Deck 3: Financial Statements and Cash Flow

Question 1

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

Answer 1

profitability

Question 2

The financial ratio that measures the accounting profit per dollar of book equity is referred to as the:

A)profit margin.
B)price-earnings ratio.
C)return on equity.
D)equity turnover.
E)market profit-to-book ratio.

Answer 2

return on equity.

Question 3

Which statement expresses all relative account values as a percentage of total assets?

A)Pro forma balance sheet
B)Common-size income statement
C)Statement of cash flows
D)Pro forma income statement
E)Common-size balance sheet

Answer 3

Common-size balance sheet

Question 4

The amount that investors are willing to pay for each dollar of annual earnings is reflected in the:

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

Question 5

The total asset turnover ratio measures the amount of:

A)total assets needed for every $1 of sales.
B)sales generated by every $1 in total assets.
C)fixed assets required for every $1 of sales.
D)net income generated by every $1 in total assets.
E)net income that can be generated by every $1 of fixed assets.

Question 6

Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as:

A)asset management ratios.
B)long-term solvency measures.
C)liquidity measures.
D)profitability ratios.
E)market value ratios.

Question 7

The market-to-book ratio is measured as the:

A)market price per share divided by the par value per share.
B)net income per share divided by the market price per share.
C)market price per share divided by the net income per share.
D)market price per share divided by the dividends per share.
E)market value per share divided by the book value per share.

Question 8

The debt-equity ratio is measured as:

A)total equity divided by long-term debt.
B)total equity divided by total debt.
C)total debt divided by total equity.
D)long-term debt divided by total equity.
E)total assets minus total debt,divided by total equity.

Question 9

The measure of net income returned from every dollar invested in total assets is the:

A)profit margin.
B)return on assets.
C)return on equity.
D)asset turnover.
E)earnings before interest and taxes.

Question 10

Which one of these terms is most synonymous with the term "income from operations"?

A)TTM
B)EBIT
C)LTM
D)EBITDA
E)EPS

Question 11

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 12

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

Question 13

The equity multiplier 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 14

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.

Question 15

You would like to compare your firm's cost structure to that of your competitors.However,your competitors are much larger in size than your firm.Which one of these would best enable you to compare costs across your industry?

A)Pro forma balance sheet
B)Common-size income statement
C)Statement of cash flows
D)Pro forma income statement
E)Common-size balance sheet

Question 16

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 17

The inventory turnover ratio is measured as:

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

Question 18

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 19

Days' sales in inventory is measured as:

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

Question 20

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 21

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)stockholders.

Question 22

A supplier,who requires payment within ten days,should be 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 23

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

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

Question 24

If stockholders want to know how much profit the firm is making on their entire investment in that firm,the stockholders should refer to the:

A)profit margin.
B)return on assets.
C)return on equity.
D)equity multiplier.
E)earnings per share.

Question 25

Puffy's Pastries generates five cents of net income for every $1 in equity.Thus,Puffy's has ________ of 5 percent.

A)a return on assets
B)a profit margin
C)a return on equity
D)an EV multiple
E)a price-earnings ratio

Question 26

If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent,then the firm:

A)has no debt of any kind.
B)is using its assets as efficiently as possible.
C)pays all its earnings out in dividends.
D)also has a current ratio of 15.
E)has an equity multiplier of 2.

Question 27

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

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

Question 28

Joe's has old,fully depreciated equipment.Moe's just purchased all new equipment which will be depreciated over eight years.If Joe's and Moe's have the same sales,costs,tax rate,and enterprise value,then:

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 and Joe's will have the same EV multiple.
E)Moe's will have a lower EV multiple.

Question 29

Which one of the following statements is correct concerning ratio analysis?

A)A single ratio is often computed differently by different individuals.
B)No ratio can address the problem of size differences among firms.
C)Only a very limited number of ratios can be used for analytical purposes.
D)Every ratio is an income statement entry divided by a balance sheet item.
E)Ratios cannot be used for comparison purposes over periods of time.

Question 30

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 31

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 32

Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales 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)total debt ratio will decrease.
E)price-earnings ratio will increase.

