Finance CH 3
33) A firm has a year-end retained earnings balance of $220,000 for 2014. The firm reported net profits after taxes of $50,000 and paid dividends of $30,000 in 2015. The firm's retained earnings balance at 2015 year end is ________. A) $240,000 B) $250,000 C) $270,000 D) $300,000
A) $240,000
31) A firm's year-end retained earnings balances are $670,000 and $560,000, for 2014 and 2015 respectively. The firm paid $10,000 in dividends in 2015. The firm's net profit after taxes in 2015 was ________. A) -$100,000 B) -$110,000 C) $100,000 D) $110,000
A) -$100,000
42) ________ ratios are a measure of the speed with which various accounts are converted into sales or cash. A) Activity B) Liquidity C) Debt D) Profitability
A) Activity
57) ________ is a term used to describe the magnification of risk and return introduced through the use of fixed-cost financing, such as preferred stock and debt. A) Financial leverage B) Operating leverage C) Fixed-payment coverage D) Benchmarking
A) Financial leverage
39) If the only information you are given about Ryan Corporation, a large public company in business for many years, is that it has a current ratio of 2.9, what could you infer from this? A) It can meet the short-term obligations without any difficulty. B) You could determine that Ryan has a liquidity problem because Ryan's current ratio is greater than 2 which is the rule of thumb for the current ratio. C) Nothing, you would also need the current ratio's from the last few years of the S&P 500 Index. D) You could determine that Ryan has an activity problem because Ryan's current ratio is greater than 2 which is the rule of thumb for the current ratio.
A) It can meet the short-term obligations without any difficulty.
54) A firm's total asset turnover increased from 0.75 to 0.90. Which of the following is true about the given data? A) Its assets have been efficiently used to derive the optimum level of sales. B) Its assets have been efficiently used to derive the optimum level of net income. C) Its assets have been efficiently used to derive the minimum level of net income. D) Its assets have been efficiently used to derive the minimum level of gross profit.
A) Its assets have been efficiently used to derive the optimum level of sales.
74) ________ measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders
A) Net profit margin
22) ________ analysis involves comparison of current to past performance and the evaluation of developing trends. A) Time-series B) Cross-sectional C) Marginal D) Break-even
A) Time-series
59) ________ ratio measures a firm's ability to pay contractual interest payments. A) Times interest earned B) Fixed-payment coverage C) Debt D) Average payment period
A) Times interest earned
26) Time-series analysis is often used to ________. A) assess developing trends B) correct errors of judgment C) evaluate the value of a firm or its assets D) standardize results
A) assess developing trends
31) Inflation can distort ________. A) book value of inventory costs B) market value of revenue C) market value of sales D) book value of revenue
A) book value of inventory costs
80) Book value per share is the ratio of ________. A) common stock equity to number of outstanding common shares B) retained earnings to number of outstanding common shares C) fixed assets to number of outstanding common shares D) total liabilities to number of outstanding common shares
A) common stock equity to number of outstanding common shares
55) A firm with a total asset turnover that is lower than industry standard but with a current ratio that meets industry standard must have excessive ________. A) fixed assets B) inventory C) accounts receivable D) debt
A) fixed assets
73) A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive ________. A) general and administrative expenses B) cost of goods sold C) dividend payments D) principal payments
A) general and administrative expenses
13) Operating profit is ________. A) gross profit minus operating expenses B) sales revenue minus cost of goods sold C) earnings before depreciation and taxes D) sales revenue minus depreciation expense
A) gross profit minus operating expenses
11) A(n) ________ provides a financial summary of a firm's operating results during a specified period. A) income statement B) balance sheet C) statement of cash flows D) statement of retained earnings
A) income statement
