Deck 13: Analysis of Financial Statements

Question 1

If the firm's current ratio exceeds 1:1 and the firm retires an account payable,the quick ratio increases.

Answer 1

True

Question 2

The return on equity measures earnings before interest and taxes.

Answer 2

False

Question 3

If accounts receivable are collected more rapidly,the average collection period is reduced.

Answer 3

True

Question 4

An inventory turnover of 3.0 suggests that inventory is sold every four months.

Question 5

The current ratio and the quick ratio are measures of asset usage.

Question 6

The quick ratio excludes inventory,plant,and equipment.

Question 7

The greater the numerical value of the debt ratio,the riskier the firm.

Question 8

If inventory is sold for cash instead of on credit,inventory turnover is increased.

Question 9

If a firm's inventory turnover is 4.0 and receivables turnover is 6.0,then it takes about five months for newly acquired inventory to generate cash.

Question 10

Senior debt should have a lower times-interest-earned than junior debt.

Question 11

The proportion of a firm's assets that are financed by debt is measured by the debt ratio.

Question 12

If accounts receivable are collected,the quick ratio is unaffected.

Question 13

Coverage ratios may be used to measure the safety of debt and other fixed obligations.

Question 14

The return on assets employs operating income instead of net income.

Question 15

An increase in retained earnings will increase the debt to equity ratio.

Question 16

Ratios may be used in both time-series and cross-section types of analysis.

Question 17

An increase in assets financed by equity increases the debt ratio.

Question 18

Net profit margins on sales tend to exceed operating profit margins on sales.

Question 19

A times-interest-earned of 0.9 means that interest will not be paid.

Question 20

The quick ratio is a better measure of liquidity than the current ratio for manufacturers.

Question 21

When a firm makes a profitable sale,its total assets increase.

Question 22

Cash flow depends on depreciation as well as the firm's earnings.

Question 23

If the ratio of debt to equity increases,the proportion of assets financed by debt is increased.

Question 24

The current ratio is unaffected by

A) using cash to retire an account payable
B) the collection of an account receivable
C) selling inventory for a profit
D) selling bonds and using the funds to finance inventory

Question 25

Firms with too much debt are undercapitalized.

Question 26

As the debt ratio increases,
1)fewer assets are debt financed
2)more assets are debt financed
3)the ratio of debt to equity increases
4)the ratio of debt to equity decreases

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 27

Coverage ratios measure a firm's

A) ability to use debt financing
B) use of plant and equipment
C) ability to cover (i.e., sell) its inventory
D) ability to meet fixed payments such as interest

Question 28

The comparability of the individual investor's ratio computations with industry averages is reduced by the age of industry averages.

Question 29

The net profit margin increases as the firm's interest expense declines.

Question 30

The quick ratio

A) excludes accounts payable
B) excludes accounts receivable
C) includes inventory
D) includes cash and cash equivalents

Question 31

As times-interest-earned increases,

A) bondholders' position deteriorates
B) net income decreases
C) interest payments become more assured
D) taxes decrease

Question 32

Activity ratios measure

A) how rapidly assets flow through the firm
B) how frequently the firm's stock is traded
C) how rapidly employees turn over
D) the profitableness of accounts receivable

Question 33

Lower cash flow may be the result of higher depreciation expense.

Question 34

The more financially leveraged a firm,the smaller is its debt ratio.

Question 35

The average collection period measures

A) the speed with which accounts payable are paid
B) the speed with which accounts receivable are collected
C) the safety of accounts receivable
D) the safety of accounts payable

Question 36

The statement of cash flow places emphasis on management's ability to retire debt.

Question 37

Bondholders are concerned with the firm's operating income,while stockholders are concerned with its net income.

Question 38

Lower depreciation increases earnings and cash flow.

Question 39

Inventory turnover may increase if

A) the firm increases its accounts payable
B) the firm uses less debt financing
C) the firm increases its inventory
D) the firm lowers the prices of its goods

Question 40

Stockholders who seek capital gains prefer a large payout ratio.

Question 41

Given the following information,construct the statement of cash flows.What happened to the firm's liquidity position during the year?

Question 42

Using the income statement and balance sheet constructed in (1)and (2),compute the following ratios.Compare the results with the industry averages.What strengths and weaknesses are apparent?

Question 43

Determine a firm's earnings per share from the following information.

Question 44

Which of the following has no impact on cash flow?

A) the firm's equity
B) depreciation expense
C) taxes paid
D) net income

Question 45

Creditors would prefer
1)a quick ratio of 1.2 to a quick ratio of 0.8
2)a quick ratio of 0.8 to a quick ratio of 1.2
3)an average collection period of 46 to an average collection period of 35
4)an average collection period of 35 to an average collection period of 46

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 46

An analysis of last year's financial statements produced the following results.
Use the following data to compute the comparable financial ratios for next fiscal year.Has the firm's financial position changed?

Question 47

Operating income is not affected by

A) depreciation
B) cost of goods sold
C) rent payments
D) interest earned

Question 48

Owners of bonds would prefer
1)a debt ratio of 60 percent to a debt ratio of 40 percent
2)a debt ratio of 40 percent to a debt ratio of 60 percent
3)a times-interest-earned of 5.1 to a times-interest-earned of 3.9
4)a times-interest-earned of 3.9 to a times-interest-earned of 5.1

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 49

Efficient financial markets suggest that

A) fundamental analysis leads to superior returns
B) fundamental analysis does not lead to superior returns
C) ratio analysis predicts changes in stock prices
D) ratio analysis reduces market efficiency

Question 50

Which of the following is a cash inflow?

A) distributing a stock dividend
B) retiring an account payable
C) collecting an account receivable
D) paying property taxes

Question 51

Construct a balance sheet from the following information.

Question 52

The return on equity

A) is the ratio of sales to equity
B) measures what the firm earns on assets
C) is the ratio of net income to total equity
D) measures what the firm earns on sales

Question 53

Which of the following is a cash outflow?

A) splitting the stock two for one
B) acquiring inventory
C) retaining earnings
D) switching from straight-line depreciation to accelerated depreciation

Question 54

Cash flow differs from earnings because

A) cash flow includes depreciation expense
B) earnings can be negative
C) taxes only affect earnings
D) interest expense only affects cash flow

Question 55

The debt ratio is a measure of
1)financial leverage
2)the use of debt financing
3)asset utilization

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices