Deck 14: Financial Statement Analysis

Question 1

Cost of goods sold refers to ________.

A) direct costs attributable to producing the product sold by the firm
B) salaries, advertising, and selling expenses
C) payments to the firm's creditors
D) payments to federal and local governments

Answer 1

A

Question 2

One of the biggest impediments to a global capital market has been ________.

A) volatile exchange rates
B) the lack of common accounting standards
C) lower disclosure standards in the United States than abroad
D) the lack of transparent reporting standards across the EU

Answer 2

B

Question 3

Which of the following is not one of the three key financial statements available to investors in publicly traded firms?

A) income statement
B) balance sheet
C) statement of operating earnings
D) statement of cash flows

Answer 3

C

Question 4

Which one of the following ratios is used to calculate the times-interest-earned ratio?

A) Net profit/Interest expense
B) Pretax profit/EBIT
C) EBIT/Sales
D) EBIT/Interest expense

Question 5

In 2017 Huge-Packing repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Huge-Packing's total cash flow from financing was -$6,077 million. How much did the long-term debt accounts of Huge-Packing change?

A) increased $138 million
B) decreased $138 million
C) increased $836 million
D) decreased $836 million

Question 6

Cash Flow Data for Interceptors, Inc.

What must cash flow from financing have been in 2018 for Interceptors, Inc.?

A) $5
B) $28
C) $30
D) $33

Question 7

Depreciation expense is in what broad category of expenditures?

A) operating expenses
B) general and administrative expenses
C) debt interest expense
D) tax expenditures

Question 8

Which of the following is NOT a liquidity ratio?

A) Inventory turnover ratio
B) Current ratio
C) Quick ratio
D) Cash ratio

Question 9

The highest possible value for the interest-burden ratio is ________, and this occurs when the firm ________.

A) 0; uses as much debt as possible
B) 1; uses debt to the point where ROA = interest cost of debt
C) 1; uses no interest-bearing debt
D) -1; pays down its existing debts

Question 10

Which of the following is not a ratio used in the DuPont analysis?

A) Interest burden
B) Profit margin
C) Asset turnover
D) Earnings yield ratio

Question 11

Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had ________ over his long professional life.

A) increased greatly
B) increased slightly
C) remained constant
D) decreased

Question 12

A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm's:
I) Beta
II) Earnings variability over the business cycle
III) ROE
IV) Stock price

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

Question 13

Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to ________.

A) $175 million
B) $155 million
C) $120 million
D) $55 million

Question 14

The process of decomposing ROE into a series of component ratios is called ________.

A) DuPont analysis
B) technical analysis
C) comparative analysis
D) liquidity analysis

Question 15

Common-size balance sheets are prepared by dividing all quantities by ________.

A) total assets
B) total liabilities
C) shareholders' equity
D) fixed assets

Question 16

Which of the following assets is most liquid?

A) cash equivalents
B) receivables
C) inventories
D) plant and equipment

Question 17

Many observers believe that firms "manage" their income statements to ________.

A) minimize taxes over time
B) maximize expenditures
C) smooth their earnings over time
D) generate level sales

Question 18

If the interest rate on debt is higher than the ROA, then by using debt a firm's ROE will ________.

A) decrease
B) increase
C) not change
D) change but in an indeterminable manner

Question 19

Operating ROA is calculated as ________, while ROE is calculated as ________.

A) EBIT/total assets; net profit/total assets
B) net profit/total assets; EBIT/total assets
C) EBIT/total assets; net profit/equity
D) net profit/EBIT; sales/total assets

Question 20

Cash Flow Data for Interceptors, Inc.

Based on the cash flow data in the table for Interceptors Inc., which of the following statements is (are) correct?
I) This firm appears to be a good investment because of its steady growth in cash.
II) This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows.
III) Financing activities have been increasingly important for this firm's operations, at least in the short run.

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

Question 21

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's current ratio for 2017 is ________.

A) 1.3
B) 1.5
C) 1.69
D) 2.83

Question 22

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) Flathead's receivables are outstanding about 9 fewer days than the industry average.
B) Flathead's receivables are outstanding about 15 fewer days than the industry average.
C) Flathead's receivables are outstanding about 12 more days than the industry average.
D) Flathead's receivables are outstanding about 6 more days than the industry average.

Question 23

If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be ________.

A) greater than zero, but it is impossible to determine how operating ROA will compare to ROE
B) equal to ROE
C) greater than ROE
D) less than ROE

Question 24

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. In 2017 Flathead generated ________ of EBIT for every dollar of sales.