Question 33

A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of ________,and a times interest earned ratio of ________.

A).50; .75
B).50; 1.00
C).45; 1.75
D).40; .75
E).40; 1.75

Question 34

Which one of the following is a liquidity ratio?

A)Quick ratio
B)Cash coverage ratio
C)Total debt ratio
D)EV multiple
E)Times interest earned ratio

Question 35

Vinnie's Motors has a market-to-book ratio of 3.4.The book value per share is $34 and earnings per share are $1.36.Holding the market-to-book ratio and earnings per share constant,a $1 increase in the book value per share will:

A)decrease the price-earnings ratio.
B)decrease the EV multiple.
C)decrease the market price per share.
D)increase the price-earnings ratio.
E)increase the return on equity.

Question 36

The higher the inventory turnover,the:

A)less time inventory items remain on the shelf.
B)higher the inventory as a percentage of total assets.
C)longer it takes a firm to sell its inventory.
D)greater the amount of inventory held by a firm.
E)greater the selection of goods available for sale.

Question 37

A capital intensity ratio of 1.03 means a firm has $1.03 in:

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

Question 38

Which one of the following is most apt to cause a profitable,stable firm to have a higher price-earnings ratio?

A)Slow industry outlook
B)Very low current earnings
C)Low market share
D)Low prospect of firm growth
E)Low investor opinion of firm

Question 39

Last year,Alfred's Automotive had a price-earnings ratio of 15 and earnings per share of $1.20.This year,the price-earnings ratio is 18 and the earnings per share is $1.20.Based on this information,it can be stated with certainty that:

A)the price per share decreased.
B)the earnings per share decreased.
C)investors are paying a lower price per share this year as compared to last year.
D)investors are receiving a higher rate of return this year.
E)the investors' outlook for the firm has improved.

Question 40

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 41

Which one of these ratios measures the efficiency at which a firm employs its assets?

A)Profit margin
B)Return on equity
C)Equity multiplier
D)P/E ratio
E)Total asset turnover

Question 42

The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:

A)rate of return on assets.
B)internal rate of growth.
C)average historical rate of growth.
D)rate of return on equity.
E)sustainable rate of growth.

Question 43

The projected addition to retained earnings can be calculated as:

A)PM × Δ Sales.
B)PM × Δ Sales × (1 − Dividend payout ratio).
C)PM × Projected sales × (1 − Dividend payout ratio).
D)Projected sales × (1 − Dividend payout ratio).
E)PM × Projected sales.

Question 44

In the financial planning model,the external financing needed (EFN)as shown on a pro forma balance sheet is equal to the changes in assets:

A)plus the changes in liabilities minus the changes in equity.
B)minus the changes in both liabilities and equity.
C)minus the changes in liabilities only.
D)plus the changes in both liabilities and equity.
E)minus the change in retained earnings.

Question 45

The least problems encountered when comparing the financial statements of one firm with those of another firm occur when the firms:

A)are in different lines of business.
B)have geographically diverse operations.
C)use different methods of depreciation.
D)are both classified as conglomerates.
E)have the same fiscal year-end.

Question 46

Enterprise value is based on the:

A)market value of interest-bearing debt plus the market value of equity minus cash.
B)book values of debt and assets,other than cash.
C)market value of equity plus the book value of total debt minus cash.
D)book value of debt plus the market value of equity.
E)book values of debt and equity less cash.

Question 47

If a firm decreases its operating costs,all else constant,then the:

A)profit margin will decrease.
B)return on assets will decrease.
C)total asset turnover rate will increase.
D)cash coverage ratio will decrease.
E)price-earnings ratio will decrease.

Question 48

A public firm's market capitalization is equal to the:

A)total book value of assets less the book value of debt.
B)par value of common equity.
C)price per share multiplied by number of shares outstanding.
D)stock price per share multiplied by the number of shares authorized.
E)maximum value an acquirer would pay for the firm in an acquisition.

Question 49

The equity multiplier measures:

A)financial leverage.
B)returns to stockholders.
C)operating efficiency.
D)management efficiency.
E)asset use efficiency.

Question 50

Which one of the following sets of ratios would generally be of the most interest to stockholders?

A)Return on assets and profit margin
B)Quick ratio and times interest earned
C)Price-earnings ratio and debt-equity ratio
D)Return on equity and price-earnings ratio
E)Cash coverage ratio and equity multiplier

Question 51

The return on equity can be calculated as:

A)ROA × Equity multiplier.
B)Profit margin × ROA.
C)Profit margin × ROA × Total asset turnover.
D)ROA × Net income/Total assets.
E)ROA × Debt-equity ratio.

Question 52

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 equity financing.
E)assumes the dividend payout ratio is equal to zero.

Question 53

The DuPont identity can be computed as:

A)Net income × Profit margin × (1 + Debt-equity ratio).
B)Profit margin × 1/Capital intensity ratio × (1 + Debt-equity ratio).
C)Net income × Total asset turnover × Equity multiplier.
D)Profit margin × Total asset turnover × Debt-equity ratio.
E)Return on equity × Profit margin × Total asset turnover.

Question 54

The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to:

A)the firm's ratios from prior time periods and to the ratios of firms with similar operations.
B)the average ratios of all firms within the same country over a period of time.
C)those of other firms located in the same geographic area that are similarly sized.
D)the average ratios of the firm's international peer group.
E)those of the largest conglomerate that has operations in the same industry as the firm.

Question 55

Which account is least apt to vary directly with sales?

A)Notes payable
B)Inventory
C)Cost of goods sold
D)Accounts payable
E)Accounts receivable

Question 56

Projected future financial statements are called:

A)imaginative statements.
B)pro forma statements.
C)reconciled statements.
D)aggregated statements.
E)comparative statements.

Question 57

A firm with a high level of growth opportunities is most apt to have a:

A)high PE ratio and a high EV multiple.
B)high cash ratio and a low EV multiple.
C)high PE ratio and a low EV multiple.
D)low PE ratio and a high EV multiple.
E)low cash ratio and a low PE ratio.

Question 58

The sustainable growth rate will be equivalent to the internal growth rate when,and only 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 equal to 1.
E)the retention ratio is equal to 1.

Question 59

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 60

Which one of these values best represents the funds needed to acquire a firm and payoff all of that firm's debt?

A)Market value of total assets
B)Book value of equity
C)Return on assets
D)Market value of equity
E)Enterprise value

Question 61

Jessica's Boutique has cash of $218,accounts receivable of $457,accounts payable of $398,and inventory of $647.What is the value of the quick ratio?

A).55
B)1.05
C)1.70
D)1.32
E)1.52

Question 62

Browning's has a debt-equity ratio of .47.What is the equity multiplier?

A)1.47
B).53
C)2.13
D)1.13
E)1.53

Question 63

Cado Industries has total debt of $6,800 and a debt-equity ratio of .36.What is the value of the total assets?

A)$18,889
B)$24,480
C)$23,520
D)$25,689
E)$25,360

Question 64

If a firm bases its growth projection on the rate of sustainable growth,shows positive net income,and has a dividend payout ratio of 30 percent,then the:

A)fixed assets will have to increase at the sustainable growth rate,even if the firm is currently operating at only 78 percent of capacity.
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,the debt-equity ratio,and number of common shares outstanding will all increase.

Question 65

Marcie's Mercantile wants to maintain its current dividend policy,which is a payout ratio of 35 percent.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)35 percent of the internal rate of growth.
B)65 percent of the internal rate of growth.
C)the internal rate of growth.
D)the sustainable rate of growth.
E)65 percent of the sustainable rate of growth.

Question 66

Discount Mart has $876,400 in sales with a profit margin of 3.8 percent.There are 32,500 shares of stock outstanding at a market price per share of $21.60.What is the price-earnings ratio?

A)23.40
B)22.60
C)19.21
D)21.08
E)18.47

Question 67

Leo's Markets has sales of $684,000,costs of $437,000,interest paid of $13,800,total assets of $712,000,and depreciation of $109,400.The tax rate is 21 percent and the equity multiplier is 1.6.What is the return on equity?

