Chapter 3 FIN

A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action? A. equity multiplier B. total asset turnover C. profit margin D. return on assets E. return on equity

A. equity multiplier

Relationships determined from a firm's financial information and used for comparison purposes are known as: A. financial ratios. B. identities. C. dimensional analysis. D. scenario analysis. E. solvency analysis.

A. financial ratios

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current: A. financial ratios to the firm's historical ratios. B. financial statements to the financial statements of similar firms operating in other countries. C. financial ratios to the average ratios of all firms located within the same geographic area. D. financial statements to those of larger firms in unrelated industries. E. financial statements to the projections that were created based on Tobin's Q.

A. financial ratios to the firm's historical ratios.

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0.0 B. 0.5 C. 1.0 D. 1.5 E. 2.0

B. 0.5

Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's? A. Al's has more net income than Ben's. B. Ben's is increasing its earnings at a faster rate than the Al's. C. Al's has a higher market value per share than does Ben's. D. Ben's has a lower market-to-book ratio than Al's. E. Al's has a higher net income than Ben's.

B. Ben's is increasing its earnings at a faster rate than the Al's.

Which one of the following statements is correct? A. Book values should always be given precedence over market values. B. Financial statements are frequently used as the basis for performance evaluations. C. Historical information provides no value to someone who is predicting future performance. D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.

B. Financial statements are frequently used as the basis for performance evaluations.

An increase in which of the following will increase the return on equity, all else constant? I. sales II. net income III. depreciation IV. total equity A. I only B. I and II only C. II and IV only D. II and III only E. I, II, and III only

B. I and II only

Which of the following can be used to compute the return on equity? I. Profit margin × Return on assets II. Return on assets × Equity multiplier III. Net income/Total equity IV. Return on assets × Total asset turnover A. I and III only B. II and III only C. II and IV only D. I, II, and III only E. I, II, III, and IV

B. II and III only

Which of the following ratios are measures of a firm's liquidity? I. cash coverage ratio II. interval measure III. debt-equity ratio IV. quick ratio A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and III only E. I, II, III, and IV

B. II and IV only

A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit? A. current B. cash C. debt-equity D. quick E. total debt

B. cash

Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. book value

B. long-term solvency

The price-sales ratio is especially useful when analyzing firms that have which one of the following? A. volatile market prices B. negative earnings C. positive PEG ratios D. a negative Tobin's Q E. increasing sales

B. negative earnings

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? A. accounts payable B. cash C. inventory D. accounts receivable E. fixed assets

D. accounts receivable

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following? A. pay all of its debts that are due within the next 48 hours B. pay all of its debts that are due within the next 48 days C. cover its operating costs for the next 48 hours D. cover its operating costs for the next 48 days E. meet the demands of its customers for the next 48 hours

D. cover its operating costs for the next 48 days

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways? A. decrease in the inventory turnover rate B. decrease in the net working capital turnover rate C. no change in the fixed asset turnover rate D. decrease in the day's sales in inventory E. no change in the total asset turnover rate

D. decrease in the day's sales in inventory

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. turnover

D. profitability

On a common-size balance sheet all accounts are expressed as a percentage of: A. sales for the period. B. the base year sales. C. total equity for the base year. D. total assets for the current year. E. total assets for the base year.

D. total assets for the current year

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91. Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have similar operations. Based on this information, Dee's must be doing which one of the following? A. utilizing its fixed assets more efficiently than Sam's B. utilizing its total assets more efficiently than Sam's C. generating $1 in sales for every $1.12 in net fixed assets D. generating $1.12 in net income for every $1 in net fixed assets E. maintaining the same level of current assets as Sam's

B. utilizing its total assets more efficiently than Sam's

The Du Pont identity can be used to help managers answer which of the following questions related to a firm's operations? I. How many sales dollars has the firm generated per each dollar of assets? II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity? III. How much net profit is a firm generating per dollar of sales? IV. Does the firm have the ability to meet its debt obligations in a timely manner? A. I and III only B. II and IV only C. I, II, and III only D. II, III and IV only E. I, II, III and IV

C. I, II and III only

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the: A. NASDAQ 100. B. Standard & Poor's 500. C. Standard Industrial Classification code. D. Governmental ID code. E. Government Engineered Coding System.

