Final Review Topic 4

In order to make ratio analysis a more effective tool, you should carefully consider: 1. Demographic trends. 2. Bubbles and recessions. 3. Technological changes. 4. All the statements are correct.

4. All the statements are correct. All are examples of external risks that may affect a company's performance.

If a company has current assets of $80 and fixed assets of $120, if sales are $150 and EBIT is $35, what is the fixed asset turnover? A. 1.25 B. 0.80 C. 2.29 D. 5.71

A. 1.25 150 / 120 = 1.25

For Eastern Family, what percentage of sales is consumed by Cost of Goods Sold? A. 58.90% B. 47.92% C. 52.08% D. 41.10%

A. 58.90% Since Gross Margin = Gross Profit / Sales = 4110 / 10000 = 41.10%, the COGS / Sales = 1 - Gross Margin = 58.90%.

If a firm's financial leverage ratio is 2.50, what percentage of assets are financed by debt? A. 60% B. 70% C. 40% D. 50%

A. 60% We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So, Financial leverage ratio = 2.5 = 100%/Y% = Assets/Equity; thus Y = 40%, so X = 60% = percent financed by debt.

A company has sales of $300, expenses of $200 and interest expense of $25, what is its times interest earned ratio? A. 3.00 B. 4.00 C. 1.75 D. 2.00

B. 4.00 EBIT / Int Exp (300 - 200) / 25 = 4

Accounts receivable turnover for the industry is 4.50. Assume a 365 day year and all sales were made on credit. This tells you that: 1. Eastern Family's accounts receivable is more liquid than the industry norm. 2. Eastern Family's accounts receivable is collected 28.4 days quicker than the industry average. 3. In this industry, the companies take about 81.1 days to collect their accounts receivable. 4. In this industry, the companies take about 4.5 days to collect their accounts receivable.

In this industry, the companies take about 81.1 days to collect their accounts receivable.

The timing of a firm's fiscal year end would be most relevant to which of the following firms: 1. A snowboard shop. 2. A supermarket. 3. A hospital. 4. A restaurant.

1. A snowboard shop. When analyzing seasonal firms, an analyst must be careful to understand the relationship between fiscal year end and the sales cycle.

The flexibility aspect of ratios and ratio analysis refers to which of the following? 1. Analysts can create new ratios if needed. 2. Firms of different size can be compared on the same scale. 3. Ratios determine the financial flexibility of a company. 4. Ratios can be used to compare a firm to the industry's top performers.

1. Analysts can create new ratios if needed.

If a competitor of Eastern Family has a Total Asset Turnover (TAT) of 1.10, then: 1. Eastern Family's asset utilization success cannot be assessed by the TAT alone. 2. Eastern Family is generating more sales per dollar of assets than the competitor. 3. Eastern Family is in good shape since its TAT is higher than the competitor. 4. Eastern Family is in bad shape since its TAT is lower than the competitor.

1. Eastern Family's asset utilization success cannot be assessed by the TAT alone.

Consider two companies, Hoogle and Mapple. They are economically identical. However, for reporting purposes Hoogle uses the managerial discretion that is required with accrual accounting to increase net income relative to Mapple (assume any balance sheet effects are inconsequential). Which of the following is correct: 1. Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient. 2. Hoogle's OIROI is higher than Mapple's and Hoogle is more efficient. 3. Mapple's OIROI is higher than Hoogle's and Mapple is more efficient. 4. Mapple's OIROI is higher than Hoogle's but Mapple is NOT more efficient.

1. Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient.

Big-Tokyo Inc. has a financial leverage ratio of 2.00, total asset turnover of 1.50 and ROE of 18.00%. For Big-Tokyo's industry, the average ROE is 16.00% and the industry average total asset turnover (TAT) and financial leverage ratio (FLR) are the same as Big-Tokyo. The industry average net margin must be: 1. Lower than Big-Tokyo's. 2. Equal to Big-Tokyo's. 3. Cannot be determined with available data. 4. Higher than Big-Tokyo's.

1. Lower than Big-Tokyo's. TAT and FLR are the same for the industry and Big-Tokyo. Hence, since Big-Tokyo has a higher ROE, Big-Tokyo must have a higher net margin than the industry.

The industry average current ratio and quick ratio are 2.64 and 1.88 respectively. Which of the following would be the most plausible inference about Macrosoft's liquidity? 1. Macrosoft has higher inventory relative to current liabilities than the industry average. 2. Macrosoft has a larger amount of cash relative to its current assets than the industry average. 3. Macrosoft has worse liquidity than the industry. 4. Macrosoft has better liquidity than the industry.

1. Macrosoft has higher inventory relative to current liabilities than the industry average. Current ratio = CA/CL = 12,550/4260 = 2.95 Macrosoft has a higher current ratio while the quick ratio is lower. This means that the company must be carrying a large amount of inventory (i.e., when we take inventory out of the numerator, the ratio falls significantly).

If the industry average ROE is 4.12% and ROA is 2.09%, the most plausible conclusion about Macrosoft's profitability is: 1. Macrosoft is more profitable than the industry. 2. Macrosoft is underperforming the industry. 3. Macrosoft should use more equity financing. 4. The industry is outperforming Macrosoft

1. Macrosoft is more profitable than the industry. For Macrosoft: ROE = NI/Equity = 462/8300 = 5.56%; ROA = 462/20900 = .0221 = 2.21%. Hence, Macrosoft is generating higher ROA and ROE than the industry.

Suppose that Macrosoft decides to increase the estimated life over which fixed assets are depreciated. Which of the following is most likely? 1. Macrosoft's OIROI will increase. 2. Macrosoft's total asset turnover will increase. 3. Macrosoft's inventory turnover will decrease. 4. None of the above are likely.

1. Macrosoft's OIROI will increase.

Suppose that Macrosoft's times interest earned ratio has varied between 0.80 times and 5.23 over the past five years. Which of the following statements is most plausible? 1. Macrosoft's borrowing cost may increase due to the fluctuations in interest coverage. 2. Banks will be eager to loan to Macrosoft because of the fluctuations in the times interest earned ratio. 3. Macrosoft should use more debt to finance assets. 4. Macrosoft's borrowing cost may decrease due to the uncertainty of being able to cover interest payments.

1. Macrosoft's borrowing cost may increase due to the fluctuations in interest coverage. Uncertainty in the times interest earned ratio will cause lenders to view Macrosoft as a higher risk borrowing candidate. Therefore, if Macrosoft needs to borrow, they will likely pay a higher interest rate.

Which one of the following ratios is NOT part of the common ratio categories? 1. Operating 2. Liquidity 3. Profitability 4. Financing

1. Operating

Suppose an analyst is reviewing the profitability ratios for a firm. Which of the following statements represents the most valid insight for the analyst? 1. Since the profitability ratios of the firm declined, the analyst devotes additional effort to understanding revenues and costs. 2. Since the profitability ratios of the firm declined, the firm is facing serious competitive pressures. 3. Since the profitability ratios of the firm improved, the firm is not subject to competitive pressures. 4. Since the profitability ratios of the firm improved, the firm is obviously headed in the right direction.

1. Since the profitability ratios of the firm declined, the analyst devotes additional effort to understanding revenues and costs. As the textbook states, ratios do not tell you about the company; rather, ratios helps you know what questions to ask.

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? 1. The firm has too little inventory resulting in lost sales or stock-outs. 2. The firm has lower liquidity than the industry average. 3. The firm has low sales volume. 4. The firm has too much inventory thus impairing overall liquidity.

1. The firm has too little inventory resulting in lost sales or stock-outs. If a firm has a higher inventory turnover this implies that it is more liquid and does NOT necessarily have too much inventory on hand because it is able to sell its inventory. The only likely answer then is that it may have too little inventory on hand.

A firm has a ROE (return on equity) of 0.27, and the industry average ROE is 0.24.Which conclusion should an analyst draw when comparing this firm to the industry? 1. The firm is generating higher returns to owners than the industry. 2. The firm is generating lower returns to owners than the industry. 3. The firm should use more equity financing. 4. The firm should use less equity financing.

1. The firm is generating higher returns to owners than the industry.

An analyst is comparing the ratios of two firms and needs to address timing differences. What is an example of a timing difference between these two firms? 1. The firms have different fiscal years. 2. The firms are in different industries. 3. The firms use different depreciation methods. 4. The firms use different inventory methods.

1. The firms have different fiscal years.

Which one of the following is NOT an example of meaningful ratio analysis? 1. Using GAAP rules to calculate standard ratios. 2. Using ratios to assess goal achievement. 3. Using ratios to compare a firm with high performing competitors. 4. Analyzing the trend in ratios over time for a single firm.

1. Using GAAP rules to calculate standard ratios. While GAAP rules must be understood, ratio analysis is not standardized by GAAP.

If the current ratio of a company is higher than the industry, then: 1. You cannot tell without looking at other liquidity ratios. 2. The company has lower liquidity than the industry. 3. The company has higher liquidity than the industry. 4. The company has about the same liquidity as the industry.

1. You cannot tell without looking at other liquidity ratios. *You cannot tell a company's liquidity compared to the industry by just looking at one ratio.

When performing ratio analysis, scrubbing the data includes all of the following except: 1. Identifying accounting differences among competitors. 2. Choosing a relevant comparison set. 3. Alignment of ratios for companies with different fiscal year-ends. 4. All are included in scrubbing the data.

2. Choosing a relevant comparison set. Choosing the comparison set is important, but is not part of scrubbing the data. Aligning year-end data and identifying/correcting accounting differences are both part of scrubbing the data.

The OIROI (operating income return on investment) uses what elements on the income statement? 1. Net margin, total current assets 2. EBIT, total assets 3. Sales, total assets, equity 4. Operating income, EBIT, total liabilities

2. EBIT, total assets

Assume that the industry average ROE is 12%. For Eastern Family, which of the following best describes their ROE: 1. Eastern Family is more profitable than the industry. 2. Eastern Family is generating lower return to owners than the industry. 3. Eastern Family is in a good position in the industry regarding to the return to its owner. 4. Eastern Family's ROE is 2.93%.

2. Eastern Family is generating lower return to owners than the industry. ROE for Eastern Family is 8.94% (474/5300 = 8.9%) which is less than the industry average.

If the industry average debt ratio is 60%, then: 1. Eastern Family is more conservatively financed than the industry norm. 2. Eastern Family is more aggressively financed by debt than the industry. 3. Eastern Family has more owners' equity relative to its assets than the industry average. 4. Eastern Family's debt is lower quality than the average in the industry.

2. Eastern Family is more aggressively financed by debt than the industry.

If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? 1. The same 2. Higher 3. It does not matter 4. Lower

2. Higher

Consider Kyoto Restaurant. Kyoto's ROE is lower than the industry average. However, Kyoto's total asset turnover and financial leverage ratio are identical to the industry. The industry average net margin must be: 1. Equal to Kyoto's net margin. 2. Higher than Kyoto's net margin. 3. Cannot be determined 4. Lower than Kyoto's net margin.

2. Higher than Kyoto's net margin. Kyoto's TAT and FLR are the same as the industry. Since TAT x FLR x net margin = ROE, the industry average net margin must be higher than Kyoto's since the industry has a higher ROE.

Consider two companies, Hoogle and Mapple. They are economically identical. However, for reporting purposes Hoogle uses the managerial discretion that is required with accrual accounting to increase net income relative to Mapple (assume any balance sheet effects are inconsequential). Which of the following is correct: 1. Mapple's OIROI higher than Hoogle's and Mapple is more efficient. 2. Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient. 3. Hoogle's OIROI is higher than Mapple's and Hoogle more efficient. 4. Mapple's OIROI higher than Hoogle's but Mapple is NOT more efficient.

2. Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient.

Big-Tokyo Inc. has a financial leverage ratio of 2.00, total asset turnover of 1.50 and ROE of 18.00%. For Big-Tokyo's industry, the average ROE is 16.00% and the industry average total asset turnover (TAT) and financial leverage ratio (FLR) are the same as Big-Tokyo. The industry average net margin must be: 1. Equal to Big-Tokyo's. 2. Lower than Big-Tokyo's. 3. Higher than Big-Tokyo's. 4. Cannot be determined with available data.

2. Lower than Big-Tokyo's. TAT and FLR are the same for the industry and Big-Tokyo. Hence, since Big-Tokyo has a higher ROE, Big-Tokyo must have a higher net margin than the industry.

Which one of the following is NOT an example of the use of meaningful comparison standards for ratio analysis? 1. Using ratios to assess whether the firm is meeting established goals. 2. Reporting ratios in annual financial statements. 3. Comparing ratios over several years to understand changes in the company. 4. Comparing a firm's ratios to the industry average to assess strengths and weaknesses.

2. Reporting ratios in annual financial statements. There are no required ratios for financial reporting. Simply including ratios for the year in an annual report does not provide a comparison or standard for the calculated ratios. The other answers are examples of internal goal monitoring, trend analysis, and cross-sectional analysis.

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? 1. The firm has low sales volume. 2. The firm has too little inventory resulting in lost sales or stock-outs. 3. The firm has too much inventory thus impairing overall liquidity. 4. The firm has lower liquidity than the industry average.

2. The firm has too little inventory resulting in lost sales or stock-outs.

What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules? 1. The firm must have been paid for the product. 2. The product must have been delivered. 3. The price of the product must have included sales tax. 4. The price of the product must have been exempt from sales tax.

2. The product must have been delivered

What is the current ratio of Eastern Family? A. 2.49 B. 1.94 C. 1.46 D. 2.18

2.49 Current Ratio = 9700/3900=2.49

The industry has the following ratios: · Current ratio = 2.15 · Quick ratio = 1.5 · Inventory turnover = 1.95 · AR turnover = 4.5 Which one of the following statements is the most accurate about Eastern Family? 1. Since Eastern Family has a higher current ratio than the industry average, it has a higher liquidity. 2. Easter Family is a better inventory manager than the industry norm. 3. Eastern Family takes longer to collect receivables than the industry. 4. All the statements are correct.

3. Eastern Family takes longer to collect receivables than the industry.

Which one of the following statements is most likely correct? 1. Firm B's inventory is more liquid than Firm A's. 2. Firm B has higher total asset turnover than Firm A. 3. Firm B should have higher debt ratio than Firm A. 4. All the statements are correct.

3. Firm B should have higher debt ratio than Firm A.

Which one of the following is NOT included in the DuPont calculation? 1. Return on asset 2. Net profit margin 3. Fixed asset turnover 4. Financial leverage ratio

3. Fixed asset turnover ROE = Net Margin x TAT x FLR = ROA x FLR.

Macrosoft's biggest competitor, Mapple, has the gross margin of 41.84%, the operating margin of 11.50%, and the net margin of 3.13%. Both companies have a tax rate of 40%. Comparing these two companies, Macrosoft must have: 1. Lower cost of goods sold relative to its sales than Mapple. 2. Lower operating expense relative to its sales than Mapple. 3. Lower interest expense relative to its sales than Mapple. 4. Lower sales than Mapple.

3. Lower interest expense relative to its sales than Mapple.

Eastern Family's main competitor has Gross Margin of 40.32%, operating margin of 15.53%, and net margin of 4.83%. Both Eastern Family and the competitor have the tax rate of 40%. Given this information, Eastern Family must have: 1. Higher dollar amount sales than the competitor. 2. Lower operating expense relative to its sales than the competitor. 3. Lower interest expense than the competitor. 4. Higher COGS relative to its sales than the competitor.

3. Lower interest expense than the competitor.

For Macrosoft's industry, average fixed asset turnover is 2.31. Which of the following is the most plausible conclusion about Macrosoft? 1. Macrosoft is using its fixed assets more efficiently than the industry norm. 2. Macrosoft likely needs to invest in fixed assets in the near future. 3. Macrosoft it is using its fixed assets less efficiently than the industry norm. 4. Macrosoft must relax credit standards to increase sales.

3. Macrosoft it is using its fixed assets less efficiently than the industry norm. For Macrosoft, fixed asset turnover = Sales/ fixed assets = 15000/8350 = 1.80. Hence, Macrosoft generates $1.80 in sales for each dollar of fixed assets compared to $2.31 in sales for each dollar of fixed asset for the industry. While the fixed asset turnover doesn't tell the whole story, the most plausible conclusion is that Macrosoft is not using fixed assets as efficiently as the industry norm.

In Macrosoft's industry, the average current ratio is 2.76, the average quick ratio is 1.56, the average inventory turnover is 1.68 and the industry average collection period is 54.3 days. When comparing Macrosoft to the industry, which one of the following statements is the most accurate? 1. Macrosoft is less liquid than the industry because of the firm's high current and quick ratios. 2. Macrosoft inventories are less liquid than the industry average. 3. Macrosoft's higher current ratio and quick ratio could be due to the build up illiquid current assets. 4. None of the statements are correct.

3. Macrosoft's higher current ratio and quick ratio could be due to the build up illiquid current assets.

In Macrosoft's industry, the average current ratio is 2.76, the average quick ratio is 1.56, the average inventory turnover is 1.68 and the industry average collection period is 54.3 days. When comparing Macrosoft to the industry, which one of the following statements is the most accurate? 1. Macrosoft is less liquid than the industry because of the firm's high current and quick ratios. 2. Macrosoft inventories are less liquid than the industry average. 3. Macrosoft's higher current ratio and quick ratio could be due to the build up of illiquid current assets. 4. None of the statements are correct.

3. Macrosoft's higher current ratio and quick ratio could be due to the build up of illiquid current assets.

Suppose the inventory turnover of a company is higher than the industry. Based on this one ratio, which of the following is most likely to be correct? 1. The firm has too much inventory thus impairing overall liquidity. 2. The firm has low sales volume relative to inventory. 3. The firm has too little inventory resulting in lost sales or stock-outs. 4. The firm has lower liquidity than the industry average.

3. The firm has too little inventory resulting in lost sales or stock-outs.

Which of the following best describes the problem associated with GAAP accounting standards when performing ratio analysis? 1. GAAP accounting standards are too simplistic for most firms. .2. Most firms use cash accounting rather than GAAP accounting. 3. Most firms use cash accounting rather than accrual accounting. 4. GAAP accounting standards allow for significant managerial discretion in reported financial statements.

4. GAAP accounting standards allow for significant managerial discretion in reported financial statements. Within the confines of GAAP, managers still have significant discretion over reported results.

Which of the following best describes the problem associated with GAAP accounting standards when performing ratio analysis? 1. GAAP accounting standards are too simplistic for most firms. 2. Most firms use cash accounting rather than GAAP accounting. 3. Most firms use cash accounting rather than accrual accounting. 4. GAAP accounting standards allow for significant managerial discretion in reported financial statements.

4. GAAP accounting standards allow for significant managerial discretion in reported financial statements. Within the confines of GAAP, managers still have significant discretion over reported results.

Why would a company be interested in the TAT (total asset turnover) ratio? 1. It indicates how efficient assets are to liabilities and equity. 2. It indicates what the turnover of sales is to liabilities. 3. It indicates how efficient assets are at producing income. 4. It indicates how efficient assets are at producing sales.

4. It indicates how efficient assets are at producing sales.

If the industry average ROE is 4.12% and ROA is 2.09%, the most plausible conclusion about Macrosoft's profitability is: 1. Macrosoft should use more equity financing. 2. Macrosoft is underperforming the industry. 3. The industry is outperforming Macrosoft. 4. Macrosoft is more profitable than the industry.

4. Macrosoft is more profitable than the industry. For Macrosoft: ROE = NI/Equity = 462/8300 = 5.56%; ROA = 462/20900 = .0221 = 2.21%. Hence, Macrosoft is generating higher ROA and ROE than the industry.

Which one of the following is not an element of the DuPont decomposition? 1. Earnings as a percentage of sales. 2. Portion of assets financed by equity. 3. Sales as a percentage of total assets. 4. Percentage of net income paid out as dividends.

4. Percentage of net income paid out as dividends. The DuPont decomposes ROE into three factors: profitability (net margin; earnings as a percent of sales), assets usage efficiency (asset turnover; sales as a percent of assets), and leverage (financial leverage; portion of assets financed by equity). Dividend payout is not included in the DuPont decomposition of ROE.

If the current ratio of a company is higher than the industry, then: 1. The company has higher liquidity than the industry. 2. The company has lower liquidity than the industry. 3. The company has about the same liquidity as the industry. 4. You cannot tell without looking at other liquidity ratios.

4. You cannot tell without looking at other liquidity ratios. You cannot tell a company's liquidity compared to the industry just by looking at one ratio.

Macrosoft's average collection period is closest to which of the following? (Assume 365 days in a year.) A. 80 days B. 4.05 days C. 45 days D. 90 days

90 Days AR Turnover = credit sales/AR = 15000/3700 = 4.055. Average Collection Period = 365/AR Turnover = 90.0 days. (Note: in the absence of other information, all sales are assumed to be on credit).

Which of the following statements is NOT correct with respect to using ratios to analyze a firm or firms? 1. Ratio analysis can be used to assess the need for cost cutting initiatives. 2. Ratio analysis can be used to compare three companies with different size, strategy and risks: Toyota, Ford and Tesla. 3. A change in a ratios reveals the economic character of the firm. 4. Analysts can create a new ratio to show more detail about the cost structure of a company.

A change in a ratios reveals the economic character of the firm.

What is the fixed asset turnover of Eastern Family? A. 1.53 B. 0.62 C. 0.08 D. 1.34

A. 1.53 FAT=Sales/Fixed Assets = 10,000/6,500 = 1.53

Kyoto Restaurant has total asset turnover of 1.50, ROE of 18.00%, and net profit margin of 6.00%. What is Kyoto's financial leverage ratio? A. 2.00 B. 2.50 C. 1.00 D. 1.50

A. 2.00 ROE = Net Margin x TAT x FLR, so FLR = ROE / (Net Margin x TAT) = 0.18 / (0.06 x 1.50) = 2.00.

Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets is financed by equity? A. 40% B. 70% C. 60% D. 50%

A. 40% The ratio is 2.5 to 1. The amount financed by equity is a ratio of 1 to 2.5 or the inverse. 1 / 2.5 = .40

Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets are financed by equity? A. 40% B. 70% C. 50% D. 60%

A. 40% The correct answer is 40%. We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So Financial leverage ratio = 2.5 = 100% / Y% = Assets/Equity; thus Y = 100 / 2.5 = 40%.

Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets are financed by equity? A. 60% B. 40% C. 50% D. 70%

B. 40% The correct answer is 40%. We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So Financial leverage ratio = 2.5 = 100% / Y% = Assets/Equity; thus Y = 100 / 2.5 = 40%.

Macrosoft's total asset turnover is closest to which of the following? A. 0.38 B. 1.39 C. 0.72 D. 2.11

C. 0.72 Solution: Total asset turnover = sales / total assets = 15k / 20.9k = 0.72

What percentage of Macrosoft's sales is consumed by operating expense (including depreciation)? A. 59.53% B. 40.47% C. 30.34% D. 10.13%

C. 30.34% Operating Expense/Sales = Gross Margin - Operating Margin = 40.47% - 10.13% = 30.34%. Alternatively, Op Expense/Sales = (3250+1300)/15000 = 30.33%. (difference is due to rounding error)

If a firm's financial leverage ratio is 2.50, what percentage of assets are financed by debt? A. 40% B. 50% C. 60% D. 70%

C. 60% Solution: We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So, Financial leverage ratio = 2.5 = 100%/Y% = Assets/Equity; thus Y = 40%, so X = 60% = percent financed by debt.

What is the ROE for Eastern Family? A. 23.70% B. 14.36% C. 8.94% D. 2.93%

C. 8.94 ROE = 474 / 5300 = 8.94%

If a company has current assets of $90 and fixed assets of $140, if it has debt of $125, what is its debt ratio? A. 1.36 B. 1.84 C. 1.12 D. 0.54

D. 0.54 (debt) 125 / 140 + 90 (total assets) = .5435

A company has cash of $100, accounts receivable of $250, inventory of $300, and accounts payable of $300. What is the quick ratio? A. 1.00 B. 2.17 C. 0.33 D. 1.17

D. 1.17 100 + 250 / 300 = 1.17

What is the ROA for Macrosoft? A. 3.92% B. .0221% C. 7.27% D. 2.21%

D. 2.21% ROA = 462/20900 = .0221 = 2.21%

What is the Times Interest Earned for Eastern Family? A. 1.85x B. 7.34x C. 0.41x D. 2.41x

D. 2.41x TIE = 1350 / 560 = 2.41x

Intel provides the following data for 2014: · A/R 600 · Inventory 800 · Fixed assets 1,000 · A/P 500 · Long term debt 900 · Common stock 400 What is the current ratio? A. 1.5 B. 1.2 C. 2.0 D. 2.8

D. 2.8 600 + 800 / 500 = 2.8

A company's year-end balance sheet for 2013 shows the following: Accounts Receivable: $900 Inventory: $1,200 Fixed Assets: $1,000 Accounts Payable: $1,300 Sales: $4,000 Salaries Expense: $275 What is its fixed asset turnover ratio? A. 1.7 B. 1.8 C. 3.7 D. 4.0

D. 4.0

What is Macrosoft's interest-bearing debt to total capital ratio (IBDTC)? A. 46.23% B. 43.73% C. 51.24% D. 52.41%

D. 52.41% Interest bearing debt includes notes payable of $800 and long-term debt of $8340 (accounts payable and accrued expenses do not carry an explicit interest rate and are therefore excluded). Total capital includes interest bearing debt and equity of $8300. Hence, IBDTC = (800+8340)/(800+8340+8300) = 52.41%

A company has cash sales of $200 and credit sales of $750. It's average accounts receivable is $90. What is the A/R turnover? What is the average collection period? A. Turnover: 8.33 ACP: .694 B. Turnover 10.56 ACP: 24.9 C. Turnover: 10.56 ACP: 43.8 D. Turnover 8.33 ACP: 43.8

D. Turnover 8.33 ACP: 43.8 750 / 90 = 8.33 ACP = 365 / 8.33 = 43.8

True or False: The ratios used in financial analysis are defined by GAAP.

False: There are no rules for ratios. You can make your own to meet your needs.

Which one of the following is NOT part of the common ratio categories? 1. Liquidity 2. Profitability 3. Operating 4. Financing

Operating

True or False: The process of making a target firm's data comparable to a peer group is known as scrubbing the data.

True Scrubbing the data is a preliminary step in ratio analysis. The process entails recasting the target/peer financial statements to align significant accounting choices, fiscal year-ends, etc.

True or False: Ratios help identify the areas of a firm that need investigation.

True Ratios tell you what questions to ask about the company

True or False: Ratios help identify the areas of a firm that need investigation.

True: Ratios tell you what questions to ask about the company.