ACCT 223 | Chapter 4

Which of the following is considered a financially leveraged firm?

A company that uses debt to finance some of its assets.

Which of the following asset classes is generally considered to be the most liquid?

Accounts Receivable Inventories

Test #18 Considered alone, which of the following would increase a company's current ratio?

An increase in accounts receivable.

Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called _____ ratios.

Asset Management or Activity

Which of the following statements are TRUE:

Blank Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Blank Company. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing it's short-term assets well.

Test #20 Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Company E trades at a higher P/E ratio

Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called ____ ratios.

Debt or Financial Leverage Management

Test #13 The basic power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

False

Test #4 High current and quick ratios always indicate that the firm is managing its liquidity position well.

False

Test #5 If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.

False

Test #8 A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.

False

the inventory turnover ratio across companies in the industry is 24.43x. based on this information, which of the following statements is true for InputOutzone Inc.?

InputOutzone Inc. is holding less inventory per dollar of sales compared to the industry average.

Ratios that help determine whether a company can access its cash and pay its short-term obligations are called _____ ratios.

Liquidity

_____ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market.

Market-value or Market-based

Test #23 If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?

Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge

Which of the following asset classes is generally considered to be the least liquid?

Plant and Equipment

_____ ratios help measure a company's ability to generate income and profits based on its invested capital.

Profitablitiy

Which of the following statements represent a WEAKNESS or LIMITATION of ratio analysis? 1. Seasonal factors can distort data. 2. Market data is not sufficiently considered. 3. Window dressing might be in effect.

Seasonal factors can distort data. Window dressing might be in effect.

Test #25 Which of the following statements is CORRECT?

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed

Test #22 Which of the following would indicate an improvement in a company's financial position, holding other things constant?

The current and quick ratios both increase.

Test #24 Which of the following statements is CORRECT?

The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

Test #21 If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

The division's basic earning power ratio is above the average of other firms in its industry

Test #19 Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

The quick ratio increases

Test #1 Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.

True

Test #10 Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

True

Test #11 The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

True

Test #12 Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.

True

Test #14 The profit margin measures net income per dollar of sales.

True

Test #15 The return on invested capital measures the total return that a company has provided for its investors.

True

Test #16 The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

True

Test #17 Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

True

Test #2 The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short- term obligations without relying on the sale of inventories.

True

Test #3 Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

True

Test #6 If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.

True

Test #7 The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.

True

Test #9 If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

True

Which of the following is TRUE about the leveraging effect?

Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.

Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with _____ times-interest earned ratios (TIE).

high