Question 1

Assume a firm is operating at full capacity.Which one of these accounts is least apt to vary directly with sales?
A)Inventory
B)Cash
C)Long-term debt
D)Accounts payable
E)Fixed assets

Accepted Answer

Long-term debt is least likely to vary directly with sales as it is a fixed obligation that cannot be easily changed in the short-term, unlike inventory or accounts payable which directly vary with the level of sales. Cash and fixed assets can also vary with sales, as increased sales may lead to a need for more cash or capital expenditures for additional fixed assets.

Question 2

Ratio analysis works best when evaluating the financial statements of two firms:
A)in the same industry but located in different countries.
B)of differing sizes in the same industry.
C)with one being in a single-line of business while the other is a conglomerate.
D)of the same size in differing industries.
E)when both are conglomerates with varying lines of business.

Accepted Answer

Ratio analysis is most effective in comparing firms within the same industry, as this enables us to compare apples to apples. However, comparing two firms of the same size in differing industries (D) or both being conglomerates with varying lines of business (E) would make meaningful comparisons more difficult. Comparing firms in the same industry but located in different countries (A) could also pose challenges due to differences in accounting standards, tax laws, and economic conditions. Similarly, comparing a single-line business with a conglomerate (C) will yield results that are less meaningful since the two businesses would have different risk profiles and operating models, and therefore, different financial ratios.

Question 3

The only difference between Joe's and Moe's is that Joe's has old,fully depreciated equipment.Moe's just purchased all new equipment which will be depreciated over eight years.Assuming all else equal:
A)Joe's will have a lower profit margin.
B)Joe's will have a lower return on equity.
C)Moe's will have a higher net income.
D)Moe's will have a lower profit margin.
E)Moe's will have a higher return on assets.

Accepted Answer

Joe's will have a higher profit margin because their equipment is fully depreciated, meaning their expenses will be lower. Moe's will have a lower profit margin because they have expenses related to depreciation of their new equipment. Therefore, option D is correct.

Question 4

For a dividend-paying firm,how is the projected addition to retained earnings calculated using the percentage of sales approach?
A)Net income × (1 - Retention ratio)
B)Net income × (1 - Dividend payout ratio)
C)(Cash dividends/Net income)× (New sales/Old sales)
D)Retained earnings/Sales × (New Sales/Old Sales)
E)Net income × (New Sales/Old Sales)

Accepted Answer

The percentage of sales approach for calculating the projected addition to retained earnings involves multiplying the net income by (1 - dividend payout ratio). This gives the amount of earnings that will be retained by the company, rather than distributed as dividends.

Question 5

Assume JustDoIt Co.increases its operating efficiency such that costs decrease while sales remain constant.As a result,given all else constant,the:
A)equity multiplier will decrease
B)return on assets will decrease.
C)profit margin will decline.
D)return on equity will increase.
E)total asset turnover will increase.

Accepted Answer

When operating efficiency improves and costs decrease while sales remain constant, the company's net income increases. This leads to an increase in return on equity (ROE), as ROE is calculated as net income divided by shareholders' equity.

Question 6

If Textile Cloth shareholders want to know how much net profit Textile Cloth is making on a percentage basis on their investment in that firm,the shareholders should refer to the:
A)profit margin.
B)return on assets.
C)return on equity.
D)equity multiplier.
E)EV multiple.

Accepted Answer

Return on equity (ROE) measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested.

Question 7

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?
A)Accounts payable
B)Cash
C)Accounts receivable
D)Inventory
E)Fixed assets

Accepted Answer

Inventory is included in the current ratio but not in the quick ratio, so an increase in inventory will increase the current ratio without affecting the quick ratio.

Question 8

Which cash coverage ratio would a lender prefer its borrower have?
A)-1.5
B)-.5
C)0
D).5
E)1.5

Accepted Answer

A lender would prefer a cash coverage ratio of 1.5, as it indicates that the borrower has sufficient cash flow to cover 1.5 times their debt obligations, suggesting a lower risk of default.

