Deck 4: Financial Analysissizing up Firm Performance

Question 1

Which transaction does not affect the quick ratio?

A)Land held for investment is sold for cash.
B)Equipment is purchased and is financed by a long-term debt issue.
C)Inventories are sold for cash.
D)Inventories are sold on a credit basis.

Answer 1

B

Question 2

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

Answer 2

False

Question 3

If you were given the components of current assets and of current liabilities, what ratios could you calculate?

A)Profitability ratios
B)Capital structure ratios
C)Asset management ratios
D)Liquidity ratios

Answer 3

D

Question 4

On a common-size balance sheet, total assets are equal to 100%.

Question 5

Individuals who do not work for a company rarely have enough information to perform a detailed financial analysis of the company.

Question 6

By using common-size income statements, firms can determine how various expenses as a percentage of total sales changed from period to period.

Question 7

On a common-size income statement, EBIT is equal to 100%.

Question 8

Financial analysis is equally important to large corporations and small businesses.

Question 9

Which of the following parties would perform an external financial analysis?

A)A firm's compensation committee
B)A financial analyst forecasting the next period's borrowing needs
C)A firm's creditors
D)A Chief Financial Officer (CFO)comparing the performance of the firm's various divisions

Question 10

Common-size balance sheets represent all figures on the balance sheet [blank].

A)as a percentage change from the previous year
B)as percentages of the current year's sales
C)as a percentage of peer group sales
D)as a percentage of total assets

Question 11

Provide two examples of firms or individuals that would undertake an external financial analysis.Include a brief description of the reasons for this interest.

Question 12

Given an accounts receivable turnover of 8 and annual credit sales of $362 000, the average collection period (360-day year)is [blank].

A)90 days
B)45 days
C)75 days
D)60 days

Question 13

What is the purpose of using common-size balance sheets and common-size income statements?

Question 14

Common-size financial statements represent all figures on the financial statements [blank].

A)in inflation-adjusted dollars from a base year
B)as if all companies being compared had the same total revenue
C)as if all companies being compared had the same total assets
D)as a percentage of either sales or total assets

Question 15

The debt ratio is a measure of a firms [blank].

A)leverage
B)profitability
C)liquidity
D)efficiency

Question 16

Which of the following parties would perform an internal financial analysis?

A)A financial analyst forecasting the next period's borrowing needs
B)A firm's competitors
C)A firm's creditors
D)Analysts for investment companies

Question 17

Common-size income statements represent all figures on the income statement [blank].

A)as a percentage change from the previous year
B)as percentages of the current year's sales
C)as a percentage of some benchmark figure
D)as a percentage of total assets

Question 18

If you were given the components of current assets and of current liabilities, what ratio(s)could you calculate?

A)Acid-test or quick ratio
B)Average collection period
C)Inventory turnover ratio
D)Capital structure ratio

Question 19

The principal reason for preparing common-size statements is [blank].

A)to make meaningful comparisons between firms that are not the same size
B)to make meaningful comparisons between different quarters within the fiscal year
C)to eliminate the effects of inflation
D)to make meaningful comparisons between firms in different industries

Question 20

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Question 21

Smart and Smiley Ltd has an average collection period of 74 days.What is the accounts receivable turnover ratio for Smart and Smiley?

A)4.93
B)2.47
C)2.66
D)1.68

Question 22

Which of the following is included in the numerator of the times-interest-earned ratio?

A)Net profit
B)Net operating profit
C)Interest expense
D)Gross profit

Question 23

Kingsbury Associates has current assets as follows: If Kingsbury has a current ratio of 3.2, what is its quick ratio?

A)2.07
B)1.55
C)0.48
D)0.96

Question 24

Table 1

Based on the information in Table 1, the current ratio is [blank].

A)2.97
B)1.46
C)2.11
D)2.23

Question 25

Which of the following ratios indicates how rapidly the firm's credit accounts are being collected?

A)Debt ratio
B)Gross profit margin
C)Accounts receivable turnover ratio
D)Fixed asset turnover

Question 26

Why is the quick ratio a more refined measure of liquidity than the current ratio?

A)It measures how quickly cash and other liquid assets flow through the company.
B)Inventories are omitted from the numerator of the ratio because they are generally the least liquid of the firm's current assets.
C)It is a quicker calculation to make.
D)Cash is the most liquid current asset.

Question 27

What is the reason for computing the acid-test ratio in addition to the current ratio?

A)Inventory is the most liquid of the liquid assets.
B)A firm's inventory may not be particularly liquid.
C)Inventory is the best collateral for short term loans.
D)Compared to accounts receivable, inventory balances may be difficult to verify.

Question 28

A firm's average collection period has decreased significantly from the previous year.Which of the following could possibly explain the results?

A)Customers are paying off their accounts quicker.
B)Customers are taking longer to pay for purchases and the firm has a large debt ratio.
C)The firm has a stricter collection policy.
D)Customers are paying off their accounts quicker or the firm has a stricter collection policy

Question 29

The question 'Did the common stockholders receive an adequate return on their investment?' is answered through the use of [blank].

A)liquidity ratios
B)profitability ratios
C)coverage ratios
D)leverage ratios

Question 30

Smith Corporation has current assets of $11 400, inventories of $4000 and a current ratio of 2.6.What is Smith's quick or acid-test ratio?

A)1.69
B)0.54
C)0.74
D)1.35

Question 31

The DuPont method decomposes return on equity into [blank].

A)return on assets and the debt ratio
B)return on assets and the equity multiplier
C)operating profit and inventory turnover
D)net profit margin and fixed asset turnover

Question 32

Marshall Networks, Ltd.has a total asset turnover of 2.5 and a net profit margin of 3.5%.The firm has a return on equity of 17.5%.Calculate Marshall's debt ratio.

A)30%
B)40%
C)50%
D)60%

Question 33

Table 1

Based on the information in Table 1, the net profit margin is [blank].

A)4.61%
B)2.94%
C)1.97%
D)5.33%

Question 34

Table 1

Based on the information in Table 1, the inventory turnover ratio is [blank].

A)0.29 times
B)2.35 times
C)0.43 times
D)3.47 times

Question 35

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

A)Current ratio
B)Gross profit margin
C)Quick ratio
D)Return on investment

Question 36

If a company's average collection period is higher than the industry average, then the company might be [blank].

A)enforcing credit conditions upon its customers which are too stringent
B)allowing its customers too much time to pay their bills
C)too tough in collecting its accounts
D)too liquid

Question 37

Table 1

Based on the information in Table 1, the average collection period is [blank].

A)71 days
B)84 days
C)64 days
D)127 days

Question 38

Water Works International has a current ratio of 1.33, current liabilities of $540 000 and inventory of $400 000.What is Water Works International's quick ratio?

A)1.11
B)0.86
C)1.90
D)0.59

Question 39

Which of the following is included in the denominator of the times-interest-earned ratio?

A)Lease payments
B)Principal payments
C)Interest expense
D)Gross profit

Question 40

Table 1

Based on the information in Table 1, the debt ratio is [blank].

A)0.70
B)0.20
C)0.74
D)0.42

Question 41

A decrease in the return on equity ratio could be caused by an increase in [blank].

A)the tax rate only
B)cost of goods sold or the total assets
C)total assets only
D)the tax rate, cost of goods sold or total assets

Question 42

Gold Coast Organics has a total asset turnover of 2.5 and a net profit margin of 3.5%.The total debt ratio for the firm is 50%.Calculate Gold Coast Organic's return on equity.

A)17.5%
B)19.5%
C)21.5%
D)23.5%

Question 43

Other things held constant, an increase in [blank] will decrease the current ratio.Assume an initial current ratio greater than 1.0.

A)accruals
B)common stock
C)average collection period
D)cash

Question 44

Luminara Pty Ltd has a net profit margin of 15% and a total asset turnover of 1.7.What is Luminara's return on total assets?

A)12.3%
B)25.5%
C)8.8%
D)11.1%

Question 45

Sharky's Loan Company has an annual interest expense of $30 000.If Sharky's times-interest-earned ratio is 2.9, what is Sharky's earnings before taxes (EBT)?

A)$87 000
B)$57 000
C)$117 000
D)$60 000

Question 46

GAAP Ltd has total assets of $2 575 000, sales of $5 950 000, total liabilities of $1 855 062 and a net profit margin of 2.9%.What is GAAP's return on equity? Round to the nearest 0.1%.

A)8.6%
B)24.0%
C)16.4%
D)4.4%

Question 47

Ortny Industries has an accounts receivable turnover ratio of 4.3.If Ortny has an accounts receivable balance of $90 000, what is Ortny's average daily credit sales?

A)$387 000
B)$1548
C)$1060
D)$3521

Question 48

Global Graphics has an annual interest expense of $30 000.Global Graphics' times-interest-earned ratio is 4.2.What is Global Graphics' operating profit?

A)$96 000
B)$57 000
C)$126 000
D)$57 600

Question 49

Which of the following is the best indicator of management's effectiveness at generating profits relative to the firm's assets?

A)Quick ratio
B)Fixed assets turnover
C)Return on assets
D)Accounts receivable turnover

Question 50

Snort and Smiley Incorporated has a debt ratio of .42, noncurrent liabilities of $20 000 and total assets of $70 000.What is Snort and Smiley's level of current liabilities?

A)$8400
B)$9400
C)$12 340
D)$10 600

Question 51

Sputter Motors has sales of $3 450 000, total assets of $1 240 000, cost of goods sold of $2 550 000 and an inventory turnover of 6.38.What is the amount of Sputter's inventory?

A)$421 054
B)$638 112
C)$543 000
D)$399 687

Question 52

Smart Paper has an accounts receivable turnover ratio of 3.4.What is Smart Paper's average collection period?

A)107 days
B)102 days
C)73 days
D)55 days

Question 53

Snype Ltd.has an accounts receivable turnover ratio of 7.3.Stork Company has an accounts receivable turnover ratio of 5.0.Which of the following statements is correct?

A)Snype's average collection period is less than Stork's.
B)Stork's average collection period is less than Snype's.
C)Snype has a lower accounts receivable account on average than does Stork Company.
D)Stork Company has (on average)a lower accounts receivable account than does Snype.

Question 54

Which of the following statements is true?

A)As a general rule, management would want to reduce the firm's average collection period.
B)As a general rule, management would want to reduce the firm's accounts receivable turnover ratio.
C)As a general rule, management would want to increase the firm's average collection period.
D)As a general rule, a firm is not financially affected by the amount of time required to collect its accounts receivable.

Question 55

Which of the following is the best indicator of management's effectiveness at managing the firm's balance sheet?

A)Debt ratio
B)Total asset turnover
C)Times-interest-earned
D)Operating profit margin

Question 56

In 2018, Snout and Smith Pty Ltd had a gross profit of $27 000 on sales of $110 000.S & S's operating expenses for 2018 were $13 000, and its net profit margin was .0585.Snout and Smith had no interest expense in 2018.What was Snout and Smith's operating profit margin?

A)0.245
B)0.118
C)0.127
D)0.157

Question 57

A decrease in [blank] will increase gross profit margin.

A)cost of goods sold
B)depreciation expense
C)interest expense
D)total assets

Question 58

Storm King Associates has a total asset turnover ratio of 1.90 and a return on total assets of 7.20%.What is Storm King's net profit margin?

A)3.79
B)9.56
C)13.68
D)19.09

Question 59

Pointer Health Corporation has a total asset turnover of 2.66, total liabilities of $1 004 162 and sales revenues of $7 025 000.What is Pointer's debt ratio?

A)38.0%
B)14.3 %
C)26.7%
D)81.1%

Question 60

Aussie Foods Pty Ltd has a debt ratio of .57, current liabilities of $14 000 and total assets of $70 000.What is the level of Aussie Foods' total liabilities?

A)$25 900
B)$24 600
C)$39 900
D)$53 900

Question 61

If the total asset turnover decreases, then the return on equity will [blank].

A)decrease
B)increase
C)not change
D)change slightly

Question 62

Claudia's Cupcakes has sales of $3 450 000, total assets of $1 240 000 and total liabilities of $275 000, which consist strictly of notes payable.The firm's operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable.How much is the firm's times-interest-earned?

A)15.6
B)45.3
C)20.2
D)3.0

Question 63

Dew Point Dynamite Pty Ltd generated a 1.23 total asset turnover in its latest fiscal year on assets of $2 112 077.The firm has total liabilities of $950 997.The firm's net profit margin was 10.3%.What is Dew Point's return on equity? Round to the nearest 0.1%.

A)23.1%
B)12.6%
C)5.5%
D)18.2%

Question 64

Which of the following will help an analyst determine how well a firm is able to service its debt?

A)Total liability turnover
B)Times-interest-earned
C)Return on debt
D)Asset ratio

Question 65

Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition, this firm's current ratio and acid-test ratio also meet industry standards.Based on this information, we can conclude that this firm must have excessive [blank].

A)accounts receivable
B)fixed assets
C)debt
D)inventory

Question 66

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

A)Liquidity
B)Leverage
C)Efficiency
D)Profitability

Question 67

Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition, this firm's current ratio and fixed asset turnover ratio also meet industry standards.Based on this information, we can conclude that this firm must have excessive [blank].

A)current liabilities
B)fixed assets
C)long-term debt
D)current assets

Question 68

Kannan Carpets Ltd has asked you to calculate the company's current ratio for 2016.All you have is a partial balance sheet and some assumptions.Using the information provided, calculate Kannan's current ratio for 2001. Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2016 sales = $3000

A)0.3
B)0.8
C)1.6
D)2.2

Question 69

Since 2015, ABC's inventory management has [blank].

A)improved
B)deteriorated
C)remained the same
D)changed but in an indeterminate manner

Question 70

Use the following information to answer the following question(s).
Key Ratios for ABC, Ltd.and Its Industry
ABC, Inc.Income Statement (in thousands)December 31, 2016
ABC Ltd Balance Sheet (in thousands)December 31, 2016

In 2016, ABC's fixed asset turnover is [blank].

A)2.78
B)5.0
C)4.6
D)4.8

Question 71

Since 2015, ABC's efficiency at using its assets has [blank].

A)improved
B)deteriorated
C)remained the same
D)been variable across components of the efficiency measures

Question 72

Use the following information to answer the following question(s).
Key Ratios for ABC, Ltd.and Its Industry
ABC, Inc.Income Statement (in thousands)December 31, 2016
ABC Ltd Balance Sheet (in thousands)December 31, 2016

In 2016, ABC's inventory turnover is [blank].

A)23.9
B)20.3
C)15.5
D)16.1

Question 73

An example of an asset management efficiency ratio is the [blank].

A)total asset turnover ratio
B)gross profit margin
C)times-interest-earned
D)return on assets

Question 74

Since 2015, ABC's liquidity has [blank].

A)improved
B)deteriorated
C)remained the same
D)been variable across components of the liquidity measures

Question 75

A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined.This may be due to [blank].

A)an increase in sales
B)an increase in cost of goods sold
C)an increase in inventory purchases
D)a decrease in inventory purchases

Question 76

An increase in [blank] will decrease the times-interest-earned ratio.

A)the tax rate
B)gross profit
C)interest expense
D)common stock

Question 77

In the times-interest-earned ratio, dividend payments are included in [blank].

A)the numerator
B)the denominator
C)both the numerator and the denominator
D)neither the numerator nor the denominator

Question 78

In 2016, the improvement in ABC's return on equity occurred because [blank].

A)ABC used more debt than in 1994
B)ABC lowered its expenses in 1995 and was, therefore, more profitable
C)ABC utilised its total assets more efficiently in 1995
D)there is no explanation for ABC's return on equity

Question 79

Use the following information to answer the following question(s).
Key Ratios for ABC, Ltd.and Its Industry
ABC, Inc.Income Statement (in thousands)December 31, 2016
ABC Ltd Balance Sheet (in thousands)December 31, 2016

In 2016, ABC's average collection period is [blank].

A)30 days
B)32.5 days
C)25 days
D)35 days

Question 80

Kannan Carpets Ltd has asked you to calculate the company's quick ratio for 2016.All you have is a partial balance sheet and some assumptions.Using the information provided, calculate Kannan's quick ratio for 2016. Gross profit margin = 50%
Inventory turnover (COGS/Inv)= 5
2001 sales = $3000

A)0.2
B)0.4
C)0.6
D)0.8