BF for Exam 2

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis. True false question.

False, no theory

Which of the following are traditional financial ratio categories?

Financial leverage ratios Profitability ratios Turnover ratios

What is the formula for computing the internal growth rate (IGR)?

(ROA x b)/(1 - ROA x b)

What is the formula for computing a firm's sustainable growth rate?

(ROE x b)/(1 - ROE x b)

Which of the following is the correct representation of the total debt ratio?

(Total assets - Total equity)/(Total assets)

Long-term liabilities represent obligations of the firm lasting more than _____.

1 year

Days' sales in receivables is given by the following ratio:

365/Receivables turnover

What does shareholders' equity represent?

A residual claim against the firm's total assets

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

Accounts receivable

Which one of these is considered to be the most liquid?

Accounts receivable

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

The price-earnings ratio is _____ per share divided by ______ per share.

Blank 1: price Blank 2: earnings

The DuPont identity shows that ______ _______ times total asset turnover times equity multiplier equals ROE.

Blank 1: profit Blank 2: margin

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 peer companies Comparing to major competitors Comparing to its own historical ratios Comparing to aspirant companies

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

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: Current assets are cash and other assets that are expected to convert to cash within 1-5 years.

False

True or false: Financial ratios are computed using only balance sheet information.

False

True or false: Inventory turnover is sales divided by inventory.

False

True or false: Receivables turnover is cost of goods sold divided by accounts receivable.

False

True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.

False

True or false: The dividend payout ratio equals cash dividends divided by sales.

False

True or false: The times interest earned ratio is EBIT minus interest.

False

True or false: The DuPont identity is a popular expression breaking ROA into three parts.

False, ROE

True or false: The price-earnings ratio is price per share times earnings per share.

False, divided

True or false: The retention ratio equals one minus the ROA.

False, divided payout ratio.

True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.

False, market data should be given precedence.

________ ________ are the prime source of information about a firm's financial health.

Financial statements

The common set of standards and procedures by which audited financial statements are prepared are called:

Generally Accepted Accounting Principles (GAAP)

Which of these questions can be answered by reviewing a firm's balance sheet?

How much debt is used to finance the firm? What is the total amount of assets the firm owns?

Which of the following are activities that increase cash?

Increasing long-term debt Decreasing fixed assets

Which one of the following does not affect ROE according to the DuPont identity?

Investor sentiment

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.

Long-term solvency ratios measure what aspect of the firm's financial position?

Its financial leverage

Which of the following are classified as liabilities on a firm's balance sheet?

Long-term debt Accounts payable

Which one of the following is the correct equation for computing return on assets (ROA)?

Net income/Total assets

Which of the following is the correct equation for return on equity?

Net income/Total equity

_____ group analysis is a way to establish a benchmark when using ratios.

Peer

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

Which one of the following equations defines the total asset turnover ratio?

Sales/Total assets

________ financial statements enable one to compare firms that differ in size.

Standardized

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 or its competitors are global companies. The firm and its competitors operate under different regulatory environments.

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.

Which of the following is (are) true of financial ratios?

They are developed from a firm's financial information. They are used for comparison purposes.

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

True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.

True

True or false: Current liabilities are obligations that are expected to require cash payment within one year.

True

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

Current assets are cash and other assets that will be turned into cash within ___.

a year

A balance sheet reflects a firm's:

accounting value on a specific date

Amounts not yet collected from customers on sales already made are called:

accounts receivable

Which of the following is shown on the left hand side of the balance sheet?

assests

Shareholders' equity equals ________________.

assets minus liabilities

Liquidity refers to the ease of changing _____.

assets to cash

Under GAAP, assets are generally carried on a firm's balance sheet at ________.

book value historical cost

Common-size statements are best used for comparing:

competitors firms of different sizes year-to-year for your firm

Liabilities can be classified as _______ or long-term.

current

The current ratio computes the relationship between ____.

current assets and current liabilities

Short-term finance is primarily concerned with ___.

current liabilities current assets

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 increased. The firm has (increased/decreased) its liquidity over the past year.

decreased

The more debt a firm has, the greater its:

degree degree of financial leverage financial leverage

The _____ payout ratio equals cash dividends divided by net income.

dividend

Short-term finance is concerned with current assets and current liabilities, whereas long-term finance is concerned with ___.

dividend policy, capital budgeting, capital structure

Sources of cash can involve increasing a(n) ______ account.

equity and liability

Financial statement analysis is primarily "management by ________ ."

exception

True or false: Current assets plus current liabilities equals net working capital.

false

Long-term solvency ratios are also known as:

financial leverage ratios

Given an internal growth rate of 3 percent, a firm can _____.

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

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

increase

Current assets example

inventory

Current assets are classified as relatively _______; these assets can be converted to cash within the next 12 months.

liquid

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

Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.

may increase or decrease may not change

The retention ratio equals one ____ the dividend payout ratio.

minus

The balance sheet identity says:

net working capital plus fixed assets equals long-term debt plus equity

One of the most important uses of financial statement information within the firm is:

performance evaluation

Return on assets (ROA) is a measure of _____.

profitability

Return on equity (ROE) is a measure of _____.

profitability

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

Stockholders' equity is always shown on the ______ of the balance sheet.

right side

The profit margin is equal to net income divided by ______.

sales

In a common-size income statement, each item is expressed as a percentage of total _____.

sales or revenue

Who is entitled to the residual value of a firm's cash flows?

shareholders

The times interest earned ratio is a measure of long-term ______.

solvency

Physical assets are termed ______________ assets.

tangible

The DuPont identity breaks ROE into _____ parts.

three

A common-size balance sheet expresses accounts as a percentage of ______.

total assets

Common stockholders are entitled to the difference between ______ and ________.

total assets; total liabilities

Long-term liabilities are not due in the current year (from the date of the balance sheet).

true

Financial leverage refers to a firm's _________.

use of debt in its capital structure