Question 9

A total asset turnover measure of 1.03 means that a firm has $1.03 in:
A)sales for every $1 in total assets.
B)total assets for every $1 in sales.
C)total assets for every $1 in total equity.
D)total assets for every $1 in cash.
E)long-term assets for every $1 in short-term assets.

Accepted Answer

A total asset turnover measure of 1.03 means that for every $1 in total assets, the firm is generating $1.03 in sales.

Question 10

If a non-dividend paying firm bases its growth assumptions on the sustainable rate of growth,and shows positive net income,then the pro forma statement must reflect:
A)an increase in fixed assets irrespective of the firm's current operating capacity.
B)an increase in both sales and the debt-equity ratio.
C)both an increase in the total asset turnover and in the equity multiplier.
D)a constant debt-equity ratio and an increase in retained earnings.
E)increases in fixed assets,the debt-equity ratio,and the number of shares outstanding.

Accepted Answer

If a non-dividend paying firm bases its growth assumptions on the sustainable rate of growth and shows positive net income, it implies that the firm is reinvesting its earnings to fuel its growth. In such a scenario, the pro forma statement would reflect a constant debt-equity ratio as the firm is not raising external funds to finance its growth. Additionally, the statement would show an increase in retained earnings, which are a part of the equity component. Hence, the correct answer is D.

Question 11

Last year,Bennett's had a price-earnings ratio of 10.2.This year,the price earnings ratio is 10.4.Based on this information,it can be stated with absolute certainty that:
A)the price per share increased.
B)the earnings per share decreased.
C)either the price per share,the earnings per share,or both,changed.
D)investors are receiving a higher rate of return this year.
E)investors are paying a higher price for each share of stock purchased.

Accepted Answer

The price-earnings ratio is simply the price per share divided by the earnings per share. If the price-earnings ratio increased, it could be because the price per share went up, the earnings per share went down, or both. Therefore, it can only be stated with absolute certainty that either the price per share or the earnings per share, or both, changed. The other answer choices cannot be determined with certainty based on the information provided.

Question 12

Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10?
A)It takes the firm 36.5 days to pay its creditors.
B)It takes the firm 36.5 days to sell its inventory and collect payment from the sale.
C)It take the firm 36.5 days to collect payment for a sale.
D)The firm has ten times more in accounts receivable than it does in cash.
E)It takes an average of ten days to collect payment from the firm's customers.

Accepted Answer

Accounts receivable turnover measures how quickly a firm can collect payment from its customers. If a firm has an accounts receivable turnover measure of 10, it means it takes the firm 36.5 days (365 days/year divided by 10) to collect payment for a sale. Therefore, choice C is correct.

Question 13

The higher a firm's inventory turnover,the:
A)longer it takes the firm to sell its inventory and collect payment.
B)faster the firm collects payment on its sales.
C)faster the firm sells its inventory.
D)longer inventory sits on the firm's shelves.
E)greater the amount of inventory held by the firm.

Accepted Answer

A higher inventory turnover indicates that the firm is selling its inventory at a faster rate, which means that the inventory is not sitting on the shelves for a long time. This ultimately results in faster collections and cash flow for the firm. Option A and D are contradictory and Option E is also incorrect as a higher inventory turnover generally means that the firm is holding less inventory.

Question 14

If a firm decreases its operating costs,all else constant,then:
A)the profit margin increases while the cash coverage ratio decreases.
B)the return on assets increases while the return on equity decreases.
C)both the return on assets and the return on equity increase.
D)both the profit margin and the equity multiplier increase.
E)the total asset turnover rate decreases while the profit margin increases.

Accepted Answer

Decreasing operating costs will lead to an increase in profitability, which will increase both the return on assets and return on equity. All else constant, there is no reason for the equity multiplier or total asset turnover rate to change. The cash coverage ratio is also unrelated to operating costs.

Question 15

A supplier,who requires payment within ten days,should be most concerned about which one of its customer's ratios?
A)Current ratio
B)Debt-equity ratio
C)Cash ratio
D)Quick ratio
E)Total debt ratio

Accepted Answer

The cash ratio measures a company's ability to pay off its short-term liabilities with its cash and cash equivalents, which is crucial for a supplier requiring quick payment.

Question 16

Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?
I.The firms may have unrelated lines of business.
II.The operations of the two firms may vary geographically.
III.The firms may use differing accounting methods.
IV.The two firms may be regulated differently.
A)I and II only
B)II and III only
C)I,III,and IV only
D)I,II,and III only
E)I,II,III,and IV

Accepted Answer

The answer of Which of the following represent problems encountered...

Question 17

If a firm produces a 12 percent return on assets and also a 12 percent return on equity,then the firm:
A)has no net working capital.
B)is using its assets as efficiently as possible.
C)has no debt of any kind.
D)also has a current ratio of 12.
E)has an equity multiplier of 1.2.

Accepted Answer

If a firm has the same return on assets (ROA) and return on equity (ROE), it indicates that there is no financial leverage, meaning the firm has no debt.

Question 18

From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?
A)Times interest earned ratio
B)Cash coverage ratio
C)Cash ratio
D)Quick ratio
E)Debt-equity ratio

Accepted Answer

The cash coverage ratio measures a firm's ability to pay the interest on its debts by comparing its cash flows from operations to its interest expense. It takes into account the cash available to cover interest payments, rather than just accounting profits. A higher cash coverage ratio indicates a better ability to pay interest expenses.

Question 19

Yesterday,Dai stock sold for $28 a share.Today,the overall market fell and Dai stock is now selling for $22 a share.Which of these ratios for Dai will be affected by this market reaction? Assume all else is held constant.
A)Enterprise value multiple and price-earnings ratio
B)Earnings per share and price-earnings ratio
C)Return on equity and return on assets
D)Return on book equity and market-to-book ratio
E)Price-earnings ratio and return on book equity

Accepted Answer

The enterprise value multiple and price-earnings ratio are affected by changes in stock price. The price-earnings ratio directly depends on the stock price, and the enterprise value multiple can be influenced by changes in market capitalization, which is affected by stock price.

Question 20

A firm has a total debt ratio of .53.This means the firm has $.53 in debt for every:
A)$.47 in equity.
B)$.47 in total assets.
C)$1.53 in total assets.
D)$1 in total equity.
E)$1.53 in total equity.

Accepted Answer

The total debt ratio of .53 indicates that 53% of the firm's assets are financed by debt, leaving 47% financed by equity. Thus, for every $0.53 in debt, there is $0.47 in equity.

Quiz 3: Financial Statements Analysis and Financial Models

Assume a firm is operating at full capacity.Which one of these accounts is least apt to vary directly with sales?

Ratio analysis works best when evaluating the financial statements of two firms:

The only difference between Joe's and Moe's is that Joe's has old,fully depreciated equipment.Moe's just purchased all new equipment which will be depreciated over eight years.Assuming all else equal:

For a dividend-paying firm,how is the projected addition to retained earnings calculated using the percentage of sales approach?

Assume JustDoIt Co.increases its operating efficiency such that costs decrease while sales remain constant.As a result,given all else constant,the:

If Textile Cloth shareholders want to know how much net profit Textile Cloth is making on a percentage basis on their investment in that firm,the shareholders should refer to the:

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?

Which cash coverage ratio would a lender prefer its borrower have?

A total asset turnover measure of 1.03 means that a firm has $1.03 in:

If a non-dividend paying firm bases its growth assumptions on the sustainable rate of growth,and shows positive net income,then the pro forma statement must reflect:

Last year,Bennett's had a price-earnings ratio of 10.2.This year,the price earnings ratio is 10.4.Based on this information,it can be stated with absolute certainty that:

Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10?

The higher a firm's inventory turnover,the:

If a firm decreases its operating costs,all else constant,then:

A supplier,who requires payment within ten days,should be most concerned about which one of its customer's ratios?

If a firm produces a 12 percent return on assets and also a 12 percent return on equity,then the firm:

From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?

Yesterday,Dai stock sold for $28 a share.Today,the overall market fell and Dai stock is now selling for $22 a share.Which of these ratios for Dai will be affected by this market reaction? Assume all else is held constant.

A firm has a total debt ratio of .53.This means the firm has $.53 in debt for every: