Finance Chapter 3
A U.S. parent company's foreign equity accounts are translated into dollars using the historical rate or average rate based on the company's discretion.
False
A U.S. parent company's foreign retained earnings are not adjusted for currency movements to reflect each year's operating profits or losses.
False
A single key ratio of a firm provides all the information required to judge the overall performance of the firm.
False
Average age of inventory can be calculated as inventory divided by 365.
False
Average age of inventory can be calculated as inventory turnover divided by 365.
False
Average payment period can be calculated as accounts payable divided by average sales per day.
False
Benchmarking is a type of time-series analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to isolate areas of opportunity for improvement.
False
Common stock dividends paid to stockholders is equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding.
False
Current ratio provides a firm's ability to meet its long-term obligations.
False
Earnings per share represents the dollar amount earned and distributed to shareholders.
False
Earnings per share results from dividing earnings available for common stockholders by the number of shares of common stock authorized.
False
GAAP is the accounting profession's rule-setting body.
False
Gross profit margin measures the percentage of each sales dollar left after a firm has paid for its goods and operating expenses.
False
Higher the value of the times interest earned ratio, higher is the proportion of the firm's interest income compared to its contractual interest payments.
False
Paid-in capital in excess of par represents a firm's book value received from the original sale of common stock.
False
Profitability ratios capture both risk and return.
False
Publicly owned corporations are those which are financed by the proceeds from the treasury securities.
False
The DuPont system allows a firm to break its return on equity into a profit-on-sales component, an efficiency-of-asset-use component, and a use-of-operating leverage component.
False
The Financial Accounting Standards Board (FASB) is the federal regulatory body that governs the sale and listing of securities.
False
The McCain-Feingold Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.
False
The Sarbanes-Oxley Act of 2002 established the Private Company Accounting Oversight Board (PCAOB) which is a for-profit corporation that oversees CEOs of public corporations.
False
The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk and return.
False
The lower the fixed-payment coverage ratio, the lower is the firm's financial leverage.
False
The president's letter, the first component of the stockholders' report, is the primary communication from management to a firm's employees.
False
The statement of cash flows reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.
False
The use of the unaudited financial statements for ratio analysis is preferable because it reflects the firm's true financial condition.
False
Time-series analysis evaluates the performance of various firms at the same point in time using financial ratios.
False
Time-series analysis is the evaluation of a firm's financial performance in comparison to other firm(s) at the same point in time.
False
Total asset turnover commonly measures the liquidity of a firm's total assets.
False
Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectional and time-series analysis.
In summarizing a large number of ratios, all aspects of a firm's activities can be assessed. However, limitations of ratio analysis must be recognized. A comparison of current and past ratios may reveal mismanagement. But, the ratio does not give definitive cause to the problem. Additional investigation is necessary to confirm the possible problem. The analyst must be cautious of the following points: 1) a single ratio does not provide sufficient information to judge the overall performance of the firm, 2) the dates of the financial statements should be the same, 3) audited statements should be used, 4) similar accounting treatment of comparative data is essential, and 5) inflation and differing asset ages can distort ratio comparisons.
Average age of inventory can be calculated as 365 divided by inventory turnover.
True
Average age of inventory is viewed as the average length of time inventory is held by a firm or as the average number of days' sales in inventory.
True
Average payment period can be calculated as accounts payable divided by average purchases per day.
True
Benchmarking is a type of cross-sectional analysis in which a firm's ratios are compared to a key competitor firm within the same industry, primarily to identify areas for improvement.
True
Both current and prospective shareholders are interested in the firm's current and future level of risk and return, which directly affect share price.
True
Creditors are primarily interested in short-term liquidity of the company and its ability to make interest and principal payments.
True
Cross-sectional analysis involves the comparison of different firms' financial ratios at the same point in time.
True
Earnings per share represents amount earned during the period on each outstanding share of common stock.
True
Generally accepted accounting principles are authorized by the Financial Accounting Standards Board (FASB).
True
Higher the debt ratio, more the financial leverage a firm has and thus, the greater will be its risk and return.
True
In ratio analysis, the financial statements being used for comparison should be dated at the same point in time during the year. If not, the effect of seasonality may produce erroneous conclusions and decisions.
True
Net fixed assets represent the difference between gross fixed assets and accumulated depreciation of fixed assets.
True
Net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and common stock dividends, have been deducted.
True
Publicly owned corporations with more than $5 million assets are required by the Securities and Exchange Commission (SEC) and individual state securities commissions to provide their stockholders with an annual stockholders' report.
True
Ratios merely direct an analyst to potential areas of concern and it does not provide conclusive evidence as to the existence of a problem.
True
Retained earnings represent the cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception.
True
Return on total assets (ROA) measures the overall effectiveness of management in generating profits with its available assets.
True
The DuPont formula allows a firm to break down its return into the net profit margin, which measures the firm's profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales.
True
The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that U.S.-based companies translate their foreign-currency-denominated assets and liabilities into dollars using the current rate (translation) method.
True
The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) which is a not-for-profit corporation that oversees auditors of public corporations.
True
The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.
True
The amount paid in by the original purchasers of common stock is shown by two entries in the firm's balance sheet—common stock and paid-in capital in excess of par on common stock.
