FIN 3320 Quiz 2

Retained earnings is the total amount of _____.

income that has been saved and reinvested in assets since the firm started business

The equity section of a firm's balance sheet contains _____.

retained earnings

The days sales outstanding (DSO) ratio of a firm identifies _____.

the average length of time a firm must wait after making a credit sale before receiving cash

Market value ratios indicate _____.

what investors think of the company's future prospects based on its past performance

Using the information below for WAM Inc., what is the market value per share?

$4.00

The proportion of a firm's funds that is provided by shareholders is equal to _____.

1 minus the debt ratio

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times interest earned ratio?

11 times

Selzer Inc. sells all of its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)?

3.3%

Which of the following transactions will not affect the quick ratio of a company? a. An increase in property, plant, and equipment b. A decrease in accrued wages c. An increase in accounts receivable d. A decrease in accounts payable e. A decrease in inventories

A decrease in inventories

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

Accounts receivable are collected.

Which of the following transactions will not affect the quick ratio of a company?

Accounts receivable collected

Which of the following changes is considered a source of cash when preparing a statement of cash flow?

An increase in property, plant, and equipment

Which of the following is the most appropriate measure to examine whether management of a firm is pursuing the goal of maximizing the firm's stock price?

Cash flows

Which of the following is an example of a firm's long-term debt?

Corporate bonds

Which of the following is considered by analysts when comparing the operations of two firms that are financed differently?

Earnings before interest and taxes

Which of the following ratios indicate how much investors are willing to pay for a firm's stock for each dollar of reported profits?

Earnings per share

Which of the following accounting principles does the Securities and Exchange Commission (SEC) require U.S. firms to use when filing their financial statements?

Generally Accepted Accounting Principles (GAAP)

Which of the following is the formula to calculate a firm's inventory turnover ratio?

Inventory turnover = Cost of goods sold ÷ Inventory

Which of the following ratios measures how effectively a firm is managing its assets?

Inventory turnover ratio

Which of the following mathematical expressions is used to compute the net working capital of a firm?

Net working capital = Current assets − Current liabilities

Pearl Automotive Ltd. has a current ratio of 2. The company wants to window dress its financial statements. Which of the following transactions will increase the current ratio of Pearl Automotive, assuming all other variables remain constant?

Repayment of short-term loan

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

Statement of cash flows

Which of the following financial statements is prepared to show the changes in the common equity accounts between balance sheet dates?

Statement of retained earnings

Which of the following statements is true about the annual report of a company?

The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends.

A firm's net income as reported on its income statement is also known as the firm's _____.

accounting profit

The firm's statement of retained earnings reports changes in the _____.

common equity accounts between balance sheet dates

Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. What is the ending balance of retained earnings?

$218 million

The statement of retained earnings for Redwood Systems Ltd. shows a retained earnings balance of $300 million on December 31. During the year, Redwood generated net income of $60 million and paid dividends of $20 million to its stockholders. What was the beginning balance of retained earnings at the start of this year?

$260 million

Greenwood Builders Ltd. has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of the firm's total liabilities?

$262,500

Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?

$275 million

Amber Devices Ltd. has total assets worth $900 million and total liabilities worth $475 million at the end of December 31. What is the amount of money received by the stockholders, if Amber liquidates all of its assets for $850 and pays off all of its outstanding debt at book value?

$375 million

The book value per share of Topaz General Ltd. is $10 per share and the company has a total of 4 million shares. Calculate the total book value of common equity of the company.

$40 million

The Charleston Company is a relatively small, privately owned firm. Last year, the company had an after-tax income of $15,000 and 10,000 shares were outstanding. The owners were trying to determine the market value for the stock prior to taking the company public. A similar firm, which is publicly traded, had a price/earnings ratio of 5.0. Using only the information given, what is the estimated market value of one share of Charleston's stock?

$7.50

The book value of the common stock of Zircon Global Ltd. is $34 million. If Zircon has four million shares of common stock outstanding, what is its book value per share?

$8.50 per share

Sapphire Industries Ltd. has a net income of $60 million and the total depreciation on its assets is $20 million. What is the net cash flow of Sapphire Industries?

$80 million.

