Which Of The Following Create Problems With Financial Statement Analysis

Question: Which of the following are traditional financial ratio categories?

Answer: Financial leverage ratiosProfitability ratiosturnover ratios

Question: How is the price-earnings (PE) ratio computed?

Answer: market price per share/earnings per share

Question: Whenever _____ information is available, it should be used instead of accounting data.

Answer: market

Question: Which of the following is (are) true of financial ratios?

Answer: Are developed from a firm's financial informationAre used for comparison purposes pg 56

Question: The cash coverage ratio adds _____ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.

Answer: depreciationpg 59

Question: Common-size statements are best used for comparing:

Answer: Firms of different sizescompetitorsyear-to-year for your firm

Question: What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

Answer: The total asset turnover will increasepg 72

Question: Which of the following would help a company take action to improve its ratios?

Answer: Comparing to its own historical ratiosComparing to major competitorsComparing to peer companiesComparing to aspirant companies

Question: What does it mean when a firm has a days' sales in receivables of 45?

Answer: The firm collects its credit sales in 45 days on average.pg 60

Question: Which of the following items are used to compute the current ratio?

Answer: CashAccounts payable

Question: _____ _____ are the prime source of information about a firm's financial health.

Answer: Financial statements

Question: Time-trend analysis is an example of

Answer: Management by exceptionpg74

Question: Alpha Co. has interest expense of $1.2 million, total assets of $84 million, sales o $76 million, long-term debt of $16.4 million, and net income of $12.1 million. How will interest expense be recorded in the common-size income statement?

Answer: $1.2m/$76m = 1.58%

Question: AD corporation had sales of $750,000 and costs of goods sold of $350,000. Inventory at year end was $87,500. The firm's inventory turnover is _____ .

Answer: Inventory Turnover = COGS/Inventory = 350/87.5 = 4.0

Question: Which of the following create problems with financial statement analysis?

Answer: The firm or its competitors are conglomerates.The firm or its competitors are global companies.The firm or its competitors operate under different regulatory environments.

Question: What does a Time Interest Earned (TIE) ratio 3.5 times mean?

Answer: The company's interest obligations are covered 3.5 times by its EBIT

Question: The information needed to compute the profit margin can be found on the ____ .

Answer: Income statement

Question: Which of the following is the correct representation of the total debt ratio?

Answer: (total assets - total equity) / (total assets)

Question: A common-size balance sheet expresses accounts as a percentage of ____ .

Answer: total assets

Question: Based on the DuPont Identity, an increase in sales, all else held equal, _____ ROE.

Answer: May not changeMay increase or decreaseAn increase in sales (all else equal) will decrease net profit margin and increase total asset turnover.

Question: Solid Rock Construction has current assets totaling $7 million, including $4 million in inventory. The company's current liabilities total $5 million. The quick ratio is ____ .

Answer: Quick ratio = ($7m - $4m) / $5m = 0.60pg 51

Question: Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

Answer: Profit marginFinancial policyDividend policypg 72

Question: AD Corporation had net income of $300,000 and paid out $125,000 in cash dividends to stockholders. The firm's retention ratio is _____ %. (Round the percent the nearest whole number.)

Answer: Retention ratio = Addition to retained earnings / net income = (Net income - dividends) / Net income = ($300,000 - $125,000) / $300,000 = 0.58, or 58%

Question: The cash ratio is found by dividing cash by:

Answer: current liabilitiespg65

Question: Return on equity (ROE) is a measure of ____ .

Answer: profitability

Question: AD Corporation has a return on equity of 20% on total equity of $800,000. AD generated $1.6m in sales on $2.7m in assets. A DuPont decomposition of ROE shows the 20% return on equity is from a _____ total asset turnover ratio.

Answer: 0.59pg 51

Question: Which one of the following does NOT affect ROE according to the DuPont identity?

Answer: Investor sentmentpg 67

Question: Alpha Star's net income is $300 on $2,000 of sales. The company has $5,000 in assets nd equity of $3,000. The firm paid out $125 in cash dividends. What is the dividend payout ratio?

