Question 1

Which one of the following will decrease if a firm can decrease its operating costs,all else constant?
A)return on equity
B)return on assets
C)profit margin
D)total asset turnover
E)price-earnings ratio

Accepted Answer

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

Question 2

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level.Assume that both the cost per unit and the selling price per unit also remained constant.This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?
A)decrease in the inventory turnover rate
B)decrease in the net working capital turnover rate
C)no change in the fixed asset turnover rate
D)decrease in the day's sales in inventory
E)no change in the total asset turnover rate

Accepted Answer

If the Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level, it means that the inventory turnover rate has decreased. This is because the inventory turnover rate measures how quickly a company can sell its inventory and replace it with new inventory. If the company is selling more without increasing its inventory, then the turnover rate will decrease. As a result, the days' sales in inventory ratio will also decrease, indicating that the company is selling its inventory faster. Therefore, the correct choice is D.

Question 3

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)turnover

Accepted Answer

Profitability ratios measure a company's ability to generate net income from its operations and assets. Examples of profitability ratios include return on assets, return on equity, and gross profit margin.

Question 4

If a firm has a debt-equity ratio of 1.0,then its total debt ratio must be which one of the following?
A)0.0
B)0.5
C)1.0
D)1.5
E)2.0

Accepted Answer

A debt-equity ratio of 1.0 means that the firm's total debt is equal to its total equity. The total debt ratio is calculated as total debt divided by total debt plus total equity. If debt equals equity, then the total debt ratio is 0.5 (or 50%), because the debt represents half of the financing.

Question 5

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91.Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88.Both companies have similar operations.Based on this information,Dee's must be doing which one of the following?
A)utilizing its fixed assets more efficiently than Sam's
B)utilizing its total assets more efficiently than Sam's
C)generating $1 in sales for every $1.12 in net fixed assets
D)generating $1.12 in net income for every $1 in net fixed assets
E)maintaining the same level of current assets as Sam's

Accepted Answer

Dee's has a higher total asset turnover rate (0.91) compared to Sam's (0.88), indicating that Dee's is utilizing its total assets more efficiently to generate sales.

Question 6

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?
A)accounts payable
B)cash
C)inventory
D)accounts receivable
E)fixed assets

Accepted Answer

The quick ratio is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. Increasing accounts receivable improves the quick ratio without affecting the cash ratio, which is calculated as (Cash + Marketable Securities) / Current Liabilities.

Question 7

Which one of the following statements is correct?
A)If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.
B)Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C)The debt-equity ratio can be computed as 1 plus the equity multiplier.
D)An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E)An increase in the depreciation expense will not affect the cash coverage ratio.

Accepted Answer

The cash coverage ratio is calculated by adding depreciation and amortization back to earnings before interest and taxes (EBIT), then dividing by the interest expense. Since depreciation is added back in the calculation, an increase in depreciation expense will not affect the cash coverage ratio.

Question 8

The price-sales ratio is especially useful when analyzing firms that have which one of the following?
A)volatile market prices
B)negative earnings
C)positive PEG ratios
D)a negative Tobin's Q
E)increasing sales

Accepted Answer

The price-sales ratio is particularly useful for analyzing firms with negative earnings because it allows investors to value a company even when it's not profitable, unlike metrics that rely on earnings.

Question 9

Al's has a price-earnings ratio of 18.5.Ben's also has a price-earnings ratio of 18.5.Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?
A)Al's has more net income than Ben's.
B)Ben's is increasing its earnings at a faster rate than the Al's.
C)Al's has a higher market value per share than does Ben's.
D)Ben's has a lower market-to-book ratio than Al's.
E)Al's has a higher net income than Ben's.

Accepted Answer

The PEG ratio is calculated by dividing the price-earnings ratio by the expected earnings growth rate. If Al's has a higher PEG ratio than Ben's, it means that Al's is expected to have a lower earnings growth rate compared to its price-earnings ratio. Therefore, if Al's has a higher PEG ratio, it must be the case that Ben's is increasing its earnings at a faster rate than Al's, as option B states. The other options do not necessarily have any direct correlation with the PEG ratio.

Question 10

Shareholders probably have the most interest in which one of the following sets of ratios?
A)return on assets and profit margin
B)long-term debt and times interest earned
C)price-earnings and debt-equity
D)market-to-book and times interest earned
E)return on equity and price-earnings

Accepted Answer

Shareholders are most concerned with the return on their investment, which is captured by the return on equity ratio. They also pay attention to the price-earnings ratio, as it provides a measure of the market's valuation of the company's earnings. Other ratios, such as long-term debt and times interest earned, are more relevant to creditors and lenders.

Question 11

An increase in which of the following will increase the return on equity,all else constant?
I.sales
II.net income
III.depreciation
IV.total equity
A)I only
B)I and II only
C)II and IV only
D)II and III only
E)I, II, and III only

Accepted Answer

Return on equity (ROE) is calculated as net income divided by total equity. Therefore, an increase in sales and net income will directly lead to an increase in ROE. Depreciation does not directly impact net income, but it does impact the amount of assets on the balance sheet, which affects total equity. Therefore, an increase in depreciation will also increase total equity, and thus, ROE. However, an increase in total equity alone will not necessarily increase ROE unless there is a corresponding increase in net income.

