FIN SB Exam 1 Review
A firm with a profit margin of 10 percent generates ______ in net income for every dollar in sales.
10 cents
Which one of the following is true?
Cash flows can be derived from financial statements.
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.
A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ___________ available to pay interest.
cash
The profit margin is equal to net income divided by ______.
sales
The market value of an item is:
the cash value you'd get if you sold it.
Which of the following is the correct representation of the cash coverage ratio?
(EBIT + depreciation)/Interest expense
Which of the following is the correct representation of the total debt ratio?
(Total assets − Total equity)/(Total assets)
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
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
True or false: "Profit maximization" is the goal for the management of a corporation in the short run only.
False
True or false: Inventory turnover is sales divided by inventory.
False
How is the price-earnings (PE) ratio computed?
Market price per share/Earnings per share
Which of the following is the correct equation for return on equity?
Net income/Total equity
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
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.
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
WorldCom Enron Tyco
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
What is depreciation?
a systematic expensing of an asset based on the asset's estimated life
Noncash items do not affect ______.
cash flow
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
True or false: Market-to-book ratio equals book value per share divided by market value per share.
false
True or false: The price-earnings ratio is price per share times earnings per share.
false
True or false: The times interest earned ratio is EBIT minus interest.
false
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
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
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
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
If a company has had negative earnings for several periods, they might choose to use a ______.
price-sales ratio
The price-earnings ratio is ________ per share divided by _______ per share.
price; earnings
Return on assets (ROA) is a measure of ______.
profitability
Return on equity (ROE) is a measure of ______.
profitability
Which one of the following equations defines the total asset turnover ratio?
sales/total assets
On which side of the balance sheet do liabilities appear?
the right-hand side
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
True or false: Current assets plus current liabilities equals net working capital.
False
True or false: Financial ratios are computed using only balance sheet information.
False
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
False
True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.
False
What does GAAP stand for?
Generally Accepted Accounting Principles
A good financial decision will do which of the following?
Increase the value of the firm's existing stock Increase market value of shareholders' equity
Which of the following are defining features of the primary market?
It is the market where initial public offerings are made. Proceeds from the sale of securities go to the issuing firm.
How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?
It makes management personally responsible for the accuracy of a company's financial statements.
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase.
In an over-the-counter market, which of the following is true?
Most of the buying and selling is done by the dealer. Many dealers are also connected electronically.
Is profit maximization the primary objective of a business?
No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.
Why would the threat of a takeover motivate a manager to act in stockholders' interest?
Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.
______ financial statements enable one to compare firms that differ in size.
Standardized
______ can be used to encourage managers to maximize the value of the stock.
Stock options
Which of the following are true of financial ratios?
They are developed from a firm's financial information. They are used for comparison purposes.
What is the main goal of financial management?
To maximize current share value
True or false: Free cash flow is also known as cash flow from assets.
True
True or false: Operating cash flow does not include depreciation or interest.
True
True or false: The total debt ratio equals the total assets minus total equity divided total assets.
True
Which of these questions can be answered by reviewing a firm's balance sheet?
What is the total amount of assets the firm owns? How much debt is used to finance the firm?
The threat of ______ motivates managers to make good decisions.
a takeover
A balance sheet reflects a firm's:
accounting value on a specific date.
Which of the following items are used to compute the current ratio?
accounts payable cash
The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.
agency
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?
agency problem
The conflict of interest between an agent and a principal is called a(n):
agency problem.
The New York Stock Exchange is a(n) ______.
auction market
A corporation receives cash from financial markets by selling ______ and ______.
bonds stocks
On the balance sheet, assets are listed at their ______ value.
book
In finance, the value of a firm depends on its ability to generate ______.
cash flows
The Sarbanes-Oxley Act requires corporate officers to:
confirm the validity of the financial statements. be responsible for errors in the annual report.
The Sarbanes-Oxley Act is intended to strengthen protection against:
corporate accounting fraud and financial malpractice
Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.
fixed assets depreciation
The common set of standards and procedures by which audited financial statements are prepared are called ______.
generally accepted accounting principles (GAAP)
Under GAAP, assets are generally carried on a firm's balance sheet at ______.
historical cost book value
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
A good financial decision will do which of the following?
increase market value of shareholders' equity increase the value of the firm's existing stock
Operating cash flow _________.
is a sign of trouble if negative over a long period of time tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows
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
Short-term solvency ratios are also called _________ ratios.
liquidity
Agency costs occur when ______ and stockholder interests are not in line with each other.
management
In a shareholder-manager relationship, who is the agent?
managers
The price at which willing buyers and sellers would trade is called ______ value.
market
The goal of a "for-profit" business is to ______ the value of shareholders' wealth.
maximize
Current assets __________ (plus/minus) current liabilities equals NWC.
minus
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 primary reason that accounting income differs from cash flow is that an income statement contains ______.
noncash items
Which of the following are components of cash flow from assets?
operating cash flow capital spending change in net working capital
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow.
According to Figure 1.2, where does cash generated by a corporation typically go?
paid to shareholders and creditors to pay corporate taxes reinvested in the firm
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ______.
plus depreciation
Which one of these is an important mechanism used by unhappy stockholders to replace current management?
proxy fight
Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?
public firms "going dark" and leaving the stock market firms going public outside of the U.S. market eliminating public disclosure for many firms
Stockholders' equity is always shown on the ______ of the balance sheet.
right-hand side
When one owner or creditor sells to another, the transaction takes place in the ______ market.
secondary
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
A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm
stakeholder
A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.
stakeholder
Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:
stock options.
Who elects the board of directors and ultimately maintains control of the firm?
stockholders
Cash flow refers to ______.
the difference between the number of dollars that came in and the number that went out
Changes in capital spending can be negative if:
the firm sold more assets than it purchased
In a for-profit business, owners' equity is equivalent to:
the total value of stock in a corporation.
What is the primary objective of an auction market?
to bring buyers and sellers together
What is the purpose of the income statement?
to measure performance over a set period of time
Common stockholders are entitled to the difference between ______ and ______.
total assets; total liabilities
Free cash flow is better described as ______.
total distributable cash flow
Which of the following are traditional financial ratio categories?
turnover ratios profitability ratios financial leverage ratios
Financial leverage refers to a firm's ______.
use of debt in its capital structure
Common-size statements are best used for comparing:
firms of different sizes. competitors. year-to-year for your firm.
The current ratio computes the relationship between ______.
current assets and current liabilities
"Increasing shareholder wealth" means increasing the ______.
current common stock value
A bad financial decision is defined as a decision that ______ shareholders wealth.
decreases
The more debt a firm has, the greater its:
degree of financial leverage
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
Which of the following is an example of a noncash item on an income statement?
depreciation
Which of the following are considered non-owner stakeholders in a company?
employees suppliers government
Noncash items are ______ that ______ cash flow.
expenses; do not directly affect
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
false
Long-term solvency ratios are also known as:
financial leverage ratios
Cash flows can be derived from ______
financial statements.
Which of the following is not a component of cash flow from assets?
financing expenses