492 chapter 12

87) At what Z-value level is a firm considered in serious trouble? A) below 1.81 B) above 1.81 C) greater than 5.0 D) between 2.2 and 3.1 E) between 3.2 and 4.1

A) below 1.81

73) Fixed asset turnover is what type of financial ratio? A) liquidity ratio B) profitability ratio C) leverage ratio D) activity ratio E) revenue ratio

D) activity ratio

Cases present actual business situations and enable you to examine ONLY successful corporations.

FALSE

A Z-value below 10 indicates significant credit problems.

false

An important liquidity ratio is Earnings per Share (EPS).

false

In case analysis, how the company actually dealt with the case problem is the most important part of the solution.

false

In case analysis, it is best to make an exhibit that includes all the financial ratios.

false

One way to adjust for inflation for global operations outside the United States is to use the U.S. Consumer Price Index (CPI).

false

A typical financial analysis of a firm would include a study of the operating statements for five or so years.

true

A typical financial analysis would compare the firm under study with industry standards.

true

Common-size statements are income statements and balance sheets in which the dollar figures have been converted into percentages.

true

Constant dollars are dollars adjusted for inflation to make them comparable over various years.

true

Key liquidity ratios include the current ratio, quick ratio, and cash ratio.

true

36) According to the text, what information can be obtained by accessing the SEC website? A) corporate annual reports and 10-k forms B) press releases C) product specifications D) research and development trends E) information about graduate school

A) corporate annual reports and 10-k forms

67) Which financial ratio measures the extent to which borrowed funds have been used to finance the company's assets? A) debt to asset ratio B) debt to equity ratio C) long-term debt to capital structure D) times interest earned E) current liabilities to equity

A) debt to asset ratio

76) Which financial indicator is calculated by the ratio of annual dividends per share to annual earnings per share? A) dividend payout ratio B) dividend yield on common stock C) price/earnings ratio D) return on investment E) return on equity

A) dividend payout ratio

66) "Times interest earned" is an example of a(n) A) leverage ratio. B) liquidity ratio. C) activity ratio. D) asset management ratio. E) profitability ratio.

A) leverage ratio.

44) Which financial ratio measures the company's ability to pay off its short-term obligations from current assets, excluding inventories? A) quick ratio B) current ratio C) cash ratio D) strategic ratio E) inventory ratio

A) quick ratio

50) Which financial ratio shows the return on all of the assets under its control regardless of source of financing? A) return on investment B) return on equity C) earnings per share D) gross profit margin E) net profit margin

A) return on investment

86) At what Z-value level is a firm considered healthy? A) below 1.81 B) above 3.0 C) above 5.0 D) between 6.0 and 10.0 E) above 100

B) above 3.0

61) Which financial ratio measures the utilization of all of the company's assets? A) days of inventory B) asset turnover C) inventory turnover D) fixed asset turnover E) average collection period

B) asset turnover

34) What has been the most popular method of teaching strategy and policy for years? A) lecture B) case analysis C) team teaching D) group presentations E) student teaching

B) case analysis

91) Dollars adjusted for inflation to make them comparable over various years are known as A) consumer dollars. B) constant dollars. C) consumer inflation. D) constant inflation. E) earning dollars.

B) constant dollars.

43) What financial ratio serves as a short-term indicator of the company's ability to pay its short-term liabilities from its short-term assets? A) quick ratio B) current ratio C) cash ratio D) strategic ratio E) inventory ratio

B) current ratio

53) Which financial indicator measures the number of one day's worth of inventory that a company has on hand at any given time? A) days of cash B) days of inventory C) average collection period D) fixed asset turnover E) inventory turnover

B) days of inventory

77) Which financial ratio indicates the percentage of profit that is paid out as dividends? A) return on equity B) dividend payout ratio C) dividend yield on common stock D) price/earnings ratio E) debt to asset ratio

B) dividend payout ratio

79) Which financial ratio indicates the dividend rate of return to common shareholders at the current market price? A) return on equity B) dividend yield on common stock C) price/earnings ratio D) dividend payout ratio E) earnings per share

B) dividend yield on common stock

54) "Inventory to net working capital" is an example of a(n) A) leverage ratio. B) liquidity ratio. C) activity ratio. D) asset management ratio. E) profitability ratio.

B) liquidity ratio.

71) Which financial indicator shows the current market's evaluation of a stock, based on its earnings? A) debt to asset ratio B) price/earnings ratio C) coverage of fixed charges D) debt to equity ratio E) times interest earned

B) price/earnings ratio

75) Which financial indicator is calculated by the ratio of market price per share to earnings per share? A) return on investment B) price/earnings ratio C) return on equity D) dividend yield on common stock E) dividend payout ratio

B) price/earnings ratio

57) Net profit margin is what type of financial ratio? A) liquidity ratio B) profitability ratio C) activity ratio D) leverage ratio E) revenue ratio

B) profitability ratio

41) The calculation of ratios from financial data is referred to as A) SWOT analysis. B) ratio analysis. C) receivables analysis. D) integration analysis. E) diversification analysis.

B) ratio analysis.

48) Which financial ratio measures the rate of return on the book value of shareholders' total investment in the company? A) return on investment B) return on equity C) gross profit margin D) net profit margin E) earnings per share

B) return on equity

92) ________ is used worldwide and measures the total output of goods and services within a country's borders. A) CPI B) Prime interest rate C) GDP D) Z-Value E) The Index of sustainable growth

C) GDP

35) What is the main purpose of conducting outside research into the environmental setting of the case? A) It allows students to identify how the company addressed the problem. B) It provides a learning experience on library usage which is helpful in all courses. C) It gives a realistic background of the industry during a specified period. D) It gives you clues as to what the organization should be doing in the future. E) It furnishes large amounts of data — both pertinent and extraneous.

C) It gives a realistic background of the industry during a specified period.

89) What benefit does converting sales and profits to constant dollars in times of inflation offer when analyzing a case? A) It is helpful in predicting the future potential of the organization. B) It contributes to determining the risk factors when computing the Z-value. C) It shows the true performance of the corporation adjusted for inflation to make them comparable over years. D) It is easier for the financial analyst to judge the effectiveness of management's decision making. E) It provides a method which is familiar and easy to understand.

C) It shows the true performance of the corporation adjusted for inflation to make them comparable over years.

65) Which financial indicator is calculated as the ratio of annual credit sales to accounts receivable? A) days of cash B) average collection period C) accounts receivable turnover D) inventory turnover E) net working capital turnover

C) accounts receivable turnover

59) The quick ratio is also known as the A) key profitability ratio. B) EPS. C) acid test. D) asset turnover. E) key activity ratio.

C) acid test.

72) Inventory turnover and asset turnover are both examples of which type of financial ratio? A) liquidity ratio B) profitability ratio C) activity ratio D) leverage ratio E) revenue ratio

C) activity ratio

56) "Days of inventory" is an example of a(n) A) leverage ratio. B) liquidity ratio C) activity ratio. D) asset management ratio. E) profitability ratio.

C) activity ratio.

42) Which of the following is NOT one of the categories of important financial ratios that is mentioned in the text to help assess an organization's overall financial situation? A) leverage ratios B) liquidity ratios C) asset management ratios D) activity ratios E) profitability ratios

C) asset management ratios

52) Which of the following financial ratios is NOT a profitability ratio? A) net profit margin B) gross profit margin C) asset turnover D) ROE E) ROI

C) asset turnover

45) Which financial ratio measures the extent to which the company's capital is in cash or cash equivalents? A) quick ratio B) current ratio C) cash ratio D) strategic ratio E) inventory ratio

C) cash ratio

81) Converting categories on financial statements from dollar terms to percentages results in A) inflation-adjusted statements. B) diverse rates of returns. C) common-size statements. D) constant dollar denominations. E) equivalency comparison.

C) common-size statements.

85) All of the following ratios are used in the calculation of a company's Z-value EXCEPT A) working capital/total assets. B) retained earnings/total assets. C) current assets/current liabilities. D) market value of equity/total liabilities. E) sales/total assets.

C) current assets/current liabilities.

62) Which financial ratio indicates the number of days of cash on hand, at present sales levels? A) days of inventory B) fixed asset turnover C) days of cash D) average collection period E) inventory turnover

C) days of cash

78) Which financial indicator is calculated by the ratio of annual dividends per share to current market price per share? A) return on equity B) dividend payout ratio C) dividend yield on common stock D) price/earnings ratio E) debt to equity ratio

C) dividend yield on common stock

32) According to Schilit, the search for hidden weaknesses in a company's performance is known as A) a strategic audit. B) a SWOT analysis. C) forensic accounting. D) activity based accounting. E) competitive analysis.

C) forensic accounting.

88) The formula which indicates if a company embarking on a growth strategy will need to take on debt to fund this growth is called A) the return on investment. B) the CAPM. C) the index of sustainable growth. D) operating cash flow. E) the Z-value.

C) the index of sustainable growth.

68) Which financial ratio indicates the ability of the company to meet its annual interest costs? A) debt to asset ratio B) debt to equity ratio C) times interest earned D) long-term debt to capital structure E) coverage of fixed charges

C) times interest earned

80) Between 1997 and 1999, what percent of the mergers used the pooling approach to account for the value of the companies' stocks? A) 95% B) 80% C) 55% D) 40% E) 20%

D) 40%

84) The Z-value uses ________ ratios and weights them according to their importance to a corporation's financial strength. A) 2 B) 3 C) 4 D) 5 E) 6

D) 5

40) According to the text, what percentage of security analysts use annual reports when making decisions? A) 20% B) 35% C) 50% D) 75% E) 100%

D) 75%

93) Which of the following is NOT true of case analysis? A) Case discussion focuses on critical analysis. B) A solution is satisfactory if it resolves important problems and if it is likely to be implemented successfully. C) Case analysis helps build analytic and decision-making skills. D) A solution is satisfactory if it reflects what the company actually did. E) Case discussion focuses on logical development of thought.

D) A solution is satisfactory if it reflects what the company actually did.

90) To adjust for general inflation in the United States, what index does the text suggest? A) Dow-Jones Industrial Average B) New York Stock Exchange Index C) Wilshire 500 Equity Index D) Consumer Price Index E) NASDAQ Series

D) Consumer Price Index

38) All of the following are true of annual reports EXCEPT A) 80% of portfolio managers use annual reports when making decisions. B) annual reports contain income statements and balance sheets. C) annual reports contain cash flow statements. D) annual reports contain all the information found in the 10-K form. E) annual reports contain notes to the financial statements indicating why certain actions were taken.

D) annual reports contain all the information found in the 10-K form.

37) Among the most useful and important documents that can be used to understand why actions were taken are A) news releases. B) product specification reports. C) its corporate history. D) annual reports. E) 10-Q forms.

D) annual reports.

49) Which financial ratio shows the after-tax earnings generated for each share of common stock? A) return on investment B) return on equity C) gross profit margin D) earnings per share E) net profit margin

D) earnings per share

60) All of the following ratios represent activity ratios EXCEPT A) accounts payable period. B) days of inventory. C) net working capital turnover. D) earnings per share. E) days of cash.

D) earnings per share.

63) Which financial ratio measures the utilization of plant and equipment? A) days of inventory B) asset turnover C) average collection period D) fixed asset turnover E) inventory turnover

D) fixed asset turnover

64) Which financial indicator measures the ratio of sales to fixed assets? A) days of inventory B) asset turnover C) average collection period D) fixed asset turnover E) inventory turnover

D) fixed asset turnover

46) All of the following represent liquidity ratios EXCEPT A) cash ratio. B) inventory to net working capital. C) quick ratio. D) gross profit margin. E) current ratio.

D) gross profit margin.

74) Which two basic statements provide most of the financial data needed for analysis? A) statement of retained earnings and income statement B) sources and uses of working capital and the balance sheet C) non-operating gains and losses and statement of financial position D) historical income statement and balance sheet E) statement of financial position and statement of owner's equity

D) historical income statement and balance sheet

47) Which financial ratio indicates how much after-tax profit is generated by each dollar of sales? A) return on investment B) return on equity C) gross profit margin D) net profit margin E) inventory to net working capital

D) net profit margin

70) All of the following ratios reflect leverage ratios EXCEPT A) debt to asset ratio. B) times interest earned. C) coverage of fixed charges. D) price/earnings ratio. E) debt to equity ratio.

D) price/earnings ratio.

39) According to the text, what percentage of portfolio managers use annual reports when making decisions? A) 20% B) 35% C) 50% D) 60% E) 80%

E) 80%

33) Which of the following is a red flag according to Schilit? A) cash flow from operations drops below net income B) accounts receivable growing faster than sales C) fluctuating gross margins over time D) nepotism on the board of directors E) all of the above

E) all of the above

58) Return on equity A) is the ratio of net profit after taxes to shareholders' equity. B) is a profitability ratio. C) is referred to by the acronym ROE. D) measures the rate of return on the book value of shareholders' total investment in the company. E) all of the above

E) all of the above

69) Which financial ratio is a measure of the ability of the company to meet all of its fixed-charge obligations? A) debt to asset ratio B) debt to equity ratio C) times interest earned D) long-term debt to capital structure E) coverage of fixed charges

E) coverage of fixed charges

82) To get a proper picture of the position of the organization, common-size statements and ratios should be compared to A) the organization's future historical performance. B) the leading competitor in the industry. C) the financial performance of the overall U.S. gross domestic production (GDP). D) the direct competitor least like the organization. E) industry-wide average trends.

E) industry-wide average trends.

51) Which financial ratio measures the number of times that average inventory of finished goods was turned over or sold during a period of time? A) days of inventory B) asset turnover C) average collection period D) fixed asset turnover E) inventory turnover

E) inventory turnover

55) "Earnings per share" is an example of a(n) A) leverage ratio. B) liquidity ratio C) activity ratio. D) asset management ratio. E) profitability ratio.

E) profitability ratio.

83) The formula which predicts the likelihood of a corporation going bankrupt is called A) the return on investment. B) the CAPM. C) the index of sustainable growth. D) operating cash flow. E) the Z-value.

E) the Z-value.

Ratios are only useful for large firms where their ratios may be compared with industry averages.

FALSE

The case method provides the opportunity to move from a broader, less precise analysis of the overall corporation to a narrow, specialized view that emphasizes functional techniques.

FALSE

The public interest rate is the rate of interest banks charge on their lowest risk loans.

FALSE

When preparing a case analysis, you should always undertake outside research and go beyond the decision date of the case.

FALSE

A company's annual report from the year of the case can be helpful, but the 10-K form is not beneficial for those conducting a case analysis.

False

10-K forms include detailed information not usually available in an annual report.

TRUE

According to Schilit, a change of more than 2% in gross margins from year to year is worth a closer look.

TRUE

According to Schilit, forensic accounting is a search for hidden weaknesses in a company's performance.

TRUE

According to Schilit, unusually high goodwill gains related to recent acquisitions is a red flag, suggesting an underlying problem.

TRUE

If a firm's trends in common-size statements are generally in line with those of the rest of the industry, problems are less likely than if the firm's trends are worse than the industry average.

TRUE

If the corporation being studied appears to be in poor financial condition, use Altman's Bankruptcy Formula to calculate its Z-value.

TRUE

One of the most important categories of financial ratios are the liquidity ratios.

TRUE

Ratio analysis is a valuable part of SWOT analysis, helping to assess the company's overall situation and pinpoint some problem areas.

TRUE

According to Yankelovich Partners survey firm, eight out of 10 portfolio managers and 75 percent of security analysts use annual reports when making decisions.

True

The Z-value formula combines five ratios by weighting them according to their importance to a corporation's financial strength.

true

The amount of change from one year to the next in GDP indicates how much that country's economy is growing.

true

The debt to asset ratio measures the extent to which borrowed funds have been used to finance the company's assets.

true

The index of sustainable growth indicates how much of the growth rate of sales can be sustained by internally generated funds.

true

When conducting a financial analysis, select and discuss those financial ratios that have an impact on the company's problems.

true