512 Finance Chapter 3 SmartBook

A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.

26

True or false: A deteriorating time trend in a financial ratio is always a bad sign.

False

True or false: When acquiring another firm, financial statement information is not important in identifying potential targets.

False

______ are the prime source of information about a firm's financial health.

Financial statements

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

A firm has a total debt ratio of 0.30 times. This means the firm has ___ in total debt for every $1 in total assets.

$0.30 (Reason: Total debt/Assets =0.3. If assets = $1, then Total debt/1=0.3, so total debt is $0.30)

Which of the following are uses of cash? (Check all that apply.)

Increases in inventory Increases in property, plant and equipment Decreases in accounts payable

One common way to identify potential peers is based on Standard ______ Classification codes.

Industrial

An important accounting goal is to report financial information to users in a way that is useful for _____.

decision making (Reason: An important accounting goal is to report financial information to users in a way that is useful for decision making.)

The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations. Multiple choice question.

depreciation

EBITDA multiple is equal to the enterprise value ________ (divided/multiplied) by EBITDA.

divided

Whenever ______ information is available, it should be used instead of accounting data.

market

How is the price-earnings (PE) ratio computed?

market price per share/earnings per share

The price-earnings (PE) ratio is a ______ ratio.

market value

How is market-to-book ratio measured?

market value per share/book value per share

By combining common-size and base year analysis, we eliminate the effect of the _____.

overall growth

One of the most important uses of financial statement information within the firm is:

performance evaluation

When a company has negative earnings for an extended period of time, analysts will often resort to the:

price-sales ratio

Some financial ratios are based on the market price per share of stock, which is information not contained in the financial statements. As a result, these measures can only be directly calculated for _______ traded companies.

publicly

The profit margin is equal to net income divided by ________.

sales

What does an inventory turnover ratio of 5 mean?

the entire inventory was sold and replaced 5 times during the year

Financial ratios are ways of comparing and investigating ________.

the relationships between pieces of financial information

Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.

total equity

What is the equation for enterprise value?

Market value of stock + book value of liabilities − cash

What is the main difference between the cash coverage ratio and the times interest earned ratio?

Noncash expenses

The EBITDA ratio is similar in spirit to:

PE ratio (Reason: The EBITDA ratio is a market value ratio. The quick ratio is a liquidity ratio.)

Which of the following are sources of cash? (Check all that apply.)

A decrease in accounts receivable An increase in notes payable

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

A problem with the TIE ratio is that it is based on ______, which is not really a measure of cash available to pay interest.

EBIT

Which two of the following groups are most interested in liquidity ratios?

Suppliers Bankers (Reason: Short-term creditors (including trade creditors) are particularly interested in liquidity ratios.)

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average.

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:

common-size statements (Reason: To construct combined common-size and common-base year begin with the common-size statements then divide by a common base year for each item.)

The quick ratio is computed just like the _________ ratio, except that inventory is omitted.

current

The current ratio shows the relationship between ____.

current assets and current liabilities

The cash ratio is found by dividing cash by:

current liabilities

A common-base year financial statement presents items relative to a certain base, which is the _____.

dollar amount of each item during a common base year

Long-term debt ratio is equal to long-term debt divided by the sum of long-term debt and total ________.

equity

A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

higher

When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.

higher

A(n) ________ in net profit margin will increase ROE.

increase

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

increase

The times interest earned ratio equals EBIT divided by ________.

interest

The interval measure is useful for start-up companies because it indicates how long a company can operate until _____.

it needs another round of financing

A ______ performance indicator is a measurable value that shows how effectively a company is achieving business objectives.

key

The price-sales ratio is calculated as the price per _________ divided by the sales per ___________.

share; share (Reason: price-sales ratio= price per share/sales per share)

Liquidity ratios are particularly important to _______ -term creditors.

short

At the most fundamental level, firms generate cash and:

spend it

Financial managers use a common-size income statement to determine ___.

which costs are rising or falling as a percentage of sales (Reason: Financial managers use a common-size income statement to determine which costs are rising or falling as a percentage of sales. Capital structure is shown on the balance sheet.)

How are firms classified into peer groups for ratio analysis?

According to Standard Industrial Classification codes

True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.

False (Reason: Enterprise value equals total market value of the stock plus the book value of the liabilities minus cash.)

True or false: There is only one method for preparing the statement of cash flows.

False (Reason: The exact form differs from one preparer to the next.)

Which ratios use some information that is not contained in financial statements?

