ACCT: Mod 4-5

Which of the following statements about a company's life cycle is least correct?

Early in the introduction stage, revenues are usually negative.

If a firm repurchase shares (all else equal) what happens to ROE?

ROE increase When a firm reacquires its stock, the stock is no longer outstanding; thus, average stockholders' equity is lower. If net income is unchanged and average stockholders' equity is lower, ROE is higher (lower denominator).

Which of the following ratios are included in the computation of return on assets? #1: Net income / Sales #2: Average total assets / Average stockholders' equity

Ratio #1. ROA can be disaggregated into profitability (net income / sales) and productivity (sales / average total assets). Ratio #2 is used to measure financial leverage to calculate ROE. Financial leverage is not a component of ROA.

Which of the following ratios measure a firm's liquidity? Ratio #1: Operating cash flow to capital expenditures Ratio #2: Operating cash flow to average current liabilities

Ratio #2.

In an indirect method cash flow statement, an increase in inventories is reported as:

a decrease in cash flow from operating activities.

Tahoka Corporation repurchased 100,000 shares of its common stock near the end of the year. If net income remained unchanged, Tahoka's return on equity for the year most likely:

increased.

Which of the following best describes an increasing times interest earned ratio, all else equal? The company is:

more solvent The times interest earned ratio measures how many times interest expense is covered by EBIT. The higher the ratio, the greater the solvency. The times interest earned ratio is not a measure of liquidity. Higher solvency results in less risk.

A vertical common-size financial statement is a tool used to compare companies:

within a given industry without regard to relative size.

Which of the following statements is least likely a limitation of using ratios for analytical purposes?

Data for single industry firms is difficult to acquire.

Lorenzo Company has a current ratio of 1.5. Which of the following best describes the impact on Lorenzo's current ratio if it uses cash to pay its outstanding accounts payable?

Increase. Using cash to pay accounts payable will reduce current assets and current liabilities by the same amount. However, if the ratio is greater than one, the percentage decrease in the denominator (current liabilities) is greater than the percentage decrease in the numerator (current assets). Thus, the current ratio will increase (greater percentage decrease in the denominator). The opposite effect would occur if the current ratio were less than one.

In the cash flow statement, which of the following is most likely reported in the cash flow from operating activities section?

Interest received from a bank.

Littlefield Company has a quick ratio of 0.9. Which of the following transactions will most likely cause Littlefield's quick ratio to decrease?

The company purchases inventory on credit. The quick ratio is equal to quick assets divided by current liabilities. Quick assets include cash, marketable securities, and accounts receivable. Inventory is not included in the quick ratio. However, purchasing inventory on credit will increase current liabilities (accounts payable). As a result, the quick ratio will decrease (higher denominator). Collecting accounts receivable will have no impact on the quick ratio since cash will increase and accounts receivable will decrease by the same amount. Converting a short-term liability to a long-term liability will reduce current liabilities; thus, the quick ratio will increase (lower denominator)