A) $0.075
B) $0.086
C) $0.092
D) $0.099

Question 25

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total asset turnover for 2017 is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) 3.56
B) 3.26
C) 3.14
D) 3.02

Question 26

Economic value added (EVA) is

A) the difference between the return on assets and the opportunity cost of capital times the capital base.
B) ROA × ROE.
C) a measure of the firm's abnormal return.
D) largest for high-growth firms.

Question 27

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2017 is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) 6.5%
B) 26.5%
C) 33.4%
D) 38%

Question 28

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) 1.5
B) 2
C) 2.5
D) 3

Question 29

A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is ________.

A) 8.4
B) 11.9
C) 17.62
D) 47.6

Question 30

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's debt-to-equity ratio for 2017 is ________.

A) 2.13
B) 2.44
C) 2.56
D) 2.89

Question 31

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2017 indicates that Flathead's liquidity has ________ since 2016.

A) risen
B) fallen
C) stayed the same
D) The answer cannot be determined from the information given.

Question 32

A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is ________.

A) 2.88
B) 2
C) 1.75
D) 0.69

Question 33

A firm has an ROA of 8% and a debt/equity ratio of 0.5; its ROE is ________.

A) 4%
B) 6%
C) 8%
D) 12%

Question 34

You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________.

A) the firm's use of financial leverage is positively contributing to ROE
B) the firm's use of financial leverage is negatively contributing to ROE
C) the firm's use of operating leverage is positively contributing to ROE
D) the firm's use of operating leverage is negatively contributing to ROE

Question 35

Which of the following statements is true concerning economic value added?

A) A growing number of firms tie managers' compensation to EVA.
B) A profitable firm will always have a positive EVA.
C) EVA recognizes that the cost of capital is not a real cost.
D) If a firm has positive present value of growth opportunities, it will have positive EVA.

Question 36

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) 11.6
B) 10.2
C) 9.5
D) 7.7

Question 37

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's cash flow from operating activities for 2017 was ________.

A) $810,000
B) $775,000
C) $755,000
D) $735,000

Question 38

Operating ROA can be found as the product of ________.

A) return on sales × ATO
B) tax burden × interest burden
C) interest burden × leverage ratio
D) ROE × dividend payout ratio

Question 39

A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?

A) 12.4%
B) 14.5%
C) 16.6%
D) 17.8%

Question 40

The financial statements of Flathead Lake Manufacturing Company are shown below.


Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's P/E ratio for 2017 is ________.

A) 3.39
B) 3.6
C) 13.33
D) 10.67

Question 41

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2017 is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) 1.3
B) 1.5
C) 1.69
D) 2.83

Question 42

A firm has a net profit/pretax profit ratio of 0.6, a leverage ratio of 1.5, a pretax profit/EBIT of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its ROE is ________.

A) 7.56%
B) 15.12%
C) 20.16%
D) 30.24%

Question 43

A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has:
I) Lower ATO than the industry average
II) Lower ROA than the industry average
III) Lower ROE than the industry average

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 44

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's times-interest-earned ratio for 2017 is ________.

A) 2.8
B) 6
C) 9
D) 11.11

Question 45

Use the following cash flow data of Haven Hardware for the year ended December 31, 2017.

What is the net increase or decrease in cash for Haven Hardware for 2017?

A) −$94,000
B) −$88,000
C) $88,000
D) $188,000

Question 46

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's P/E ratio for 2017 is ________.

A) 2.8
B) 3.6
C) 6
D) 11.11

Question 47

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixed-asset turnover ratio for 2017 is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) 2.8
B) 6
C) 9
D) 11.11

Question 48

A high price-to-book ratio may indicate which one of the following?

A) The firm expanded its plant and equipment in the past few years.
B) The firm is doing a poorer job controlling its inventory expense than other related firms.
C) Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.
D) All of these options.

Question 49

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-on-equity ratio for 2017 is ________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A) 0.0409
B) 0.0429
C) 0.0462
D) 0.0923

Question 50

Use the following cash flow data of Haven Hardware for the year ended December 31, 2017.

What is the net cash provided by or used in investing activities of Haven Hardware?

A) −$12,000
B) −$62,000
C) $12,000
D) $164,000

Question 51

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's quick ratio for 2017 is ________.

A) 1.3
B) 1.5
C) 1.69
D) 2.83

Question 52

Use the following cash flow data of Haven Hardware for the year ended December 31, 2017.

What is the net cash provided by or used in financing activities of Haven Hardware?

A) −$10,000
B) −$120,000
C) $10,000
D) $120,000

Question 53

A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's ________.

A) earnings yield is above the industry average
B) P/E ratio is above the industry average
C) dividend payout ratio is too high
D) interest burden must be below the industry average

Question 54

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-on-sales ratio for 2017 is ________.

