FINC 301 Chapter 6

Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent. A.) 1.60 B.) 2.05 C.) 2.50 D.) 4.00

A.) 1.60

Determine a firm's total asset turnover (TAT) if its net profit margin is 5 percent, assets are $8 million, and ROI is 8 percent. A.) 1.60 B.) 2.05 C.) 2.50 D.) 4.00

A.) 1.60

Which of the following would NOT improve the current ratio? A.) Borrow short term to finance additional fixed assets. B.) Issue long-term debt to buy inventory. C.) Sell common stock to reduce current liabilities. D.) Sell fixed assets to reduce accounts payable.

A.) Borrow short term to finance additional fixed assets.

Which of the following would not improve the current ratio? A.) Borrow short term to finance additional fixed assets. B.) Issue long-term debt to buy inventory. C.) Sell common stock to reduce current liabilities. D.) Sell fixed assets to reduce accounts payable.

A.) Borrow short term to finance additional fixed assets.

Which group of ratios measure a firm's ability to meet short-term obligations? A.) Liquidity ratios. B.) Debt ratios. C.) Coverage ratios. D.) Profitability ratios. E.) Activity ratios.

A.) Liquidity ratios.

The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = __________. A.) Net profit margin × Total asset turnover × Equity multiplier B.) Total asset turnover × Gross profit margin × Debt ratio C.) Total asset turnover × Net profit margin D.) Total asset turnover × Gross profit margin × Equity multiplier

A.) Net profit margin × Total asset turnover × Equity multiplier

Sales for 1991 (base year) were $800,000 and the year-end total asset turnover ratio was 1.6. With which of the following statements would you agree? A.) The total assets index analysis value, assuming $1.05 million of assets at the end of 2000, would be 210. B.) The gross profit margin and the net profit margin are examples of balance sheet ratios. C.) If total debt in 2000 was $420,000, the debt-to-equity ratio in 2000 would be 84%. D.) Index analysis supplements the common-size analysis by comparing key industry ratios.

A.) The total assets index analysis value, assuming $1.05 million of assets at the end of 2000, would be 210.

In conducting an index analysis every balance sheet item is divided by __________ and every income statement is divided by __________. A.) its corresponding base year balance sheet item; its corresponding base year income statement item B.) its corresponding base year income statement item; its corresponding base year balance sheet item C.) net sales or revenues; total assets. D.) total assets; net sales or revenues

A.) its corresponding base year balance sheet item; its corresponding base year income statement item

The process of convergence of accounting standards around the world aims to A.) narrow or remove national accounting differences B.) move non-US accounting standards towards US Generally Accepted Accounting Principles (US GAAP) C.) create one set of rules-based accounting standards for all countries

A.) narrow or remove national accounting differences

When doing an "index analysis," we should expect that changes in a number of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company. A.) net sales B.) cost of goods sold C.) earnings before interest and taxes (EBIT) D.) earnings before taxes (EBT)

A.) net sales

A firm's operating cycle is equal to its inventory turnover in days (ITD) A.) plus its receivable turnover in days (RTD). B.) minus its RTD. C.) plus its RTD minus its payable turnover in days (PTD). D.) minus its RTD minus its PTD.

A.) plus its receivable turnover in days (RTD).

Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.) A.) $26.1 million B.) $23.7 million C.) $7.4 million D.) $18.7 million

B.) $23.7 million

Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales? A.) $3,750,000 B.) $480,000 C.) $300,000 D.) $1,500,000

B.) $480,000

Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales? A.) $3,750,000 B.) $480,000 C.) $300,000 D.) $1,500,000

B.) $480,000

Which group of ratios shows the extent to which the firm is financed with debt? A.) Liquidity ratios. B.) Debt ratios. C.) Coverage ratios. D.) Profitability ratios. E.) Activity ratios.

B.) Debt ratios

Which of the following statements is most accurate? A.) Coverage ratios also shed light on the "liquidity" of these current ratios. B.) Receivable- and inventory-based activity ratios also shed light on the "liquidity" of these current assets. C.) Receivable- and inventory-based activity ratios also shed light on the firm's use of financial leverage. D.) Liquidity ratios also shed light on the firm's use of financial leverage.

B.) Receivable- and inventory-based activity ratios also shed light on the "liquidity" of these current assets.

Which of the following statements (in general) is correct? A.) A low receivables turnover is desirable. B.) The lower the total debt-to-equity ratio, the lower the financial risk for a firm. C.) An increase in net profit margin with no change in sales or assets means a poor ROI. D.) The higher the tax rate for a firm, the lower the interest coverage ratio.

B.) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

Which of the following statements (in general) is correct? A.) A low receivables turnover is desirable. B.) The lower the total debt-to-equity ratio, the lower the financial risk for a firm. C.) An increase in net profit margin with no change in sales or assets means a weaker ROI. D.) The higher the tax rate for a firm, the lower the interest coverage ratio.

B.) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

Which of the following statements is the least likely to be correct? A.) A firm that has a high degree of business risk is less likely to want to incur financial risk. B.) There exists little or no negotiation with suppliers of capital regarding the financing needs of the firm. C.) Financial ratios are relevant for making internal comparisons. D.) It is important to make external comparisons or financial ratios

B.) There exists little or no negotiation with suppliers of capital regarding the financing needs of the firm.

Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio? A.).2 B.) .6 C.) .667 D.) .333

C.) .667

Krisle and Kringle's debt-to-total assets ratio is.4. What is its debt-to-equity ratio? A.) .2 B.) .77 C.) .667 D.) .333

C.) .667

Which group of ratios relate the financial charges of a firm to its ability to service them? A.) Liquidity ratios. B.) Debt ratios. C.) Coverage ratios. D.) Profitability ratios. E.) Activity ratios.

C.) Coverage ratios.

Which of the following statements is most correct regarding the current ratio for a firm that uses industry averages and a peer benchmark as their comparison? A.) Firms should attempt to maintain a current ratio that is below 0.5. B.) Firms should always exceed both the industry average and the peer benchmark current ratio. C.) Firms should strive to maintain a current ratio that seems reasonable when compared to an industry average and a peer benchmark. D.) Firms should strive to maintain a current ratio of at least 2.0.

C.) Firms should strive to maintain a current ratio that seems reasonable when compared to an industry average and a peer benchmark.

Benchmarking can be applied to ratio analysis. How is this different from comparing a firm's ratios to industry averages over time? A.) In benchmarking you compare your firm's performance to a previous "benchmarked" period and not industry averages. B.) It creates a benchmark of numerous industries for comparison purposes rather than a single industry due to wild fluctuations within specific industries. C.) It creates a benchmark that compares your firm to the best world-class competitors rather than an entire industry. D.) It creates a benchmark by taking an average of a portfolio of industries over a specific time period, usually 5 years, rather than a single industry in a single year due to wild fluctuations within specific industries over short periods of time.

C.) It creates a benchmark that compares your firm to the best world-class competitors rather than an entire industry.

Retained earnings for the "base year" equals 100.0 percent. You must be looking at A.) a common-size balance sheet. B.) a common-size income statement. C.) an indexed balance sheet. D.) an indexed income statement.

C.) an indexed balance sheet

The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if __________. A.) cost of goods sold increased relative to sales B.) sales increased relative to expenses C.) the U.S. Congress increased the tax rate D.) dividends were decreased

C.) the U.S. Congress increased the tax rate

The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if A.) cost of goods sold increased relative to sales. B.) sales increased relative to expenses. C.) the U.S. Congress increased the tax rate. D.) dividends were decreased

C.) the U.S. Congress increased the tax rate.

Which group of ratios relate profits to sales and investment? A.) Liquidity ratios. B.) Debt ratios. C.) Coverage ratios. D.) Profitability ratios. E.) Activity ratios.

D.) Profitability ratios.

A company can improve (lower) its debt-to-total asset ratio by doing which of the following? A.) Borrow more. B.) Shift short-term to long-term debt. C.) Shift long-term to short-term debt. D.) Sell common stock.

D.) Sell common stock.

A company can improve (lower) its debt-to-total assets ratio by doing which of the following? A.) Borrow more. B.) Shift short-term to long-term debt. C.) Shift long-term to short-term debt. D.) Sell common stock.

D.) Sell common stock.

Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company A.) will not experience any difficulty with its creditors. B.) has less liquidity than other firms in the industry. C.) will be viewed as having high creditworthiness. D.) has greater than average financial risk when compared to other firms in its industry.

D.) has greater than average financial risk when compared to other firms in its industry.

In conducting a common-size analysis every balance sheet item is divided by __________ and every income statement is divided by __________. A.) its corresponding base year balance sheet item; its corresponding base year income statement item B.) its corresponding base year income statement item; its corresponding base year balance sheet item C.) net sales or revenues; total assets. D.) total assets; net sales or revenues

D.) total assets; net sales or revenues

The authors place financial ratios into __________. A.) two broad categories: (1) balance sheet ratios; and (2) income statement ratios B.) three broad categories: (1) balance sheet ratios; (2) income statement ratios; and (3) income statement/balance sheet ratios C.) two broad categories: (1) balance sheet and income statement/balance sheet ratios; and (2) income statement ratios D.) two broad categories: (1) balance sheet ratios; (2) income statement and income statement/balance sheet ratios

D.) two broad categories: (1) balance sheet ratios; (2) income statement and income statement/balance sheet ratios

Which group of ratios measure how effectively the firm is using its assets? A.) Liquidity ratios. B.) Debt ratios. C.) Coverage ratios. D.) Profitability ratios. E.) Activity ratios.

E.) Activity ratios.

T/F A common-size balance sheet analysis compares the firm's performance with the consumer price index.

False

T/F A short average collection period assures us that accounts receivable are being efficiently managed.

False

T/F All companies should have at least a 1.5 to 1 current ratio.

False

T/F Assets are listed in order of increasing liquidity on the balance sheet.

False

T/F The United States and a few European Union (EU) countries all adhere to US Generally Accepted Accounting Principles (US GAAP).

False

T/F The current ratio is never larger than the quick ratio.

False

T/F The income statement summarizes the assets, liabilities and owners' equity of a company at a moment in time.

False

T/F The shareholders' equity figure on a balance sheet represents what the firm is worth to shareholders.

False

T/F A firm's operating cycle is equal to its inventory turnover in days (ITD) plus its receivable turnover in days (RTD

True

T/F A firm's operating cycle is equal to its inventory turnover in days (ITD) plus its receivable turnover in days (RTD).

True

T/F A high inventory turnover would be more important to a dairy company than to a jewelry store.

True

T/F A problem with a balance sheet based on historical costs is that in a period of inflation a company with old fixed assets will show a much better return on investment than a similar firm with new fixed assets.

True

T/F Convergence is the process of the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) and other national accounting standard setters working together to a common set of standards.

True