C. Standard Industrial Classification code

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012. The firm's current accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The net working capital turnover rate increased. D. The fixed asset turnover decreased. E. The receivables turnover rate decreased.

C. The net working capital turnover rate increased

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time? A. statement of standardization B. statement of cash flows C. common-base year statement D. common-size statement E. base reconciliation statement

C. common-base year statement

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. A. increase in the cash ratio B. increase in the net working capital to total assets ratio C. decrease in the quick ratio D. decrease in the cash coverage ratio E. increase in the current ratio

C. decrease in the quick ratio

Which one of the following accurately describes the three parts of the Du Pont identity? A. operating efficiency, equity multiplier, and profitability ratio B. financial leverage, operating efficiency, and profitability ratio C. equity multiplier, profit margin, and total asset turnover D. debt-equity ratio, capital intensity ratio, and profit margin E. return on assets, profit margin, and equity multiplier

C. equity multiplier, profit margin, and total asset turnover

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations? A. payment to supplier B. payment to employee C. payment of interest to a lender D. payment of principle to a lender E. payment of a dividend to a shareholder

C. payment of interest to a lender

It is easier to evaluate a firm using financial statements when the firm: A. is a conglomerate. B. has recently merged with its largest competitor. C. uses the same accounting procedures as other firms in the industry. D. has a different fiscal year than other firms in the industry. E. tends to have many one-time events such as asset sales and property acquisitions.

C. uses the same accounting procedures as other firms in the industry.

A firm uses 2011 as the base year for its financial statements. The common-size, base-year statement for 2012 has an inventory value of 1.08. This is interpreted to mean that the 2012 inventory is equal to 108 percent of which one of the following? A. 2011 inventory B. 2011 total assets C. 2012 total assets D. 2011 inventory expressed as a percent of 2011 total assets E. 2012 inventory expressed as a percent of 2012 total assets

D. 2011 inventory expressed as a percent of 2011 total assets

The formula which breaks down the return on equity into three component parts is referred to as which one of the following? A. equity equation B. profitability determinant C. SIC formula D. Du Pont identity E. equity performance formula

D. Du Pont Identity

Which one of the following statements is correct? A. If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. C. The debt-equity ratio can be computed as 1 plus the equity multiplier. D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity. E. An increase in the depreciation expense will not affect the cash coverage ratio.

E. An increase in the depreciation expense will not affect the cash coverage ratio.

Which of the following represent problems encountered when comparing the financial statements of two separate entities? I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business. II. The operations of the two firms may vary geographically. III. The firms may use differing accounting methods. IV. The two firms may be seasonal in nature and have different fiscal year ends. A. I and II only B. II and III only C. I, III, and IV only D. I, II, and III only E. I, II, III, and IV

E. I, II, III, and IV

On a common-base year financial statement, accounts receivables will be expressed relative to which one of the following? A. current year sales B. current year total assets C. base-year sales D. base-year total assets E. base-year accounts receivables

E. base-year accounts receivables

If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm: A. may have short-term, but not long-term debt. B. is using its assets as efficiently as possible. C. has no net working capital. D. has a debt-equity ratio of 1.0. E. has an equity multiplier of 1.0.

E. has an equity multiplier of 1.0.

Which one of the following will decrease if a firm can decrease its operating costs, all else constant? A. return on equity B. return on assets C. profit margin D. total asset turnover E. price-earnings ratio

E. price-earnings ratio

Shareholders probably have the most interest in which one of the following sets of ratios? A. return on assets and profit margin B. long-term debt and times interest earned C. price-earnings and debt-equity D. market-to-book and times interest earned E. return on equity and price-earnings

E. return on equity and price-earnings

A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of: A. total assets. B. total equity. C. net income. D. taxable income. E. sales.

E. sales

Tobin's Q relates the market value of a firm's assets to which one of the following? A. initial cost of creating the firm B. current book value of the firm C. average asset value of similar firms D. average market value of similar firms E. today's cost to duplicate those assets

E. today's cost to duplicate those assets