Chapter 3: Working With Financial Statements

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

.5

Which one of these identifies the relationship between the return on assets and the return on equity?

DuPont identity

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

The DuPunt 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?

On the statement of cash flows, which of the following are considered financing activities? I. Increase in long-term debt II. Decrease in accounts payable III. Interest paid IV. Dividends paid

Increase in long-term debt & Dividends paid

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

Interval measure & Quick ratio

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?

cash

Which one of the following standardizes items on the income statement and balance sheet relative to their values as a chosen point in time?

common-base year statement

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?

cover its operating costs for the next 48 days

Which one of the following statements is correct?

historical information is useful when projecting a firm's future performance

Which one of the following is a source of cash for a non-paying tax firm?

increase in common stock

Lenders probably have the most interest in which one of the following sets of ratios?

long-term debt and times interest earned

The price-sales ratio is especially useful when analyzing firms that have which one of the following?

negative earnings

The cash coverage ratio directly measures the ability of a firm to meet which one of its following obligations?

payment of interest to a lender

Which one of the following will decrease if a firm can decrease its operating costs, all else constant?

price-earnings ratio

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios

profitability

Which of the following can be used to compute the return on equity?

return on assets x equity multiplier

a common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales

Ratios that measure a firm's liquidity are known as _____ ratios

short-term solvency

The sources and uses of cash over a stated period of time are reflected on the:

statement of cash flows

All-State Moving had sales of $899,000 in 2014 and $967,000 in 2015. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?

the net working capital turnover rate increased

Tobin's Q relates the market value of a firm's assets to which one of the following?

today's cost to duplicate those assets

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:

total assets for the current year

Activities of a firm that require the spending of cash are known as:

uses of cash

RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?

utilizing its total assets more efficiently than Sam's

If a firm produces a 13 percent return on assets and also a 13 percent return on equity, then the firm:

has an equity multiplier of 1.0

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?

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

On the statement of cash flows, which of the following are considered operating activities? I. Costs of goods sold II. Decrease in accounts payable III. Purchase of equipment IV. Dividends paid

Costs of goods sold & Decrease in accounts payable

An increase in which of the following will increase the return on equity, all else constant? I. Total asset turnover II. Net income III. Total assets IV. Debt-equity ratio

Total asset turnover, Net income & Debt-equity ratio

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:

Standard Industrial Classification codes

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

accounts receivable

Which one of the following is a source of cash?

acquisition of debt

Which one of the following statements is correct?

an increase in the depreciation expense will not affect the cash coverage ratio

On a common-base year financial statement, accounts receivables for the current year will be expressed relative to which one of the following?

base-year accounts receivables

Which one of the following is a use of cash?

decrease in accounts payable

Which one of the following is a source of cash?

decrease in inventory

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?

decrease in the day's sales in inventory

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values

decrease in the quick ratio

According to the statement of cash flows, an increase in interest expense will _____ cash flow from ______ activities

decrease; operating

According to the statement of cash flows, an increase in inventory will ___ the cash flow from ______ activities

decrease; operating

A firm currently has $600 in debt for ever $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?

equity multiplier

Which one of the following accurately describes the three parts of the DuPunt identity?

equity multiplier, profit margin, and total asset turnover

Relationships determined from a firm's financial information and used for comparison purposes are known as:

financial ratios

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current:

financial ratios to the firm's historical ratios