8) The Public Company Accounting Oversight Board (PCAOB) ________. A) is a not-for-profit corporation that oversees auditors of public corporations B) is a not-for-profit corporation that oversees managers of public corporations C) is a for-profit corporation that oversees auditors of public corporations D) is a for-profit corporation that oversees managers of public corporations
A) is a not-for-profit corporation that oversees auditors of public corporations
19) Which of the following is a fixed asset? A) land B) accounts payable C) accruals D) notes payable
A) land
79) P/E ratio measures the ________. A) market value of the stock to earnings per share B) intrinsic value of the stock to earnings per share C) book value of the stock to earnings per share D) market price of the stock to retained earnings
A) market value of the stock to earnings per share
84) The modified DuPont formula relates the firm's return on total assets (ROA) to its ________. A) return on equity (ROE) B) operating leverage multiplier C) net profit margin D) total asset turnover
A) return on equity (ROE)
38) Present and prospective shareholders are mainly concerned with a firm's ________. A) risk and return B) profitability C) leverage D) liquidity
A) risk and return
35) Information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements can be found on ________. A) the notes to the financial statements B) the statement of retained earnings C) the proxy statement D) the management discussion and analysis (MD&A)
A) the notes to the financial statements
29) An analyst should be careful when conducting ratio analysis to ensure that ________. A) the overall performance of a firm is not judged on a single ratio B) the role of inflation is ignored C) ratios being compared should be calculated using financial statements dated at different points in time during the year D) different accounting procedures are used
A) the overall performance of a firm is not judged on a single ratio
23) Which of the following is used to analyze a firm's financial performance over different years? A) time-series analysis B) break-even analysis C) gap analysis D) marginal analysis
A) time-series analysis
32) A firm's year-end retained earnings balances are $320,000 and $400,000, for 2014 and 2015 respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm's dividend payment for 2015 is ________. A) $0 B) $20,000 C) $80,000 D) $100,000
B) $20,000
30) Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000, and preferred dividends of $5,000. What was the firm's net profit after taxes? A) $66,000 B) $49,000 C) $44,000 D) $83,000
B) $49,000
43) Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory turnover is ________ and the average age of inventory is ________. A) 36.5; 10 B) 10; 36.5 C) 36.0; 10 D) 30; 36.0
B) 10; 36.5
21) ________ analysis involves the comparison of different firms' financial ratios at the same point in time. A) Time-series B) Cross-sectional C) Marginal D) Technical
B) Cross-sectional
82) The ________ is used by financial managers as a structure for dissecting a firm's financial statements to assess its financial condition. A) statement of cash flows B) DuPont system of analysis C) break-even analysis D) technical analysis
B) DuPont system of analysis
2) The rule-setting body, which authorizes generally accepted accounting principles is the ________. A) IFRS B) FASB C) SEC D) Federal Reserve System
B) FASB
44) ________ may indicate a firm is experiencing stockouts and lost sales. A) Average payment period B) Inventory turnover ratio C) Average collection period D) Quick
B) Inventory turnover ratio
24) Which of the following is true of benchmarking? A) It is an analysis in which a firm's ratio values are analyzed to project the fundamental values of the assets for upcoming years or business cycle. B) It is an analysis in which a firm's ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate. C) It is an analysis in which a firm's financial performance over time is evaluated using financial ratio analysis. D) It is a financial statement analysis technique which combines cross-sectional and time-series analyses.
B) It is an analysis in which a firm's ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate.
72) ________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders
B) Operating profit margin
28) Which of the following is a limitation of ratio analysis? A) Financial ratios cannot reveal certain specific aspects of a firm's financial position. B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem. C) It is difficult to access audited financial statements for ratio analysis. D) Ratio analysis assumes that inflation has no effect on a firm's business.
B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.
16) Earnings available for common stockholders is calculated as net profits ________. A) before taxes minus preferred dividends B) after taxes minus preferred dividends C) after taxes minus common dividends D) before taxes minus common dividends
B) after taxes minus preferred dividends
5) The stockholders' annual report must include ________. A) common-size financial statements B) an income statement C) an advance tax statement D) the margin of safety report
B) an income statement
50) Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements? A) debt equity ratio B) average payment period C) quick ratio D) total asset turnover
B) average payment period
22) The ________ represents a summary statement of a firm's financial position at a given point in time. A) income statement B) balance sheet C) statement of cash flows D) statement of retained earnings
B) balance sheet
10) Total assets less net fixed assets equals ________. A) gross assets B) current assets C) depreciation D) liabilities and equity
B) current assets
36) FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the ________. A) historical rate B) current rate C) average rate D) rate prescribed by the SEC
B) current rate
37) The two basic measures of liquidity are ________. A) inventory turnover and current ratio B) current ratio and quick ratio C) gross profit margin and ROE D) current ratio and total asset turnover
B) current ratio and quick ratio
15) Operating profit is known as ________. A) earnings after interest and taxes B) earnings before interest and taxes C) earnings before depreciation and taxes D) earnings after tax
B) earnings before interest and taxes
6) The 2002 Sarbanes-Oxley Act was designed to ________. A) limit the compensation that could be paid to corporate CEOs B) eliminate the many disclosure and conflict-of-interest problems of corporations C) provide uniform international accounting standards D) provide the guidelines to minimize the tax
B) eliminate the many disclosure and conflict-of-interest problems of corporations
86) A firm with a low net profit margin can improve its return on total assets by ________. A) increasing its debt ratio B) increasing its total asset turnover C) decreasing its fixed asset turnover D) decreasing its total asset turnover
B) increasing its total asset turnover
46) The ________ measures the activity, or liquidity, of a firm's stock of goods. A) average collection period B) inventory turnover ratio C) average payment period D) total asset turnover ratio
B) inventory turnover ratio
35) The ________ of a business firm is measured by its ability to satisfy its short-term obligations as they come due. A) activity B) liquidity C) debt D) profitability
B) liquidity
27) In ratio analysis, a comparison to a standard industry ratio is made to isolate ________ deviations from the norm. A) greater than average B) negative C) marginal D) standard
B) negative
32) Without adjustment, inflation may tend to cause ________ firms to appear more efficient and profitable than ________ firms. A) larger; smaller B) older; newer C) smaller; larger D) newer; older
B) older; newer
78) A ________ ratio is commonly used to assess owners' appraisal of the share value. A) debt B) price/earnings C) return on equity D) return on total assets
B) price/earnings
30) The analyst should be careful when analyzing ratios that ________. A) pre-audited statements are used B) right interpretation of the ratio value is made C) financial data being compared need not be uniform D) inflation will not affect while comparing older to newer firms
B) right interpretation of the ratio value is made
1) A firm's annual stockholders' report ________. A) is only accessible to the shareholders of the firm B) summarizes and documents the firm's financial activities during the past year C) documents the list of all investors who bought the firm's shares during the past year D) summarizes and documents the firm's financial plan and budgets during the past year
B) summarizes and documents the firm's financial activities during the past year
45) If an inventory turnover is divided into 365, it becomes a measure of ________. A) financial efficiency B) the average age of the inventory C) sales turnover D) the average collection period
B) the average age of the inventory
53) The ________ ratio indicates the efficiency with which a firm uses its assets to generate sales. A) inventory turnover B) total asset turnover C) quick D) current asset turnover
B) total asset turnover
25) A firm has the following accounts and financial data for 2014: The firm's earnings available to common shareholders for 2014 is ________. A) -$224.25 B) $195.40 C) $302.40 D) $516.60
C) $302.40
27) A firm had the following accounts and financial data for 2014: The firm's net profit after taxes for 2014 is ________. A) -$206.40 B) $213.80 C) $320.40 D) $206.25
C) $320.40
27) A firm had the following accounts and financial data for 2014: The firm's net profit after taxes for 2014 is ________. A) -$206.40 B) $213.80 C) $320.40 D) $206.25
C) $320.40
31) Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense. What was Candy Corporation's earnings per share? A) $3.91 B) $4.52 C) $7.42 D) $7.59
C) $7.42
85) In the DuPont system of analysis, the return on equity is equal to ________. A) (net profit margin) × (total asset turnover) B) (stockholders' equity) × (financial leverage multiplier) C) (return on total assets) × (financial leverage multiplier) D) (return on total assets) × (total asset turnover)
C) (return on total assets) × (financial leverage multiplier)
51) Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then average purchases per day are ________ and the average payment period is ________. A) 36.5; 821.9 B) 36.0; 833.3 C) 821.9; 36.5 D) 833.3; 36.0
C) 821.9; 36.5
3) Accounting practices and procedures used to prepare financial statements are called ________. A) SEC B) IFRS C) GAAP D) IRB
C) GAAP