Market value ratios

What does a current ratio of 1.2 mean?

The firm has $1.20 in current assets for every $1 in current liabilities.

A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

Long-term debt ratio is equal to long-term debt divided by the sum of long-term debt and total ___________.

equity

The debt-equity ratio expresses the total debt divided by total equity, while the _______ multiplier expresses the total assets divided by the total equity.

equity

Long-term solvency ratios are also called financial ______ ratios.

leverage

________ financial statements provide for comparison of firms that differ in currency type.

Standardized

The inventory ___________ is calculated as the COGS divided by the inventory.

turnover

A(n) _____ is a measurable value that shows how effectively a company is achieving a business objective.

KPI

Which of the following is the correct representation of the total debt ratio?

(Total assets - Total equity)/(Total assets)

At the most fundamental level, firms generate ______ and spend it.

cash

Cal's Market has return on equity (ROE) of 15 percent. What does this mean?

Cal's generated $.15 in profit for every $1 of book value of equity.

The ROE equals the net profit margin multiplied by the total _______ turnover multiplied by the equity multiplier.

asset

The cash ratio is found by dividing ________ by current liabilities.

cash

A common-size income statement helps compare financial results over time by controlling for changes in ______.

sales (Reason: A common-size income statement helps compare financial results over time by controlling for changes in sales.)

Common-size statements are used for comparing firms with differing ____.

sizes (Reason: Common-size statements are used for comparing firms with differing sizes.)

True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.

true

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase. (Reason: An increase in the numerator, all else equal, results in an increase in the ratio.)

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Seasonality Differing accounting methods Differing fiscal years

ROA and ROE are common and useful measures, but it is important to remember that they are _________ rates of return.

accounting

A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.

base year; base amount

Which of the following is the correct representation of the cash coverage ratio?

(EBIT+ Non-cash expenses)/Interest expense

Which one of the following equations defines the total asset turnover ratio?

Sales/Total assets (Reason: Total asset turnover = sales/total assets)

True or false: The interval measure indicates how long a start-up company can operate until it needs more financing.

True

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past three years is 30, 34, and 40 percent, respectively. This indicates that the firm has increased its ______.

leverage (Reason: On the common size balance sheet, long-term debt is expressed as a percentage of total assets.)

As long as all sales requests are being met, a ______ inventory turnover ratio is better.

higher (Reason: A higher turnover implies more efficient operations provided there is sufficient inventory to meet demand.)

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase.

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.

liquidity (Reason: An increase in the percentage of current assets and a decrease in the percentage of current liabilities indicates an increase in net working capital, which is one measure of liquidity.)

Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______, which demonstrates the proportion of assets financed by long-term obligations.

liquidity; leverage (Reason: Liquidity shows the ability to meet short-term obligations without undue stress, while leverage demonstrates the proportion of assets financed by long-term obligations.)

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes a ___ time to sell.

long (Reason:When inventory takes a long time to sell, it does not meet the definition of liquidity.)

Total capitalization equals total equity plus total:

long-term debt (Reason: Total capitalization equals total equity plus total long-term debt.)

Which of the following are traditional financial ratio categories?

-Market value ratios -Asset management ratios -Profitability ratios

The five categories of financial ratios include:

-short term solvency, or liquidity, ratios -long-term solvency, or financial leverage, ratios -asset management, or turnover, ratios -profitability ratios -market value ratios

A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.

6.8

Which of the following items are among the items used to compute the current ratio?

Accounts payable Cash

Which one of the following is one way in which financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?

There are different methods of preparing it.

Days' sales in receivables are calculated as _________ days divided by the receivables turnover. (Enter your answer as a numerical value.)

365

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

Long-term solvency ratios are also known as:

financial leverage ratios

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:

further investigation

By evaluating the quick ratio, we can see that one sign of possible short-term trouble is the existence of relatively _______ (small/large) inventories.

large

By evaluating the quick ratio, we can see that one sign of possible short-term trouble is the existence of relatively _________ (small/large) inventories.

large

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than (Reason: Since the quick ratio excludes inventory, it will always be less than the current ratio.)

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____.

less than 1

Which one of the following does not affect ROE according to the DuPont identity?

Investor sentiment (Reason: The DuPont identity decomposes ROE into profitability, asset management, and leverage. Operating efficiency is part of profitability)

Profitability measures such as return on assets (ROA) and return on equity (ROE) are __________ rates of return.

accounting