Financial Analysis

Long-term liabilities can be paid (excluding current component): Within one year Within a week Within one month In more than one year

In more than one year

Which of the following is NOT included in operating income? Income tax Net sales Selling expenses Cost of goods sold

Income tax

Goodwill is a(n) .......................... Tangible asset Current asset Liability Intangible asset

Intangible asset

Which of the following is a current asset? Long-term financial investments Property, plant & equipment Intangibles Inventory

Inventory

The quick ratio equals: Sales/Total assets Current assets/Current liabilities (Cash and near cash)/Current liabilities Gross profit/Sales

(Cash and near cash)/Current liabilities

What do we divide cost of goods sold by in order to estimate a firm's inventory turnover? Sales (average) Inventory Cost of goods sold 365

(average) Inventory

We divide accounts receivable turnover by what in order to estimate a firm's average collection period (in days)? 365 Accounts receivable turnover Sales (average) Accounts receivable

365

Which of the following is a current liability? Long-term debts Accounts payable Pension liabilities Deferred income taxes

Accounts payable

Which of the following equations represents the calculation of a firm's liabilities? Assets - Liabilities - Equity Equity - Assets Assets + Equity Assets - Equity

Assets - Equity

Which of the following equations represent the residual claim on a firm's assets? Assets - Liabilities Equity + Liabilities Assets - Liabilities - Equity Assets - Equity

Assets - Liabilities

Which of the following is true? Liabilities = Assets + Equity Equity = Assets + Liabilities Assets = Liabilities + Equity Assets = Liabilities - Equity

Assets=Liabilities + Equity

Debt investors generally want the firm to: invest only in risk-free assets invest in projects that are not too risky relative to the average risk of projects in place Avoid risky projects Invest in very risky projects

Avoid risky projects

Which of the following accurately describes the book value of a company's assets? Book value is dependent on historical cost of assets Book value is difficult to measure Book value always reflects the current value of a company's assets Book value is a better input to firm valuation than the market value of a company's assets

Book value is dependent on historical cost of assets

Debt is generally considered a cheaper form of funding than equity funding? False True

True

The quick ratio will always be equal to, or larger than, the cash ratio. False True

True

Wealth maximization focuses on: Cash flows Accruals Revenues Profit

Cash flows

What accounting method do small businesses tend to use (sole proprietor or partnerships)? Historical cost accounting Acquisition cost accounting Accrual accounting Cash-basis accounting

Cash-basis accounting

Total assets equal: Current assets + non-current assets Cash + accounts receivable Residual claim after all liabilities are repaid Current assets + property plant equipment

Current assets + non-current assets

The current ratio equals: Total debt/Total equity Gross profit/Sales Current assets/Current liabilities Equity/ Current liabilities Total

Current assets/Current liabilities

The current ratio formula is: Current assets/Current liabilities Equity/ Current liabilities Total debt/Total equity Gross profit/Sales

Current assets/Current liabilities

Which of the following must be disclosed in the notes to the profit and loss statement? Disposals of property, plant and equipment or investments Sales revenue Selling expenses Income tax

Disposals of property, plant and equipment or investments

Net income equals: EBIT - interest Operating income EBITDA EBT- tax

EBT- tax

What are the most often quoted and related financial ratios? Earnings per share and Price/Earnings Price/Earnings and gross margin Operating margin and gross margin Earnings per share and Price/Sales

Earnings per share and Price/Earnings

Corporations in consideration of the interest of shareholders (who care about financial gain) should primarily focus on keeping costs low True False

False

If the interest coverage ratio increases from one year to the next, the interest expense for the firm must have fallen. False True

False

Market value is commonly referred to as the book value. True False

False

Market value is commonly referred to as the book value. True False

False

Most well-known large firms use cash basis accounting instead of accrual accounting as it helps to keep track of their large and complex cash positions False True

False

Plant, equipment and inventory are most commonly valued using market value (this is because it is considered a 'fair value'). True False

False

Operating margin measures the: Operating income Firms ability to sell a product for more than the direct and indirect costs of production Gross sales of the firm Firms ability to sell a product

Firms ability to sell a product for more than the direct and indirect costs of production

How do accountants arrive at the book value for an asset? Accountants only use market value to value assets Accountants don't record assets at book value or market value Historical cost Historical cost, less accumulated depreciation

Historical cost, less accumulated depreciation

Which of the following is NOT included in the operating profit figure? Selling, general and administrative expenses Cost of goods sold Net sales Interest expense

Interest expense

Profit maximization: Is sometimes equal to wealth creation for shareholders Is not the focus of corporations Equals wealth creation for shareholders Is a subset of wealth creation for shareholders

