CMA Exam Part 2

Which ratio is calculated using amounts obtained exclusively from the income statement? Profit margin Current ratio Asset turnover Earnings per share

Profit margin

Gil Corp. has current assets of $90,000 and current liabilities of $180,000. Which of the following transactions would improve Gil's current ratio? Refinancing a $30,000 long-term mortgage with a short-term note Paying $20,000 of short-term accounts payable Collecting $10,000 of short-term accounts receivable Purchasing $50,000 of merchandise inventory with a short-term account payable

Purchasing $50,000 of merchandise inventory with a short-term account payable

Which of the following ratios would not be useful to evaluate a company's operating efficiency? Fixed asset turnover Total asset turnover Equity turnover Quick ratio

Quick ratio

Which of the following ratios would not be useful to evaluate a company's operating efficiency? Quick ratio Fixed asset turnover Total asset turnover Equity turnover

Quick ratio

The traditional DuPont system =

ROE = Net Profit Margin × Asset Turnover × Financial Leverage --> SOLVEN FOR NET PROFIT MARGIN

Sustainable Growth Rate (SGR) =

ROE × (1 - Dividend Payout Ratio)

Successful use of leverage (favorable leverage) results when

invested funds earn more than the cost of borrowing the funds.

How are shares of convertible preferred stock similar to convertible bonds? Both cause an increase in the number of common stock shares upon conversion. Both cause an increase in equity upon conversion. Both cause a decrease in the debt-to-equity ratio upon conversion. Both cause a decrease in retained earnings upon conversion.

Both cause an increase in the number of common stock shares upon conversion.

How can a company increase earnings per share without realizing an increase in net income? By issuing preferred stock By recognizing an extraordinary loss By purchasing plant assets By reducing common shares outstanding

By reducing common shares outstanding

If a firm switches inventory valuation method from FIFO (first in, first out) to LIFO (last in, first out), which of the following ratios would be affected? Current ratio Cash ratio Quick ratio Accounts receivable turnover ratio

Current ratio- only one with inventory in numerator

Which of the following companies will most likely be unable to pay their interest expenses? Latimer Industries has net income of $346,000, income tax of $186,000, and interest expense of $321,000. Thorn Enterprises has net income of $618,000, income tax of $333,000, and interest expense of $468,000. Easton Restaurants has net income of $942,000, income tax of $507,000, and interest expense of $694,000. Wicker Baskets has net income of $437,000, income tax of $235,000, and interest expense of $192,000.

Latimer Industries has net income of $346,000, income tax of $186,000, and interest expense of $321,000.

When inventory turnover is high, is there a higher or lesser chance of inventory becoming obsolete?

Lesser

Price-Earnings Ratio = Stock Price / Earnings per Share

Stock Price / Earnings per Share

What does profit margin measure?

What % of every dollar of a sales a company earns as income

EPS=

(Net Income − Preferred Dividends) ÷ Weighted-Average Common Shares Outstanding.

Quick ratio =

(cash + marketable securities + receivables) / Current liabilities

Increase in DFL=

(increase in EPS ÷ increase in EBIT)

In which scenario would a horizontal analysis be the best choice? A bank wishes to compare progress among different companies. A company wishes to market its growth to potential stockholders. A vendor wishes to evaluate financial statement data in a given year. An investor wishes to evaluate financial statement data by expressing each item in a financial statement as a percentage of a base amount.

A company wishes to market its growth to potential stockholders.

An investor is investigating the solvency of four companies. Based on their solvency, which company is the investor most likely to invest in? A company with total assets of $137 million and total liabilities of $65 million A company with total assets of $53 million and total liabilities of $18 million A company with total assets of $462 million and total liabilities of $159 million A company with total assets of $714 million and total liabilities of $594 million

A company with total assets of $53 million and total liabilities of $18 million

Which of the following will occur if a company shortens its collection period? Accounts receivable turnover will increase. Accounts receivable turnover will decrease. Net credit sales will increase. Net credit sales will decrease.

Accounts receivable turnover will increase.

ROE can also be defined as

Asset Turnover x Profit Margin

James Jeans Co. is evaluating the business performance for last year. They are assessing if inventory is being properly managed. Which of the following vertical analysis approaches would be the most effective way to summarize this activity?

Collect the balance sheet data for the last two years, obtain the values for inventory and total assets, calculate the balance sheet percentage by dividing inventory by total assets for each year, and summarize the observations for the relative size of inventory to total assets for each year and the percentage change from year-to-year.

The company that is most likely to have lost sales due to an inventory shortage is: Company B, which has an average days in inventory of 23.8 days. Company C, which has an inventory turnover of 14.6. Company A, which has an inventory turnover of 28.9. Company D, which has an average days in inventory of 19.4 days.

Company A, which has an inventory turnover of 28.9.

Degree of Operating Leverage =

Contribution Margin / EBIT OR [Quantity(Price - Variable costs)] ÷ [Quantity(Price - Variable costs) - Fixed costs]

Inventory turnover is correctly calculated:

Cost of Goods Sold ÷ Average Inventory

The capital asset pricing model (CAPM) is used to determine the cost of what? Cost of capital Cost of debt Cost of equity Cost of leasing

Cost of equity

Which of the following would not be included on a balance sheet? Prepaid rent Retained earnings Cost of goods sold Accumulated depreciation

Cost of goods sold

Increase in DOL=

DOL = (increase in EBIT ÷ increase in sales) = 0.15 ÷ 0.10 = 1.50

Zenk Co. wrote off obsolete inventory of $100,000 during Year 1. What was the effect of this write-off on Zenk's ratio analysis? Decrease in current ratio but not in quick ratio Decrease in quick ratio but not in current ratio Increase in current ratio but not in quick ratio Increase in quick ratio but not in current ratio

Decrease in current ratio but not in quick ratio

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for Treasury stock. What is the impact of this acquisition on total stockholders' equity and the book value per common share, respectively? Increase, increase Increase, decrease Decrease, increase Decrease, decrease

Decrease, increase

Payout Ratio =

Dividends per Common Share ÷ EPS

Degree of Financial Leverage =

EBIT / (EBIT-Interest)

Operating Profit Margin =

EBIT ÷ Net Sales

Operating Profit Margin =

EBIT ÷ Net sales

Operating Profit Margin=

EBIT ÷ Sales

What does Price-Earnings Ratio measure?

Expected growth in a company's earnings

Which of the following firms' stock price would increase the most if the market increased by 5%? Firm A with a beta of 1.25 Firm B with a beta of 0.75 Firm C with a beta of 0.25 Firm D with a beta of 1.50

Firm D with a beta of 1.50

North Bank is analyzing Belle Corp.'s financial statements for a possible extension of credit. Belle's quick ratio is significantly better than the industry average. Which of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle's credit worthiness? Fluctuating market prices of short-term investments may adversely affect the ratio. Increasing market prices for Belle's inventory may adversely affect the ratio. Belle may need to sell its available-for-sale investments to meet its current obligations. Belle may need to liquidate its inventory to meet its long-term obligations.

Fluctuating market prices of short-term investments may adversely affect the ratio.

Gross Profit Rate =

GP/Net Sales

gross profit rate=

Gross Profit ÷ Net Sale

Which of the following financial ratios is not used to gauge a firm's internal liquidity? Current ratio Gross profit margin ratio Quick ratio Cash ratio

Gross profit margin ratio

GP of higher quality goods compared to those of lower quality goods

Higher quality goods have a higher GP because customers are often more willing to spend more for them

What does companies GP Rate measure?

How much a company sells its products for above the price it pays for the good

A purchase of Treasury stock would result in an _______ Ibn BV per common share

Increase; BV of Treasury stock in excess of cost would be attributed to remaining outstanding shares

Which basis will stock analysts use to compare department stores? Intercompany Intracompany Industry Long-term

Intercompany

What basis will market analysts use to determine earnings trends? Industry averages Intercompany basis Balance sheet Intracompany basis

Intracompany basis

What is the primary difference between the current ratio and the quick ratio?

Inventory is omitted from the numerator to calculate the quick ratio

All else being equal, which of the following will help decrease a company's total debt-to-equity ratio? Buying Treasury stock Paying cash dividends to stockholders Converting long-term debt to short-term debt Lowering the dividend payout ratio

Lowering the dividend payout ratio

Question 3 aq.solvency.rat.0003_1710 Which of the following will help decrease a company's total debt-to-equity ratio, if all else is equal? Buying Treasury stock Lowering the dividend payout ratio Paying cash dividends to stockholders Converting long-term debt to short-term debt

Lowering the dividend payout ratio

What does a beta (β) that is greater than one mean? A fixed return with no sensitivity to market changes More systematic risk than the market Less systematic risk than the market The same systematic risk as the market

More systematic risk than the market

ROE =

Net Income ÷ Average Common Shareholders' Equity

Profit Margin =

Net Income ÷ Net Sales

Profit margin =

Net Income ÷ Net Sales

Return on Assets=

Net income / Average total assets

Fixed Asset Turnover =

Net sales ÷ Average fixed assets

The higher the percentage of a firms costs that are fixed, the higher the _______ _______

Operating leverage

Which ratio must be calculated using an amount external to a company's financial statements? Current ratio Times interest earned Price-earnings ratio Inventory turnover

Price-earnings ratio - Market price is not found on FS

Horizontal analysis is used to prepare which of the following? Data on competitors Reports on year-to-year trends Industry averages Financial statement percentages

Reports on year-to-year trends

Which of the following is not a ratio or measure used to evaluate a firm's liquidity? Current ratio Return on assets Net working capital (NWC) Quick ratio

Return on assets

Which of the following is not a ratio or measure used to evaluate a firm's liquidity? Current ratio Net working capital Quick ratio Return on assets

Return on assets

Which of the following is not a category on the statement of cash flows? Cash flow from sales. financing. investing. operations.

Sales

Which ratio would a bondholder most closely analyze? Current ratio Solvency Accounts receivable turnover Fixed asset ratios

Solvency

Companies with high inventory turnover or low days in inventory are more likely to suffer from stockout or obsolete inventory

Stock outs - loses sale due to lack of inventory because they carry relatively little inventory

How do you treat Treasury stock shares when they are not outstanding

Subtract Treasury stock from common shares outstanding

Which of the following pairs of scenarios presents an intracompany comparison followed by an intercompany comparison? Tarvis Industries analyzes its current ratio for the past three years then analyzes a competitor's current ratio. Ferris Inc. analyzes its current ratio for the past five years then analyzes its current ratio for the past ten years. Wallace Technologies analyzes its current ratio for the past two years then analyzes average current ratios across the technology industry. Houlihan Co. analyzes a competitor's current ratio for the last two years then analyzes its own current ratio for the last two years.

Tarvis Industries analyzes its current ratio for the past three years then analyzes a competitor's current ratio.

Which of the following is likely to encourage a firm to increase the amount of debt in its capital structure? The firm's assets become less liquid. The corporate tax rate increases. The firm's earnings become more volatile. The personal tax rate increases.

The corporate tax rate increases.

Your firm has a quick ratio of 1.5 and a current ratio of 1.9. Industry averages are 1.0 for the quick ratio and 2.0 for the current ratio. Which of the following is true about the firm's working capital position? The firm has less inventory than other firms. The firm has more accounts receivable than other firms in the industry. The firm has less accounts receivable than other firms. The firm has more inventory than other firms in the industry.

The firm has less inventory than other firms.

Two sporting goods stores have similar annual net sales. If one store sells mostly high-quality goods and the other store sells mostly moderate-quality goods, which store likely has the higher gross profit rate? Why? The store that sells high-quality goods likely has the higher gross profit rate because markup tends to be higher for higher quality goods. The store that sells high-quality goods likely has the higher gross profit rate because stores with higher quality goods usually have a higher inventory turnover rate. The store that sells moderate-quality goods likely has the higher gross profit rate because markup tends to be higher for lower quality goods. The store that sells moderate-quality goods likely has the higher gross profit rate because stores with moderate-quality goods usually have a higher inventory turnover rate.

The store that sells high-quality goods likely has the higher gross profit rate because markup tends to be higher for higher quality goods.

Which of the following is a key determinant of operating leverage? The tradeoff between fixed and variable costs The firm's beta Level and cost of debt The competitive nature of business

The tradeoff between fixed and variable costs

Which of the following is a key determinant of operating leverage? The tradeoff between fixed and variable costs The firm's beta Level and cost of debt The competitive nature of business

The tradeoff between fixed and variable costs

Which amounts will show the same percentage increase or decrease when horizontal analysis is performed? Sales revenue and net income Total assets and total liabilities Total assets and total liabilities plus stockholders' equity Current assets and current liabilities

Total assets and total liabilities plus stockholders' equity

In which of the following circumstances is it most effective for a market analyst to rely on intracompany comparisons? When determining the market share controlled by an industry When exploring earnings trends for a single company When comparing competitive positions of two stores When looking at a company's performance against others within its market segment

When exploring earnings trends for a single company

Average Common Shareholders Equity =

[(Common Stock Year 1 + Retained Earnings Year 1) + (Common Stock Year 2 + Retained Earnings Year 2)] ÷ 2

Degree of Total Leverage =

[Quantity(Price - Variable costs)] ÷ [Quantity(Price - Variable costs) - Fixed costs - Interest expense]

__________ Comparison is designed to provide information about the relative strength gets of one company in an industry compared to another firm in he industry

_________ Comparison is designed to provide information about the relative strengths of one company in an industry compared to another firm in the industry

Liquidity measure the

ability of firm to pay bills in short term with current assets and current liabilities

What is the increase in net income under the if-converted method of calculating diluted EPS

after-tax interest expense of convertible bonds

How does treasury stock affect SH equity under cost and par value method of recording Treasury stock

as a decrease to SH equity

The higher the % of firms costs that are fixed and the higher the operating leverage, the greater the firm's _________ risk

business risk

The uncertainty in return on assets due to the nature of a firm's operations is known as: tax efficiency. financial leverage. financial flexibility. business risk.

business risk.

Horizontal analysis is most likely to show: changes in account balances over time. changes in income per month. daily changes in profit loss. performance against competitors.

changes in account balances over time.

for EPS purposes, shares of stock issued as a result of stock dividends or splits should be

considered outstanding for the entire period in which they were issued.

Current Ratio =

current assets divided by the current liabilities

The decrease in stock price without a current drop in EPS signals that investors expect profitability to

decrease in the future.

When the market price per share of a firm's stock decreases but the firm's earnings remain constant, the firm's price-earnings ratio will _______, which suggests that investors expect the firm's profitability to _______. decrease; decrease decrease; increase increase; increase increase; decrease

decrease; decrease

All else being equal, a firm's sensitivity to swings in the business cycle is higher when: variable costs are the highest portion of its expense. fixed costs are the highest portion of its expense. variable and fixed costs are roughly in the same proportion. the firm has low operating leverage.

fixed costs are the highest portion of its expense.

Accountants at XYZ Corp. calculate cost of goods sold, selling and administrative expenses, and net income as a percentage of net sales for their company and the two largest competitors. This would allow them to effectively assess: costs relative to income and sales for their company over time. the company's return on assets relative to its two largest competitors. how the company is performing relative to its two largest competitors. how the company generates return on stockholders' equity.

how the company is performing relative to its two largest competitors.

Accountants at ABC Inc. obtain their values for inventory and total assets, calculate the balance sheet percentage by dividing inventory by total assets for each year, and summarize the observations for the relative size of inventory to total assets for each year and the percentage change from year-to-year. This would allow them to effectively assess: inventory control compared to competitors. if there is an effective return on assets. if inventory is being properly managed. how they are managing their liabilities.

if inventory is being properly managed.

Darling Corp. has a current ratio of 1.5. Darling repays a short-term loan to the bank. The effect of this transaction on the current ratio is that the current ratio will: decrease. increase. remain unchanged. Cannot be determined from the information provided.

increase.

If the Fed caused the risk-free rate to increase, we would expect the cost of capital to: increase. decrease. remain unchanged. Need more information to answer question.

increase.

A(n) ___________________ in net sales will cause asset turnover to ___________________. increase; increase. increase; decrease. decrease; increase. decrease; remain the same.

increase; increase. Net Sales Turnover = Net Sales / Average Total Assets

AS collection period decrease, AR Turnover ...

increases

Lowering dividend payout _______ Retained earnings

increases

When a company ________ its payout ratio from the prior year, a ________ percent of net income is being distributed to common stockholders. decreases; larger increases; larger decreases; constant increases; smaller

increases; larger

When Nike analyzes ___________________, the comparison is made on an intracompany basis. When Nike views ___________________, the intercompany basis is being used. a competitor's current ratio; its current ratio for the past five years its current ratio for the past five years; a competitor's current ratio the clothing and apparel industry; a competitor's current ratio its current ratio for the past five years; the clothing and apparel industry

its current ratio for the past five years; a competitor's current ratio

The current ratio, net working capital, and quick ratio are used to measure

liquidity of a firm

ROE =

net income / average total assets

Degree of financial leverage is defined as the change in

net income relative to the change in the EBIT

Net profit margin =

net income ÷ sales

Total Asset Turnover =

net sales/average total assets

Carl is a stock analyst conducting an intercompany comparison of two department stores. Carl is most likely conducting this analysis in order to gain insight about: both stores' overall position in the industry. changes in one of the store's financial relationships. significant trends affecting both stores. one of the store's competitive positions.

one of the store's competitive positions.

The price-earnings ratio is a ___________________ ratio that will ___________________ when the market price per share of stock increases.

profitability; increase

Successful use of financial leverage is evidenced by a: rate of return on investment greater than the rate of return on stockholders' equity. rate of return on investment greater than the cost of debt. rate of return on sales greater than the rate of return on stockholders' equity. rate of return on sales greater than the cost of debt.

rate of return on investment greater than the cost of debt.

Successful use of financial leverage is evidenced by a: rate of return on investment greater than the rate of return on stockholders' equity. rate of return on investment greater than the cost of debt. rate of return on sales greater than the rate of return on stockholders' equity. rate of return on sales greater than the cost of debt.

rate of return on investment greater than the cost of debt.

Cash Conversion Cycle =

receivables collection period + inventory processing period - payables payment period

Two primary factors that contribute to business risk are: the degree of financial leverage and variable costs. sales volatility and the degree of operating leverage. sales volatility and the degree of financial leverage. the degree of operating leverage and the degree of financial leverage.

sales volatility and the degree of operating leverage.

The cash conversion cycle is the: length of time it takes to sell inventory. length of time it takes the firm to pay the credit extended to it for purchases. sum of the time it takes to sell inventory and the time it takes to collect accounts receivable. sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases.

sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases.

If a company wants to assess the liquidity of receivables, it computes the accounts receivable turnover by dividing net credit sales by: the average net accounts receivable. the ending receivables. the beginning net receivables. the total number of net sales.

the average net accounts receivable.

The weighted average of common shares outstanding should be used when calculating earnings per share because: it calculates the average value of common and preferred shares. it weights preferred shares more than common shares. the number of shares outstanding can change during a single period. the number of shares outstanding grows each period.

the number of shares outstanding can change during a single period.

Because horizontal analysis compares the same amounts over a specified period of time, it is also referred to as: trend analysis. static analysis. ratio analysis. income analysis.

trend analysis.