Chapter 3-SB

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

(total assets-total equity)/ Total assets

The Dupont identity breaks ROE into__________parts

3

Which of the following items are used to compute the current ratio? -Earnings -Accounts payable -Equipment -Cash

Accounts payable Cash

How is inventory turnover computed?

COGS/ Inventory

The_________payout ratio equals cash dividends divided by net income

Dividend

Common size balance sheet percentages:

Each item is divided by the Total Assets

If there is a conflict between market and accounting data, accounting data should be given precedence. T/F

False

There is a solid and prescriptive method to select which ratios to use in financial statement analysis. T/F

False

The dupont identity is a popular expression breaking ROA into three parts. T/F

False; ROE into 3 parts

Given an internal growth rate of 3 percent, a firm can ___

Grow by 3% or less without any additional external financing

The income needed to compute the profit margin can be found on the:

Income statement

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

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

May not change May increase or decrease

The dupont identity shows that __________ ___________times total asset turnover X equity multiplier =ROE

Profit Margin

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

ROA x b/ 1- ROA x b

The profit margin is equal to net income divided by

Sales

In a common size Income statement, each item is expressed as a percentage of total____________

Sales (revenue)

__________financial statements enable one to compare firms that differ in size

Standardized

What best explains why financial managers use a common size income statment?

The common size income statement can show which costs are rising or falling as a percentage of sales

Which of the following create problems with financial statement analysis? -The firm or its competitors are global companies -The firm and its competitors operate under different regulatory environments -The firm or its competitors are conglomerates -The firm and its competitors are approximately the same size

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

Which of the following is (are) true of financial ratios? -They always reflect market values -They are computed in the same manner by all firms -They use only balance sheet data -The are used for comparison purposes -They are developed from a firm's financial information

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

Which of the following best explains why financial managers use a common size balance sheet? -To keep an eye of the firm's profit margin -To monitor labor costs -To track changes in a firm's capital structure -To identify changes in operating costs

To track changes in a firm's capital structure

A common size balance sheet expresses accounts as a percentage of:

Total assets

In a common size income statement, each item is expressed as a percentage of a total sales. T/F

True

It is important to investigate trends in financial ratios to identity the reason for the trend. T/F

True

The total debt ratio equals the total assets minus total equity all over total assets. T/F

True

Common size statements are best used for comparing: -Year to year for your firm -Firms of different sizes -Competitors -Firms in different industries

Year to year for your firm Firms of different sizes Competitors

The current ratio computes the relationship between: -Current and long term assets -Current assets and current liabilities -Current and liquid assets -Current assets and long term liabilities

current assets and current liabilities

Common Size Income Statement

an income statement in which each item is expressed as a percentage of sales

Net working capital

current assets - current liabilities

Financial ratios are computed using only balance sheet information. T/F

false

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

market price per share/earnings per share

DuPont Identity

popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage