Chapter 8: Business and FInancial Analysis

Use the correct formula to solve the following return on assets ratio problem where the net profit was $30,000 and total assets were $450,000. net profit/ total assets

.067

No operating business ever matches the proposed business exactly.

True

Short surveys __________

analyze the business, its activities, and its performance without focusing on financial data

Which of the following is NOT one of the four classic analysis techniques?

Competition analysis

Which of the following statements about leverage ratios are correct?

Creditors use them to ensure that the business has the ability to repay loans. Leverage ratios are used to evaluate the relative level of indebtedness of a business. There are three leverage ratios that are commonly used.

The current ratio examines a company's pure cash position relative to its current liabilities by removing inventory from the firm's assets.

False

Which of the true statements about hypothesis-driven analysis for new businesses.

The analysis is conducted in small batches. The analysis uses the hypothesis that an entrepreneur has about what a customer really desires.

The _______ ratios require information from both the balance sheet and the income statement.

activity

The __________ ratio is calculated by dividing current assets by current liabilities.

current

The _______ ratio provides information on the portion of the business owned by the lenders and that portion owned by the founder(s).

debt-to-equity

____________ is the analysis of the difference between the predicted and the actual performance.

deviation analysis

Activity ratios measure the ______ with which the entrepreneur handles the business's resources.

efficiency

When calculating the times interest earned ratio, a business owner wants a _______ number, which shows the business is capable of servicing its debt load.

higher

_______ ratios are used to examine the relative level of indebtedness of the business.

leverage

_______ ratios measure the short-term ability of the firm to meet its obligations.

liquidity

All the following are techniques used to perform an analysis of a business, its activities, and its performance EXCEPT

management analysis

________ analysis is a tool that provides a picture of a company's health.

ratio

Use the correct formula to solve the following return on equity ratio problem where the net profit was $70,000 and equity was $345,000. profit / equity

.20

Use the correct formula to solve the following operating profit margin ratio problem where the operating income was $145,000 and net sales were $425,000. net profit/ net sales

.34

Use the correct formula to solve the following total assets turnover ratio problem where net sales were $210,000 and fixed assets were $560,000. net sales/ fixed assets

.38

Use the correct formula to solve the following debt-to-assets ratio problem where total liabilities are $250,000 and total assets were $475,000. total liabilities/total assets

.53

Identify a true statement about ratio analysis.

A ratio analysis only provide insight into a firm's health when compared over time or to the ratios of other firms.

Sensitivity analysis is one of the methods of examining the ability of an organization to handle changes in the future. Which financial statement is required for this type of analysis?

All of these (income statement) (Balance sheet) (current cash flow statement)

Which of the following financial statements of a business provide information necessary to calculated the times interest earned?

Income statement and balance sheet

_________ turnover is cost of goods sold divided by inventory.

Inventory

Which of the following statements regarding net profit margin are correct?

Net profit is the bottom-line calculation from the income statement. It is calculated by dividing net profit by net sales. It provides entrepreneurs with an understanding of the margin earned after all obligations and expenses are considered.

Which of the following statements about ratio analysis are correct?

Ratios help the entrepreneur examine the firm's overall health. One firm's ratios should be compared to other similar firms, an industry average, or the previous month's/year's performance. Ratios by themselves are of little value.

In the context of ratio analysis, the quick ratio measure

The current assets of a firm, excluding its current inventory, relative to its current liabilities.

Which of the following statements about liquidity ratios are correct?

They are used by banks to measure the credit worthiness of the business. They take into account the debt or accounts payable that must be paid in the short term. They measure a business's short term ability to meet its obligations.

Identify the true statements about the use the short surveys in business.

They give entrepreneurs the opportunity to evaluate their firm's performance on dimensions that may lead to financial success. They can be given to any party to a transaction with the business.

Which of the following are likely actions that financing institutions may take when a firm's liquidity ratios is not within certain range?

They may limit the line of credit to the firm. They may require a higher interest rate on the debt.

_________ turnover is credit sales divided by accounts receivables.

account receivable

A firm's key measures should focus on the important aspects with which the firm hopes to build its ___________.

competitive advantage

Which is the correct formula for calculating the inventory turnover ratio?

cost of good sold/ inventory

Calculate the quick ratio (acid test) based on the following: a firm's current assets are worth $250,000, inventory is valued at $175,000, and the current liabilities are $100,000

.75

Use the correct formula to solve the following accounts receivable turnover ratio problem where credit sales were $140,000 and accounts receivable were $15,000. credit sales/ account receivables

9.33

The _________ ratio is used to determine the overall profit that is obtained from all sales during the period.

Gross profit margin

Which of the following profitability ratios of a firm can calculated using only its income statement?

Gross profit margin operating profit margin net profit margin

Identify the true statements about an organization's operating profit margin.

It is also known as Earnings Before Interest and Taxes (EBIT) It is representative of the operating efficiency of the organization.

Identify a true statement about a firm's return on assets (ROA)

It is calculated by dividing net profit by total assets

Which of the following statements are true about a firm's return on equity (ROE)?

It is calculated by dividing the firm's net profit by its equity. It shows how much each dollar of investment is generating in profit.

Which of the following statements regarding the gross profit margin are correct?

It is used determine the overall profit obtained from all sales during the period. It is the most basic of the profitability measures. It is calculated by dividing gross profit by net sales.

Which is the following statements are true about a firm's deviation analysis?

It tracks various performance measures from one time period to the next. It uses a deviation chart that should be maintained for all important metrics.

Any firm conducting an evaluation of its operations should focus primarily on the key aspects with which it hopes to build a competitive advantage in the market

True

Current ratios are computed by dividing current assets by current liabilities.

True

In the context of activity ratios, a rise in a firm's rate of inventory turnover indices that the firm is moving closer to a just-in-time system of inventory management.

True

In the context of the importance of having a measurement focus, the standard parts of a business need to be managed in the simplest way possible and with minimal extra analysis.

True

_______ ratios measure the efficiency with which the entrepreneurs is handling the business's resources.

activity

The _______ ratio is used to determine the overall profit that is obtained from all sales during the period.

gross profit margin

Which of the correct formula for calculating the gross profit margin ratio?

gross profit/ net sales

Evaluating a firm with its _______ and how the entrepreneur expects to build its __________.

mission; competitive advantage

Which of the correct formula for calculating the net profit margin ratio?

net profit/ net sales

Total/fixed asset turnover is calculated by dividing ___________.

net sales by fixed assets or net sales divided by total assets

Which of the correct formulas for calculating times interest earned?

operating income/ interest

________ __________ examine the performance of a firm and its potential to generate economic returns of and above its costs.

profitability ratio

Which of the following profitability of a firm are calculated using its income statement and balance sheet?

return on assets return on equity

________ analysis is a chart using a business's financial statements to create a pro forma projection based on a dramatic increase or decrease in sales, or the complication of a major change in the business.

sensitivity

Deviation analysis is _____________

the analysis that allows an entrepreneur to evaluate the performance of an organization on those times that are considered most important to the success of a firm.