Deck 3: Financial Analysis

Question 1

Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power.

Answer 1

True

Question 2

Return on equity will not change if the firm increases its use of debt.

Answer 2

False

Question 3

Liquidity ratios indicate how fast a firm can generate cash to pay bills.

Answer 3

True

Question 4

Heavy use of long-term debt can be of benefit to a firm to help expand, although it adds to the firm's overall level of risk.

Question 5

Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets, but not a combination of both.

Question 6

A current ratio of 2 to 1 is always acceptable for a company in any industry.

Question 7

Return on equity will be higher than return on assets if there is higher amounts of debt in the capital structure.

Question 8

Asset utilization ratios include receivable turnover, average collection period, inventory turnover, fixed asset turnover and total asset turnover.

Question 9

The age of the firm's assets is not necessary for analyzing ratios.

Question 10

Higher debt utilization ratios will always increase a firm's return on equity given a positive return on assets.

Question 11

Ratios are not considered as important to non-accounting functional areas of a business such as marketing, head of production and human resources.

Question 12

Asset utilization ratios describe how capital is being utilized to buy assets.

Question 13

A trade creditor is most concerned about a firm's profitability ratios.

Question 14

The DuPont system of analysis emphasizes that profit generated by assets can be derived by a combination of profit levels and how fast an asset can turnover.

Question 15

Asset utilization ratios relate balance sheet assets to income statement net income.

Question 16

Profitability ratios allow one to measure the ability of the firm to earn an adequate profit compared to sales, total assets, and invested capital.

Question 17

Ratios are used to compare different firms in the same industry.

Question 18

Asset utilization ratios measure the net returns on various assets such as return on total assets.

Question 19

Financial ratios are used to weigh and evaluate the operational performance of the firm.

Question 20

Ratios are only useful for those areas of business that involve investment decisions.

Question 21

The stock market tends to move up when inflation goes up.

Question 22

To compute the quick ratio, accounts receivable are not included in current assets.

Question 23

Under generally acceptable accounting principles, two companies with identical operating results may not report identical net incomes.

Question 24

Because ratios are historic, they have minimal value to an investor.

Question 25

During disinflation, stock prices tend to go up because the investor's required rate of return goes down.

Question 26

Asset utilization ratios can be used to measure the effectiveness of a firm's managers.

Question 27

Although Apple Computers has a profit margin significantly greater than that of a long-time industry giant such as IBM, IBM continues to have a higher return on equity than Apple. The primary reason for this unusual condition is that IBM has a much greater equity than Apple.

Question 28

Inflation causes phantom sources of profit that may mislead even the most alert analyst.

Question 29

LIFO and FIFO are two ways that companies following the generally accepted accounting principles value their inventory. One method may be preferred over the other during inflationary time periods, which results in different profits, even though both methods are legal to use.

Question 30

Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are one-time events, and can distort annual results from normal operations.

Question 31

Industries with cyclical products such as lumber and copper are more sensitive to inflation-induced profits because many sales prices and/or expenses are set by the market.

Question 32

As long as prices of products continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise.

Question 33

Ratios are not misleading by inflation.

Question 34

Economists believe that prices of goods may rise before 2020 since the prices of most goods fell during the 2008-2009 recession.

Question 35

Trend analysis is used to project the future performance of an industry.

Question 36

LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue.

Question 37

One of the major problems during inflationary times is that revenue is almost always stated in current dollars, whereas plant and equipment or inventory may have been purchased at lower levels.

Question 38

A company can improve its return on equity (ROE) by changing its capital structure.

Question 39

If two companies have the same return on equity (ROE), they will also have the same return on assets (ROA).

Question 40

Profitability ratios are distorted by inflation because profits are stated in current dollars, while assets and equity are stated in historical dollars.

Question 41

If accounts receivable stays the same, and credit sales go up

A) the average collection period will go up.
B) the average collection period will go down.
C) accounts receivable turnover will decrease.
D) the average collection period will go down and accounts receivable turnover will decrease.

Question 42

Asset utilization ratios

A) relate balance sheet assets to income statement sales.
B) measure how much cash is available for reinvestment into current assets.
C) are most important to stockholders.
D) measure the firm's ability to generate a profit on sales.

Question 43

Which of the following is not a debt utilization ratio?

