FINA ch2

operating, investing, or financing activity in the statement of cash flows? Teresa Co.'s total raw materials inventory decreased from the previous year.

Operating

___ may distort data for firms that do the majority of their business at a certain point during the year. This can certainly cause distortions during ratio analysis

Seasonal factors

Source of cash to the firm (cash inflow) or a use of cash (cash outflow)? This month, Aberdeen Petroleum Refiners Corp. collected $87,458 in accounts receivable.

Source

Source of cash to the firm (cash inflow) or a use of cash (cash outflow)? Eastern Gas Pipeline Co. spent $930,000 to purchase a controlling interest (200,000 shares) in a competitor.

Use

Larger publicly traded firms must file a _____ report with the Securities and Exchange Commission (SEC). a. 10-K b. 10-V c. 1040

a. 10-K

Which of the following is considered a financially leveraged firm? a. A company that uses debt to finance some of its assets b. A company that uses only equity to finance its assets

a. A company that uses debt to finance some of its assets

Which of the following statements are true about profitability ratios? Check all that apply. a. If a company has a net profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. b. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. c. An increase in the return on assets ratio implies an increase in the assets a firm owns. d. If a company issues new common shares but its net income does not increase, return on common equity will increase.

a. If a company has a net profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. b. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply. a. Seasonal factors can distort data. b. Window dressing might be in effect. c. Market data is not sufficiently considered.

a. Seasonal factors can distort data. b. Window dressing might be in effect.

Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Cold Goose Metal Works Inc.'s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)? a. The company's debts are listed in the order in which they are to be repaid. b. The company's debts should be listed from those carrying the largest balance to those with the smallest balance. c. The company's debts should be listed in order of their liquidity.

a. The company's debts are listed in the order in which they are to be repaid.

The value of assets, liabilities, and equities outside of the firm in the marketplace is the a. market value. b. historic value. c. book value. d. intrinsic value.

a. market value

An asset is liquid if it is easily converted to cash. a. True b. False

a. true

The inventory turnover ratio across companies in IAC's industry is 3.75. Based on this information, which of the following statements is true for Industrialization Automation Company? a. Industrialization Automation Company is holding less inventory per dollar of COGS compared to the industry average. b. Industrialization Automation Company is holding more inventory per dollar of COGS compared to the industry average.

b. Industrialization Automation Company is holding more inventory per dollar of COGS compared to the industry average.

How does financial leverage affect the expected rate of return realized by stockholders of a firm? a. Firms with high debts will be less risky. b. Interest on debt is tax deductible. c. Interest on debt is paid at the end of the loan term. d. Debts are to be repaid only at the time of liquidation.

b. Interest on debt is tax deductible.

Which of the following statements about the analysis report is true? a. The ratios provide an accurate and thorough representation of the Chinese company's performance b. The analysis likely includes incorrect and misleading conclusions

b. The analysis likely includes incorrect and misleading conclusions

Sapphire Industries Ltd. and Garnet Enterprises Ltd. are textile businesses. The quick ratio of Sapphire is 0.5, and the quick ratio of Garnet is 1.0. As part of the window-dressing strategy, both firms will purchase inventory on credit. Which of the following is true about the actual results of this transaction? a. The quick ratio of Sapphire will increase, while the quick ratio of Garnet will decrease. b. The quick ratios of both Sapphire and Garnet will decrease. c. The quick ratios of both Sapphire and Garnet will increase. d. The quick ratio of Sapphire will decrease, while the quick ratio of Garnet will increase.

b. The quick ratios of both Sapphire and Garnet will decrease.

Which of the following best describes stockholders' equity? a. The difference between a company's assets and retained earnings. b. The sum of stockholders capital provided by stockholders and retained earnings.

b. The sum of stockholders capital provided by stockholders and retained earnings.

