FIN 323 CHAPTER 3
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+ Non-cash expenses)/Interest expense
Which of the following is the correct representation of the total debt ratio?
(Total assets - Total equity)/(Total assets)
Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______, which demonstrates the proportion of assets financed by long-term obligations. Multiple choice question.
liquidity; leverage
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes a ___ time to sell.
long
The price-earnings (PE) ratio is a ______ ratio.
market value
By combining common-size and base year analysis, we eliminate the effect of the _____.
overall growth
One of the most important uses of financial statement information within the firm is:
performance evaluation
When a company has negative earnings for an extended period of time, analysts will often resort to the:
price sales ratio
When a company has negative earnings for an extended period of time, analysts will often resort to the:
price-sales ratio
Some financial ratios are based on the market price per share of stock, which is information not contained in the financial statements. As a result, these measures can only be directly calculated for __________________ traded companies.
publicly
if a company's common-size income statement shows a lower percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has _____. Multiple choice question.
raised its prices relative to costs
A common-size income statement helps compare financial results over time by controlling for changes in ______.
sales
The profit margin is equal to net income divided by ______.
sales
Which one of the following equations defines the total asset turnover ratio?
sales/total assets
The price-sales ratio is calculated as the price per _____ divided by the sales per _________
share, share
Liquidity ratios are particularly important to_________ -term creditors.
short
Common-size statements are used for comparing firms with differing ____. Multiple choice question.
sizes
At the most fundamental level, firms generate cash and:
spend it
________ financial statements provide for comparison of firms that differ in currency type.
standardized
Financial ratios are ways of comparing and investigating Blank______.
the relationships between pieces of financial information
A common-size balance sheet expresses accounts as a percentage of:
total assets
Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.
total equity
True or false: The interval measure indicates how long a start-up company can operate until it needs more financing.
true
The inventory ____________is calculated as the COGS divided by the inventory.
turnover
A firm has a total debt ratio of 0.30 times. This means the firm has _________in total debt for every $1 in total assets.
0.30
A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.
26
The days' sales in inventory are equal to days divided by the inventory turnover.
365
Which of these computes days' sales in receivables? Multiple choice question.
365/Receivables turnover
Which of the following are sources of cash?
An increase in notes payable A decrease in accounts receivable
Which of the following are traditional financial ratio categories?
Asset management ratios Market value ratios Profitability ratios
Which of the following are traditional financial ratio categories?
Asset management ratios Profitability ratios Market value ratios
Cal's Market has return on equity (ROE) of 15 percent. What does this mean? Multiple choice question.
Cal's generated $.15 in profit for every $1 of book value of equity.
Which of the following items are among the items used to compute the current ratio?
Cash Accounts payable
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
Which of the following are uses of cash?
Decreases in accounts payable Increases in property, plant and equipment Increases in inventory
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPoint
A problem with the TIE ratio is that it is based on_________ which is not really a measure of cash available to pay interest.
EBIT, earning before interest and tax, or earnings before interests and taxes
______ are the prime source of information about a firm's financial health.
Fin Statements
When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.
Higher
The information needed to compute the profit margin can be found on the ____.
Inc Statement
Which of the following are uses of cash? (Check all that apply.) Multiple select question.
Increases in property, plant and equipment Decreases in accounts payable Increases in inventory
One common way to identify potential peers is based on Standard _____________ Classification codes.
Industrial
A(n) _____ is a measurable value that shows how effectively a company is achieving a business objective. Multiple choice question.
KPI
If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____. Multiple choice question.
Less than 1
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
Which ratios use some information that is not contained in financial statements?
M.V ratios
How is market-to-book ratio measured?
M.v of shares/ b.v of shares
The price-earnings (PE) ratio is a ______ ratio.
MV
The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and ________value ratios.
Market
How is the price-earnings (PE) ratio computed?
Market price per share/Earnings per share
How is the price-earnings (PE) ratio computed? Multiple choice question.
Market price per share/Earnings per share
What is the equation for enterprise value? Multiple choice question.
Market value of stock + book value of liabilities − cash
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Noncash expenses
The EBITDA ratio is similar in spirit to:
P.E ratio
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
Which two of the following groups are most interested in liquidity ratios?
Suppliers Bankers
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average.
What does it mean when a firm has a days' sales in receivables of 45? Multiple choice question.
The firm collects its credit sales in 45 days on average.
What does a current ratio of 1.2 mean?
The firm has $1.20 in current assets for every $1 in current liabilities.
Because we are almost always unable to obtain all of the market information we want, we rely on ___________numbers for much of our financial information.
accounting
Profitability measures such as return on assets (ROA) and return on equity (ROE) are ___ rates of return.
accounting
ROA and ROE are common and useful measures, but it is important to remember that they are ______________rates of return.
accounting
Although Blank______ are often poor reflections of reality, they are often the best information available.
accounting numbers
Which of the following are sources of cash? (Check all that apply.)
an increase in N.P a decrease in A/R
A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.
base year; base amount
financial statement report
book value Reason: Financial statements of firms in the US carry assets at cost. Market value is the price at which the assets, liabilities, and equity could actually be bought or sold, which is a completely different concept from historical cost.
At the most fundamental level, firms generate and spend it.
cash
The cash ratio is found by dividing by current liabilities.
cash
When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:
common-size statements
A firm with a market-to-book ratio that is greater than 1 is said to have ______ value for shareholders.
created
The quick ratio is computed just like the _______ratio, except that inventory is omitted.
current
The current ratio shows the relationship between ____.
current assets and current liabilities
The cash ratio is found by dividing cash by:
current liabilities
An important accounting goal is to report financial information to users in a way that is useful for _____. Multiple choice question.
decision making
The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
depreciation
EBITDA multiple is equal to the enterprise value (divided/multiplied) by EBITDA.
divided
A common-base year financial statement presents items relative to a certain base, which is the _____.
dollar amount of each item during a common base year
A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense. Multiple choice question.
earning before interests and taxes
Long-term debt ratio is equal to long-term debt divided by the sum of long-term debt and total
equity
True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.
false
True or false: There is only one method for preparing the statement of cash flows.
false
Long-term solvency ratios are also known as:
financial leverage ratios
The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:
further investigation
A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.
higher
As long as all sales requests are being met, a ______ inventory turnover ratio is better.
higher
A(n) Blank______ in net profit margin will increase ROE. Multiple choice question.
increase
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
The times interest earned ratio equals EBIT divided by
interest
Which one of the following does not affect ROE according to the DuPont identity?
investment statement
The interval measure is useful for start-up companies because it indicates how long a company can operate until _____.
it needs another round of financing
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
it will increase.
By evaluating the quick ratio, we can see that one sign of possible short-term trouble is the existence of relatively (small/large) inventories.
large
If a company has inventory, the quick ratio will always be ______ the current ratio. Multiple choice question.
less than
Long-term solvency ratios are also called financial ______ ratio, Correct Unavailable ratios.
leverage
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables? Multiple choice question.
The total asset turnover ratio will increase.
The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?
There are different methods of preparing it.
Which one of the following is one way in which financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
Total capitalization equals total equity plus total:
Total capitalization equals total equity plus total:
