Question 1

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Accepted Answer

A) True 
 B)False  True

Question 2

Considered alone, which of the following would increase a company's current ratio?

Accepted Answer

A)   An increase in net fixed assets.
B)   An increase in accrued liabilities.
C)   An increase in notes payable.
D)   An increase in accounts receivable.
E)   An increase in accounts payable. D

Question 3

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Accepted Answer

A) True 
 B)False  False

Question 4

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Accepted Answer

A)   The TIE declines.
B)   The DSO increases.
C)   The quick ratio increases.
D)   The current ratio declines.
E)   The total assets turnover decreases.

Question 6

Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

Accepted Answer

A) True 
 B)False

Question 7

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Accepted Answer

A)   Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
B)   Use cash to repurchase some of the company's own stock.
C)   Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
D)   Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E)   Use cash to increase inventory holdings.

Question 8

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

Accepted Answer

A)   7.89%
B)   8.29%
C)   8.70%
D)   9.14%
E)   9.59%

Question 9

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

Accepted Answer

A)   Borrow using short-term notes payable and use the proceeds to reduce accruals.
B)   Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
C)   Use cash to reduce accruals.
D)   Use cash to reduce short-term notes payable.
E)   Use cash to reduce accounts payable.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
B)   A firm's use of debt will have no effect on its profit margin.
C)   If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
D)   The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.
E)   If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a higher operating margin and return on assets.

Question 11

Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?

Accepted Answer

A)   $158,750
B)   $166,688
C)   $175,022
D)   $183,773
E)   $192,962

Question 12

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

Accepted Answer

A) True 
 B)False

Question 13

One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Accepted Answer

A) True 
 B)False

Question 14

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.
B)   In general, it's better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
C)   If a firm's fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
D)   The more conservative a firm's management is, the higher its debt ratio is likely to be.
E)   The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

Question 16

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Accepted Answer

A)   Company HD pays less in taxes.
B)   Company HD has a lower equity multiplier.
C)   Company HD has a higher ROA.
D)   Company HD has a higher times-interest-earned (TI
E)   ratio.
E)   Company HD has more net income.

Question 17

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $295,000 and its net income was $10,600. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed?

Accepted Answer

A)   6.55%
B)   7.28%
C)   8.09%
D)   8.90%
E)   9.79%

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   Other things held constant, the more debt a firm uses, the higher its operating margin will be.
B)   Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
C)   Other things held constant, the more debt a firm uses, the higher its profit margin will be.
D)   Other things held constant, the higher a firm's debt ratio, the higher its TIE ratio will be.
E)   Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the debt ratio, the lower the risk.

Question 19

Royce Corp's sales last year were $280,000, and its net income was $23,000. What was its profit margin?

Accepted Answer

A)   7.41%
B)   7.80%
C)   8.21%
D)   8.63%
E)   9.06%

Question 20

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

Accepted Answer

A) True 
 B)False

Exam 4: Statement Analysis

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Considered alone, which of the following would increase a company's current ratio?

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

Which of the following statements is CORRECT?

Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.

Which of the following statements is CORRECT?

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Royce Corp's sales last year were $280,000, and its net income was $23,000. What was its profit margin?

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.