FIN CH 3

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

False

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

False (If there is a conflict between market and accounting data, market data should be given precedence.)

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

False (The dividend payout ratio equals cash dividends divided by net income.)

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

False (The price-earnings ratio is price per share divided by earnings per share.)

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.

False (If a company has inventory, the quick ratio will always be less than the current ratio.)

Which of the following are true of financial ratios?

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

Inventory turnover is cost of goods sold divided by

inventory

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

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

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

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

sales

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

solvency

The DuPont identity breaks ROE into ___ parts.

three

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.

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

Common-size statements are best used for comparing:

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

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 (Receivables turnover = Sales/Accounts receivable. If sales increase and there is no change in receivables, receivables turnover would increase.)

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

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.

The price-earnings ratio is ___ per share divided by ___ per share.

price earnings

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

(ROA × b)/(1 − ROA × b)

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

False (Inventory turnover is cost of goods sold divided by inventory.)

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

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

dividend

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

profitability

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

(Total assets − Total equity)/(Total assets)

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

False (The DuPont identity is a popular expression breaking ROE into three parts.)

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

False (The times interest earned ratio is EBIT divided by interest.)

The current ratio computes the relationship between ______.

current assets and current liabilities

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

less than (Since the quick ratio excludes inventory, it will always be less than the current ratio.)

Time-trend analysis is an example of:

management by exception

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

False (There is no theory or set method to select the ratios to use in financial statement analysis.)

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

True

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

True

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

10 cents

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

(ROE × b)/(1 − ROE × b)

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

Net income/Total equity

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

Standardized

Which of the following create problems with financial statement analysis?

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

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

cash (asset) accounts payable (liability)

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

sales

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

created