Question 1

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.
A) Cash purchase of inventory
B) Cash payment of an account receivable
C) Cash payment of an account payable
D) Credit sale of inventory at cost
E) Cash sale of inventory at a loss

Accepted Answer

C

Question 2

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?
A) Decrease in the total asset turnover
B) Decrease in the capital intensity ratio
C) Increase in days' sales in receivables
D) Decrease in the profit margin
E) Decrease in the inventory turnover rate

Accepted Answer

A decrease in the capital intensity ratio, which measures how much capital is required per unit of sales, indicates that the firm is using its assets more efficiently than it has in the past. This can be achieved by reducing the amount of capital invested in the business or increasing sales without a corresponding increase in capital, both of which would improve the firm's financial performance. The other choices suggest that the firm's asset utilization has decreased, which is not indicative of improved efficiency.

Question 3

Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?
A) Current ratio
B) Debt ratio
C) Cash coverage ratio
D) Quick ratio
E) Cash ratio

Accepted Answer

The ratio that Fred should compute is the cash ratio. This ratio measures the amount of cash and cash equivalents that a business has on hand to cover its current liabilities. By calculating this ratio, Fred can determine how many months or weeks his store can pay its bills with its existing cash reserves. The other ratios listed do not specifically measure a company's ability to pay its bills with its cash on hand.

Question 4

Blooming Gardens has an inventory turnover of 16. This means the firm:
A) sells its entire inventory every 16 days.
B) only stocks its inventory every 16 days.
C) buys 16 days of inventory with each order.
D) sells its inventory by granting customers 16 days credit.
E) sells its inventory an average of 16 times each year.

Accepted Answer

Inventory turnover ratio measures how many times a company sells its inventory in a given period. Inventory turnover of 16 means that the company sells its entire inventory, on average, 16 times in a year. So, option E is the best choice.

Question 5

The Du Pont identity can be totally defined by which one of the following?
A) Return on equity, total asset turnover, and equity multiplier
B) Equity multiplier and return on assets
C) Profit margin and return on equity
D) Total asset turnover, profit margin, and debt-equity ratio
E) Equity multiplier, return on assets, and profit margin

Accepted Answer

The answer of The Du Pont identity can be totally...

Question 6

Which one of the following transactions will increase the liquidity of a firm?
A) Cash purchase of new production equipment
B) Payment of an account payable
C) Cash purchase of inventory
D) Credit sale of inventory at cost
E) Cash payment of employee wages

Accepted Answer

The answer of Which one of the following transactions will...

Question 7

Common-size financial statements present all balance sheet account values as a percentage of:
A) the forecasted budget.
B) sales.
C) total equity.
D) total assets.
E) last year's account value.

Accepted Answer

Common-size financial statements present all balance sheet account values as a percentage of total assets. This allows for easier comparison between companies of different sizes and helps to identify trends in a company's financial performance.

Question 8

Which one of the following is a measure of long-term solvency?
A) Price-earnings ratio
B) Profit margin
C) Equity multiplier
D) Receivables turnover
E) Quick ratio

Accepted Answer

The equity multiplier is a measure of long-term solvency because it measures the amount of assets that a company can support with its equity. It is calculated by dividing total assets by total equity, indicating how much debt a company is using to finance its assets. A higher equity multiplier indicates a higher level of debt compared to equity, which could potentially lead to financial distress if the company is unable to meet its debt obligations. The other options are measures of profitability (A and B), efficiency (D), and liquidity (E).

Question 9

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?
A) Receivables turnover
B) Equity multiplier
C) Profit margin
D) Return on assets
E) Total asset turnover

Accepted Answer

Total asset turnover reflects the relationship between sales and total assets. A ratio of $2 in sales for every $1 invested in total assets indicates that the total asset turnover ratio is 2:1.

Question 10

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?
A) BEC
B) SED
C) BID
D) SIC
E) SBC

Accepted Answer

The abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations is SIC (Standard Industrial Classification). A, B, C, and E are not relevant codes for this purpose.

