Chapter 3 Learn

A firm has a total debt ratio of 0.30 times. This means the firm has ___ in total debt for every $1 in total assets.

$0.30

________ financial statements provide for comparison of firms that differ in size.

Standardized

A(n) Blank______ in net profit margin will increase ROE.

increase

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

market value

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

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

Which of the following are traditional financial ratio categories?

- Asset management ratios - Profitability ratios - Market value ratios

Long-term debt ratio is equal to long-term debt divided by the sum of long-term debt and total _____.

equity

The debt-equity ratio expresses the total debt divided by total equity, while the _____ multiplier expresses the total assets divided by the total equity.

equity

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:

further investigation

A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

higher

When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.

higher

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than

True or false: A deteriorating time trend in a financial ratio is always a bad sign.

False

True or false: There is only one method for preparing the statement of cash flows.

False

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

Financial statements

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

Investor sentiment

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Seasonality Differing accounting methods Differing fiscal years

Although Blank______ are often poor reflections of reality, they are often the best information available.

accounting numbers

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:

common-size statements

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

created

Total capitalization equals total equity plus total:

long-term debt

The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and ______value ratios.

market

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

market

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

market price per share/earnings per share

How is market-to-book ratio measured?

market value per share/book value per share

By combining common-size and base year analysis, we eliminate the effect of the _____.

overall growth

Return on assets (ROA) is a measure of:

profitability

At the most fundamental level, firms generate cash and:

spend it

The inventory ______ is calculated as the COGS divided by the inventory.

turnover

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

Cash Accounts payable

The current ratio shows the relationship between ____.

current assets and current liabilities

A common-base year financial statement presents items relative to a certain base, which is the _____.

dollar amount of each item during a common base year

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

Net income/Total assets

True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.

True

Because we are almost always unable to obtain all of the market information we want, we rely on _____ numbers for much of our financial information.

accountint

The quick ratio is computed just like the _____ ratio, except that inventory is omitted.

current

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase.

________ financial statements provide for comparison of firms that differ in currency type.

Standardized

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.

The ROE equals the net profit margin multiplied by the total __________ turnover multiplied by the equity multiplier.

asset

A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.

base year; base amount

At the most fundamental level, firms generate _____ and spend it.

cash

Common-size statements are used for comparing firms with differing ____.

sizes

Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.

total equity

Which of the following are uses of cash?

-increases in property, plant and equipment -increases in inventory -decreases in accounts payable

Which of the following are sources of cash?

A decrease in accounts receivable. An increase in notes payable.

How is the inventory turnover ratio computed?

COGS/Inventory

Which one of the following is one way in which financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

What does a current ratio of 1.2 mean?

The firm has $1.20 in current assets for every $1 in current liabilities.

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?

There are different methods of preparing it.