Deck 3: Working With Financial Statements

Question 1

The financial ratio,defined as earnings before interest and taxes divided by
Interest paid,is called the:

A)times interest earned ratio
B)debt-equity ratio
C)profit margin
D)return on equity
E)cash coverage ratio

Answer 1

times interest earned ratio

Question 2

The cash ratio is defined as cash divided by:

A)current assets
B)current liabilities
C)total assets
D)total debt
E)total equity

Answer 2

current liabilities

Question 3

The ratios that are based on financial statement values and used for comparison purposes are called:

A)financial ratios
B)industrial statistics
C)equity standards
D)accounting returns
E)analytical standards

Answer 3

financial ratios

Question 4

Sales divided by total assets is referred to as the:

A)days' sales in total assets
B)capital intensity ratio
C)return on assets
D)total asset turnover
E)asset utilisation rate

Question 5

Ben-Q company has 178 300 shares issued to shareholders and the shares sell for $4.10 per share at the end of the year.As the company's net profit is $450 000,what are its earnings per share (EPS)?

A)$0.62
B)$4.38
C)$2.52
D)$2.08
E)$1.01

Question 6

Short-term solvency ratios are also referred to as:

A)leverage ratios
B)liquidity measures
C)utilisation ratios
D)profitability ratios
E)turnover rates

Question 7

The current ratio is defined as current assets:

A)minus current liabilities
B)plus current liabilities
C)divided by total assets
D)divided by current liabilities
E)multiplied by the total asset turnover

Question 8

The ratio which includes all debts of all maturities to all creditors is called the:

A)cash coverage ratio
B)times interest earned ratio
C)equity multiplier
D)capital intensity ratio
E)total debt ratio

Question 9

Ratios which analyse a firm's ability to meet its long-term obligations are called:

A)profitability ratios
B)asset utilisation ratios
C)leverage ratios
D)market value ratios
E)liquidity ratios

Question 10

The financial ratio measured as net income divided by total assets is known as a
Firm's:

A)profit margin
B)return on equity
C)total asset turnover
D)return on assets
E)capital intensity ratio

Question 11

The group of ratios which are focused on net income are referred to as:

A)asset utilisation ratios
B)financial leverage measures
C)liquidity ratios
D)market value ratios
E)profitability measures

Question 12

Swagerman Incorporated has total assets of $6 842 200 and total debt of
$3 000 000.What is the equity multiplier?

A)1.78
B)2.28
C)0.44
D)1.56
E)0.56

Question 13

Samurai company has 8 500 000 shares issued to shareholders and the shares sell for $1.98 per share,at the end of the year.Total shareholders' equity is equal to $9 300 000.What is market-to-book ratio?

A)0.55
B)1.09
C)1.81
D)1.55
E)0.91

Question 14

The amount of profit a firm earns for every $1 of equity is referred to as the:

A)profit margin
B)equity multiplier
C)return on equity
D)capital intensity ratio
E)price-earnings ratio

Question 15

Which one of the following transactions will increase the liquidity of a firm?

A)using cash to purchase new equipment
B)increasing short-term debt while decreasing long-term debt by an equivalent amount
C)issuing long-term debt to repurchase shares of outstanding stock
D)increasing the sales on credit while reducing cash sales by the same amount
E)selling inventory on credit

Question 16

The relationship between a firm's earnings and the multiple of those earnings which investors are willing to pay to purchase one share of stock is called the:

A)financial leverage ratio
B)debt-equity ratio
C)capital intensity ratio
D)market-to-book ratio
E)price-earnings ratio

Question 17

The internal growth rate is best described as the __________ growth rate achievable:

A)minimum;if the firm does not pay out any dividends
B)minimum;if the firm maintains a constant equity multiplier
C)maximum;without external financing of any kind
D)maximum;without using any external equity financing,while maintaining a constant debt-equity ratio
E)maximum;without any limits on the amount of debt financing used by the firm

Question 18

A common-size balance sheet helps financial managers determine:

A)which customers are paying on a timely basis
B)if costs are increasing faster or slower than sales
C)if changes are occurring in a firm's mix of assets
D)if a firm is generating more or less sales per dollar of assets than in prior years
E)the rate at which the firm's dividends are changing

Question 19

The Du Pont identity tells us that return on equity (ROE)is affected by the:

A)equity multiplier
B)total asset turnover
C)profit margin
D)none of the given answers
E)all of the given answers

Question 20

The acid-test ratio is also called the:

A)current ratio
B)cash ratio
C)times interest earned ratio
D)quick ratio
E)return on equity ratio

Question 21

A firm has sales of $428 000 for the year.The profit margin is 3.4 per cent and the retention ratio is 60 per cent.What is the common-size percentage for the dividends paid?

A)0.99 per cent
B)1.18 per cent
C)1.21 per cent
D)1.36 per cent
E)1.42 per cent

Question 22

The Noodle Place has total assets of $123 800,a debt-equity ratio of 0.65,and net income of $7100.What is the return on equity?

A)3.48 per cent
B)3.73 per cent
C)8.01 per cent
D)9.46 per cent
E)13.61 percent

Question 23

Computer Geeks has sales of $521 000,a profit margin of 14.8 per cent,a total asset turnover rate of 2.16,and an equity multiplier of 1.30.What is the return on equity?

A)8.91 per cent
B)12.67 per cent
C)18.28 per cent
D)32.11 per cent
E)41.56 per cent

Question 24

Friendly's Shoe Store has earnings before interest and taxes of $21 680 and net income of $12 542.The tax rate is 34 per cent.What is the times interest earned ratio?

A)0.88
B)1.67
C)3.09
D)5.59
E)8.10

Question 25

High Tower Pharmacy pays a fixed percentage of its net income out to its shareholders in the form of annual dividends.Given this,the percentage shown on a common-size income statement for the dividend account will:

A)remain constant over time
B)be equal to the dividend amount divided by the net income
C)vary in direct relation to the net profit percentage
D)vary in direct relation to changes in the sales level
E)vary but not in direct relation to any other variable

Question 26

Manly Manufacturers Pty Ltd has a profit margin of 7.5 per cent and a dividend payout ratio of 30 per cent.What is the retention ratio?

A)10.66 per cent
B)27.33 per cent
C)54.60 per cent
D)70.00 per cent
E)78.20 per cent

Question 27

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

A)no new external financing of any kind
B)no new debt but additional external equity equal to the increase in retained earnings
C)new debt and external equity in equal proportions
D)new debt and external equity,provided the debt-equity ratio remains constant
E)no new equity and a constant debt-equity ratio

Question 28

Haymarket Traders Pty Ltd has sales of $450 000,a profit margin of 5 per cent and dividends of $10 500.What is the retention ratio?

A)53.33 per cent
B)46.67 per cent
C)23.33 per cent
D)35.33 per cent
E)47.10 per cent

Question 29

The Du Pont identity can be used to help a financial manager determine:
I.the degree of financial leverage used by a firm
II.the operating efficiency of a firm
III.the utilisation rate of a firm's assets
IV.the rate of return on a firm's assets

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

Question 30

The Inside Door has total debt of $78 600,total equity of $214 000,and a return on equity of 14.5 per cent.What is the return on assets?

A)9.14 per cent
B)10.61 per cent
C)21.45 per cent
D)34.61 per cent
E)39.48 per cent

Question 31

A firm has net income of $114 000,a return on assets of 12.6 per cent,and a debt-equity ratio of 0.60.What is the return on equity?

A)17.11 per cent
B)18.98 per cent
C)20.16 per cent
D)22.20 per cent
E)24.60 per cent

Question 32

Morrison Motors has total equity of $289 100 and net income of $64 500.The debt-equity ratio is 0.45 and the total asset turnover is 1.6.What is the profit margin?

A)3.10 per cent
B)5.23 per cent
C)5.67 per cent
D)8.21 per cent
E)9.62 per cent

Question 33

Which of the following are determinants of a firm's sustainable rate of growth?
I.amount of sales generated from each dollar invested in assets
II.amount of debt per dollar of equity
III.amount of current assets per dollar of current liabilities
IV.percentage of net income distributed as dividends

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

Question 34

Which one of the following is the abbreviation for the international coding system that classifies a firm by its industry sector?

A)NYSE
B)NRMA
C)ASIC
D)GICS
E)SBIC

Question 35

If a firm has a 100 per cent dividend payout ratio,then the internal growth rate of the firm is:

A)zero per cent
B)100 per cent
C)equal to the ROA
D)negative
E)infinite

Question 36

A firm has net income of $5890 and interest expense of $2130.The tax rate is 34 per cent.What is the firm's times interest earned ratio?

A)4.82
B)5.19
C)5.38
D)5.67
E)6.33

Question 37

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

A)Du Pont rate
B)External growth rate
C)Sustainable growth rate
D)Internal growth rate
E)Cash flow rate

Question 38

Donovan Brothers,Inc.would like to increase its internal rate of growth.Decreasing which one of the following will help the firm achieve its goal?

A)return on assets
B)net income
C)retention ratio
D)dividend payout ratio
E)return on equity

Question 39

Foreign Travel Services has net income of $48 400,total assets of $219 000,total equity of $154 800,and total sales of $311 700.What is the common-size percentage for the net income?

A)9.00 per cent
B)13.90 per cent
C)15.53 per cent
D)22.10 per cent
E)31.27 per cent

Question 40

Delmont Movers has a profit margin of 6.2 per cent and net income of $48 900.What is the common-size percentage for the cost of goods sold if that expense amounted to $379 000 for the year?

A)12.90 per cent
B)23.50 per cent
C)33.25 per cent
D)41.06 per cent
E)48.05 per cent

Question 41

Which of the following statements is correct?

A)Peer group analysis is easier when a firm is a conglomerate rather than a single line of business.
B)Australian listed companies can only be compared to other companies listed on the ASX.
C)Peer group analysis is easier when firms have different fiscal years.
D)GICS are useful in identifying companies for comparison purposes but some care must be taken.
E)Peer-group analysis is simplified when firms use different depreciation methods.

Question 42

It takes the Jolly Jumbuck Asian Trading Company 32 days to collect its accounts receivable.Sales for the year are $650 000.What is the accounts receivable turnover ratio?

A)11.23
B)11.41
C)11.78
D)12.23
E)12.55

Question 43

The Bondi Tourist Shop has sales of $6 000 000 per year.The accounts receivable turnover figure is 10.43 per year.What is the accounts receivable balance?

A)$755 264
B)$380 695
C)$580 293
D)$575 264
E)$257 024

Question 44

The Bondi Tourist Shop has an average inventory level of $535 000.If the cost of goods sold for the year are $3 150 000 what is the inventory turnover ratio?

A)4.66
B)5.89
C)8.68
D)5.75
E)6.46

Question 45

Harry's Healthy Foods has total assets of $129 800,net fixed assets of $71 500,long-term debt of $52 000,and total debt of $78 700.If inventory is $31 800,what is the current ratio?

A)0.33
B)0.46
C)0.84
D)1.18
E)2.18

Question 46

Which of the following statements identify problems with financial statement analysis?
I: It is not always easy to identify a suitable benchmark for comparison purposes.
II: As many firms are conglomerates owning more than one line of business it is sometimes difficult to identify groups of firms that are directly comparable.
III: Firms in the same industry operate globally and comparison may be difficult due to different accounting standards used in the preparation of financial statements.
IV: Unusual events may affect financial performance which may give misleading signals when comparing firms' results.

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

Question 47

Financial statement analysis:

A)will always give a precise analysis of the financial health of a company
B)is based on past results and is therefore not useful
C)provides useful information that can serve as a basis for predicting future performance
D)is limited to internal use by managers
E)provides useful information to shareholders but not other stakeholders