Answer: 125/300 = 41.67%pg 67

Question: AD Corporation's return on assets is 14% and the firm retains 40% of all its earnings. AD's internal growth rate is _____ %.

Answer: 5.93pg 67

Question: Which of the following is true about the sustainable growth rate?

Answer: It is the max rate of growth a firm can maintain without increasing its financial leveragepg 67

Question: Which one of the following is the correct equation for computing return on assets (ROA)?

Answer: Net income/Total assetspg 66

Question: How is the market-to-book ratio measured?

Answer: Market value per share/book value per sharepg 51

Question: If sales increase while there is no change in accounts receivable, the receivables turnover ratio will _____ .

Answer: increasepg 51

Question: The profit margin is equal to net income divided by _____ .

Answer: salespg 51

Question: Return on assets (ROA) is a measure of ____ .

Answer: profitailitypg 51

Question: AC motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $49,300. What is the return on equity.

Answer: $51,750 ($523,400 - 267,000) = 20.18%pg 51

Question: BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2m and equity of $1.5m. What is the PE ratio if the stock is currently selling at $18 per share?

Answer: $18/($2,700/1,800) = 12 timespg 1

Question: If a company has had negative earnings for several periods they might choose to use a _____ .

Answer: Price sales ratiopg 51

Question: Nestor's has net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity?

Answer: 315,000/1.98m = 15.91%pg 51

Question: Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

Answer: price per share/earnings per share30/3 = 10 pg 51

Question: A firm with a 26 percent return on equity earned _____ cents in profit for every one dollar in shareholders' equity.

Answer: 26pg 51

Question: Cal's Market has return on equity (ROE) of 15 percent. What does this mean?

Answer: Cal's gen'd $.15 in profit for every $1 of market value of equity. pg 51

Question: How is inventory turnover ratio computed?

Answer: cost of goods sold/inventory

Question: Rock Construction has current assets of $45m, total liabilities and equity of $67m, and sales of $59m. How would current assets be expressed on a common-size balance sheet?

Answer: Assets = liabilities + equity45mA/67mE = 67%

Question: True or False: A way to establish a benchmark for ratio analysis is to identify a peer group.

Answer: TRUE

Question: What does it mean when a company reports ROA of 12 percent?

Answer: The company gen's $12 in net income for every $100 invested in assets.

Question: Current assets on the common-size balance sheet over the pas three yeas have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25%. This indicates the firm has increased its ______ .

Answer: liquidity

Question: AD Corporation has net income of $425,000 and total sales of $2.5 million. The firm's profit margin is _____ % .

Answer: Profit Margin = $425,000/$2,500,000 = 17%

Question: Long-term solvency ratios are also known as:

Answer: financial leverage ratiospg 52

Question: The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.

Answer: a long-time

Question: Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?

Answer: non-cash expenses

Question: What will happen to the current ratio if current assets increase, while everything else remains unchanged?

Answer: it will increase

Question: The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell

Answer: a long time

Question: Assume current assets = 11,300; long-term liabilities = 45,000; and total debt - 54,800. What is the current ratio?

Answer: 11,300/(54,800 - 45,000) = 1.15

Question: Which one of the following best explains why financial managers use a common-size balance sheet?

Answer: To track changes in a firm's capital structure.

Question: Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?

Answer: 2.9

Question: If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:

Answer: Less than 1

Question: BC Corporation has net income of $176,000, sales of $1,982,000 and total assets of $2.24m. What is the return on assets?

Answer: $176,000/$2.24m = 7.86%

Question: A firm with a profit margin of 10% generates _____ in net income for every dollar in sales.

Answer: 10 cents

Question: BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratios?

Answer: $54/($584,000/35,000) = 3.24 times

Question: BK trucking has total equity of $25,380 and 1,500 shares outstanding. Its stock is currently selling at $38 per share. what is the market-to-book ratio?

Answer: $38/($25,380/1,500) = 2.25