Which of the following is true about financial leverage? a. Under economic growth conditions, firms with relatively low leverage will have higher expected returns. b. Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

b. Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

Inventory is an example of a(n) a. fixed asset. b. current asset. c. intangible asset. d. long-term asset.

b. current asset

The ___ provides a snapshot of the financial condition of a company.

balance sheet

Which of the following statements are true? Check all that apply. a. An increase in the current ratio over time would always mean that the company's liquidity position is improving. b. Vallante Corporation. has a better ability to meet its short-term liabilities than East India Inc. (EII) c. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. d. As compared to East India Inc. (EII), Vallante Corporation. has less liquidity and relatively greater reliance on outside cash flow to finance its short-term obligations. e. If a company has a quick ratio of less than 1 but a current ratio of more than 1, and if the difference between the two ratios is large, it would mean that the company depends heavily on the sale of its inventory to meet its short-term obligations.

c. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. d. As compared to East India Inc. (EII), Vallante Corporation. has less liquidity and relatively greater reliance on outside cash flow to finance its short-term obligations. e. If a company has a quick ratio of less than 1 but a current ratio of more than 1, and if the difference between the two ratios is large, it would mean that the company depends heavily on the sale of its inventory to meet its short-term obligations.

Which of the following statements about a firm's income statement is true? a. It shows the portion of the firm's earnings that has been saved rather than paid out as dividends. b. It shows a firm's financing activities and investment activities over a particular period of time. c. It summarizes the revenue generated and the expenses incurred by a firm during the accounting period. d. It includes information about a firm's assets, equity, and liabilities.

c. It summarizes the revenue generated and the expenses incurred by a firm during the accounting period.

Which of the following statements regarding a corporation's annual report is true? a. Only quantitative information is contained in the annual report. b. The basic financial statements in the report provide detailed data for the past six years. c. The verbal statements in the report attempt to explain how management expects the firm to perform in the future. d. The quantitative information in the report is based on future events.

c. The verbal statements in the report attempt to explain how management expects the firm to perform in the future.

On March 3 of the current year, a firm had a quick ratio of 2.0. Two days later, the firm purchased equipment for cash. Assuming all other things are equal, how will this transaction affect the firm's quick ratio? a. The quick ratio will increase. b. The quick ratio will become equal to its current ratio. c. The quick ratio will not change. d. The quick ratio will decrease.

d. The quick ratio will decrease

Which of the following is an example of a liquid asset? a. Car b. House c. Roth IRA d. Checking account

d. checking account

Which of the following groups of ratios show the combined effects of liquidity management, asset management, and debt management on the operating results? a. Fixed charge coverage ratios b. DuPont ratios c. Market value ratios d. Profitability ratios

d. profitability rations

When calculating ratios, a company can minimize the problems arising from seasonal factors by a. using the first-in first-out method of inventory valuation. b. considering the DuPont analysis to evaluate inventory ratios. c. window dressing the value of inventory. d. using monthly averages for inventories.

d. using monthly averages for inventories.

Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called ___ ratios.

debt management

The income statement reports this value, which is calculated by dividing the firm's earnings available to common shareholders by the number of common shares outstanding. Many people consider this to be one of the most important numbers in this statement.

earnings per share

operating, investing, or financing activity in the statement of cash flows? Andrew Industries repurchased common stock for $260,000.

financing

operating, investing, or financing activity in the statement of cash flows? Sam Inc. issued long-term bonds for $370,000.

financing

This statement is also called a profit and loss (or P&L) statement since it reports whether the business earned a profit or a loss during the period reported.

income statement

The ___ provides a snapshot of a company's financial performance during a specified period of time.

income statement (profit and loss statement)

An asset that lacks this attribute may take a long time to sell or be collected (so that it can be converted into usable cash), may require a big drop in price compared to its purchase price to induce a buyer to purchase it and/or a large transaction cost to purchase or sell it.

liquidity

Ratios that help determine whether a company can access its cash and pay its short-term obligations are calledRatios that help determine whether a company can access its cash and pay its short-term obligations are called ___ ratios.

liquidity

Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with ___debt ratios. low high

low

___ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market.

market value

This type of cash inflow or outflow results from the production, sale, and delivery of the firm's goods and services as well as collecting customer payments, and is reported in the statement of cash flows.

operating cash flows

___ ratios help measure a company's ability to generate income and profits based on its invested capital.

profitability

This statement categorizes and reports the financial activities and transactions that led to a change in the firm's cash holdings over an interval of time (accounting period).

statement of cashflows