A) 0.0409
B) 0.0429
C) 0.0475
D) 0.0753

Question 55

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's leverage ratio for 2017 is ________.

A) 1.3
B) 1.5
C) 1.69
D) 2.83

Question 56

The financial statements of Burnaby Mountain Trading Company are shown below.


Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's market-to-book value for 2017 is ________.

A) 0.1708
B) 0.1529
C) 0.1462
D) 0.1636

Question 57

A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is ________.

A) 15.12%
B) 28.42%
C) 37.24%
D) 40.6%

Question 58

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to ________ income, and the level of interest expense reported tends to ________ income.

A) understate; overstate
B) understate; understate
C) overstate; understate
D) overstate; overstate

Question 59

If a firm's ratio of stockholders' equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders' equity is also lower than the industry average, this would suggest that the firm ________.

A) has more current liabilities than the industry average
B) has more leased assets than the industry average
C) will be less profitable than the industry average
D) has more current assets than the industry average

Question 60

Use the following cash flow data of Haven Hardware for the year ended December 31, 2017.

What is the net cash provided by operating activities of Haven Hardware?

A) −$30,000
B) $220,000
C) $320,000
D) $780,000

Question 61

When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources?

A) cash flow from investment activities
B) cash flow from operating activities
C) cash flow from financing
D) cash flow from extraordinary events

Question 62

What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

A) asset turnover
B) current ratio
C) liquidity ratio
D) quick ratio

Question 63

A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing?

A) $20 increase
B) $80 increase
C) $100 increase
D) $200 increase

Question 64

The table below shows some data for Key Biscuit Company:

What must have caused the firm's ROE to drop?

A) The firm began using more debt as a percentage of financing.
B) The firm began using less debt as a percentage of financing.
C) The compound leverage ratio was less than 1.
D) The operating ROA was declining.

Question 65

Use the following cash flow data of Haven Hardware for the year ended December 31, 2017.

What is the cash at the end of 2017 for Haven Hardware?

A) $6,000
B) $94,000
C) $736,000
D) $188,000

Question 66

The tax burden of the firm is 0.4, the interest burden is 0.65, the return on sales is 0.05, the asset turnover is 0.90, and the leverage ratio is 1.35. What is the ROE of the firm?

A) 1.58%
B) 5.68%
C) 12.2%
D) 13.33%

Question 67

The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS?

A) $8 million
B) -$6 million
C) $3 million
D) -$4 million

Question 68

The term quality of earnings refers to ________.

A) how well reported earnings conform to GAAP
B) the realism and sustainability of reported earnings
C) whether actual earnings matched expected earnings
D) how well reported earnings fit a trend line of earnings growth

Question 69

A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments?

A) $10 decrease
B) $90 decrease
C) $180 decrease
D) $190 decrease

Question 70

Which of the following will result in an increase in cash to the firm?

A) dividends paid
B) a delay in collecting on accounts receivable
C) net new investments
D) an increase in accounts payable

Question 71

Which of the following would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows?

A) purchase of capital equipment
B) payments to suppliers for inventory
C) collections on receivables
D) sale of production machinery

Question 72

The tax burden of the firm is 0.5, the interest burden is 0.55, the profit margin is 0.25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?

A) 1.88%
B) 6.68%
C) 12.15%
D) 17.02%

Question 73

The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities?

A) increase of $225
B) increase of $130
C) decrease of $195
D) decrease of $110

Question 74

All of the following ratios are related to efficiency except ________.

A) total asset turnover
B) fixed-asset turnover
C) average collection period
D) cash ratio

Question 75

Another term for EVA is ________.

A) net income
B) operating income
C) residual income
D) market-based income

Question 76

Which of the following transactions will result in a decrease in cash flow from investments?

A) acquisition of another business
B) capital gain from sale of a subsidiary
C) decrease in net investments
D) sale of equipment

Question 77

A firm's leverage ratio is 1.2, interest-burden ratio is 0.81, and profit margin is 0.25, and its asset turnover is 1.1. What is the firm's compound leverage factor?

A) 0.243
B) 0.267
C) 0.826
D) 0.972

Question 78

The practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed ________.

A) channel stuffing
B) clogging the network
C) spamming the johns
D) artificial sales

Question 79

A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations?

A) $50 increase
B) $100 increase
C) $150 increase
D) $250 increase

Question 80

Which of the following transactions will result in a decrease in cash flow from operations?

A) increase in accounts receivable
B) decrease in inventories
C) increase in taxes payable.
D) decrease in bonds outstanding