FIN315 Chapter 3 review

A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.

6.8

How are firms classified into peer groups for ratio analysis?

According to Standard Industrial Classification codes

Financial ratios are ways of comparing and investigating _____.

the relationships between pieces of financial information

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

total equity

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

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

turnover

Financial managers use a common-size income statement to determine ___.

which costs are rising or falling as a percentage of sales

Financial statements report: Multiple choice question. book values market values

Book value

Cal's Market has 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.

Which of the following are uses of cash? (Check all that apply.) Multiple select question. Decreases in accounts payable Decreases in accounts receivable Decreases in property, plant and equipment Increases in inventory Increases in property, plant and equipment

Decreases in accounts payable Increases in inventory Increases in property, plant and equipment

Which three of the following are most apt to create problems when comparing financial statements for multiple firms? Differing levels of cash Differing accounting methods Differing fiscal years Seasonality

Differing accounting methods Differing fiscal years Seasonality

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

DuPont

Which of the following are uses of cash? Increases in inventory Decreases in accounts receivable Decreases in property, plant and equipment Increases in property, plant and equipment Decreases in accounts payable

Increases in inventory Increases in property, plant and equipment Decreases in accounts payable

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

Investor sentiment

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

It will increase.

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

Market price per share/Earnings per share

What is the equation for enterprise value?

Market value of stock + book value of liabilities − cash

Which ratios use some information that is not contained in financial statements?

Market value ratios

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

Net income/Total assets

Which of the following represents the receivables turnover ratio? Accounts receivable/Cost of goods sold Cost of goods sold/Accounts receivable Sales/Accounts receivable Accounts receivable/Sales

Sales/Accounts receivable

Which two of the following groups are most interested in liquidity ratios?

Suppliers Bankers

What does an inventory turnover ratio of 5 mean?

The entire inventory was sold and replaced 5 times during the year.

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

True or false: The interval measure indicates how long a start-up company can operate until it needs more financing.

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.

accounting

Profitability measures such as return on assets (ROA) and return on equity (ROE) are ___ rates of return.

accounting

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

accounting numbers

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

assets

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

The cash ratio is found by dividing __________ by current liabilities.

cash

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

Financial statements are used to: Multiple select question. communicate financial information to outsiders communicate financial information within the firm assess a company's current financial position assess the market value of the firm

communicate financial information to outsiders communicate financial information within the firm assess a company's current financial position

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

current

The current ratio shows the relationship between ____.

current assets and current liabilities

The cash ratio is found by dividing cash by:

current liabilities

An important accounting goal is to report financial information to users in a way that is useful for _____.

decision making

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

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

A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

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 formula for total __________ is the total equity plus long-term debt.

equity

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

false

True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.

false

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

false

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

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

grow by 3 percent or less without any additional external financing

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

higher

All other things staying the same, a high growth firm will have a relatively ______ need for external financing than a low growth firm.

higher

The information needed to compute the profit margin can be found on the ____.

income statement

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

increase

One common way to identify potential peers is based on Standard ____________ Classification codes.

industrial

The cash ratio adds noncash expenses back to the EBIT to determine its ability to meet its _________________ obligations, while the TIE is based on EBIT.

interest

The times interest earned ratio equals EBIT divided by ___________.

interest

The ______________ growth rate tells us the maximum growth rate that can be achieved with no external financing of any kind.

internal

The interval measure is useful for start-up companies because it indicates how long a company can operate until _____.

it needs another round of financing

By evaluating the quick ratio, we can see that one sign of possible short-term trouble is the existence of relatively ____________ (small/large) inventories.

large

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____.

less than 1

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past three years is 30, 34, and 40 percent, respectively. This indicates that the firm has increased its ______.

leverage

Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______, which demonstrates the proportion of assets financed by long-term obligations.

liquidity; leverage

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes a ___ time to sell.

long

Total capitalization equals total equity plus total:

long-term debt

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

market

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

market value

What is the main difference between the cash coverage ratio and the times interest earned ratio?

noncash expenses

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

overall growth

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

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

performance evaluation

Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)?

$1.2 million

When a company has negative earnings for an extended period of time, analysts will often resort to the:

price-sales ratio

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

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

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

profitability

The net income as shown on the common-size income statement of Omega Industries for the past three years increased from 3 percent to 6 percent. This indicates that the firm is increasing its ______.

profitability

Days' sales in receivables are calculated as _____________ days divided by the receivables turnover. (Enter your answer as a numerical value.)

365

Which of these computes days' sales in receivables?

365/Receivables turnover

Which of the following are sources of cash? (Check all that apply.) Multiple select question. An increase in notes payable Purchasing an asset Reason: Purchasing an asset is a use of cash. A decrease in notes payable Reason: A decrease in notes payable is a use of cash. A decrease in accounts receivable

An increase in notes payable A decrease in accounts receivable

Which of the following are traditional financial ratio categories?

Asset management ratios Market value ratios Profitability ratios

Which of the following items are among the items used to compute the current ratio? Cash Accounts payable Earnings Equipment

Cash Accounts payable

True or false: All other things staying the same, the lower the rate of growth in sales or assets, the greater will be the need for external financing.

False

What does a current ratio of 1.2 mean?

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

At the most fundamental level, firms generate cash and:

spend it

________ financial statements provide for comparison of firms that differ in size. Multiple choice question. Original Compressed Standardized Restated

standardized

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

Sales/Total assets

ROA and ROE are common and useful measures, but it is important to remember that they are ______________ rates of return.

accounting

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement? Multiple choice question. There is one strict method of preparing the statement. There are different methods of preparing it. There are two opposing methods of preparing the statement.

There are different methods of preparing it.

Alpha Omega's percentage of sales model forecasts sales growth of 20 percent next year. If cost of good sold are proportionate at 80 percent of sales, then cost of good sold will increase by _____.

20%

A(n) _____ is a measurable value that shows how effectively a company is achieving a business objective.

key performance indicator (KPI)

A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of 0.5 is maintained, then debt must increase by _____.

$100000

Dot's financial planning model shows assets are projected to increase by $800,000 but liabilities and equity increase by $395,000. What is the external financing need (EFN)?

$405000

Which of the following is the correct representation of the cash coverage ratio? Total cash/Total interest expense Total interest expense/Total cash EBIT/Interest expense (EBIT+ Non-cash expenses)/Interest expense

(EBIT+ Non-cash expenses)/Interest expense

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

created

True or false: When acquiring another firm, financial statement information is not important in identifying potential targets.

false

As long as all sales requests are being met, a ______ inventory turnover ratio is better.

higher

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

increase

A _____________ performance indicator is a measurable value that shows how effectively a company is achieving business objectives.

key

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

less than

Some financial ratios are based on the market price per share of stock, which is information not contained in the financial statements. As a result, these measures can only be directly calculated for _____________ traded companies.

publicly

Liquidity ratios are particularly important to _____________term creditors.

short

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

sizes

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

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

The price-sales ratio is calculated as the price per _____________ divided by the sales per ___________ .

share, share

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.

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

market

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

profitability

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

Long-term solvency ratios are also known as:

financial leverage ratios

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

financial statements