In class practice problems Financial analysis (slides Sep. 27

4. Purple Fleur S.A., a retailer of floral products, reported COGS for the year of $75 million, total assets increase by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: A. $67 million B. $79 million C. $83 million

A. $67 million Purchase 69 Paid 67

2. Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? A. $90 million B. $100 million C. $110 million

A. $90 million

3. Which ratio would a company most likely use to measure its ability to meet short-term obligations? A. Current ratio B. Payables turnover C. Gross profit margin

A. Current ratio

1. Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and U.S. GAAP? A. Operating B. Investing C. Financing

A. Operating

2. What does the P/E ratio measure? A. The "multiple" that the stock market places on a company's EPS B. The relationship between dividends and market prices C. The earnings for one common share of stock

A. The "multiple" that the stock market places on the company's EPS

5. An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data (in millions of euros): Total debt: FY5=2,000; FY4=1,900; FY3=5,000 Total equity: FY5=4,000; FY4=4,500; FY3=5,000 Which of the following would be the analyst's most likely conclusion based on the debt-to-equity ratio? A. The company is becoming increasingly less solvent B. The company is becoming less liquid, as evidenced by the increase in its debt-to-equity ratio from .35 to .50 from FYE to FY2 C. The company is becoming increasingly more liquid

A. The company is becoming increasingly less solvent

1. Distinguishing between current and noncurrent items on the balance sheet and presenting a subtotal for current assets and liabilities is referred to as: A. a classified balance sheet B. an unclassified balance sheet C. a liquidity-based balance sheet

A. a classified balance sheet

6. The initial measurement of goodwill is most likely affected by: A. an acquisition's purchase price B. the acquired company's book value C. the fair value of the acquirer's assets and liabilities

A. an acquisition's purchase price

1. The most stringent test of a company's liquidity is its: A. cash ratio B. quick ratio C. current ratio

A. cash ratio

5. An investor concerned whether a company can meet its near term obligations is most likely to calculate the: A. current ratio B. return on total capital C. financial leverage ratio

A. current ratio

4. When screening for potential equity for potential equity investments based on return on equity, to control risk, an analyst would be most likely to include a criterion that requires: A. positive net income B. negative net income C. negative shareholders equity

A. positive net income

5. Which of the following is an appropriate method of computing free cash flow to the firm? A. Add operating cash flows to capital expenditures and deduct after-tax interest payments B. Add operating cash flows to after-tax interest payments and deduct capital expenditures C. Deduct both after-tax interest payments and capital expenditures from operating cash flows

B. Add operating cash flows to after-tax interest payments and deduct capital expenditures

3. Which of the following would an analyst most likely be able to determine from a common-size analysis of a company's balance sheet over several periods? A. An increase or decrease in sales B. An increase or decrease in financial leverage C. An increase or decrease in taxes

B. An increase or decrease in financial leverage

3. A creditor most likely would consider a decrease in which of the following ratios to be positive news? A. Interest coverage (times interest earned) B. Debt to total assets C. Return on assets

B. Debt total assets Hint: Interest Coverage Ratio = EBIT / Interest Expense

5. One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/Es may be financially weak. What criterion might an analyst include to avoid inadvertently selecting weak companies? A. Net income less than zero B. Debt-to-total assets ratio below a certain cutoff point C. Current-year sales growth lower than prior-year sales growth

B. Debt-to-total assets ratio below a certain cutoff point

*****7. Which of the following would best explain an increase in receivables turnover? A. The company adopted new credit policies last year and began offering credit to customers with weak credit histories. B. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables. C. To match the terms offered by its closest competitor, the company adopted new payment terms now requiring net payment within 30 days rather than 15 days, which had been its previous requirement

B. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables

6. Which is an appropriate method of preparing a common-size cash flow statement? A. Show each item of revenue and expense as a percentage of net revenue B. Show each line item on the cash flow statement as a percentage of net revenue C. Show each line item on the cash flow statement as a percentage of total cash outflows

B. Show each line item on the cash flow statement as a percentage of net revenue

8. Which is an appropriate method of preparing a common-size cash flow statement? A. Show each item of revenue and expense as a percentage of net revenue B. Show each line item on the cash flow statement as a percentage of net revenue C. Show each line item on the cash flow statement as a percentage of total cashflows

B. Show each line item on the cash flow statement as a percentage of net revenue

2. When a company buys shares of its own stock to be held in treasury, it records a reduction in: A. both assets and liabilities B. both assets and shareholders equity C. assets and an increase in shareholders equity

B. both assets and shareholders equity

1. Comparison of a company's financial results to other peer companies for the same time period is called: A. time-series analysis B. cross-sectional analysis

B. cross-sectional analysis

2. All of the following are current assets except: A. cash B. goodwill C. inventories

B. goodwill

3. Green Glory Corp., a garden supply wholesaler, reported COGS for the year of $80 million, total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: A. $73 million B. $77 million C. $83 million

C. $83 million Purchased 85 Paid 83 Purchase = 80+5 = 85 Paid = 95-2 = 83

3. Assuming no changes in other variables, which of the following would decrease ROA? A. A decrease in the effective tax rate. B. A decrease in interest expense. C. An increase in average assets.

C. An increase in average assets

6. When a database eliminates companies that cease to exist because of a merger or bankruptcy, this can result in: A. look-ahead bias B. back-testing bias C. survivorship bias

C. Survivorship bias

6. An analyst observes a decrease in a company's inventory turnover. Which of the following would most likely explain this trend? A. The company installed a new inventory management system, allowing more efficient inventory management. B. Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period. C. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

C. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

7. In a comprehensive financial analysis, financial statements should be: A. used as reported without adjustment B. adjusted after completing ratio analysis C. adjusted for differences in accounting standards, such as international financial reporting standards and U.S. generally accepted accounting principles

C. adjusted for differences in accounting standards, such as international financial reporting standards and U.S. generally accepted accounting principles

5. Defining total assets turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in: A. the debt-to-equity ratio but not the total asset turnover B. the total asset turnover but not the debt-to-equity ratio C. both the debt-to-equity ratio and the total asset turnover

C. both the debt-to-equity ratio and the total asset turnover

4. An investor worried about a company's long-term solvency would most likely examine its: A. current ratio B. return on equity C. debt-to-equity ratio

C. debt-to-equity ratio

1. Projecting profit margins into the future on the basis of past results would be most reliable when the company: A. is in the commodities business B. operates in a single business segment C. is a large, diversified company operating in mature industries

C. is a large, diversified company operating in mature industries

4. When a company pays its rent in advance, its balance sheet will reflect a reduction in: A. assets and liabilities B. assets and shareholders' equity C. one category of assets and an increase in another

C. one category of assets and an increase in another

2. In order to assess a company's ability to fulfill its long-term obligations, an analyst would most likely examine: A. activity ratios B. liquidity ratios C. solvency ratios

C. solvency ratios

3. Under IFRS, the carrying value of inventories reflects: A. their historical cost B. their current value C. the lower of historical cost or net realizable value

C. the lower of historical cost or net realized value