Finance Ch 03 - 2

A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total liabilities of $750,000 has a return on equity of

4%

A U.S. parent company's foreign retained earnings are adjusted to reflect gains and losses resulting from currency movements as well as each year's operating profits or losses.

FALSE

Common stock dividends paid to stockholders are equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding.

FALSE

Earnings per share represent the dollar amount earned and distributed to shareholders.

FALSE

In general, the more debt (other people's money) a firm uses in relation to its assets, the smaller its financial leverage.

FALSE

Return on total assets (ROA) measures teh overall effectiveness of management in generating profits with the owners' investment in the firm.

FALSE

The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they come due.

FALSE

The lower the fixed-payment coverage ratio, the lower is the firm's financial leverage.

FALSE

Time-series analysis is the evaluation of the firm's financial performance in comparison to other firm(s) at teh same point in time.

FALSE

[BLANK] is a term used to describe the magnification of risk and return introduced through the use of fixed cost financing such as preferred stock and long-term debt.

Financial leverage

Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.

TRUE

Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.

TRUE

Since the differences in the composition of a firm's current assets and liabilities can significantly affect the firm's "true" liquidity, it is important to look beyond measures of overall liquidity to assess the activity (liquidity) of specific current accounts.

TRUE

The DuPont formula allows the firm to break down its return into the net profit margin, which measures the firm's profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales.

TRUE

The average age of inventory can be calculated as 365 divided by inventory turnover.

TRUE

The average age of inventory is viewed as the average length of time inventory is held by the firm or as teh average number of days' sales in inventory.

TRUE

The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity.

TRUE

The firm's creditors are primarily interested in the short-term liquidity of the company and its ability to make interest and principal payments.

TRUE

The higher the debt ratio, the more financial leverage a firm has and, thus, the greater will be its risk and return.

TRUE

The liquidity of a business firm refers to the solvency of the firm's overall financial position.

TRUE

The magnification of risk and return introduced through the use of fixed-cost financing such as debt and preferred stock is called financial leverage.

TRUE

Typically, higher coverage ratios are preferred, but too high a ratio may indicate under-utilization of fixed-payment obligations, which may result in unnecessarily low risk and return.

TRUE

Ratios provide a [BLANK] measure of a company's performance and condition.

relative

The [BLANK] measures the overall effectiveness of management in generating profits with its available assets.

return on total assets

The DuPont system merges the income statement and balance sheet into two summary measures of profitability:

return on total assets and return on equity.

The primary concern of creditors when assessing the strength of a firm is the firm's

short-term liquidity.

The analyst should be careful when conducting ratio analysis to ensure that

the dates of the financial statements being compared are the same, audited statements are used, the same accounting procedures were used, the overall performance of the firm is not judged on a single ratio (all of the above)

When assessing the fixed-payment coverage ratio,

the lower its value the more risky is the firm.

The [BLANK] ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.

times interest earned

[BLANK] analysis involves comparison of current to past performance and the evaluation of developing trends.

Time-series

A firm with a total asset turnover lower than industry standard may have

insufficient sale.

The [BLANK] measures the activity, or liquidity, of a firm's inventory.

inventory turnover

The two categories of ratios that should be utilized to assess a firm's true liquidity are the

liquidity and activity ratios.

[BLANK] is where the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement.

Benchmarking

A decrease in total asset turnover will result in [BLANK] in the return on equity.

a decrease

The stockholder's annual report must include

a statement of cash flows, an income statement, a balance sheet, and a statement of retained earnings

One of the most influential documents issued by a publicly-held corporation is the

annual report

In ratio analysis, a comparison to a standard industry ratio is made to isolate [BLANK] deviations from the norm.

any

The [BLANK] is useful in evaluating credit and collection policies.

average collection period.

As a firm's cash flows become more predictable,

current assets should decrease.

The two basic measures of liquidity are

current ratio and quick ratio.

A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might

decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios.