Accy Chapter 3 & 11

A common size income statement: A. uses the same dollar amount of revenues for each year. B. expresses items as a percentage of revenues. C. makes comparisons between years more difficult. D. is useful in estimating the impact of inflation.

b

A higher P/E ratio means that: A. the stock is more reasonably priced. B. the stock is relatively expensive. C. investors are wary of the stock. D. earnings are expected to decrease.

b

Another term for return on investment is: A. Return on equity. B. Return on assets. C. Return on retained earnings. D. Return to sender.

b

If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be: A. less than 10. B. between 10 and 25. C. between 25 and 40. D. over 40.

b

Management's use of resources can best be evaluated by focusing on measures of: A. liquidity. B. activity. C. leverage. D. book value.

b

The return on investment measure of performance: A. is relevant only to business enterprises. B. is used by individuals to compare investment performance. C. is calculated using sales as the amount of return. D. is calculated using total assets at the beginning of the period as the amount of investment

b

When a corporation has both common stock and preferred stock outstanding: A. dividends on preferred stock are paid only if the company has current earnings. B. dividends on preferred stock must be paid before dividends on common stock can be paid. C. preferred stockholders receive the same dividend per share as common stockholders. D. dividends on preferred stock are paid only if dividends are to be paid on the common stock.

b

When comparing entity financial ratios with industry ratios: A. it should be assumed that the data result from the consistent application of alternative accounting methods. B. relative values at a point in time may not be significant. C. the trend of entity ratios should be compared to the current year's industry ratio. D. entity ratios should not be compared with industry ratios.

b

A current ratio of 6.0 is usually an indication that the firm: A. has a low degree of liquidity. B. has a reasonable degree of liquidity. C. has not made the most productive use of its assets. D. has made the most productive use of its assets.

c

A leveraged buyout refers to: A. one firm issues stock to take over another firm. B. one firm trades its stock for the stock of another firm. C. a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private. D. one firm pays cash for the shares of a takeover firm's shares.

c

A management that wanted to increase the financial leverage of its firm would: A. raise additional capital by selling common stock. B. use excess cash to purchase preferred stock for the treasury. C. raise additional capital by selling fixed interest rate long-term bonds. D. try to increase its ROI by increasing asset turnover.

c

An individual interested in making a judgment about the profitability of a company should: A. review the trend of working capital for several years. B. calculate the company's ROI for the most recent year. C. review the trend of the company's ROI for several years. D. compare the company's ROI for the most recent year with the industry average ROI for the most recent year.

c

Another term for the price/earnings ratio is: A. cost ratio. B. sales multiple. C. earnings multiple. D. profit ratio.

c

If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be: A. Higher. B. Lower. C. The same. D. Would depend on the amount borrowed.

c

The inventory turnover calculation: A. is wrong unless cost of goods sold is used in the numerator. B. is wrong unless sales is used in the numerator. C. is an alternative way of expressing the number of days' sales in inventory. D. requires knowledge of the inventory cost flow assumption being used.

c

The return on investment measure of performance: A. is never as important a measure of management effectiveness as the amount of net income. B. relates dividends paid to the entity's assets. C. is calculated using net income as the amount of return. D. is calculated by dividing average assets for a period by the amount of net income for the period.

c

When a firm has financial leverage: A. ROI will be greater than ROE. B. ROI will usually be less than it would be without leverage. C. risk is greater than if there wasn't any leverage. D. the firm will always have a higher ROE than it would without leverage.

c

Which of the following accounts is part of working capital? A. Retained Earnings B. Sales C. Merchandise Inventory D. Common Stock

c

Which of the following is not usually considered a measure of an entity's liquidity? A. Current ratio. B. Acid-test ratio. C. Cash ratio. D. Working capital.

c

A potential creditor's judgment about granting credit would be most influenced by the potential customer's: A. current ratio at the end of the prior fiscal year. B. most recent acid-test ratio. C. trend of acid-test ratio over the past three years. D. practice with respect to taking cash discounts offered by current suppliers.

