Deck 3: Financial Statements Analysis and Financial Models

Question 1

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.

Answer 1

current assets divided by current liabilities.

Question 2

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

Answer 2

long-term solvency

Question 3

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.

Answer 3

cash on hand divided by current liabilities.

Question 4

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

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

Question 5

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

Question 6

The equity multiplier ratio is measured as total:

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

Question 7

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 8

The inventory turnover ratio is measured as:

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

Question 9

The debt-equity ratio is measured as total:

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

Question 10

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

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

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

Projected future financial statements are called:

A) plug statements.
B) pro forma statements.
C) reconciled statements.
D) aggregated statements.
E) None of these.

Question 13

The quick ratio is measured as:

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

Question 14

The financial ratio measured as earnings before interest and taxes,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 15

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

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

Question 16

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 these.

Question 17

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 18

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 19

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

Question 20

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.

Question 21

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 22

The financial ratio measured as net income divided by total equity 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 23

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 these.
E) None of these.

Question 24

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 25

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

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

Question 26

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 27

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

Question 28

The total asset turnover ratio is measured as:

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

Question 29

Which of the following will increase sustainable growth?

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

Question 30

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 31

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 32

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 33

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 34

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

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

Question 35

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

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

Question 36

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

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

Question 37

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 profit margin, total asset turnover and the price to earnings ratio or profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio.
E) None of these.

Question 38

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 39

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 40

The market-to-book ratio is measured as:

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

Question 41

The higher the inventory turnover measure,the:

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

Question 42

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 43

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

Question 44

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 45

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 equity multiplier,the profit margin and the total asset turnover.
IV) the debt-equity ratio,the capital intensity ratio and the profit margin.

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

Question 46

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 47

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 48

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

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

Question 49

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 50

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 51

If shareholders want to know how much profit a firm is 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 52

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 53

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 54

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

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

Question 55

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 56

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 57

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

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

Question 58

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 59

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 60

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 61

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 62

A firm has total debt of $1,200 and a debt-equity ratio of .40. What is the value of the total assets?

A) $1,680
B) $3,000
C) $3,520
D) $4,200
E) $5,300

Question 63

A firm has sales of $4,000,costs of $3,000,interest paid of $100,and depreciation of $400. The tax rate is 34%. What is the value of the cash coverage ratio?

A) 3
B) 4
C) 6
D) 7
E) 10

Question 64

A firm has sales of $1,500,net income of $100,total assets of $1,000,and total equity of $700. Interest expense is $50. What is the common-size statement value of the interest expense?

A) 3.3%
B) 5.0%
C) 7.1%
D) 16.7%
E) 50.0%

Question 65

Jessica's Boutique has cash of $50,accounts receivable of $60,accounts payable of $400,and inventory of $100. What is the value of the quick ratio?

A) .125
B) .15
C) .275
D) .525
E) 1.525

Question 66

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 67

Which two of the following represent the most effective methods of directly evaluating the financial performance of a firm?
I. comparing the current financial ratios to those of the same firm from prior time periods
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 financial statements of the firm to the financial statements of similar firms operating in other countries
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 68

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 $80. What is the value of the cash coverage ratio?

A) 2.71
B) 3.64
C) 4.12
D) 5.78
E) 6.10

Question 69

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 70

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 71

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

Question 72

A firm has sales of $1,200,net income of $200,net fixed assets of $500,and current assets of $300. The firm has $200 in inventory. What is the common-size statement value of inventory?

A) 10.0%
B) 16.67%
C) 25.0%
D) 40.0%
E) 67.67%

Question 73

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

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

Question 74

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 75

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

Question 76

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 77

Enterprise value focused on:

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

Question 78

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 79

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

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

Question 80

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.