Financial Management Ch. 3 Working with Financial Statements

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

financial statements enable one to compare firms that differ in size.

Standardized

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average.

The cash ratio is found by dividing cash by:

current liabilities.

The cash coverage ratio adds ______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.

depreciation

The ___ payout ratio equals cash dividends divided by net income.

dividend

Financial statement analysis is primarily "management by Blank______ ."

exception

True or false: Financial ratios are computed using only balance sheet information.

false

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.

false

True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.

false

True or false: Inventory turnover is sales divided by inventory.

false

True or false: The retention ratio equals one minus the ROA.

false

The current ratio computes the relationship between

current assets and current liabilities

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will Blank______.

increase

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than

Time-trend analysis is an example of:

management by exception

Whenever ______ information is available, it should be used instead of accounting data.

market

The price-earnings (PE) ratio is a _____ ratio.

market value

Days' sales in receivables is given by the following ratio:

365/receivables turnover

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

Which of the following is the correct equation for return on equity?

Net income/Total equity

Which of the following create problems with financial statement analysis?

The firm or its competitors are global companies. The firm or its competitors are conglomerates. The firm and its competitors operate under different regulatory environments.

Return on assets (ROA) is a measure of Blank______.

profitability

In a common-size income statement, each item is expressed as a percentage of total

sales

The times interest earned ratio is a measure of long-term .

solvency

Which of the following is true about the sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage.

______ are the prime source of information about a firm's financial health.

Financial statements

Common-size statements are best used for comparing:

competitors. firms of different sizes. year-to-year for your firm.

A firm with a market-to-book value that is greater than 1 is said to have Blank______ value for shareholders.

created

True or false: The DuPont identity is a popular expression breaking ROA into three parts.

false

True or false: The price-earnings ratio is price per share times earnings per share.

false

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

false

Given an internal growth rate of 3 percent, a firm will _____

grow by 3 percent or less without any additional external financing

The information needed to compute the profit margin can be found on the Blank______.

income statement

How is the market-to-book ratio measured?

market value per share/book value per share

Based on the DuPont Identity, an increase in sales, all else held equal, Blank______ ROE.

may not change may increase or decrease

The retention ratio equals one _____ the dividend payout ratio.

minus

Which one of the following is the correct equation for computing return on assets (ROA)?

net income/total assets

The DuPont identity shows that ____ ____ times total asset turnover times equity multiplier equals ROE. (Enter only one word per blank.)

profit margin

The DuPont identity breaks ROE into ___ parts.

three

Which one of the following best explains why financial managers use a common-size balance sheet?

to track changes in a firm's capital structure

A common-size balance sheet expresses accounts as a percentage of

total assets

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

true

True or false: The total debt ratio equals the total assets minus total equity divided total assets.

true

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + depreciation)/Interest expense

What is the formula for computing the internal growth rate (IGR)?

(ROA × b)/(1 − ROA × b)

What is the formula for computing a firm's sustainable growth rate?

(ROE × b)/(1 − ROE × b)

Which of the following is the correct representation of the total debt ratio?

(Total assets − Total equity)/(Total assets)

A firm with a profit margin of 10 percent generates ______ in net income for every dollar in sales.

10 cents

Which of the following are true of financial ratios?

They are developed from a firm's financial information. They are used for comparison purposes.

Which of the following items are used to compute the current ratio?

accounts payable cash