Question 11

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.

Accepted Answer

The answer of A common-size balance sheet helps financial managers...

Question 12

The cash coverage ratio is used to evaluate the:
A) liquidity of a firm.
B) speed at which a firm generates cash.
C) length of time that a firm can pay its bills if no additional cash becomes available.
D) ability of a firm to pay the interest on its debt.
E) relationship between the firm's cash balance and its current liabilities.

Accepted Answer

The cash coverage ratio measures the ability of a company to pay the interest on its debt, which makes option D the correct answer. The ratio is calculated by dividing the company's earnings before interest and taxes (EBIT) by the interest expense. A higher ratio indicates that the company is generating enough cash to cover its interest payments, which is a positive sign for lenders and investors.

Question 13

High Tower Pharmacy pays a fixed percentage of its net income out to its shareholders in the form of annual dividends. Given this, the percent 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.

Accepted Answer

The dividend percentage will vary in direct relation to the net profit percentage because dividends are a fixed percentage of net income.

Question 14

A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:
A) pays cash for its inventory.
B) has more than half its current assets invested in inventory.
C) has more cash than inventory.
D) has more current liabilities than it does current assets.
E) has positive net working capital.

Accepted Answer

The answer of A firm has a current ratio of...

Question 15

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

Accepted Answer

The sustainable growth rate is defined as the maximum rate at which a firm can grow given no new external equity and a constant debt-equity ratio. This is because external equity involves selling shares of the company, which can dilute ownership and control, while a constant debt-equity ratio ensures that the company's debt levels do not become unsustainable. Therefore, option E is the best choice.

Question 16

Which one of the following will increase the profit margin of a firm, all else constant?
A) Increase in interest paid
B) Increase in fixed costs
C) Increase in depreciation expense
D) Decrease in the tax rate
E) Decrease in sales

Accepted Answer

A decrease in the tax rate will lead to an increase in profit margin because the firm will have to pay less in taxes for the same level of revenue. The other options will either increase costs or decrease revenue, which will decrease the profit margin.

Question 17

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past 3 years determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?
A) Income statement
B) Balance sheet
C) Common-size income statement
D) Common-size balance sheet
E) Statement of cash flows

Accepted Answer

The best choice for the CFO would be a common-size income statement as it allows for a comparison of sales and costs over the past 3 years, indicating any trends or areas for improvement. The other options, such as the balance sheet and statement of cash flows, do not provide the same level of detail in analyzing sales and costs. Common-size balance sheets could be useful for analyzing the firm's assets and liabilities, but it would not provide the necessary information for a sales and cost analysis.

Question 18

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

Accepted Answer

The internal growth rate is the maximum growth rate that a firm can achieve without any additional external financing. It is based on the firm's current assets, liabilities, and profitability.

Question 19

The equity multiplier is equal to:
A) one plus the debt-equity ratio.
B) one plus the total asset turnover.
C) total debt divided by total equity.
D) total equity divided by total assets.
E) one divided by the total asset turnover.

Accepted Answer

The equity multiplier is calculated as total assets divided by total equity. Using algebraic manipulation, we can also express it as total debt divided by equity, which is equal to the debt-equity ratio plus one. Therefore, the correct answer is A: one plus the debt-equity ratio.

Question 20

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.

Accepted Answer

Financial ratios are ratios that are calculated using financial statement values and are used for comparison purposes such as evaluating a company's performance or comparing it to another company in the industry.

Quiz 3: Working With Financial Statements

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?

Blooming Gardens has an inventory turnover of 16. This means the firm:

The Du Pont identity can be totally defined by which one of the following?

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

Common-size financial statements present all balance sheet account values as a percentage of:

Which one of the following is a measure of long-term solvency?

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?

A common-size balance sheet helps financial managers determine:

The cash coverage ratio is used to evaluate the:

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

A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:

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

Which one of the following will increase the profit margin of a firm, all else constant?

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

The equity multiplier is equal to:

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