Chapter 3 - FINC

The company has sales of $10,000,000, total assets of $2,400,000, stockholders' equity of $2,000,000, and net income of $500,000. The company's return on assets is _________ (give the answer in percent and round the answer to two decimal places).

A: investment = Net Income/ Total Assets or investment= Net Income/Sales * Sales/Total Assets 500000/2400000 = 0.208 * 100 = 20.8%

Trend analysis can be described as which of the following? An analysis of the firm's ability to overcome inflation over a number of years. An analysis of the firm's management by objectives over a number of years. An analysis of the firm's performance over a number of years. An analysis of the firm's pro forma financial statements over a number of years.

An analysis of the firm's performance over a number of years.

The company has the credit sales of $10,000,000, total assets of $2,100,000, fixed assets of $1,000,000, inventory of $600,000, and accounts receivable of $500,000,. The company's average collection period is ______ days (use a 360 day year).

Average Collection Period = Accounts Receivable / Average Daily Credit Sales 500,000 / (10,000,000 / 360) = 18 days

If the company's fixed asset turnover ratio is 9 and the industry average is 6, the company's fixed asset turnover ratio is _____ the industry average. Worse Than Better Than

Better Than

If the company's fixed charge coverage ratio is 8 times and the industry average is 6 times, the company's fixed charge coverage ratio is ______ the industry average. Worse Than Better Than

Better Than

If the company's times interest earned ratio is 8 times and the industry average is 5 times, the company's times interest earned ratio is _____ the industry average. Worse Than Better Than

Better Than

Which of the following organizations provide industry data that can be used to evaluate a company's operating performance? Moody's Corporation The Wall Street Journal Bloomberg Factset

Bloomberg Standard & Poor's Industry Surveys and Corporate Reports Value Line Investment Survey FactSet Moody's Corporation

If the company's current ratio is 2.5 times and current liabilities are $600,000, what are current assets? $1,500,000 $240,000 $480,000 $1,250,000

Current Ratio = Current Assets / Current Liabilities 2.5 = CA / 600,000 CA = 2.5 * 600,000 CA = 1,500,000

The company has total assets of $2,400,000, accounts receivable of $500,000, inventory of $600,000, cash & marketable securities of $20,000, and current liabilities of $530,000. The company's current ratio is _____ times (round to 2 decimals).

Current Ratio = Current Assets / Current Liabilities CR = (20,000 + 500,000 + 600,000) / 530,000 CR = 2.11

Which of the following are debt utilization ratios? Fixed Charge Coverage Return on equity Times Interest Earned Debt to Total Assets

Debt to Total Assets Times Interest Earned Fixed Charge Coverage

If a company has a debt to total assets ratio of 50% and total assets of $5,000,000, what amount of debt is the company carrying? $250,000 $1,000,000 $10,000,000 $2,500,000

Debt to Total Assets = Total Debt / Total Assets .50= x / 5,000,000 x = .50 * 5,000,000 x = 2,500,000

A bondholder is likely to be primarily influenced by which of the following ratio categories? Asset utilization ratios Profitability ratios Liquidity ratios Debt utilization ratios

Debt utilization ratio

Inflation is a source of ___________ on the financial reporting of the firm. Wealth Help Liability Distortion

Distortion

Profitability ratio measure the company's ability to Pay off long-term debt when it comes due Pay off short-term debt when it comes due Earn an adequate return on sales, total assets, and invested capital Sell inventory and collect on accounts receivable

Earn and adequate return on sales, total assets, and invested capital

What does a fixed charge coverage ratio of 8 times indicate? The firm can pay off the fixed charges in 8 days. Earnings before interest and taxes covers fixed charge obligations 8 times. Earnings before fixed charges and taxes covers the fixed charge obligation 8 times. Earnings after interest and taxes covers fixed charge obligations 8 times.

Earnings before fixed charges and taxes covers the fixed charge obligation 8 times.

For Bankers and trade creditors, their emphasis is on long-term debt to total assets. False True

False

Ratio analysis should not include trend analysis because recent ratios are the only relevant information. False True

False

_____ ratios are used to weigh and evaluate the operating performance of the firm.

Financial

The company has sales of $10,000,000, total assets of $2,400,000, fixed assets of $1,000,000, inventory of $600,000, and accounts receivable of $500,000. What is the company's fixed asset turnover? 10 times 4.2 times 12 times 2.9 times

Fixed Asset Turnover = Sales / Fixed Assets FAT = 10,000,000 / 1,000,000 FAT = 10

If the company's fixed charge coverage ratio is 4.5 times and income before fixed charges and taxes is $450,000, the company has a fixed charges balance of ______ (round to the nearest whole number).

Fixed Charge Coverage = Income before fixed charges and taxes / Fixed charges 450,000/ x = 4.5 Fixed Charges = 100,000

What does a current ratio of 2.5 times represent. For every $1 in liabilities the company has $2.50 in total assets. For every $1 in current liabilities the company has $2.50 in current assets. For every $1 in current liabilities the company has $2.50 in current assets, not including inventory. For every $1 in assets the company has $2.50 in liabilities.

For every $1 in current liabilities the company has $2.50 in current assets.

A major problem during inflationary times is that profit may be more a function of decreasing prices than of management performance. management performance than of increasing prices. decreasing prices than of improved performance. increasing prices than of improved performance.

Increasing prices than of improved performance.

The company has sales of $10,000,000, total assets of $2,400,000, fixed assets of $1,000,000, inventory of $600,000, and accounts receivable of $500,000. The company's inventory turnover ratio is ______ times.

Inventory Turnover = Sales / Inventory 10,000,000 / 600,000 Inventory = 16.67 times

For ______ ratios, the primary emphasis is on the firm's ability to pay off short-term obligations as they come due.

Liquidity

If a company has a profit margin of 6% and sales are $1,800,000, what is its net income? $300,000 $108,000 $10,800,000 $30,000,000

Profit Margin = Net Income / Sales 0.06 = NI / 1,800,000 NI = 0.06 * 1,800,000 NI = 108,000

From an investor's perspective, which ratio category is of primary importance? Asset utilization ratios Profitability Ratios Liquidity Ratios Debt Utilization Ratios

Profitability

The company has a total assets of $2,400,000, inventory of $600,000, fixed assets of $1,000,000, and current liabilities of $530,000. What is the company's quick ratio? 2.64 times 2.11 times 1.51 times 2.5 times

Quick Ratio = (Current Assets - Inventory) / Current Liabilities QR = (2,400,000 - 1,000,000) /530,000 QR = 1.51 Times

If a company has a quick ratio of 1.25 times, current assets of $25,000 and inventory of $5,000, the current liabilities balance is equal to _______ (round to the nearest dollar).

Quick Ratio = Current Assets - Inventory / Current Liabilities 1.25 = (25,000 - 5000) / CL 1.25CL = (25,000 - 5000) CL = 20000 / 1.25 CL = 16000

People in various functional areas of a business must be familiar with ______ analysis.

Ratio

If a company has a receivables turnover ratio of 10 and accounts receivable of $750,000, what is the company's level of sales on credit? $7,500,00 $75,000 $833,333 $825,000

Receivables Turnover = Sales (credit) / Receivables 10 = X / 750,000 $7,500,000

Besides changing prices, other elements of distortion in the financial evaluation of a company may include which of the following: Treatment of nonrecurring items Methods of reporting revenue Methods of constructing the financial statements Tax write-off policies

Reporting of Revenue Treatment of nonrecurring items Tax write-off policy

The company has sales of $10,000,000, total assets of $2,400,000, stockholders' equity of $2,000,000, and net income of $500,000. What is the company's return on equity? 31% 35% 25% 21%

Return of Equity = Net Income / Stockholders Equity Return of Equity = (Return on Assets * Investment) / (1 - (Debt/Assets)) ROE = 500,000 / 2,000,000 ROE = 25%

What does a return on assets of 12.5% represent? The company generates a profit of $12.5 for every $1 in sales. The company generates $1 in profit for every $12.5 in total assets. The company generates $12.5 for every $1 in equity. The company generates a profit of $12.5 for every $100 in total assets.

Return on assets (investment) = Profit margin * Asset Turnover The company generates a profit of $12.5 for every $100 in total assets.

What does an average collection period of 30 days indicate for a company? The company has a 30 day collection policy. The company collected on sales and re-loaned the money 30 times during the year. The company sold off their accounts receivable in 30 days or less. The company collects on its issued trade credit in 30 days.

The company collects on its issued trade credit in 30 days.

What does a profit margin of 20% represent? The company generates a $1 in profit for every 20 cents in sales. The company generates 20 cents in profit for every $1 in sales. The company generates 20 cents in profit for every $1 in equity. The company generates 20 cents in profit for every $1 in assets.

The company generates 20 cents in profit for every $1 in sales.

What does an inventory turnover ratio of 7 times represent? The company generates sales equivalent to 7 times its inventory value during the year. The company's inventory turnover is 7 times greater than the industry average. The company's inventory turnover is 7 times smaller than the industry average. The company collected on sales and repurchased its entire inventory in 7 days.

The company generates sales equivalent to 7 times its inventory value during the year.

What does the debt to total assets ratio of 50% indicate about a company? The company's debt is 50% greater than the company's equity. The company's current liabilities are half of its total assets. The company's earnings before interest and taxes are 50% greater than the company's debt. The company is carrying half as much debt as it has total assets.

The company is carrying half as much debt as it has total assets.

If the company's times interest earned ratio is 8 times and the interest is $60,000, the company's earnings before interest and taxes is equal to _______ (enter a whole number).

Times interest earned = Income before interest and taxes / interest 8 = x / 60,000 x = 8 * 60,000 x = 480,000 480,000

The company has sales of $10,000,000, total assets of $2,400,000, fixed assets of $1,000,000, inventory of $600,000, and accounts receivable of $500,000. The company's total asset turnover is equal to ________ times (enter only the number, rounded to two decimals).

Total Asset Turnover = Sales / Total Assets TAT = 10,000,000 / 2,400,000 TAT = 4.17

A bondholder's secondary consideration is the capacity of the firms' profit to cover debt obligations. True False

True

If the company's profit margin is 6% and the industry average is 9.5%, the company's profit margin is ______ the industry average. Better Than Worse Than

Worse Than

If the company's receivables turnover is 7 times and the industry average is 10 times, the company's receivables turnover is ___ the industry average. Worse Than Better Than

Worse Than

If the company's total asset turnover ratio is 3 times and the industry average is 7 times, the company's total asset turnover ratio is ______ the industry average. Better Than Worse Than

Worse Than

If the company's return on equity is 18% and the industry average is 15%, the company's return on equity ratio is _____ the industry average. better than worse than

better than

Deflation can be described as_______

decrease in prices

Asset utilization ratios are used to measure management's ability to make the best use of the company's assets to generate revenue pay off long-term debt when it comes due pay off short-term debt when it comes due earn an adequate return on sales

make the best use of the company's assets to generate revenue

Which of the following are liquidity ratios? quick ratio current ratio receivable ratio debt ratio

quick ratio current ratio