A) Debt to total assets
B) Times interest earned
C) Fixed asset turnover
D) Fixed charge coverage

Question 44

For a given level of profitability as measured by profit margin, the firm's return on equity will

A) increase as its debt-to-assets ratio decreases.
B) decrease as its current ratio increases.
C) increase as its debt-to-assets ratio increases.
D) decrease as its times-interest-earned ratio decreases.

Question 45

The Bubba Corp. had earnings before taxes of $400,000 and sales of $2,000,000. If it is in the 40% tax bracket, its after-tax profit margin is

A) 40%.
B) 12%.
C) 20%.
D) 25%.

Question 46

A short-term creditor would be most interested in

A) profitability ratios.
B) asset utilization ratios.
C) liquidity ratios.
D) debt utilization ratios.

Question 47

Which two ratios are used in the DuPont system to create return on assets?

A) Return on assets and asset turnover
B) Profit margin and asset turnover
C) Return on total capital and profit margin
D) Inventory turnover and return on fixed assets

Question 48

Ratio analysis can be useful for

A) historical trend analysis within a firm.
B) comparison of ratios within a single industry.
C) measuring the effects of debt or equity financing.
D) All of the options are true.

Question 49

A decreasing average receivables collection period could be associated with

A) increasing account receivable.
B) decreasing sales.
C) increasing sales and decreasing accounts receivable.
D) none of the answers are correct.

Question 50

If XYZ's receivables turnover is 4x, what does that mean?

A) XYZ's total sales are rotated four times a year.
B) XYZ has a really good receivables turnover rate.
C) XYZ is able to collect its receivables every 90 days, or 4 times a year.
D) XYZ generates four times as much sales through receivables than sales through cash.

Question 51

XYZ's receivables turnover is 4x. The accounts receivable at year-end are $600,000. The average collection period is 90 days. What was the sales figure for the year assuming all sales are on credit?

A) $60,000
B) $6,000,000
C) $2,400,000
D) $54,000,000

Question 52

Which of the following is not an asset utilization ratio?

A) Inventory turnover
B) Return on assets
C) Fixed asset turnover
D) Average collection period

Question 53

A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of $50,000. Calculate return on equity.

A) 40%
B) 20%
C) 25%
D) There is not enough information to calculate return on equity.

Question 54

If ABC's sales are $1,000,000, while accounts receivable is $100,000, inventory is $45,000, and fixed assets are $132,000, what is ABC's fixed asset turnover?

A) 7.58
B) 10.00
C) 0.13
D) 22.22

Question 55

A firm has a debt-to-equity ratio of 40%, a debt of $250,000, and a net income of $100,000. The return on equity is

A) 60%.
B) 16%.
C) 30%.
D) There's not enough information to determine the return on equity.

Question 56

Times interest earned is an example of a profitability ratio.

Question 57

Investors are most concerned with the liquidity ratios of a company.

Question 58

ABC Co. has an average collection period of 90 days for its accounts receivable. If total credit sales for the year were $6,000,000, what is the balance in accounts receivable at year-end? Assume a 360-day calendar year.

A) $150,000
B) $2,250,000
C) $1,500,000
D) $40,000

Question 59

In examining the liquidity ratios, the primary emphasis is the firm's

A) ability to effectively employ its resources.
B) overall debt position.
C) ability to pay short-term obligations on time.
D) ability to earn an adequate return or profits.

Question 60

Which of the following is not considered to be a profitability ratio?

A) Profit margin
B) Times interest earned
C) Return on equity
D) Return on assets (investment)

Question 61

Disinflation, as compared to inflation, would normally be good for investments in

A) bonds.
B) gold.
C) collectible antiques.
D) textbooks.

Question 62

During inflation, replacement cost accounting will

A) increase the value of assets.
B) lower the debt-to-asset ratio.
C) reduce incomes.
D) All of the options

Question 63

In addition to comparison with industry ratios, it is also helpful to analyze ratios using

A) future projections
B) historical data
C) only industry ratios provide valid comparisons.
D) trend analysis and historical comparisons.

Question 64

A firm has total assets of $3,000,000 and stockholders equity is $1,000,000. What is the debt-to-total asset ratio?

A) 45%
B) 75%
C) 55%
D) 67%

Question 65

The higher a firm's debt utilization ratios, excluding debt-to-total assets, the

A) less risky the firm's financial position.
B) more risky the firm's financial position.
C) more easily the firm will be able to pay dividends.
D) None of the options

Question 66

Disinflation may cause

A) an increase in the value of gold, silver, and gems.
B) a reduced required return demanded by investors on financial assets.
C) additional profits through falling inventory costs.
D) None of the options are true

Question 67

A firm has operating profit of $210,000 after deducting fixed lease payments of $30,000. The fixed interest expense is $50,000. What is the firm's fixed charge coverage ratio?

A) 6.00x
B) 2.33x
C) 2.00x
D) 3.00x

Question 68

A conservative company experiencing rapid price increases for its products would use LIFO to try to:

A) Allow the inventory that was just purchased at a higher price to be moved to cost of goods sold, showing a lower net income.
B) Allow the inventory that was just purchased at a higher price to remain in ending inventory values and move older inventory to cost of goods sold, showing a higher net income.
C) Allow the inventory that was just purchased at a lower price to remain in ending inventory values and move older inventory to cost of goods sold, showing a lower net income.
D) Allow the inventory that was just purchased at a lower price to be moved to cost of goods sold, showing a higher net income.

Question 69

Total asset turnover indicates the firm's

A) liquidity.
B) debt position.
C) ability to use its assets to generate sales.
D) profitability.

Question 70

Replacement cost accounting (current cost method) during a period of inflation will usually

A) increase assets, decrease net income before taxes, and lower the return on equity.
B) increase assets, increase net income before taxes, and increase the return on equity.
C) decrease assets, increase net income before taxes, and increase the return on equity.
D) None of the options apply.

Question 71

Industries most sensitive to inflation-induced profits are:

A) cyclical products like lumber, copper, and rubber
B) food products
C) industries which inventory is a significant percentage of sales and profits.
D) all of the above.

Question 72

If fixed lease payments are reduced and everything else remains constant,

A) times interest earned goes up.
B) fixed charge coverage goes up.
C) fixed charge coverage stays the same.
D) debt to total assets goes down.

Question 73

If a firm has both a fixed interest expense and fixed lease payments,

A) times interest earned ratio will be smaller than fixed charge coverage ratio.
B) times interest earned ratio will be greater than fixed charge coverage ratio.
C) times interest earned ratio will be the same as fixed charge coverage ratio.
D) fixed charge coverage ratio cannot be computed.

Question 74

Income can be distorted by factors other than inflation. The most important causes of distortion for inter-industry comparisons are

A) timing of revenue receipts and nonrecurring gains or losses.
B) tax write-off policy and use of different inventory methods.
C) Both of these.
D) None of the options

Question 75

Investors and financial analysts wanting to evaluate the operating efficiency of a firm's managers would primarily look at the firm's

A) debt utilization ratios.
B) liquidity ratios.
C) asset utilization ratios.
D) profitability ratios.

Question 76

A quick ratio that is much smaller than the current ratio reflects

A) a small portion of current assets is in inventory.
B) a large portion of current assets is in inventory.
C) that the firm will have a high inventory turnover.
D) that the firm will have a high return on assets.

Question 77

Industries most sensitive to inflation-induced profits are those with

A) seasonal products.
B) cyclical products.
C) consumer products.
D) high-profit products.

Question 78

A firm's long-term assets = $100,000, total assets = $400,000, inventory = $50,000 and current liabilities = $200,000. What are the firm's current ratio and quick ratio?

A) Current ratio = 0.5; quick ratio = 1.25
B) Current ratio = 1.0; quick ratio = 2.0
C) Current ratio = 1.5; quick ratio = 1.25
D) Current ratio = 2.5; quick ratio = 2.0

Question 79

An increasing average receivables collection period indicates

A) the firm is generating more income.
B) accounts receivable are going down.
C) the company is becoming more efficient in its collection policy.
D) the company is becoming less efficient in its collection policy.

Question 80

A firm only has current assets and fixed assets. Its current assets are $100,000 and total assets are $300,000. The firm's sales are $900,000. The firm's fixed asset turnover is

A) 4.5x.
B) 12.0x.
C) 2.4x.
D) 5.0x.