Chapter 8

78. Price Printing Co. had sales of $10 million, operating income of $3 million, after-tax income of $1 million, assets of $8 million, stockholders' equity of $5 million, and a total debt of $3 million. What is Price Printing Company's profit margin? A. 10.0% B. 20.0% C. 30.0% D. 33.0% E. 90.0%

A. 10.0%.

49. Which of the following is NOT a key ratio in the prediction of bankruptcy, as developed by Edward Altman? A. Debt-to-equity ratio B. Current ratio C. Retained earnings as a percent of total assets D. EBIT to total assets

A. Debt-to-equity ratio.

57. ___________ ratios measure the impact of external market forces on the internal performance of a firm. A. Price B. Profitability C. Liquidity D. Asset-utilization E. Debt-utilization

A. Price.

54. Which of the following statements about liquidity ratios is true? A. The higher the current ratio, the more likely a firm is able to pay its short-term obligations B. The lower the quick ratio relative to the current ratio, the safer a firm is in terms of liquidity C. The lower the current ratio, the more likely a firm is able to pay its short-term obligations D. Relatively high current ratios are usually a sign of efficient working capital management

A. The higher the current ratio, the more likely a firm is able to pay its short-term obligations.

69. The primary sections of a statement of cash flows are: A. cash flows from investing, operating, and financing activities. B. cash flows from investing and operating activities. C. cash flows from investing, financing, and accounting activities. D. cash flows from investing, operating, financing, and accounting activities.

A. cash flows from investing, operating, and financing activities.

75. You would expect to find depreciation and amortized expenses in the statement of cash flows under: A. cash flows from operating activities. B. cash flows from investing activities. C. cash flows from financing activities. D. cash flows from purchasing activities.

A. cash flows from operating activities.

45. The major device for measuring the profitability of a firm over a defined period of time is the A. income statement. B. balance sheet. C. statement of cash flows. D. None of the above

A. income statement.

62. Replacement cost accounting __________ income but __________ assets and ____________ the debt-to-assets ratio. A. reduces; increases; lowers B. lowers; increases; increases C. increases; decreases; lowers D. none of the above

A. reduces; increases; lowers.

68. The major device that indicates what the firm owns, and how these assets are financed, in the form of liabilities or ownership interest is: A. the balance sheet. B. the statement of cash flows. C. the income statement. D. the general ledger.

A. the balance sheet.

70. Financial ratios are used to weigh and evaluate: A. the operating performance and capital structure of the firm. B. which stocks are the gold mine stocks when investing in the market. C. which stocks are about to file for bankruptcy. D. the net present value of the company. E. which companies manage their inventories effectively.

A. the operating performance and capital structure of the firm.

79. Price Printing Co. had sales of $10 million, operating income of $3 million, after-tax income of $1 million, assets of $8 million, stockholders' equity of $5 million, and a total debt of $3 million. What is Price Printing Company's asset turnover? A. .50x B. 1.25x C. 2.50x D. 3.33x E. .80x

B. 1.25x.

76. Price Printing Co. had sales of $10 million, operating income of $3 million, after-tax income of $1 million, assets of $8 million, stockholders' equity of $5 million, and a total debt of $4 million. What is Price Printing Company's return on assets? A. 37.5% B. 12.5% C. 30.0% D. 25.0% E. 20.0%

B. 12.5%.

72. Which of the following is a good example of changes in accounting principles? A. A change in earnings per share, due to an increase in the number of shares of common stock B. A change in income, due to a change for post-retirement benefits C. A change in earnings before taxes, because of a change in internal rates on debt D. None of the above

B. A change in income, due to a change for post-retirement benefits.

51. The method of calculating return on assets which highlights the importance of sales, profit margin, and asset turnover is known as: A. the sales method. B. DuPont analysis. C. the Altman model. D. the Gordon model. E. the Return on Assets model.

B. DuPont analysis.

61. In an inflationary economy, many firms use the ________ method of inventory valuation to reduce distortion of profits. A. Current cost B. LIFO C. FIFO D. LILO E. Average cost

B. LIFO.

60. __________ analysis is the process of studying a series of ratios for a company and/or industry over time. A. DuPont B. Trend C. Common size D. Critical E. All of the above

B. Trend.

46. The ________ does not represent continuing operations in any way but is simply a snapshot of the total worth of a firm at a given point in time. A. income statement B. balance sheet C. source and use of funds statement D. statement of cash flows E. none of the above

B. balance sheet.

64. The statement of cash flows tells us A. what the accounting profit or loss is. B. how cash was created. C. the actual profit or loss. D. the actual value of assets and liabilities. E. the source and use of net income.

B. how cash was created.

71. The type of ratio that allows the analyst to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital is: A. liquidity ratios. B. profitability ratios. C. asset-utilization ratios. D. debt-utilization ratios. E. price ratios.

B. profitability ratios.

77. Price Printing Co. had sales of $10 million, operating income of $3 million, after-tax income of $1 million, assets of $8 million, stockholders' equity of $5 million, and a total debt of $3 million. What is Price Printing Company's return on equity? A. 37.5% B. 10.0% C. 20.0% D. 60.0% E. 12.5%

C. 20.0%.

80. Price Printing Co. had sales of $10 million, operating income of $3 million, after-tax income of $1 million, assets of $8 million, stockholders' equity of $5 million, and a total debt of $3 million. If we measure Price's financial leverage, we would most likely use which of the following ratios from chapter 8? A. Debt-to-equity (60%) and debt-to-sales (30%) B. Debt-to-equity (60%) and equity-to-assets (62.5%) C. Debt-to-equity (60%) and debt-to-assets (37.5%) D. Equity-to-assets (62.5%) and after-tax income-to-debt (33.3%)

C. Debt-to-equity (60%) and debt-to-assets (37.5%).

50. ________________ ratios measure the ability of a firm to earn an adequate return on sales, total assets, and invested capital. A. Asset-utilization B. Liquidity C. Profitability D. Debt-utilization E. Price

C. Profitability.

67. Which of the following is not an Asset-utilization ratio: A. Receivable turnover B. Fixed-asset turnover C. Quick ratio D. Total assets turnover E. All of the above are Asset-utilization ratios

C. Quick ratio.

74. You would find the payment of dividends in the statement of cash flow under: A. cash flows from operating activities. B. cash flows from investing activities. C. cash flows from financing activities. D. cash flows from purchasing activities. E. cash flows from selling activities.

C. cash flows from financing activities.

48. Cash inflows arise from _____ assets, ________ liabilities, and ___________ stockholders' equity. A. increasing; increasing; decreasing B. increasing; decreasing; decreasing C. decreasing; increasing; increasing D. decreasing; increasing; decreasing

C. decreasing; increasing; increasing.

53. The primary purpose of the liquidity ratios is to determine: A. how much working capital is tied up in inventory. B. the relative level of short-term debt. C. how well a firm is able to pay off short-term obligations. D. More than one of the above

C. how well a firm is able to pay off short-term obligations.

58. A high payout ratio indicates that: A. a firm is investing heavily in plant and equipment. B. a firm has high current obligations. C. the firm is probably in the mature phase of its life cycle and does not have many growth opportunities available. D. the firm is probably in Stage II of its life cycle. E. the firm probably has too many highly profitable investment opportunities.

C. the firm is probably in the mature phase of its life cycle and does not have many growth opportunities available.

73. When a company repurchases shares of their own common stock, A. the earnings per share will rise. B. the dividends paid out in total will decline. C. the earnings per share growth rate will rise. D. All of the above will happen

D. All of the above will happen.

63. Corporate pension funds pose a threat to future earnings of the company because A. the company is liable for all payments. B. unfunded pensions will be paid from future earnings. C. the firm may be unable to reinvest in new assets. D. All of the above

D. All of the above.

66. A stock is a good buy when the value of which of these ratios is low, compared to a market index or company history? A. Price-to-book-value B. Price-to-earnings C. Dividend yield D. All of the above

D. All of the above.

59. Ratio analysis, which compares a company to an industry, is complicated because: A. reliable industry data is not readily accessible. B. the accounting conventions between companies may be dissimilar. C. large companies are diversified across several industries. D. More than one of the above

D. More than one of the above.

56. Which of the following statements is(are) true? A. Debt-to-equity and debt-to-asset ratios measure capital structure and vary widely among industries B. Debt-utilization ratios alone do not measure a firm's ability to meet its cash obligations C. DuPont analysis considers the impact of debt on the profitability of the firm D. Two of the above are true

D. Two of the above are true.

55. The ________ ratios help determine the degree of financial risk and earnings volatility present in a firm. A. profitability B. asset-utilization C. liquidity D. debt-utilization E. price

D. debt-utilization.

65. An analyst can judge a company's level of debt by comparing these ratios: A. return-on-equity to total debt-to-assets B. return-on-equity to total asset turnover C. return-on-equity to debt turnover D. return-on-equity to return-on-assets E. return-on-equity to current ratio

D. return-on-equity to return-on-assets.

52. Asset-utilization ratios measure all of the following except: A. productivity of fixed assets in terms of sales. B. the relationship of sales on the income statement to various assets on the balance sheet. C. how many times per year the inventory is sold and accounts receivable collected. D. the firm's ability to pay off short-term obligations as they come due.

D. the firm's ability to pay off short-term obligations as they come due.

47. The statement of cash inflows and outflows shows all of the following, except: A. how the firm's balance sheet changed from one period to another. B. how funds from operations were used to finance the company's assets. C. how the firm has matched short-term and long-term sources of funds with short-term and long-term uses of funds. D. the firm's cost of new borrowing.

D. the firm's cost of new borrowing.