Chapter 3 guided notes Finance 320

The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and ___________ value ratios.

Market Value ratios

Which of the following are traditional financial ratio categories? Multiple select question. Market value ratios Real options ratios Asset management ratios Profitability ratios

Market Value ratios, asset management ratios, profitability ratios

Although ______ are often poor reflections of reality, they are often the best information available. accounting numbers intrinsic values market valuations

Accounting Numbers

Which of the following are sources of cash? (Check all that apply.) A decrease in notes payable Purchasing an asset An increase in notes payable A decrease in accounts receivable

An increase in notes payable a decrease in accounts receivable

The current ratio shows the relationship between ____. current assets and current liabilities current and long-term assets current assets and long-term liabilities current and liquid assets

CA and CL

At the most fundamental level, firms generate _______ and spend it

Cash

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

Cash

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 common-base year statements common-law statements

Common Size Statements

How is the inventory turnover ratio computed? Inventory/Cost of goods sold Current assets/Inventory Cost of goods sold/Inventory Inventory/Total assets

Cost of goods sold/Inventory

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

Current

What will happen to the current ratio if current assets increase, while everything else remains unchanged? It will not be affected. It may either increase or decrease. It will increase. It will decrease.

Current Ratio will Increase.

The cash ratio is found by dividing cash by: inventory shareholders' equity current assets current liabilities

Current liabilities

Which of the following are uses of cash? (Check all that apply.) Multiple select question. Decreases in accounts payable Decreases in property, plant and equipment Decreases in accounts receivable Increases in inventory Increases in property, plant and equipment

Decrease in accounts payable increases in inventory increases in PPE

A common-base year financial statement presents items relative to a certain base, which is the _____. target level of each item sales forecast for a common base year dollar amount of each item during a common base year revenue amount for a common base year

Dollar amount of each item during a common base year.

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

False

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 $0.07 $0.03 $0.70

$.30 (Debt ratio is monthly debt/monthly income)

Which of the following is the correct representation of the total debt ratio? (Total assets - Total equity)/(Total assets) Long-term debt/Total assets Total equity/Total long-term debt

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

Which of the following are traditional financial ratio categories? Multiple select question. Profitability ratios Market value ratios Real options ratios Asset management ratios

Profitability ratios, market value ratios, asset management ratios.

At the most fundamental level, firms generate cash and: delegate authority employ accountants create jobs spend it

Spend it

________ financial statements provide for comparison of firms that differ in currency type. Restated Compressed Original Standardized

Standardized

________ financial statements provide for comparison of firms that differ in size. Standardized Restated Original Compressed

Standardized

What does a current ratio of 1.2 mean? The firm has $1.20 in current liabilities for every $1 in long-term debt. The firm has $1.20 in current liabilities for every $1 in current assets. The firm has $1.20 in current assets for every $1 in fixed assets. The firm has $1.20 in current assets for every $1 in current liabilities.

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

Because we are almost always unable to obtain all of the market information we want, we rely on _______ numbers for much of our financial information.

accounting numbers

Which of the following items are among the items used to compute the current ratio? Multiple select question. Accounts payable Earnings Cash Equipment

accounts payable and cash

A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____. benchmark company; that company's net income future year; estimated amount base year; estimated income base year; base amount

base year; base amount

If a company has inventory, the quick ratio will always be ______ the current ratio. less than greater than equal to

less than

Common-size statements are used for comparing firms with differing ____. management styles tax years capital structures sizes

sizes

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement? There are two opposing methods of preparing the statement. There is one strict method of preparing the statement. There are different methods of preparing it.

there are different methods of preparing it

Which one of the following is one way in which financial managers use a common-size balance sheet? To identify changes in operating costs To track changes in a firm's capital structure To keep an eye on the firm's profit margin To monitor labor costs

to track changes in a firm's capital structure

By combining common-size and base year analysis, we eliminate the effect of the _____. overall growth negative inflation interest yield possibility of a recession

overall growth