71) ________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders
C) Gross profit margin
52) ________ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm. A) Employees B) Stockholders C) Lenders and suppliers D) Auditors
C) Lenders and suppliers
76) ________ measures the return earned on the common stockholders' investment in the firm. A) Net profit margin B) Price/earnings ratio C) Return on equity D) Return on total assets
C) Return on equity
47) A(n) ________ is useful in evaluating credit policies. A) average payment period B) current ratio C) average collection period D) inventory turnover ratio
C) average collection period
48) The ________ ratio may indicate poor collections procedures or a relaxed credit policy. A) average payment period B) inventory turnover C) average collection period D) quick
C) average collection period
20) The net value of fixed assets is also called its ________. A) market value B) par value C) book value D) intrinsic value
C) book value
70) The ________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales. A) retained earnings statement B) common-size balance sheet C) common-size income statement D) profit and loss statement
C) common-size income statement
38) A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might ________. A) improve its collection practices by providing extended credit policy B) improve its collection practices and pay accounts payable, thereby decreasing current liabilities and decreasing the current and quick ratios C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios D) increase inventory, thereby increasing current assets and the current and quick ratios
C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios
28) On the balance sheet, net fixed assets represent ________. A) gross fixed assets at cost minus depreciation expense B) gross fixed assets at market value minus depreciation expense C) gross fixed assets at cost minus accumulated depreciation D) gross fixed assets at market value minus accumulated deprecation
C) gross fixed assets at cost minus accumulated depreciation
29) Paid-in capital in excess of par represents the amount of proceeds ________. A) in deficit of the par value from the original sale of common stock B) in excess of the par value from the original sale of common stock C) in excess of the par value from the current value of common stock D) in excess of the par value from the intrinsic value of common stock
C) in excess of the par value from the current value of common stock
56) A firm with a total asset turnover lower than industry standard may have ________. A) excessive debt B) excessive interest costs C) insufficient sales D) insufficient fixed assets
C) insufficient sales
33) Which of the following groups of ratios primarily measure risk? A) liquidity, activity, and profitability B) liquidity, profitability, and market C) liquidity, activity, and debt D) activity, debt, and profitability
C) liquidity, activity, and debt
18) Which of the following represents a current asset? A) automobiles B) buildings C) marketable securities D) equipment
C) marketable securities
17) Which of the following is a current liability? A) accounts receivable B) cash C) notes payable D) inventory
C) notes payable
23) The statement of cash flows ________. A) shows the financial position of a firm at a given point of time B) summarizes all the purchase and sale of fixed assets and raw materials C) provides insight into a firm's operating, investment, and financing cash flows D) classifies a firm's cash flows as operating, investing, financing, and other activities
C) provides insight into a firm's operating, investment, and financing cash flows
37) Ratios provide a ________ measure of a company's performance and condition. A) definitive B) gross C) relative D) absolute
C) relative
81) The DuPont system merges the income statement and balance sheet into two summary measures of profitability, ________. A) net profit margin, and return on total assets B) net profit margin, and return on equity C) return on total assets, and return on common equity D) net profit margin, and price/earning ratio
C) return on total assets, and return on common equity
39) The primary concern of creditors when assessing the strength of a firm is its ________. A) profitability B) leverage C) short-term liquidity D) share price
C) short-term liquidity
61) The higher, the value of ________ ratio, the better able a firm is to fulfill its interest obligations. A) dividend payout B) average collection period C) times interest earned D) average payment period
C) times interest earned
34) A firm's year-end retained earnings balance are $670,000 and $560,000 for 2014 and 2015, respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm paid dividends of ________ in 2015. A) $10,000 B) $100,000 C) $110,000 D) $210,000
D) $210,000
83) In the DuPont system of analysis, the return on total assets (asset) is equal to ________. A) (return on equity) × (financial leverage multiplier) B) (return on equity) × (total asset turnover) C) (net profit margin) × (fixed asset turnover) D) (net profit margin) × (total asset turnover)
D) (net profit margin) × (total asset turnover)
77) A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and common stockholders' investment of $750,000 has a return on equity of ________. A) 20 percent B) 15 percent C) 3 percent D) 4 percent
D) 4 percent
49) ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would likely be considered poor if its average collection period was ________. A) 30 days B) 36 days C) 44 days D) 57 days
D) 57 days
40) Which of the following is true of current ratio? A) The more predictable a firm's cash flows, the higher the acceptable current ratio. B) A higher current ratio indicates a higher return on equity. C) The more predictable a firm's current ratio, the higher the current liabilities. D) A higher current ratio indicates a greater degree of liquidity.