True
The balance sheet is a statement which balances a firm's assets (what it owns) against its debt (what it owes) or its equity (what is provided by owners).
True
The basic inputs to an effective financial analysis are the firm's income statement and the balance sheet.
True
The common stock entry in balance sheet is the par value of common stock.
True
The financial leverage multiplier is the ratio of a firm's total assets to common stock equity.
True
The income statement is a financial summary of a firm's operating results during a specified period while the balance sheet is a summary statement of a firm's financial position at a given point in time.
True
The liquidity of a business firm refers to the solvency of the firm's overall financial position.
True
The magnification of risk and return introduced through the use of fixed-cost financing, such as debt and preferred stock is called financial leverage.
True
The original price per share received by the firm on a single issue of common stock is equal to the sum of the common stock and paid-in capital in excess of par accounts divided by the number of shares outstanding.
True
The statement of cash flows provides insight into a firm's operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period of concern.
True
The two basic measures of liquidity are the debt-to-equity ratio and the asset turnover ratio.
True
The use of differing accounting treatments—especially relative to inventory and depreciation—can distort the results of ratio analysis, regardless of whether cross-sectional or time-series analysis is used.
True
Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage will result in ________. A) an increase in the return on equity B) a decrease in the gross profit margin C) an increase in the gross profit margin D) an increase in retained earnings
a) an increase in the return on equity
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
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
Which of the following is a fixed asset? A) land B) accounts payable C) accruals D) notes payable
a) land
________ 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
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)
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
When assessing the fixed-payment coverage ratio, ________. A) the lower its value the more risky is the firm B) the lower its value, the higher is the firm's financial leverage C) preferred stock dividend payments can be disregarded D) the higher its value, lesser is its reliability to pay up the debts
a) the lower its value, the more risky is the firm
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
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
The rule-setting body, which authorizes generally accepted accounting principles is the ________. A) IFRS B) FASB C) SEC D) Federal Reserve System
b) FASB
In general, the more debt a firm uses, the smaller its financial leverage.
False
Market ratios only measure the risk.
False
The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they come due.
False
The liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come due.
False
Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.
True
The price/earnings (P/E) ratio represents the degree of confidence that investors have in a firm's future performance.
True
Typically, higher coverage ratios are preferred, but a very high ratio may indicate under-utilization of fixed-payment obligations, which may result in unnecessarily low risk and return.
True
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
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
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
________ 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
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
________ 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
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
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
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
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
A firm with a low return on total assets can improve its return on equity, all else remaining the same, by ________. A) increasing its debt ratio B) increasing its total asset turnover C) decreasing its debt ratio D) decreasing its total asset turnover
a) increasing its debt ratio
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
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
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
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
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 that is not judged on a single ratio
________ 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
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
________ 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
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
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
Other things being equal, a decrease in total asset turnover will result in ________ in the return on total assets. A) an increase B) a decrease C) no change D) an undetermined change
b) a decrease
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
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
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
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
________ 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
Total assets less net fixed assets equals ________. A) gross assets B) current assets C) depreciation D) liabilities and equity
b) current assets
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
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
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
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
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
b) in excess of the par value from the original sale of common stock
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
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
________ 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
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
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
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
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
________ 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
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
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
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 effect while comparing older to newer firms
b) right interpretation of the ratio value is made
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
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
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
Financial leverage multiplier is the ratio of ________. A) current assets to common stockholders' equity B) total assets to common stockholders' equity C) total assets to total debt D) current assets to current liabilities
b) total assets to common stockholder's equity
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
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) x (financial leverage multiplier)
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
Accounting practices and procedures used to prepare financial statements are called ________. A) SEC B) IFRS C) GAAP D) IRB
c) GAAP
The three basic ratios used in the DuPont system of analysis are ________. A) net profit margin, total asset turnover, and return on investment B) net profit margin, total asset turnover, and return on equity C) net profit margin, total asset turnover, and equity multiplier D) net profit margin, financial leverage multiplier, and return on equity
c) NPM, TAT, Equity Multiplier
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
As the financial leverage multiplier increases, this may result in ________. A) an increase in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases B) an increase in the net profit margin and return on investment, due to the increase in interest expense as debt increases C) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases D) a decrease in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases
c) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases
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
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
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
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
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
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
________ 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
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
________ 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
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
Which of the following represents a current asset? A) automobiles B) buildings C) marketable securities D) equipment
c) marketable securities
Which of the following is a current liability? A) accounts receivable B) cash C) notes payable D) inventory
c) notes payable
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
Ratios provide a ________ measure of a company's performance and condition. A) definitive B) gross C) relative D) absolute
c) relative
________ 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
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
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
The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing. A) operating leverage B) long-term debt C) total debt D) total assets
c) total debt
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
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 ) x (total asset turnover)
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%
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
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
The federal regulatory body governing the sale and listing of securities is called the ________. A) IRS B) FASB C) GAAP D) SEC
d) SEC
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 ration indicates a greater degree of liquidity
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
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
________ 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
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
Which of the following is excluded when calculating quick ratio? A) accounts receivable B) accounts payable C) cash D) inventory
d) inventory
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
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
The ________ ratios are primarily used as measures of return. A) liquidity B) activity C) debt D) profitability
d) profitability
________ 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
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
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
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
________ 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