Chapter 3 Working with Financial Statements
1. True or false: In a common-size income statement, each item is expressed as a percentage of total sales.
1. True
10. True or false: The price-earnings ratio is price per share times earnings per share.
10. False
3. True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
3. False
5. True or false: Inventory turnover is sales divided by inventory.
5. False
6. True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
6. False
7. True or false: The times interest earned ratio is EBIT minus interest.
7. False
Which one of these will decrease a firm's sustainable rate of growth?
An increase in the dividend payout ratio
Which of the following items are used to compute the current ratio?
Cash Accounts payable
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
2. True or false: Financial ratios are computed using balance sheet information.
False
Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?
Financial policy Dividend policy Profit margin
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.
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
________ financial statements enable one to compare firms that differ in size.
Standardized
Which of the following best explains why financial managers use a common-size income statement?
The common-size income statement can show which costs are rising or falling as a percentage of sales.
Which of the following create problems with financial statement analysis?
The firm and its competitors operate under different regulatory environments. The firm or its competitors are conglomerates The firm or its competitors are global companies.
The current ratio computes the relationship between ____.
current assets and current liabilities
Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm increased. The firm has ____________ its liquidity over the past year.
decreased
The ________ payout ratio equals cash dividends divided by net income.
dividend
Given an internal growth rate of 3 percent, a firm can _____.
grow by 3 percent or less without any additional external financing
An increase in a firm's total asset turnover will ______ the sustainable growth rate.
increase
An increase in the profit margin will ______ a firm's sustainable growth rate.
increase
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.
liquidity
Time-trend analysis is an example of
management by exception
Whenever ___________ information is available, it should be used instead of accounting data.
market
How is the price-earnings (PE) ratio computed?
market price per share/earnings per share
The price-earnings (PE) ratio is a ____ ratio.
market value
Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.
may increase or decrease may not change
The retention ratio equals one ______the dividend payout ratio.
minus
The price-earnings ratio is _______ per share divided by _________ per share.
price earnings
Return on assets (ROA) is a measure of _____.
profitability
In a common-size income statement, each item is expressed as a percentage of total ____________. .
sales
The profit margin is equal to net income divided by ______.
sales
The times interest earned ratio is a measure of long-term __________. .
solvency
The DuPont identity breaks ROE into ________parts.
three
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
What is the formula for computing a firm's sustainable growth rate?
(ROE x b)/(1 - ROE x b)
8. True or false: The DuPont identity is a popular expression breaking ROA into three parts.
8. False
Which of the following is the correct equation for return on equity?
Net income/Total equity
The information needed to compute the profit margin can be found on the ____.
income statement
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
The DuPont identity shows that _______ ____________ __________times total asset turnover times equity multiplier equals ROE.
net profit margin
Inventory turnover is cost of goods sold divided by ___________. .
inventory
Which of the following is the correct representation of the total debt ratio?
(Total assets - Total equity)/(Total assets)
What is the formula for computing the internal growth rate (IGR)?
(ROA x b)/(1 - ROA x b)
Which of the following is (are) true of financial ratios?
They are used for comparison purposes. They are developed from a firm's financial information.
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
4. True or false: The debt-equity ratio equals the total assets minus total equity all over total assets.
True
11. True or false: The dividend payout ratio equals cash dividends divided by sales.
11. False
12. True or false: The retention ratio equals one minus the ROA.
12. False
13. True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.
13. False
14. True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.
14. True
15. True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
15. False
