Reading Assignment 3

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

10 cents

An increase in the profit margin will ______ a firm's sustainable growth rate.

increase

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

performance evaluation.

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

True

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

False

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

profitability

Receivables turnover is ________ divided by accounts receivable.

sales

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

False

Fill in the blank question. Inventory turnover is cost of goods sold divided by ________.

inventory

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

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

solvency

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

Fill in the blank question. The price-earnings ratio is _______ per share divided by __________ per share. (Enter only one word per blank.)

price earnings

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.

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

It will increase.

Fill in the blank question. The retention ratio equals one ________ the dividend payout ratio.

minus

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

False

Which one of these will decrease a firm's sustainable rate of growth?

an increase in the dividend payout ratio

The current ratio computes the relationship between ______.

current assets and current liabilities

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

dividend

Financial statement analysis is primarily "management by ______ ."

exception

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 common-size balance sheet expresses accounts as a percentage of ______.

total assets

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + depreciation)/Interest expense

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

(ROA × b)/(1 − ROA × b)

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

(ROE × b)/(1 − ROE × b)

The DuPont identity shows that _______________ ______________ times total asset turnover times equity multiplier equals ROE. (Enter only one word per blank.)

Blank 1: profit Blank 2: margin or margins

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

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

investor sentiment

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

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

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

Short-term solvency ratios are also called ________ratios.

liquidity

Time-trend analysis is an example of:

management by exception

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

market

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

Based on the DuPont Identity, an increase in sales, all else held equal, ______ ROE.

may not change may increase or decrease

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

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

profitability

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

sales

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

sales

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

sales/total assets

The DuPont identity breaks ROE into ______ parts.

three

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

Which of the following are traditional financial ratio categories?

turnover ratios profitability ratios financial leverage ratios

Fill in the blank question. Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has _____________-(increased/decreased) its liquidity over the past year.

Decrease

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

DuPont

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

False

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

False

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

False

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

False

True or false: Market-to-book ratio equals book value per share divided by market value per share.

False

True or false: Receivables turnover is cost of goods sold divided by accounts receivable.

False

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

False

True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.

False

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

False

True or false: The retention ratio equals one minus the ROA.

False

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

Financial statements

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

Increase

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

Market price per share / Earnings price per share

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

Net income/Total equity

Which of the following are true of financial ratios?

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

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

Fill in the blank question. Return on assets equals net income _________ by total assets.

divided

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

True

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

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

Long-term solvency ratios are also known as:

financial leverage ratios

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

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

The cash ratio is found by dividing cash by:

current liabilities

True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.

True

______ group analysis is a way to establish a benchmark when using ratios.

Peer

If a company has had negative earnings for several periods, they might choose to use a ______.

Price-sales ratio

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

Standardized

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.

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.

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.

Which of the following create problems with financial statement analysis?

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

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.

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

True or false: The cash ratio is found by dividing cash by current liabilities.

True

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

Fill in the blank question. A problem with the TIE ratio is that it is based on EBIT, which is not a measure of _____________ available to pay interest.

cash

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

cash accounts payable

Which of the following would help a company take action to improve its ratios?

comparing to major competitors comparing to peer companies comparing to aspirant companies comparing to its own historical ratios

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

created