Exam 3 AEB 3122

The E in the P/E ratio is found by dividing ________________________ by _____________________________.

net income (or net earnings or profit) , number of shares outstanding

Economists are interested in the _____________________of a firm's assets while on the balance sheet assets are at ______________________.

market (value, book or cost (value)

How do you calculate market cap?

multiply the price of stock times the number of share outstanding

Current assets - current liabilities = ___________.

net working capitol

The ROE and the ROE of a firm will be the same when the firm has __________________.

no debt

Generating cash from _________________ activities is the preferred method for obtaining excess cash.

operating

The change in retained earnings is often the product of both an __________________ and a _____________ activity.

operating, financing

On the balance sheet the change in cash - from the ending minus the beginning cash -is equal to the sum of net cash from _________________________________________.

operating, financing and investing activities

Generating cash from____________ is the preferred method for obtaining excess cash to finance capital expenditures and repayment of debt.

operations

In the summary analysis of the statement of cash flows, the cash flows from operations (if negative) are calculated as a percentage of total ___________________.

outflows

On the summary analysis of the statement of cash flows, the cash flows from operations (if negative) are calculated as a percentage of total __________________.

outflows

In general a ratio of _____________ to____________ is a measure of efficiency.

output to input

Financial Ratios Standardize financial data in terms of mathematical relationships expressed in the form of _____________________________________________________.

percentages, times and days

The PE ratio is the ratio of _____________________ to _______________________.

price per share of stock, earnings per share of stock

investing activity

purchase of equipment

Financing activity

purchase of treasure stock

The debt to asset ratio for a firm is 80%: that means that the debt to equity ratio is ___________________.

400%

On the statement of cash flows the repayment of the current portion of long term debt would be classified as a: A) Financing activity. B) Investing activity C) Operating activity D) Current liability

A) Financing activity.

The following items would be classified as financing activities on the statement of cash flows: A) Proceeds from borrowing, payments to lenders, payments of dividends. B) Sales of goods, repayment of debt, loans to others. C) Payments for inventory, payment of dividends, repayment of debt. D) Loans to others, returns from loans to others, acquisition of land.

A) Proceeds from borrowing, payments to lenders, payments of dividends.

In the "Du Pont system" ROE is equal to; A) ROA times financial leverage. B) Net Income divided by total assets. C) Net profit margin times market cap. D) All the above

A) ROA times financial leverage.

What is a serious limitation of financial ratios? A) Ratios are not predictive. B) Ratios can only be used by themselves. C) Ratios indicate only weaknesses. D) Ratios are screening devises.

A) Ratios are not predictive.

The following items would be classified as investing activities on the statement of cash flows: A) Sale of property, purchase of equity securities, loans to others. B) Sale of goods, receipt of dividends, repurchase of firm's own stock C) Proceeds from borrowing, payment of dividends, receipt of dividends. D) Payment to lenders, proceeds from issuing common stock, revenue.

A) Sale of property, purchase of equity securities, loans to others.

What does the price to earnings ratio measure? A) The multiple that the stock price places on firm's earnings. B) The relationship between dividends and market price. C) The earnings for one common share of stock. D) The percentage of dividends paid to net earnings

A) The multiple that the stock price places on firm's earnings.

What does the price to earnings ratio measure? A) The multiple that the stock price places on firm's earnings. B) The relationship between dividends and market price. C) The earnings for one common share of stock. D) The percentage of dividends paid to net earnings

A) The multiple that the stock price places on firm's earnings.

In the "Du Pont system" ROE is: A) equal to ROA times financial leverage. B) equal to Net Income divided by net sales. C) found by multiplying (Net income divided by equity) times (net sales divided buy net sales). D) All the above

A) equal to ROA times financial leverage.

A firm has a net profit margin is 5%, total asset turnover is 3.0 and ROE of 30%, the firm, you know the firm has; A) No debt. B) An ROA of 15%. C) Gross profit margin is 15%. D) All of the above.

