Chapter 3

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

(Total assets - Total equity)/(Total assets)

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ______ available to pay interest.

cash

The current ratio computes the relationship between _____

current assets and current liabilities

The cash ratio is found by dividing cash by:

current liabilities

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

false; less than

Long-term solvency ratios are also known as:

financial leverage ratios

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

it will increase

Long-term solvency ratios measure what aspect of the firm's financial position?

its financial leverage

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

sales

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

total assets

True or false: The debt-equity ratio equals the total assets minus total equity all over total assets.

true

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

solvency

_____ financial statements provide for comparison of firms that differ in size

Standardized

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

less than; Since the quick ratio excludes inventory, it will always be less than the current ratio.

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

Short-term solvency ratios are also called _______ ratios.

liquidity

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

- Cash - Accounts payable Current ratio = current assets/current liabilities.

Which of the following are traditional financial ratio categories?

- Financial leverage ratios - Profitability ratios - Turnover ratios

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

(EBIT+depreciation)/Interest expense

How is the inventory turnover ratio computed?

COGS/Inventory

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

False

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

False; financial ratios can use information from all financial statements

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.

False; higher levels of inventory result in less liquidity, all else equal.

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.

a long time; because inventory that is held for a long time is not very liquid.

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

True

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

Which of the following is (are) true of financial ratios?

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