Chapter 3- Finance
Echo Point has sales of $2,800, total assets of $1,900, and a debt-equity ratio of .5. Its return on equity is 15 percent. What is the net income?
$190
Kasturi Safe & Lock generated net income of $911, depreciation expense was $47, and dividends paid were $25. Accounts payables increased by $15, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity?
$959
Shen & Sanchez Engineering is an all-equity firm that has net income of $96,200, depreciation expense of $6,300, and an increase in net working capital of $2,800. What is the amount of the net cash from operating activity?
$99,700
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)
Coulter Supply has a total debt ratio of .46. What is the equity multiplier?
1.85
Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding and a book value per share of $2.09. What is the market-to-book ratio?
2.75
A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.
6.8
Halabi's Market has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and a net profit margin of 5.78 percent. What is the return on assets?
8.29%
Cal's Market has return on equity (ROE) of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity.
Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?
Common-base year statement
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
________ ________ are the prime source of information about a firm's financial health.
Financial statements
Which one of the following is a source of cash for a tax-exempt firm?
Increase in common stock
Which one of the following does not affect ROE according to the DuPont identity?
Investor sentiment
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase.
A(n) _____ is a measurable value that shows how effectively a company is achieving a business objective.
KPI
How is the price-earnings (PE) ratio computed?
Market price per share/Earnings per share
The price-earnings (PE) ratio is a ______ ratio.
Market value
What is the equation for enterprise value?
Market value of stock + book value of liabilities − cash
How is market-to-book ratio measured?
Market value per share/Book value per share
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Noncash expenses
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
Which one of the following equations defines the total asset turnover ratio?
Sales/Total assets
________ financial statements provide for comparison of firms that differ in currency type.
Standardized
________ financial statements provide for comparison of firms that differ in size.
Standardized
What does it mean when a company reports ROA of 12 percent?
The company generates $12 in net income for every $100 invested in assets.
What does an inventory turnover ratio of 5 mean?
The entire inventory was sold and replaced 5 times during the year.
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
A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.
base year; base amount
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
An important accounting goal is to report financial information to users in a way that is useful for _____.
decision making
The cash coverage ratio adds ______ 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
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
Hulsey Outdoor had a return on assets of 15 percent and a return on equity of 15 percent. Given this information, the firm:
has an equity multiplier of 1.0.
A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.
higher
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 ____.
income 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
A ____________ performance indicator is a measurable value that shows how effectively a company is achieving business objectives.
key
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
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
When developing a common-size balance sheet to evaluate last year's performance, all accounts are expressed as a percentage of:
last year's total
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than
The price-sales ratio is especially useful when analyzing firms that have:
negative earnings
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
Return on equity (ROE) is a measure of _____.
profitability
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 _____.
raised its prices relative to costs
The most acceptable method of evaluating the financial statements is to compare the company's current financial:
ratios to the company's historical ratios.
Liquidity ratios are particularly important to _______ -term creditors.
short
The EBITDA ratio is similar in spirit to:
the PE ratio
Financial ratios are ways of comparing and investigating _____.
the relationships between pieces of financial information
A firm has total assets with a current book value of $71,600, a current market value of $82,300, and a current replacement cost of $90,400. What is the value of Tobin's Q?
.91
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
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 a current ratio of 1.2 mean?
The firm has $1.20 in current assets for every $1 in current liabilities.
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?
The total asset turnover ratio will increase.
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
Financial statements report:
book values
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 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.
earnings before interest and taxes
The debt-equity ratio expresses the total debt divided by total equity, while the ______ multiplier expresses the total assets divided by the total equity.
equity
The formula for total ________ is total liabilities and equity minus total debt.
equity
Parsa's Organics currently has $56 in debt for every $100 in equity. If the company were to use some of its cash to decrease its debt, while maintaining its current equity and net income, which one of the following would decrease?
equity multiplier
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
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
The cash ratio adds noncash expenses back to the EBIT to determine its ability to meet its ________ obligations, while the TIE is based on EBIT.
interest
The times interest earned ratio equals EBIT divided by _______.
interest
The times interest earned ratio equals EBIT divided by ________.
interest
The cash coverage ratio directly measures the ability of a company to meet its obligation to pay:
interest to a lender.
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.
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
Total capitalization equals total equity plus total:
long-term debt
The net income as shown on the common-size income statement of Omega Industries for the past three years increased from 3 percent to 6 percent. This indicates that the firm is increasing its ______.
profitability
At the most fundamental level, firms generate cash and:
spend it
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
Mashburn Roasters has sales of $807,200, total assets of $768,100, and a net profit margin of 6.68 percent. The firm has a total debt ratio of 54 percent. What is the return on equity?
15.26%
Alpha Dog paid $2,380 in interest and $2,200 in dividends last year. The times interest earned ratio is 2.6 and the depreciation expense is $680. What is the value of the cash coverage ratio?
2.89
Powell's has net income for the most recent year of $24,650 and a combined federal and state tax rate of 24 percent. The firm paid $1,800 in total interest expense and deducted $2,900 in depreciation expense. What was the cash coverage ratio for the year?
20.63 times
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. (Enter your answer as a numerical value.)
365
Which of these computes days' sales in receivables?
365/Receivables turnover
Although _________ __________ are often poor reflections of reality, they are often the best information available.
accounting numbers
The ROE equals the net profit margin multiplied by the total _______ turnover multiplied by the equity multiplier.
asset
Long-term debt on the common-size balance sheet of Solid Rock Construction over the past three years is 30, 34, and 40 percent, respectively. This indicates that the firm has increased its ______.
leverage
The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and ________ value ratios.
market
Whenever ___________ information is available, it should be used instead of accounting data.
market
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
Liquidity ratios are particularly important to ________ creditors.
short
Ratios that measure a firm's liquidity are known as ______ ratios.
short-term solvency
Common-size statements are used for comparing firms with differing ____.
sizes
Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.
total equity
True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.
true
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
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 items are among the items used to compute the current ratio?
-Cash -Accounts payable
Which of the following are uses of cash?
-Decreases in accounts payable -Increases in inventory -Increases in property, plant and equipment
Which three of the following are most apt to create problems when comparing financial statements for multiple firms?
-Differing accounting methods -Differing fiscal years -Seasonality
Which two of the following groups are most interested in liquidity ratios?
-Suppliers -Bankers
Financial statements are used to:
-assess a company's current financial position -communicate financial information to outsiders -communicate financial information within the firm
The price-sales ratio is calculated as the price per ________ divided by the sales per ________.
-share -share
BL Industries has ending inventory of $302,800, annual sales of $2.33 million, and annual cost of goods sold of $1.41 million. On average, how long did a unit of inventory sit on the shelf before it was sold?
78.38 days
How are firms classified into peer groups for ratio analysis?
According to Standard Industrial Classification codes
Which ratios use some information that is not contained in financial statements?
Market value ratios
True or false: A deteriorating time trend in a financial ratio is always a bad sign.
false
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: When acquiring another firm, financial statement information is not important in identifying potential targets.f
false
A(n) ________ in net profit margin will increase ROE.
increase
One common way to identify potential peers is based on Standard _________ Classification codes.
industrial