FIN 501: Ch. 3 "Working with Financial Statements"

Which one of the following statements is correct? - Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business. - Peer group analysis is easier when seasonal firms have different fiscal years. - Peer group analysis is simplified when firms use varying methods of depreciation. - Comparing results across geographic locations is easier since all countries now use a common set of accounting standards. - Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory

The DuPont identity can be used to help a financial manager determine the: - degree of financial leverage used by a firm. - operating efficiency of a firm. - utilization rate of a firm's assets. - rate of return on a firm's assets.

All of the above

The ratios that are based on financial statement values and used for comparison purposes are called: - financial ratios. - industrial statistics. - equity standards. - accounting returns. - analytical standards.

financial ratios

Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due. - Current ratio - Debt ratio - Cash coverage ratio - Cash ratio - Quick ratio

Quick ratio

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations? - BEC - SED - BID - SIC - SBC

SIC

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? - A decrease in the total asset turnover - A decrease in the capital intensity ratio - An increase in days' sales in receivables - A decrease in the profit margin - A decrease in the inventory turnover rate

A decrease in the capital intensity ratio

Which one of these statements is true concerning the price-earnings (PE) ratio? - A high PE ratio may indicate that a firm is expected to grow significantly. - A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. - PE ratios are unaffected by the accounting methods employed by a firm. - The PE ratio is classified as a profitability ratio. - The PE ratio is a constant value for each firm.

A high PE ratio may indicate that a firm is expected to grow significantly

Which one of the following is a measure of long-term solvency? - Price-earnings ratio - Profit margin - Cash coverage ratio - Receivables turnover - Quick ratio

Cash coverage ratio

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes? - Income statement - Balance sheet - Common-size income statement - Common-size balance sheet - Statement of cash flows

Common-size income statement

The DuPont identity can be accurately defined as: - Return on equity × Total asset turnover × Equity multiplier. - Equity multiplier × Return on assets. - Profit margin × Return on equity. - Total asset turnover × Profit margin × Debt-equity ratio. - Equity multiplier × Return on assets × Profit margin.

Equity multiplier × Return on assets

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing? - DuPont rate - External growth rate - Sustainable growth rate - Internal growth rate - Cash flow rate

Internal growth rate

Scranton Paper Company generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship? - Receivables turnover - Equity multiplier - Profit margin - Return on assets - Total asset turnover

Total asset turnover

A firm can increase its sustainable rate of growth by decreasing its: - profit margin. - dividends. - total asset turnover. - target debt-equity ratio. - equity multiplier.

dividends

A common-size balance sheet helps financial managers determine: - which customers are paying on a timely basis. - if costs are increasing faster or slower than sales. - if changes are occurring in a firm's mix of assets. - if a firm is generating more or less sales per dollar of assets than in prior years. - the rate at which the firm's dividend payout is changing.

if changes are occurring in a firm's mix of assets

The equity multiplier is equal to: - one plus the debt-equity ratio. - one plus the total asset turnover. - total debt divided by total equity. - total equity divided by total assets. - one divided by the total asset turnover.

one plus the debt-equity ratio.

Financial statement analysis: - is primarily used to identify account values that meet the normal standards. - is limited to internal use by a firm's managers. - provides useful information that can serve as a basis for forecasting future performance. - provides useful information to shareholders but not to debtholders. - is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.

provides useful information that can serve as a basis for forecasting future performance

If a firm has an inventory turnover of 15, the firm: - sells its entire inventory every 15 days. - stocks its inventory only once every 15 days. - delivers inventory to its customers every 15 days. - sells its inventory by granting customers 15 days of free credit. - sells its entire inventory an average of 15 times each year.

sells its entire inventory an average of 15 times each year

The sustainable growth rate is based on the premise that: - an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued. - no additional equity will be added to the firm. - the debt-equity ratio will be held constant. - the dividend payout ratio will be zero. - the dividend payout ratio will increase at a steady rate.

the debt-equity ratio will be held constant

Common-size financial statements present all balance sheet account values as a percentage of: - the forecasted budget. - sales. - total equity. - total assets. - last year's account value.

total assets