Question 1

Another name for return on equity is return on total capitalization.

Accepted Answer

Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested, while return on total capitalization considers both the debt and equity used by a company to generate earnings.

Question 2

Payment of a note payable and repurchase of common stock are uses of cash.

Accepted Answer

Both actions involve the outflow of cash from a company, with payment of a note payable reducing liabilities and repurchase of common stock reducing equity.

Question 3

Determine the value of cash given the following information: cash ratio = 2; cash equivalents = $600 ; current liabilities = $800.
A) $1,000
B) $1,100
C) $1,200
D) $1,300
E) $1,400

Accepted Answer

The cash ratio is calculated as (Cash + Cash Equivalents) / Current Liabilities. Given a cash ratio of 2, cash equivalents of $600, and current liabilities of $800, we can set up the equation 2 = (Cash + 600) / 800. Solving for Cash gives Cash = 1600 - 600 = $1,000.

Question 4

An increase in long-term debt is source of cash?

Accepted Answer

An increase in long-term debt increases a company's cash flow because it represents new funds coming into the business from creditors.

Question 5

The most effective methods of directly evaluating the financial performance of a firm is to compare the current financial ratios to those of the same firm from prior time periods and compare a firm's financial ratios to those of other firms in the firm's peer group who have similar operations.

Accepted Answer

Comparing current financial ratios to those from prior periods allows for the assessment of the firm's financial progress over time, while comparing to peers provides context regarding the firm's performance relative to the industry standard, both of which are crucial for a comprehensive financial analysis.

Question 6

When comparing the financial statements of one firm with those of another firm, a problem that may be encountered is that the firms may use differing accounting methods for inventory purposes.

Accepted Answer

Different firms may use various accounting methods for inventory, such as FIFO (First-In, First-Out) or LIFO (Last-In, First-Out), which can lead to differences in financial statements and make direct comparisons challenging.

Question 7

If a firm has only current assets and no fixed assets of any kind, its times interest earned ratio must exceed its cash coverage ratio.

Accepted Answer

The times interest earned ratio is calculated using earnings before interest and taxes (EBIT), while the cash coverage ratio adds depreciation back into EBIT; thus, the presence of fixed assets (or lack thereof) primarily affects depreciation, which is not directly related to these ratios' comparison in the stated manner.

Question 8

Days' sales in inventory of car dealerships are generally higher when compared to grocery stores.

Accepted Answer

Car dealerships typically have a higher days' sales in inventory because cars are high-value items that take longer to sell, whereas grocery stores have fast-moving consumer goods that sell and get restocked frequently.

Question 9

Due to the difficulty of access the true enterprise value, one can use the market cap as a proxy for enterprise value to calculate the EV/EBITDA ratio.

Accepted Answer

The market cap is often used as a proxy for enterprise value because it is more readily available and easier to calculate.

Question 10

When comparing the financial statements of one firm with those of another firm, a problem that may be encountered is that the operations of the two firms may vary geographically.

Accepted Answer

Comparing financial statements of firms with operations in different geographical areas can be problematic due to variations in economic conditions, regulatory environments, and market dynamics that can significantly affect financial performance and reporting.

Question 11

If a firm uses cash to purchase inventory, its quick ratio will increase.

Accepted Answer

Purchasing inventory with cash decreases current assets (by reducing cash) without affecting current liabilities, thus lowering the quick ratio, which measures a company's ability to meet short-term obligations with its most liquid assets.

Question 12

Common size statements can only be completed on the statement of comprehensive income and statement of financial position.

Accepted Answer

Common size statements can be applied to any financial statement, including the statement of comprehensive income, statement of financial position, and the cash flow statement, by converting figures to percentages of a common base figure.

Question 13

If a firm uses part of the cash it received from payment of an account receivable to buy inventory and leaves the rest in its bank account, its current ratio will remain unchanged.

Accepted Answer

The current ratio remains unchanged because both cash and inventory are current assets, so the total current assets do not change.

Question 14

The equity multiplier, the profit margin and the total asset turnover are the three parts of the Du Pont identity.

Accepted Answer

The Du Pont identity breaks down Return on Equity (ROE) into three distinct elements: the equity multiplier, the profit margin, and the total asset turnover, showing how effectively a company uses its assets to generate profit.

Question 15

The statement of cash flows cannot be standardized.

Accepted Answer

The statement of cash flows is standardized under accounting principles like GAAP and IFRS, ensuring consistency and comparability across different organizations.

Question 16

A poor industry outlook along with low investor opinion of the firm are most apt to cause a firm to have a higher price-earnings ratio?

Accepted Answer

A poor industry outlook and low investor opinion of the firm typically lead to a lower price-earnings ratio, as these factors suggest lower future earnings and reduced investor confidence, which in turn decrease the price investors are willing to pay per unit of earnings.

Question 17

During the year, Doug's Bakery decreased its accounts receivable by $50, increased its inventory by $100, and decreased its accounts payable by $50. For these three accounts, the firm has a net:
A) $200 use of cash.
B) $100 use of cash.
C) $0 use of cash.
D) $100 source of cash.
E) $200 source of cash.

Accepted Answer

Decreasing accounts receivable by $50 means cash was collected, which is a source of $50. Increasing inventory by $100 uses cash. Decreasing accounts payable by $50 means cash was paid out, using another $50. The net effect is $100 used in cash ($50 source - $100 use - $50 use = -$100).

Question 18

Calculate net income given the following information: tax rate = 30%; times interest earned = 10.75 times; sales = $4,500; cost of goods sold = $1,600; general and administrative expenses = $750.
A) $965
B) $1,065
C) $1,165
D) $1,265
E) $1,365

Accepted Answer

The answer of Calculate net income given the following information:...

Question 19

When comparing the financial statements of one firm with those of another firm, a problem that may be encountered is that either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.

Accepted Answer

Comparing financial statements of conglomerates can be challenging because their diverse business units may operate in different industries, making direct comparisons less meaningful due to the varied nature of their operations and revenue streams.

Question 20

When comparing the financial statements of one firm with those of another firm, a problem that may be encountered is that the two firms may be seasonal in nature and have different fiscal year ends.

Accepted Answer

Comparing financial statements of firms with different fiscal years can be problematic due to seasonal variations affecting each firm differently, leading to potentially misleading comparisons.

Quiz 3: Working With Financial Statements