The balance sheet of Crimpson Solutions Ltd. has cash of $125 million, accounts receivable of $245 million, inventory of $160 million, and equipment worth $450 million. The company also has accounts payable of $120 million, notes payable of $280 million, and corporate bonds of $365 million. What is Crimpson's current ratio?

1.325 times

A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has a debt of $7,500,000, total assets of $22,500,000, and an interest cost on a total debt of 5 percent, what is the firm's return on total assets (ROA)? (Round answer to two decimal places.)

13.33%

If a firm earns a net profit of $100,000 on sales of $2,000,000, what is its net profit margin?

5%

Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current times interest earned ratio?

5.0 times

Daisy Inc.'s book value per share is $10, and its market-to-book ratio is 1.5. If its earnings per share is $2.5, calculate its price/earnings (P/E) ratio.

6.0

A firm has total assets of $500 million, including its accounts receivable, which is worth $120 million. The annual sales of the firm is $650 million. What is the firm's days sales outstanding (DSO) ratio?

66.5 days

Which of the following statements is true about net worth?

A firm's net worth is equal to total assets minus total liabilities.

Which of the following accounts contains the actual money that can be spent by a firm?

Cash and equivalents

Which of the following is considered as a liability in the balance sheet of a firm?

Corporate bonds

Which of the following ratios is calculated to help determine the liquidity of a firm?

Current ratio

Which of the following mathematical expressions calculates the debt ratio?

Debt ratio = Total liabilities ÷ Total assets

_____ is an example of a long-term investment of a firm.

Equipment

Which of the following ratios recognizes that many firms lease rather than buy a long-term asset?

Fixed charge coverage ratio

In which order will assets be listed in a balance sheet?

In order of liquidity

Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

Income statement

Which of the following actions can be considered a source of cash when constructing a statement of cash flows?

Increase in long-term bonds

Which of the following is an example of a current asset?

Inventory

Which of the following ratios shows the relationship between a firm's current assets and its current liabilities?

Liquidity ratios

Which of the following items appears at the top of an income statement when determining the net income of a firm?

Net sales

Emerald Corporation's current ratio is 0.5, while Ruby (Emerald's competitor) Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

Only Emerald Corporation's current ratio will be increased.

_____ is an example of cash flow from an investing activity in a cash flow statement.

Purchase of equipment

Which of the following is true about a common size balance sheet?

The assets, liabilities, and equities are reported as percentages of total assets.

If a company has a quick ratio of 1.0 and a current ratio of 2.0, then the value of _____.

current liabilities is equal to the value of inventory

Which of the following is considered a use of cash in a cash flow statement? a. Decrease in inventory b. Decrease in accounts receivable c. Increase in accrued wages d. Increase in fixed assets e. Increase in common stock

d. Increase in fixed assets

A low inventory turnover ratio might indicate that the _____.

firm is holding excess stocks of inventory

An inventory turnover ratio of 8.5 times indicates that the _____.

firm will restock its inventory every 42.35 days

If a firm's existing quick ratio is 1.2, and all other variables remain unchanged, the quick ratio can be increased by _____.

receiving interest income

The extent to which the operating income can decline before a firm is unable to meet its annual interest costs can be found in the _____.

times interest earned ratio

An analysis of a firm's financial ratios over time used to determine the improvement or deterioration in its financial situation is called _____.

trend analysis

Techniques employed by firms to make their financial statements look better than they actually are, are called _____.

window-dressing techniques

Which of the following financial statements includes information about a firm's assets, equity, and liabilities at a specific point in time?

Balance sheet

Which of the following mathematical expressions is used to compute the book value per share?

Book value per share = Common equity ÷ Total number of shares outstanding

Which of the following is true about the book value and market value of a firm's debt?

The book value of a firm's debt generally is either equal to or very close to the market value of the firm's debt.

Which of the following statements is true about the values recorded in the balance sheet of a firm?

The book value of a firm's debt generally is equal to or very close to the market value of the firm's liabilities.

A firm's current ratio has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?

The firm's liquidity position has improved.

Bicksler Corporation has a current ratio of 2.0 on July 21 of the current year. On July 22, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?

The value of the current ratio will decrease.