Question 1

A firm has a higher quick (or acid test) ratio than the industry average, which implies
A)the firm has a higher P/E ratio than other firms in the industry.
B)the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C)the firm may be less profitable than other firms in the industry.
D)the firm has a higher P/E ratio than other firms in the industry and the firm is more likely to avoid insolvency in the short run than other firms in the industry.
E)the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry.

Accepted Answer

Current assets earn less than fixed assets; thus, a firm with a relatively high level of current assets may be less profitable than other firms.However, its high level of current assets makes it more liquid.

Question 2

If you wish to compute economic earnings and are trying to decide how to account for inventory,
A)FIFO is better than LIFO.
B)LIFO is better than FIFO.
C)FIFO and LIFO are equally good.
D)FIFO and LIFO are equally bad.
E)None of the options

Accepted Answer

LIFO reflects the current cost of goods sold and thus is a better determinant of economic earnings.

Question 3

In periods of inflation, accounting depreciation is __________ relative to replacement cost and real economic income is________.
A)overstated; overstated
B)overstated; understated
C)understated; overstated
D)understated; understated
E)correctly; correctly

Accepted Answer

Fixed assets are depreciated based on historical costs and, as a result, are understated relative to replacement costs during periods of inflation; as a result, real economic income is overstated.

Question 4

The financial statements of Black Barn Company are given below.  Refer to the financial statements of Black Barn Company.The firm's quick ratio for 2009 is
A)1.69.
B)1.52.
C)1.23.
D)1.07.
E)1.00.

Accepted Answer

($3,240,000 - $1,840,000)/$1,400,000 = 1.00.

Question 5

__________ is a summary of the profitability of the firm over a period of time such as a year.
A)The balance sheet
B)The income statement
C)That statement of cash flows
D)The audit report
E)None of the options

Accepted Answer

The income statement summarizes revenues and expenses over a period of time.

Question 6

A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies
A)the firm has a higher P/E ratio than other firms in the industry.
B)the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C)the firm is more profitable than other firms in the industry.
D)the firm is utilizing its assets more efficiently than other firms in the industry.

Accepted Answer

The relationship P/E = (P/B)/ROE indicates that A is possible.

Question 7

An example of a liquidity ratio is
A)fixed asset turnover.
B)current ratio.
C)acid test or quick ratio.
D)fixed asset turnover and acid test or quick ratio.
E)current ratio and acid test or quick ratio.

Accepted Answer

Both current ratio and acid test or quick ratio are measures of liquidity; A relates to fixed assets.

Question 8

The financial statements of Black Barn Company are given below.  Refer to the financial statements of Black Barn Company.The firm's leverage ratio for 2009 is
A)1.65.
B)1.89.
C)2.64.
D)1.31.
E)1.56.

Accepted Answer

$6,440,000/$4,140,000 = 1.56.

Question 9

Over a period of 30 years or so, in managing investment funds, Benjamin Graham used the approach of investing in the stocks of companies where the stocks were trading at less than their working capital value.The average return from using this strategy was approximately
A)5%
B)10%.
C)15%.
D)20%.
E)None of the options

Accepted Answer

Although Graham said in 1976 that markets were so efficient that one could not expect to identify undervalued securities consistently, as he had done throughout his career, he continued to find this one variable useful.

Question 10

If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be
A)greater than the ROE.
B)equal to the ROE.
C)less than the ROE.
D)greater than zero, but it is impossible to determine how ROA will compare to ROE.
E)negative in all cases.

Accepted Answer

If interest rate = ROA; ROE = (1 - tax rate) ROA; ROA > ROE.

Question 11

If the interest rate on debt is higher than ROA, a firm will __________ by increasing the use of debt in the capital structure.
A)increase the ROE
B)not change the ROE
C)decrease the ROE
D)change the ROE in an indeterminable manner

Accepted Answer

If ROA is less than the interest rate, then ROE will decline by an amount that depends on the debt to equity ratio.

Question 12

__________ provides a snapshot of the financial condition of the firm at a particular time.
A)The balance sheet
B)The income statement
C)The statement of cash flows
D)All of the options
E)None of the options

Accepted Answer

The balance sheet is statement of assets, liabilities, and equity at one point in time.

Question 13

A firm has a higher asset turnover ratio than the industry average, which implies
A)the firm has a higher P/E ratio than other firms in the industry.
B)the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C)the firm is more profitable than other firms in the industry.
D)the firm is utilizing assets more efficiently than other firms in the industry.
E)the firm has higher spending on new fixed assets than other firms in the industry.