B) An ROA of 15%.

Which of the following could be indicative of cash flow problems for the firm? A) Increasing accounts receivable and decreasing inventories. B) Increasing accounts receivable and increasing inventories. C) Decreasing accounts receivable and increasing inventories. D) Decreasing accounts receivable and decreasing inventories

B) Increasing accounts receivable and increasing inventories.

What do the asset turnover ratios measure? A) The liquidity of the firm's current assets. B) Management's effectiveness in generating sales from investments in assets C) The overall efficiency and profitability of the firm. D) The distribution of assets in which funds are invested.

B) Management's effectiveness in generating sales from investments in assets

Current assets minus current liabilities is; A) The current ratio B) Net working capital C) The acid-test ration D) The quick ratio

B) Net working capital

The Return on Investment - ROI is the same as? A) ROE. B) ROA. C) ROIC. D) ROD

B) ROA - return on assets

The debt to asset ratio for a firm is 50% that means A) The firm is close to being bankrupt. B) The debt to equity ratio is 100%. C) The firm is profitable. D) The firm does not use leverage

B) The debt to equity ratio is 100%.

10) The debt to asset ratio for a firm is 75% that means the; A) The firm is close to being bankrupt. B) The debt to equity ratio is 300%. C) The debt to equity ratio is 3%. D) The debt to equity ratio is 25%.

B) The debt to equity ratio is 300%.

How is it possible for a firm to be profitable and still go bankrupt? A) Earnings increase more rapidly than sales. B) The firm has positive net income but fails to generate cash from the operation. C) Net income has been adjusted for inflation. D) Sales have not improved even though credit policies have been eased.

B) The firm has positive net income but fails to generate cash from the operation.

If a firm is using financial leverage what would be the impact of increasing the return on assets? A) The price-to-earnings return will increase. B) The return on equity will increase. C) The return on equity will decline. D) The price-to-earnings return will decline.

B) The return on equity will increase.

Cash conversion cycle is? A) Average collection period minus days inventory held minus days payable outstanding B) Average collection period plus days inventory held plus days payable outstanding C) Average collection period minus days inventory held plus days payable outstanding D) Average collection period plus days inventory held minus days payable outstanding

C) Average collection period minus days inventory held plus days payable outstanding

Which of the following is not a tool or technique used by financial statement analysis? A) Common-size financial statements. B) Trend analysis. C) Cost Random sampling analysis. D) Industry comparisons.

C) Cost Random sampling analysis.

Times interest earned is an example of a; A) Inventory ratio B) Activity ratio. C) Coverage ratio. D) Profitability ratio.

C) Coverage ratio.

What category of ratios is useful in assessing the capital structure of the firm? A) Liquidity. B) Activity. C) Leverage. D) Coverage.

C) Leverage.

Leverage is: A) A measure of the asset structure of the firm. B) Measured by the asset turnover ratio. C) Measured by the debt to equity ratio. D) All the above.

C) Measured by the debt to equity ratio.

9) The ROE and the ROE of a firm will be the same when the firm has; A) A positive ROA. B) Leverage. C) No leverage. D) None of the above.

C) No leverage.

The debt to equity ratio for a firm is 50% that means that: A) The firm is close to being bankrupt. B) The debt to asset ratio is 100%. C) The debt to asset ratio is 33%. D) The firm does not use leverage.

C) The debt to asset ratio is 33%.

Times interest earned

Coverage ratio

The cash conversion cycle can be: A) Negative. B) Zero. C) Positive. D) All of the above.

D) All of the above.

Which of the following items would cause the cash conversion cycle to decrease? A) Increasing DPO. B) Decreasing the DSO. C) Decreasing the DIO. D) All of the above.

D) All of the above.

The cash conversion cycle can be; A) Zero. B) Positive C) Negative. D) All the above

D) All the above

In the "Du Pont system" ROE is equal: A) ROA times financial leverage. B) Net Income divided by total equity. C) Net profit margin times asset turnover times leverage. D) All the above.

D) All the above.

Leverage is: A) A measure of the capital structure of the firm. B) Measured by the debt to asset ratio. C) Measured by the debt to equity ratio. D) All the above.

D) All the above.

Accounts receivable turnover is calculated with __________ in the numerator? A) Accounts receivable. B) Net sales per day. C) Accounts receivable per day. D) Net Sales

D) Net Sales

A firm uses $100,000 of cash to buy inventory; A) The Current ratio will increase. B) The Quick ratio will increase. C) The Current ratio will decrease. D) None of the above.

D) None of the above.

Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and generating return to firm owners? A) Gross profit margin and net profit margin. B) Return on capital. C) Total asset turnover and operating profit margin. D) Return on assets and return on equity.

D) Return on assets and return on equity.

If the times interest earned ratio is above one this means that the firm has enough cash to cover interest payments.

FALSE

Short-term liquidity focuses on assessment of the key components of the income statement.

False

The price to earnings ratio measures the relationship between dividends and market price.

False

CFO plus capital expenditures

Free cash flow

Debt to asset ratio greater than 100%.

Insolvent firm

Purchase of equipment

Investing activity

What ratio measures a firms ability to meet cash needs as they arise?

Liquidity

Estimate of market value of equity

Market Cap.

___________________ is found by multiplying the price per share of common stock times the number of shares of common stock outstanding.

Market cap

Net income divided by net sales

Net profit margin

What items would be classified as operating activities on the statement of cash flows?

Payment of taxes, revenue, purchases of supplies.

Current assets minus inventory divided by current liabilities

Quick ratio

Management efficiency is measured by ______________ while stockholders' return is measured by _________________.

ROA, ROE

How do you calculate ROE?

ROE = Net Income/Shareholders' Equity

A positive cash flow can occur in a year in which income is negative.

True

Inventory turnover is calculated with cost of goods sold in the numerator.

True

The debt (debt to asset) ratio can go down even if the firm borrows more money then it repaid during the year

True

Who is ultimately concerned with the ability of an existing or prospective borrower to make interest and principal payments on borrowed funds.

a creditor or lender

The four categories of financial ratios discussed in class were:

liquidity, leverage, activity and profitability

Depreciation is _________ to net income to determine the CFO.

added

The ratio of net sales to total assets is called the _________________ ratio.

asset turnover

net sales divided by total assets

asset turnover ratio

The amount of leverage used by the firm is determined by management decision with regard to the ____________________________ problem.

capital structure

If net cash provided or used by operating, financing and investing activities are added together, the result on the balance sheet is the _____________________.

change in cash

If net cash provided or used by operating, financing and investing activities are added together, the result on the balance sheet is the ______________________.

change in cash

times interest earned

coverage ratio

Who are three potential financial statement user?

creditors, investors and management

The acid test ratio is the ratio of _______________ to _______________________.

current assets minus inventory, current liabilities

Current assets divided by current liabilities

current ratio

What are the two most popular liquidity ratios?

current ratio, quick or acid test ratio

The cash conversion cycle can be negative if the ____________________ is very large.

day's payable outstanding

Increasing the days payable period will cause the cash conversion cycle to ___________.

decrease

Calculating cash flows from operating activities by subtracting cash paid to suppliers, employees and other cash expenditures from cash collected from customers.

direct method

In general a ratio of 'output' to "input" is a measure of __________________.

efficiency

On the statement of cash flows the payment of dividends would be classified as a _______________________.

financing activity

The cash flow from operating activities will be greater than net income if the accounts receivable account has__________________.

increased

A firm is ______________ if the total value of its debt exceeds the market value of its assets.

insolvent

What is a measure of capital structure of a firm?

leverage

How do you calculate debt to asset ratio?

total liabilities/total assets

How do you calculate debt to equity ratio?

total liabilities/total stockholders equity