Question 12

Which of the following can be used to compute the return on equity?
I.Profit margin × Return on assets
II.Return on assets × Equity multiplier
III.Net income/Total equity
IV.Return on assets × Total asset turnover
A)I and III only
B)II and III only
C)II and IV only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

The return on equity can be calculated using the DuPont model, which breaks it down into three components – profit margin, asset turnover, and equity multiplier. Option II (return on assets x equity multiplier) takes into account both the asset turnover and equity multiplier components, while option III (net income/total equity) represents the profit margin. Therefore, the correct answer is B – II and III only. Options I and IV do not include the equity multiplier component, which is necessary to calculate the return on equity using the DuPont model.

Question 13

A firm has an interval measure of 48.This means that the firm has sufficient liquid assets to do which one of the following?
A)pay all of its debts that are due within the next 48 hours
B)pay all of its debts that are due within the next 48 days
C)cover its operating costs for the next 48 hours
D)cover its operating costs for the next 48 days
E)meet the demands of its customers for the next 48 hours

Accepted Answer

An interval measure of 48 indicates that the firm has sufficient liquid assets to cover its operating costs for the next 48 days. This means that the firm can continue to operate its business for the next 48 days without running out of funds to cover necessary expenses such as salaries, rent, utilities, etc.

Question 14

Ratios that measure a firm's financial leverage are known as _____ ratios.
A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)book value

Accepted Answer

Ratios that measure a firm's financial leverage, such as debt-to-equity ratio, interest coverage ratio, and debt-to-assets ratio, are known as long-term solvency ratios. These ratios indicate a company's ability to meet its long-term financial obligations and assess the degree of risk associated with the use of debt financing.

Question 15

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations?
A)payment to supplier
B)payment to employee
C)payment of interest to a lender
D)payment of principle to a lender
E)payment of a dividend to a shareholder

Accepted Answer

The cash coverage ratio measures a company's ability to pay its interest expenses using its operating cash inflows. Therefore, it directly measures the ability of a firm's revenues to meet its obligation of paying interest to a lender.

Question 16

If a firm produces a twelve percent return on assets and also a twelve percent return on equity,then the firm:
A)may have short-term, but not long-term debt.
B)is using its assets as efficiently as possible.
C)has no net working capital.
D)has a debt-equity ratio of 1.0.
E)has an equity multiplier of 1.0.

Accepted Answer

The answer of If a firm produces a twelve percent...

Question 17

Which one of the following accurately describes the three parts of the Du Pont identity?
A)operating efficiency, equity multiplier, and profitability ratio
B)financial leverage, operating efficiency, and profitability ratio
C)equity multiplier, profit margin, and total asset turnover
D)debt-equity ratio, capital intensity ratio, and profit margin
E)return on assets, profit margin, and equity multiplier

Accepted Answer

The three parts of the Du Pont identity are equity multiplier (the ratio of assets to equity), profit margin (the ratio of net income to sales), and total asset turnover (the ratio of sales to assets). Therefore, the best choice is C, which accurately describes these three components. The other options have either incorrect components or use different terminology.

Question 18

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012.The firm's current accounts remained constant.Given this information,which one of the following statements must be true?
A)The total asset turnover rate increased.
B)The days' sales in receivables increased.
C)The net working capital turnover rate increased.
D)The fixed asset turnover decreased.
E)The receivables turnover rate decreased.

Accepted Answer

The answer of Jasper United had sales of $21,000 in...

Question 19

A supplier,who requires payment within ten days,should be most concerned with which one of the following ratios when granting credit?
A)current
B)cash
C)debt-equity
D)quick
E)total debt

Accepted Answer

The answer of A supplier,who requires payment within ten days,should...

Question 20

Tobin's Q relates the market value of a firm's assets to which one of the following?
A)initial cost of creating the firm
B)current book value of the firm
C)average asset value of similar firms
D)average market value of similar firms
E)today's cost to duplicate those assets

Accepted Answer

Tobin's Q compares the market value of a firm's assets to the cost of replacing those assets today. Therefore, (E) today's cost to duplicate those assets is the best choice.

Quiz 3: Working With Financial Statements

Which one of the following will decrease if a firm can decrease its operating costs,all else constant?

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

If a firm has a debt-equity ratio of 1.0,then its total debt ratio must be which one of the following?

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91.Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88.Both companies have similar operations.Based on this information,Dee's must be doing which one of the following?

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

Which one of the following statements is correct?

The price-sales ratio is especially useful when analyzing firms that have which one of the following?

Al's has a price-earnings ratio of 18.5.Ben's also has a price-earnings ratio of 18.5.Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?

Shareholders probably have the most interest in which one of the following sets of ratios?

An increase in which of the following will increase the return on equity,all else constant? I.sales II.net income III.depreciation IV.total equity

Which of the following can be used to compute the return on equity? I.Profit margin × Return on assets II.Return on assets × Equity multiplier III.Net income/Total equity IV.Return on assets × Total asset turnover

A firm has an interval measure of 48.This means that the firm has sufficient liquid assets to do which one of the following?

Ratios that measure a firm's financial leverage are known as _____ ratios.

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations?

If a firm produces a twelve percent return on assets and also a twelve percent return on equity,then the firm:

Which one of the following accurately describes the three parts of the Du Pont identity?

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012.The firm's current accounts remained constant.Given this information,which one of the following statements must be true?

A supplier,who requires payment within ten days,should be most concerned with which one of the following ratios when granting credit?

Tobin's Q relates the market value of a firm's assets to which one of the following?