Accepted Answer

The higher the asset turnover ratio, the more efficiently the firm is using assets.

Question 14

__________ is a report of the cash flow generated by the firm's operations, investments and financial activities.
A)The balance sheet
B)The income statement
C)The statement of cash flows
D)The auditor's statement of financial condition
E)None of the options

Accepted Answer

Only the statement of cash flows is correct; the balance sheet reports assets, liabilities, and equity at a point in time; the income statement is a summary of earnings over a period of time.

Question 15

A firm has a lower asset turnover ratio than the industry average, which implies
A)the firm has a lower P/E ratio than other firms in the industry.
B)the firm is less likely to avoid insolvency in the short run than other firms in the industry.
C)the firm is less profitable than other firms in the industry.
D)the firm is utilizing assets less efficiently than other firms in the industry.
E)the firm has lower spending on new fixed assets than other firms in the industry.

Accepted Answer

The lower the asset turnover ratio the less efficiently the firm is using assets.

Question 16

A firm has a lower quick (or acid test) ratio than the industry average, which implies
A)the firm has a lower P/E ratio than other firms in the industry.
B)the firm is less likely to avoid insolvency in the short run than other firms in the industry.
C)the firm may be more profitable than other firms in the industry.
D)the firm has a lower P/E ratio than other firms in the industry and the firm is less likely to avoid insolvency in the short run than other firms in the industry.
E)the firm is less likely to avoid insolvency in the short run than other firms in the industry and the firm may be more profitable than other firms in the industry.

Accepted Answer

Current assets earn less than fixed assets; thus, a firm with a relatively low level of current assets may be more profitable than other firms.However, its low level of current assets makes it less liquid.

Question 17

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.
A)increase the ROE
B)not change the ROE
C)decrease the ROE
D)change the ROE in an indeterminable manner

Accepted Answer

If ROA is higher than the interest rate, then ROE will increase by an amount that depends on the debt to equity ratio.

Question 18

The financial statements of Black Barn Company are given below.  Refer to the financial statements of Black Barn Company.The firm's current ratio for 2009 is
A)2.31.
B)1.87.
C)2.22.
D)2.46.

Accepted Answer

$3,240,000/$1,400,000 = 2.31.

Question 19

A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis,
A)the original and restated P/E ratios were quite similar.
B)the original and restated P/E ratios varied considerably.
C)most variation was explained by tax differences.
D)most firms were consistent in their treatment of goodwill.

Accepted Answer

This study found that restated P/E ratios varied considerably from those originally reported.

Question 20

A firm has a P/E ratio of 12 and a ROE of 13% and a market-to-book value of
A)0.64.
B)0.92.
C)1.08.
D)1.56.

Accepted Answer

E/P = ROE/(P/B); 1/12 = 0.13 P/B; 0.0833 = 0.13/(P/B); 0.0833(P/B) = 0.13; P/B = 1.56.

Quiz 19: Financial Statement Analysis

A firm has a higher quick (or acid test) ratio than the industry average, which implies

If you wish to compute economic earnings and are trying to decide how to account for inventory,

In periods of inflation, accounting depreciation is __ relative to replacement cost and real economic income is.

The financial statements of Black Barn Company are given below. Refer to the financial statements of Black Barn Company.The firm's quick ratio for 2009 is

__________ is a summary of the profitability of the firm over a period of time such as a year.

A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies

An example of a liquidity ratio is

The financial statements of Black Barn Company are given below. Refer to the financial statements of Black Barn Company.The firm's leverage ratio for 2009 is

Over a period of 30 years or so, in managing investment funds, Benjamin Graham used the approach of investing in the stocks of companies where the stocks were trading at less than their working capital value.The average return from using this strategy was approximately

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

If the interest rate on debt is higher than ROA, a firm will __________ by increasing the use of debt in the capital structure.

__________ provides a snapshot of the financial condition of the firm at a particular time.

A firm has a higher asset turnover ratio than the industry average, which implies

__________ is a report of the cash flow generated by the firm's operations, investments and financial activities.

A firm has a lower asset turnover ratio than the industry average, which implies

A firm has a lower quick (or acid test) ratio than the industry average, which implies

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

The financial statements of Black Barn Company are given below. Refer to the financial statements of Black Barn Company.The firm's current ratio for 2009 is

A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis,

A firm has a P/E ratio of 12 and a ROE of 13% and a market-to-book value of