CHAPTER 3

Select all that apply Which of the following are traditional financial ratio categories? Multiple select question. Asset management ratios Real options ratios Profitability ratios Market value ratios

Asset management ratios Profitability ratios Market value ratios

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way. Multiple choice question. Bourne ratio dilution DuPont

DuPont

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 Equity multiplier= Total assets/ Total equity

Long-term debt ratio is equal to long-term debt divided by the sum of long-term debt and total ___________ .

Equity Long-term debt ratio = Long-term debt/ Long-term debt+ Total equity

A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____. Multiple choice question. base year; base amount base year; estimated income benchmark company; that company's net income future year; estimated amount

base year; base amount

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: Multiple choice question. further investigation redundant safety measures a congressional investigation an audit by a CPA

further investigation Reason: Explaining the upward trend in the inventory turnover ratio requires further investigation.

Although Blank______ are often poor reflections of reality, they are often the best information available. Multiple choice question. market valuations accounting numbers intrinsic values

accounting numbeR Reason: Intrinsic values and market valuations reflect the reality of of what an asset is currently worth in the market. Accounting numbers, since they are based on historical values, are often poor reflections of reality.

A firm with a market-to-book ratio that is greater than 1 is said to have ______ value for shareholders. Multiple choice question. destroyed reduced created maintained

created

The current ratio shows the relationship between ____. Multiple choice question. current and long-term assets current assets and long-term liabilities current assets and current liabilities current and liquid assets

current assets and current liabilities current ratio= current assets/current liabilities

The inventory ___________is calculated as the COGS divided by the inventory.

turnover Inventory turnover= Cost of goods sold/ Inventory

What is the equation for enterprise value? Multiple choice question. Market value of stock + equity − cash Cash − market value of stock − book value of assets Market value of stock - book value of liabilities − cash Market value of stock + book value of liabilities − cash

Market value of stock + book value of liabilities − cash

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. Multiple choice question. $0.70 $0.03 $0.07 $0.30

$0.30 Reason: Total debt/Assets =0.3. If assets = $1, then Total debt/1=0.3, so total debt is $0.30

If a company has inventory, the quick ratio will always be ______ the current ratio. Multiple choice question. equal to less than greater than

less than

At the most fundamental level, firms generate _________ and spend it.

Cash

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

False Reason: It may not be a bad sign, but it does merit investigation.

Which one of the following does not affect ROE according to the DuPont identity? Multiple choice question. Investor sentiment Financial leverage Operating efficiency Asset use efficiency

Investor sentiment

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the: Multiple choice question. common-law statements common-size statements common-base year statements

common-size statements

A common-size balance sheet expresses accounts as a percentage of: Multiple choice question. sales. total equity. total liabilities. total assets.

total assets.

Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator. Multiple choice question. current assets total equity net income total debt

total equity

By combining common-size and base year analysis, we eliminate the effect of the _____. Multiple choice question. possibility of a recession interest yield negative inflation overall growth

overall growth

The profit margin is equal to net income divided by ______. Multiple choice question. total assets operating income net working capital sales

sales

Which of the following is the correct representation of the total debt ratio? Multiple choice question. Long-term debt/Total assets Total equity/Total long-term debt (Total assets - Total equity)/(Total assets)

(Total assets - Total equity)/(Total assets) Total debt ratio=total assets- Total equity/ total assets

At the most fundamental level, firms generate cash and: Multiple choice question. delegate authority create jobs spend it employ accountants

spend it Reason: A certain amount of liquidity is necessary to meet current expenditure needs of the business.

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

Blank 1: current

Select all that apply Which of the following items are among the items used to compute the current ratio? Multiple select question. Equipment Earnings Cash Accounts payable

Cash Accounts payable

How is the inventory turnover ratio computed? Multiple choice question. Inventory/Total assets Current assets/Inventory Cost of goods sold/Inventory Inventory/Cost of goods sold

Cost of goods sold/Inventory

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

False Reason: Enterprise value equals total market value of the stock plus the book value of the liabilities minus cash.

What will happen to the current ratio if current assets increase, while everything else remains unchanged? Multiple choice question. It will not be affected. It will decrease. It may either increase or decrease. It will increase.

It will increase.

Select all that apply Which three of the following are most apt to create problems when comparing financial statements for multiple firms? Multiple select question. Seasonality Differing levels of cash Differing fiscal years Differing accounting methods

Seasonality Differing fiscal years Differing accounting methods

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

Standardized

What does a current ratio of 1.2 mean? Multiple choice question. The firm has $1.20 in current assets for every $1 in current liabilities. The firm has $1.20 in current liabilities for every $1 in long-term debt. The firm has $1.20 in current assets for every $1 in fixed assets. The firm has $1.20 in current liabilities for every $1 in current assets.

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

A common-base year financial statement presents items relative to a certain base, which is the _____. Multiple choice question. sales forecast for a common base year dollar amount of each item during a common base year target level of each item revenue amount for a common base year

dollar amount of each item during a common base year

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. Multiple choice question. lower higher

higher

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____. Multiple choice question. rising very high less than 1 greater than 1

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 ______. Multiple choice question. size production efficiency earnings outlook liquidity

liquidity

Total capitalization equals total equity plus total: Multiple choice question. current assets net income long-term debt EBIT

long-term debt

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

market

Whenever Blank______ information is available, it should be used instead of accounting data. Multiple choice question. market historical trivial any other

market

The price-earnings (PE) ratio is a ______ ratio. Multiple choice question. market value liquidity turnover leverage

market value

A common-size income statement helps compare financial results over time by controlling for changes in ______. Multiple choice question. capital structure sales market share tax rates

sales

Common-size statements are used for comparing firms with differing ____. Multiple choice question. sizes management styles tax years capital structures

sizes

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.

Blank 1: accounting

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

Blank 1: asset

A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings. Multiple choice question. negative higher lower

higher Reason: A negative PE ratio means EPS are negative, because price can't be negative. A lower PE ratio means that either the company is undervalued by the market or it has lower growth prospects than similar companies.

The information needed to compute the profit margin can be found on the ____. Multiple choice question. income statement balance sheet cash flow statement

income statement

A(n) Blank______ in net profit margin will increase ROE. Multiple choice question. stagnation increase decrease

increase

Financial managers use a common-size income statement to determine ___. Multiple choice question. the firm's sources and uses of cash which costs are rising or falling as a percentage of sales the percentage of income invested in each type of asset the firm's current capital structure

which costs are rising or falling as a percentage of sales

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 are different methods of preparing it. There is one strict method of preparing the statement. There are two opposing methods of preparing the statement.

There are different methods of preparing it.

Which one of the following equations defines the total asset turnover ratio? Multiple choice question. Sales/Total assets Sales/Fixed assets Total assets/Sales Current assets/Sales

Sales/Total assets

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

Standardized

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

False There's more than one way of preparing the statement of cash flows.

______ are the prime source of information about a firm's financial health. Multiple choice question. Stock brokers Historical returns Financial statements Stock prices

Financial statements

How is the price-earnings (PE) ratio computed? Multiple choice question. Book value per share/Earnings per share Sales price per unit/Earnings per share Market price per share/Earnings per share Total income/Earnings per share

Market price per share/Earnings per share

What does a current ratio of 1.2 mean? Multiple choice question. The firm has $1.20 in current liabilities for every $1 in long-term debt. The firm has $1.20 in current liabilities for every $1 in current assets. The firm has $1.20 in current assets for every $1 in fixed assets. The firm has $1.20 in current assets for every $1 in current liabilities.

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

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? Multiple choice question. The total asset turnover will decrease. The total asset turnover ratio will not be affected. The total asset turnover ratio will increase.

The total asset turnover ratio will increase.

Which one of the following is one way in which financial managers use a common-size balance sheet? Multiple choice question. To identify changes in operating costs To keep an eye on the firm's profit margin To track changes in a firm's capital structure To monitor labor costs

To track changes in a firm's capital structure

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 false question.TrueFalse

True