D) A higher current ratio indicates a greater degree of liquidity.
58) ________ ratio measures the proportion of total assets financed by the firm's creditors. A) Total asset turnover B) Inventory turnover C) Current D) Debt
D) Debt
14) Net profit after taxes is ________. A) gross profits minus operating expenses B) sales revenue minus cost of goods sold C) EBITDA minus interest D) EBIT minus interest and taxes
D) EBIT minus interest and taxes
75) ________ measures the overall effectiveness of management in generating profits with its available assets. A) Total asset turnover B) Price/earnings ratio C) Return on equity D) Return on total assets
D) Return on total assets
4) The federal regulatory body governing the sale and listing of securities is called the ________. A) IRS B) FASB C) GAAP D) SEC
D) SEC
60) ________ ratio indicates that a firm will be able to meet interest obligations due on outstanding debt. A) Debt-to-equity B) Interest turnover C) Total assets turnover D) Times interest earned
D) Times interest earned
9) The stockholder's report includes ________. A) an estimated interest cost report B) an estimated dividend report C) a break-even sales report D) a statement of retained earnings
D) a statement of retained earnings
21) Retained earnings on the balance sheet represents the ________. A) net profit after taxes B) amount of proceeds in excess of the par value received from the original sale of common stock C) net profit after taxes minus preferred dividends D) cumulative total of all earnings reinvested in the firm
D) cumulative total of all earnings reinvested in the firm
24) When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the ending balance of retained earnings. A) net profits after taxes B) interest expense C) depreciation D) dividends
D) dividends
41) Which of the following is excluded when calculating quick ratio? A) accounts receivable B) accounts payable C) cash D) inventory
D) inventory
36) The two categories of ratios that should be utilized to assess a firm's true liquidity are the ________. A) liquidity and market ratios B) liquidity and profitability ratios C) market and debt ratios D) liquidity and activity ratios
D) liquidity and activity ratios
25) Cross-sectional ratio analysis is used to ________. A) correct expected problems in operations B) isolate the causes of problems C) provide conclusive evidence of the existence of a problem D) measure relative performance of a firm with its peers
D) measure relative performance of a firm with its peers
34) The ________ ratios are primarily used as measures of return. A) liquidity B) activity C) debt D) profitability
D) profitability
12) Gross profit is ________. A) operating profits minus depreciation B) operating profits minus cost of goods sold C) sales revenue minus operating expenses D) sales revenue minus cost of goods sold
D) sales revenue minus cost of goods sold
7) The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called ________. A) the McCain-Feingold Act B) the Harkins-Oxley Act C) the Sarbanes-Harkins Act D) the Sarbanes-Oxley Act
D) the Sarbanes-Oxley Act
69) Two frequently cited ratios of profitability that can be read directly from the common-size income statement are ________. A) the earnings per share and the return on total assets B) the gross profit margin and the earnings per share C) the gross profit margin and the return on total assets D) the gross profit margin and the net profit margin
D) the gross profit margin and the net profit margin
Look over table 3.1 in ch 3 for questions 63-68
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