Reading Assignment 3
A firm with a profit margin of 10 percent generates ______ in net income for every dollar in sales.
10 cents
An increase in the profit margin will ______ a firm's sustainable growth rate.
increase
One of the most important uses of financial statement information within the firm is:
performance evaluation.
True or false: The total debt ratio equals the total assets minus total equity divided total assets.
True
True or false: The dividend payout ratio equals cash dividends divided by sales.
False
Return on assets (ROA) is a measure of ______.
profitability
Receivables turnover is ________ divided by accounts receivable.
sales
True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
False
Fill in the blank question. Inventory turnover is cost of goods sold divided by ________.
inventory
True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.
False
The times interest earned ratio is a measure of long-term _________.
solvency
A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.
26
Days' sales in receivables is given by the following ratio:
365/receivables turnover
Fill in the blank question. The price-earnings ratio is _______ per share divided by __________ per share. (Enter only one word per blank.)
price earnings
Which of the following is true about the sustainable growth rate?
It is the maximum rate of growth a firm can maintain without increasing its financial leverage.
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase.
Fill in the blank question. The retention ratio equals one ________ the dividend payout ratio.
minus
True or false: The times interest earned ratio is EBIT minus interest.
False
Which one of these will decrease a firm's sustainable rate of growth?
an increase in the dividend payout ratio
The current ratio computes the relationship between ______.
current assets and current liabilities
The __________ payout ratio equals cash dividends divided by net income.
dividend
Financial statement analysis is primarily "management by ______ ."
exception
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?
noncash expenses
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
Which of the following is the correct representation of the cash coverage ratio?
(EBIT + depreciation)/Interest expense
What is the formula for computing the internal growth rate (IGR)?
(ROA × b)/(1 − ROA × b)
What is the formula for computing a firm's sustainable growth rate?
(ROE × b)/(1 − ROE × b)
The DuPont identity shows that _______________ ______________ times total asset turnover times equity multiplier equals ROE. (Enter only one word per blank.)
Blank 1: profit Blank 2: margin or margins
Given an internal growth rate of 3 percent, a firm will ______.
grow by 3 percent or less without any additional external financing
The information needed to compute the profit margin can be found on the ____.
income statement
Which one of the following does not affect ROE according to the DuPont identity?
investor sentiment
Long-term solvency ratios measure what aspect of the firm's financial position?
its financial leverage
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be ______.
less than 1
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.
liquidity
Short-term solvency ratios are also called ________ratios.
liquidity
Time-trend analysis is an example of:
management by exception
Whenever ______ information is available, it should be used instead of accounting data.
market
The price-earnings (PE) ratio is a ______ ratio.
market value
How is the market-to-book ratio measured?
market value per share/book value per share
Based on the DuPont Identity, an increase in sales, all else held equal, ______ ROE.
may not change may increase or decrease
A firm may use a price-sales ratio when it has had _______ (negative/positive) earnings over the past year.
negative
Which one of the following is the correct equation for computing return on assets (ROA)?
net income/total assets
Return on equity (ROE) is a measure of ______.
profitability
In a common-size income statement, each item is expressed as a percentage of total _______________.
sales
The profit margin is equal to net income divided by ______.
sales
Which one of the following equations defines the total asset turnover ratio?
sales/total assets
The DuPont identity breaks ROE into ______ parts.
three
Which one of the following best explains why financial managers use a common-size balance sheet?
to track changes in a firm's capital structure
Which of the following are traditional financial ratio categories?
turnover ratios profitability ratios financial leverage ratios
Fill in the blank question. Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has _____________-(increased/decreased) its liquidity over the past year.
Decrease
The ______ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
True or false: Financial ratios are computed using only balance sheet information.
False
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
False
True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.
False
True or false: Inventory turnover is sales divided by inventory.
False
True or false: Market-to-book ratio equals book value per share divided by market value per share.
False
True or false: Receivables turnover is cost of goods sold divided by accounts receivable.
False
True or false: The DuPont identity is a popular expression breaking ROA into three parts.
False
True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.
False
True or false: The price-earnings ratio is price per share times earnings per share.
False
True or false: The retention ratio equals one minus the ROA.
False
______ are the prime source of information about a firm's financial health.
Financial statements
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
Increase
How is the price-earnings (PE) ratio computed?
Market price per share / Earnings price per share
Which of the following is the correct equation for return on equity?
Net income/Total equity
Which of the following are true of financial ratios?
They are developed from a firm's financial information. They are used for comparison purposes.
The cash coverage ratio adds ______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
depreciation
Fill in the blank question. Return on assets equals net income _________ by total assets.
divided
True or false: Profit margin equals net income divided by sales.
True
Which of the following is the correct representation of the total debt ratio?
(Total assets − Total equity)/(Total assets)
Long-term solvency ratios are also known as:
financial leverage ratios
Cal's Market has a return on equity (ROE) of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity.
How is the inventory turnover ratio computed?
Cost of Goods Sold / Inventory
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
The cash ratio is found by dividing cash by:
current liabilities
True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.
True
______ group analysis is a way to establish a benchmark when using ratios.
Peer
If a company has had negative earnings for several periods, they might choose to use a ______.
Price-sales ratio
______ financial statements enable one to compare firms that differ in size.
Standardized
Which of the following best explains why financial managers use a common-size income statement?
The common-size income statement can show which costs are rising or falling as a percentage of sales.
What does it mean when a company reports ROA of 12 percent?
The company generates $12 in net income for every $100 invested in assets.
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average.
Which of the following create problems with financial statement analysis?
The firm or its competitors are conglomerates. The firm and its competitors operate under different regulatory environments. The firm or its competitors are global companies.
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?
The total asset turnover ratio will increase.
True or false: In a common-size income statement, each item is expressed as a percentage of total sales.
True
True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.
True
True or false: The cash ratio is found by dividing cash by current liabilities.
True
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes ______ to sell.
a long time
Fill in the blank question. A problem with the TIE ratio is that it is based on EBIT, which is not a measure of _____________ available to pay interest.
cash
Which of the following items are used to compute the current ratio?
cash accounts payable
Which of the following would help a company take action to improve its ratios?
comparing to major competitors comparing to peer companies comparing to aspirant companies comparing to its own historical ratios
A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.
created