Question 80

Which of the following ratios is not a component in the return on equity using DuPont analysis?

A)asset turnover
B)profit margin
C)equity multiplier
D)current ratio