A)21.30 percent
B)23.92 percent
C)20.06 percent
D)19.48 percent
E)21.98 percent

Question 68

Home Systems has sales of $312,800,cost of goods sold of $218,400,inventory of $46,300,and accounts receivable of $62,700.How many days,on average,does it take the firm to both sell its inventory and collect payment on the sale?

A)142.10
B)96.37
C)178.21
D)150.54
E)124.03

Question 69

Financial planning models are most apt to omit:

A)the changes in net working capital required for additional sales.
B)the increases in costs required to increase sales.
C)any change in retained earnings due to changes in the income statement.
D)the timing,risk,and size of the cash flows.
E)any additions that might be needed to fixed assets.

Question 70

The value of the variable "b" as used in the internal growth rate formula can be computed as:

A)1 + Growth rate.
B)Total dividends/Net income.
C)1 − Dividend payout ratio.
D)Net income/Total sales.
E)1 − PE ratio.

Question 71

The sustainable rate of growth for a firm can be increased by:

A)decreasing the debt-equity ratio.
B)decreasing the profit margin.
C)increasing the dividend payout ratio.
D)increasing the capital intensity ratio.
E)increasing the total asset turnover.

Question 72

Flo's Restaurant has sales of $418,000,total equity of $224,400,a tax rate of 23 percent,a debt-equity ratio of .37,and a profit margin of 5.1 percent.What is the return on assets?

A)6.93 percent
B)9.50 percent
C)11.08 percent
D)7.13 percent
E)13.13 percent

Question 73

Weston's has sales of $38,900,net income of $2,400,total assets of $43,100,and total equity of $24,700.Interest expense is $830.What is the common-size statement value of the interest expense?

A)2.13 percent
B)3.08 percent
C)1.93 percent
D)2.49 percent
E)3.46 percent

Question 74

Northern Industries has accounts receivable of $42,300,inventory of $61,200,sales of $544,200,and cost of goods sold of $393,500.How many days,on average,does it take the firm to sell its inventory?

A)93.08
B)74.92
C)85.14
D)56.77
E)80.46

Question 75

Sun Shade's has sales of $363,000,total assets of $323,500,and a profit margin of 14.6 percent.The firm has a total debt ratio of 54 percent.What is the return on equity?

A)28.45 percent
B)35.61 percent
C)23.29 percent
D)31.74 percent
E)7.88 percent

Question 76

New Metals has depreciation of $28,300,interest expense of $11,400,EBIT of $62,700,a price-earnings ratio of 8.6,a profit margin of 7.2 percent,a tax rate of 21 percent,and 37,500 shares of stock outstanding.What is the market price per share?

A)$13.48
B)$7.09
C)$9.29
D)$12.48
E)$10.92

Question 77

Southern Markets has sales of $78,400,net income of $2,400,costs of goods sold of $43,100,and depreciation of $6,800.What is the common-size statement value of EBIT?

A)36.35 percent
B)38.08 percent
C)41.93 percent
D)32.49 percent
E)35.46 percent

Question 78

Two Sisters Dresses has net working capital of $43,800,net fixed assets of $232,400,net income of $43,900,and current liabilities of $51,300.The tax rate is 21 percent and the profit margin is 9.3 percent.How many dollars of sales are generated from every $1 in total assets?

A)$1.44
B)$1.32
C)$1.73
D)$.97
E)$1.06

Question 79

DL Motors has sales of $22,400,net income of $3,600,net fixed assets of $18,700,inventory of $2,800,and total current assets of $6,300.What is the common-size statement value of inventory?

A)10.07 percent
B)13.67 percent
C)11.20 percent
D)12.50 percent
E)9.84 percent

Question 80

Rosita's Resources paid $11,310 in interest and $16,500 in dividends last year.The times interest earned ratio is 2.9,the depreciation expense is $7,900,and the tax rate is 21 percent.What is the value of the cash coverage ratio?

A)3.71
B)2.58
C)3.60
D)2.78
E)3.10