d

Another term for return on equity is: A. return on investment. B. return on assets. C. return on retained earnings. D. none of these.

d

Asset turnover calculations: A. are made by dividing the average asset balance during the year by the sales for the year. B. are made by dividing sales for the year by the asset balance at the end of the year. C. communicate information about how promptly the entity pays its bills. D. should be evaluated by observing the turnover trend over a period of time.

d

Financial statement ratios support informed judgments and decision making most effectively: A. when viewed for a single year. B. when viewed as a trend of entity data. C. when compared to an industry average for the most recent year. D. when the trend of entity data is compared to the trend of industry data.

d

Return on equity: A. will be the same as return on investment. B. relates dividends and turnover. C. relates dividends and stockholders' equity. D. relates net income and stockholders' equity

d

Which of the following is not a category of financial statement ratios? A. Financial leverage. B. Liquidity. C. Profitability. D. Prospectus.

d

Which of the following is(are) an example of a measure of leverage? A. Debt yield. B. Debt payout ratio. C. Preferred dividend coverage ratio. D. Debt/equity ratio.

d

Financial ratios: A. help financial statement users to evaluate the financial characteristics of companies by putting the large dollar amounts reported in financial statements into relative terms for comparison purposes. B. provide for a more meaningful analysis when the trends of financial ratios for a company are compared to the industry average trends over a period of time. C. are required reporting disclosures in the notes to the consolidated financial statements of U.S. companies that are regulated by the SEC. D. All of the above statements are true. E. A and B are true, but C is not true.

e

Which of the following are examples of physical measures of activity that are sometimes disclosed in corporate annual reports? A. Sales in units. B. Number of employees. C. Gross profit per square foot of selling space. D. None of the above are examples of physical measures of activity that are sometimes reported in corporate annual reports. E. A, B, and C above are all examples of physical measures of activity that are sometimes reported in corporate annual reports.

e

An advantage of the DuPont model for calculating ROI is that: A. it focuses on asset utilization as well as net income. B. it is easier to use than the straightforward ROI formula. C. it uses average assets and the straightforward ROI formula does not. D. it uses stockholders' equity.

a

An entity's current ratio will be influenced by: A. the inventory cost flow assumption used. B. writing off an overdue account receivable against the allowance for uncollectible accounts. C. the depreciation method used. D. issuance of a stock dividend

a

Book value per share of common stock of a manufacturing company: A. is not a very useful measure most of the time. B. is calculated by dividing market value per share by earnings per share. C. reflects the fair value of the company's stock. D. is the same as the total balance sheet asset value per share of common stock

a

Financial leverage: A. arises because most borrowed funds have a fixed interest rate. B. arises because most borrowed funds have a variable interest rate. C. usually has no bearing on the risk associated with a company. D. is a concept that does not apply to individuals.

a

For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is that it: A. raises the current ratio. B. lowers the current ratio. C. doesn't affect the current ratio. D. depends on the amount paid

a

The comparison of activity measures of different companies is complicated by the fact that: A. different inventory cost flow assumptions may be used. B. dollar amounts of assets may be significantly different. C. only one of the companies may have preferred stock outstanding. D. the number of shares of common stock issued may be significantly different.

a

The dividend payout ratio describes: A. the proportion of earnings paid as dividends. B. the relationship of dividends per share to market price per share. C. the percentage change in dividends this year compared to last year. D. dividends as a percentage of the price/earnings ratio.

a

The price/earnings ratio: A. is a measure of the relative expensiveness of a firm's common stock. B. does not usually change by more than 1.0 (e.g. 8.2 to 9.2) during the year. C. can be used to determine the cash dividend to be received during the year. D. is calculated by dividing the earnings multiple by net income.

a

Which of the following is a universally accepted measure of profitability? A. Return on investment. B. Return on retained earnings. C. Return on liabilities. D. All of these.

A