Is a subset of wealth creation for shareholders

Why do analysts often prefer to use ROA rather than ROE in their analysis? ROA includes assets ROE includes equity Assets are more important than equity It is not as sensitive to the firm's choice of leverage

It is not as sensitive to the firm's choice of leverage

Which of the following doesn't represent an earnings management method? Acceleration of sales Alterations in shipment schedules Minimizing cash expenses Delaying research and development (R&D) expenditures

Minimizing cash expenses

The 'bottom line' in a profit and loss statement is: Net income (or earnings) Revenues Expenses Gross income

Net income (or earnings)

Earnings per share equals: Gross profit/Assets Net income/Liabilities Net income/Average outstanding number of shares Gross profit/Owners equity

Net income/Average outstanding number of shares

ROA equals: Gross profit/assets Net income/[(average) BV of equity] Net income/[(average) BV of assets] Gross profit/Owners equity

Net income/[(average) BV of assets]

What do businesses focus on when evaluating various business propositions? Terminal value Cost of capital Discount rates Net present value of future cash flows

Net present value of future cash flows

What do businesses focus on when evaluating various business propositions? Cost of capital Discount rates Terminal value Net present value of future cash flows

Net present value of future cash flows

Which of the following is equal to gross profit? EBIT - interest Operating profit + other income EBT - tax Net sales - cost of goods sold

Net sales - cost of goods sold

Which of the following equations is true? Net sales = Revenue - Expenses Net sales = Gross sales - Selling, general and administrative expenses Net sales = Gross sales - Deductions Net sales = Gross sales - Expenses

Net sales = Gross sales - Deductions

When would Price/Earnings ratio equal earnings per share? Always Never Only when net income equals market capitalization Only when share price equals EPS

Only when net income equals market capitalization

What is a disadvantage of accrual accounting? Requires monitoring cash flow separately Makes business more flexible Matches cash received to expenses made There are no disadvantages

Requires monitoring cash flow separately

Operating margin equals: Gross profit/Owners equity Operating income/Sales Gross profit/Assets Operating income/Cost of goods sold

Operating income/Sales

Which of the following would not be a way in which you could overcome the agency problem (Conflict of interest between management and shareholders)? Voting out directors Pay directors higher salaries Informal meetings with management Organizing an AGM

Pay directors higher salaries

Which of the following is not a valid concern when dealing with accrual accounting as opposed to cash basis accounting? Accrual accounting is more complicated than cash accounting An in-depth accounting understanding is required for accrual accounting Payment terms for supplier invoices Business gets paid immediately for goods/services

Payment terms for supplier invoices

Which asset/s cannot be easily valued using market value? Plant, equipment, inventory Investments in debt instruments Investments in options Investments in stocks

Plant, equipment, inventory

Which of the following would NOT be found in the liabilities section of the balance sheet? Pension liability Accounts payable Property plant & equipment Notes payable

Property plant & equipment

The 'top line' in a profit and loss statement is: Net income/earnings Income tax Operating income Sale revenue

Sale revenue

Total asset turnover equals: Current assets/Current liabilities Sales/(average)Total assets Gross profit/Sales Total debt/Total equity

Sales/(average)Total assets

Which of the following is a key characteristic of a public corporation? Private company Separate ownership and management of assets Shareholders are also debtholders Full government ownership

Separate ownership and management of assets

What is the key reason for managers to engage in earnings management? Smooth earnings over time to avoid volatility To increase the company's total assets Smooth cash flow There is no key reason

Smooth earnings over time to avoid volatility

What do efficiency "activity" ratios capture? The firms ability to manage current assets and current liabilities The firms ability to meet short term liabilities The firms ability to effectively use its assets in generating revenue Stock price movements

The firms ability to effectively use its assets in generating revenue

A 'fast-track' analyst price/earnings forecast depends crucially on: The stability of the Price/Earnings ratio Whether the company just listed or not Where the company operates The analyst who forecasted the Price/Earnings ratio

The stability of the Price/Earnings ratio

What is a potential drawback of liquidity measures? They don't take into account cash generated by ongoing operations They don't take into account non-current assets They don't take into account non-current liabilities They only take into account cash transactions

They don't take into account cash generated by ongoing operations

Debt-equity ratio equals: Total equity/Total debt Total debt/Total assets Total assets/Total debt Total debt/Total equity

Total debt/Total equity

A firm that is profitable can still be at risk of liquidity constraints and may go bankrupt. True False

True

The asset section of the balance sheet summarizes: What the company owns Cash transactions Revenues and expenses What the company owes

What the company owns

When should market value be used to value and asset? Never When there is a competitor When market value data is available on financial markets When market value estimates are available at low cost and when they convey information about operating performance

When market value estimates are available at low cost and when they convey information about operating performance