MBA512 Module 2
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
Return on equity (ROE) is a measure of _____.
profitability
Liquidity ratios are particularly important to _________________ -term creditors.
short
Ratios that measure a firm's liquidity are known as ______ ratios.
short-term solvency
At the most fundamental level, firms generate cash and:
spend it
Financial managers use a common-size income statement to determine ___.
which costs are rising or falling as a percentage of sales
Which of the following is the correct representation of the total debt ratio?
(Total assets - Total equity)/(Total assets)
Which of the following are sources of cash?
A decrease in accounts receivable An increase in notes payable
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 does a current ratio of 1.2 mean?
The firm has $1.20 in current assets for every $1 in current liabilities.
The current ratio shows the relationship between ____.
current assets and current liabilities
If a company's common-size income statement shows a lower percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has _____.
raised its prices relative to costs
________ financial statements provide for comparison of firms that differ in size.
standardized
The inventory _______ is calculated as the COGS divided by the inventory.
turnover
The inventory _________ is calculated as the COGS divided by the inventory.
turnover
A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.
6.8
A _________ performance indicator is a measurable value that shows how effectively a company is achieving business objectives.
key
True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.
False
The cash ratio is found by dividing cash by:
current liabilities
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 price-earnings (PE) ratio is a ______ ratio.
market value
Common-size statements are used for comparing firms with differing ____.
sizes
Financial ratios are ways of comparing and investigating _____.
the relationships between pieces of financial information
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.
total equity
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
Cash Coverage Ratio
(EBIT+ Non-cash expenses)/Interest expense
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+ Non-cash expenses)/Interest expense
A firm has inventory of $29,406, accounts receivable of $46,215, net working capital of $4,507, and accounts payable of $48,919. What is the quick ratio?
.49
How are firms classified into peer groups for ratio analysis?
According to Standard Industrial Classification codes
Which one of the following statements is correct? If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. The debt-equity ratio can be computed as 1 plus the equity multiplier. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity. An increase in the depreciation expense will not affect the cash coverage ratio.
An increase in the depreciation expense will not affect the cash coverage ratio.
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 items are among the items used to compute the current ratio?
Cash Accounts payable
How is the inventory turnover ratio computed?
Cost of Goods Sold / Inventory
True or false: A deteriorating time trend in a financial ratio is always a bad sign.
False
True or false: When acquiring another firm, financial statement information is not important in identifying potential targets.
False
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Noncash expenses
The EBITDA ratio is similar in spirit to:
PE ratio
Which one of the following is a correct formula for computing the return on equity?
ROA × Equity multiplier
Receivables Turnover Ratio
Sales/Accounts receivable
Which one of the following equations defines the total asset turnover ratio?
Sales/Total assets
________ financial statements provide for comparison of firms that differ in currency type.
Standardized
Which two of the following groups are most interested in liquidity ratios?
Suppliers Bankers
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
True or false: The interval measure indicates how long a start-up company can operate until it needs more financing.
True
ROA and ROE are common and useful measures, but it is important to remember that they are __________ rates of return.
accounting
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
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
The quick ratio is computed just like the ________ ratio, except that inventory is omitted.
current
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
EBITDA multiple is equal to the enterprise value ____________ (divided/multiplied) by EBITDA.
divided
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
EBIT
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: There is only one method for preparing the statement of cash flows.
false
Long-term solvency ratios are also known as:
financial leverage ratios
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
As long as all sales requests are being met, a ______ inventory turnover ratio is better.
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
A(n) ________ in net profit margin will increase ROE.
increase
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
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 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 a company has inventory, the quick ratio will always be ______ the current ratio.
less than
If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____.
less than 1
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
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
Price/Earnings (P/E) Ratio
market price per share/earnings per share
How is market-to-book ratio measured?
market value per share/book value per share
Profit margin
net income/net sales
By combining common-size and base year analysis, we eliminate the effect of the _____.
overall growth
One of the most important uses of financial statement information within the firm is:
performance evaluation
Price-Sales Ratio
price per share/sales per share
When a company has negative earnings for an extended period of time, analysts will often resort to the:
price-sales ratio
Return on assets (ROA) is a measure of _____.
profitability
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
The most acceptable method of evaluating the financial statements is to compare the company's current financial:
ratios to the company's historical ratios.
A common-size income statement helps compare financial results over time by controlling for changes in ______.
sales
A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
sales.
The EBITDA ratio is similar in spirit to:
the PE ratio
A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.
26
The days' sales in inventory are equal to __________ days divided by the inventory turnover.
365
Days' Sales in Inventory
365/inventory turnover
Days' Sales in Receivables
365/receivables turnover
Roessler Fine Dining has total assets of $310,100 and net fixed assets of $168,500. The average daily operating costs are $2,980. What is the value of the interval measure?
47.52 days
Which one of the following is a source of cash?
Decrease in inventory
Which three of the following are most apt to create problems when comparing financial statements for multiple firms?
Differing fiscal years Differing accounting methods 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 one of the following accurately lists the three components of the DuPont identity?
Equity multiplier, net profit margin, and total asset turnover
________ ________ are the prime source of information about a firm's financial health.
Financial statements
Which of the following are uses of cash?
Increases in property, plant and equipment Increases in inventory Decreases in accounts payable
One common way to identify potential peers is based on Standard _________ Classification codes.
Industrial
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.
A(n) _____ is a measurable value that shows how effectively a company is achieving a business objective.
KPI
Enterprise Value (EV)
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 of the following are traditional financial ratio categories?
Asset management ratios Market value ratios Profitability ratios
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
The Natural Pet had sales of $763,500 in 2020, and $864,200 in 2021. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?
The net working capital turnover rate increased.
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 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.