Ch 3 Smartbook

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

False

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.

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

false

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

financial statements

Given an internal growth rate of 3 percent, a firm will ______.

grow by 3 percent or less without any additional external financing.

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

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

increase

Inventory turnover is cost of goods sold divided by

inventory

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

Time-trend analysis is an example of

management by exception

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

______ financial statements enable one to compare firms that differ in size

standardized

______ financial statements enable one to compare firms that differ in size. Multiple choice question.

standardized

How is the market-to-book ratio measured?

Market value per share / Book value per share

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

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

true

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + Depreciation) / Interest expense

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.

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

A firm with a market-to-book value that is greater than 1 is said to have _____ value for shareholders.

created

Return on assets equals net income _______ by total assets.

divided

Financial statement analysis is primarily "management by ______ ."

exception

The price-earnings (PE) ratio is a ______ ratio.

market value

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

net income/ total equity

The price-earnings ratio is ________ per share divided by _______ per share.

price; earnings

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

profitability

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

solvency

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

(Total assets − Total equity)/(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

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

total assets

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

(ROE × b) / (1 - ROE × b)

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.

The current ratio computes the relationship between ______.

current assets and current liabilities

Whenever ______ information is available, it should be used instead of accounting data.

market

True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.

true

True or false: Profit margin equals net income divided by sales.

true

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

true

True or false: The cash ratio is found by dividing cash by current liabilities. True false question.

true

True or false: The total debt ratio equals the total assets minus total equity divided total assets.

true

If a company has had negative earnings for several periods, they might choose to use a _____

price-sales ratio

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

profitability

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.

Which of the following are true of financial ratios?

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

Which of the following items are used to compute the current ratio?

-accounts payable -cash

Which of the following are true of financial ratios?

-they are developed from a firm's financial information -they are used for comparison purposes

Common-size statements are best used for comparing

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

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 price-earnings ratio is price per share times earnings per share.

false

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

false

How is the price-earnings (PE) ratio computed?

market price per share/earnings per share

A firm may use a price-sales ratio when it has had (negative/positive) earnings over the past year.

negative

A firm with a profit margin of 10 percent generates ______ in net income for every dollar in sales.

10 cents

Days' sales in receivables is given by the following ratio

365 / Receivables Turnover

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

Net Income / Total Assets