Fin Ch 3

b. 0.75

A firm with an equity multiplier of 4.0, will have a debt ratio of ____. a. 0.25 b. 0.75 c. 4.00 d. 1.00

c. total assets

A common-size balance sheet shows the firm's assets and liabilities as a percentage of: a. stockholders' equity b. industry average c. total assets d. net sales

b. net sales

A common-size income statement shows the firm's income and expense items as a percentage of ___________. a. stockholders' equity b. net sales c. industry averages d. total assets

b. allowance for funds used during construction

A component of earnings that recognizes the return that the firm is expected to earn on assets that have not been placed in services is called a. earnings allowance b. allowance for funds used during construction c. capital budgeted d. budgeted earnings

c. total asset turnover

A firm's return on equity is a function of its net profit margin, _________ and equity multiplier. a. current ratio b. cost of goods c. total asset turnover d. fixed asset turnover

b. low profit margin and high asset turnover

A fresh fruit wholesaler has high sales volume, with most selling prices not greatly exceeding costs. This wholesaler would normally be expected to have ____. a. low profit margin and low asset turnover b. low profit margin and high asset turnover c. high profit margin and high asset turnover d. high profit margin and low asset turnover

c. low profit margin and high asset turnover

A fresh fruit wholesaler would normally be expected to have a. high profit margin and high asset turnover b. low profit margin and low asset turnover c. low profit margin and high asset turnover d. high profit margin and low asset turnover

b. over time

A trend analysis indicates a firm's performance ____. a. at one given point in time b. over time c. without relying on financial ratios d. more accurately than any other type of analysis

a. over time

A trend analysis indicates a firm's performance ____. a. over time b. at one given point in time c. more accurately than any other type of analysis d. without relying on financial ratios

c. balance sheet

A(n) ____ calculates a firm's total assets and total liabilities and stockholders' equity, in dollars. a. common-size income statement b. common-size balance sheet c. balance sheet d. income statement

d. sales have decreased

An increase in the average collection period may suggest all of the following EXCEPT ____. a. the company caters to slow-paying customers b. an overly liberal credit policy c. customers are not paying their bills on time d. sales have decreased

c. sales have decreased

An increase in the average collection period may suggest all of the following EXCEPT ____. a. the company caters to slow-paying customers b. an overly liberal credit policy c. sales have decreased d. customers are not paying their bills on time

a. customers

All of the following are users of financial information EXCEPT: a. customers b. bankers c. analysts d. unions

d. All of these choices are correct

Although ratios can provide valuable information, they can also be misleading for which of the following reasons? a. Comparative analysis depends on the availability of data for appropriately defined industries. b. Ratios are only as reliable as the accounting data on which they are based. c. Compilation of industry norms often does not report information about the distribution of values. d. All of these choices are correct.

a. how well a firm is using its assets to support sales

Asset management ratios indicate a. how well a firm is using its assets to support sales b. how efficiently a firm is allocating its liabilities c. the return on assets d. the profitability of the firm

c. low; greater protection in the event of

Bondholders and other long-term creditors tend to prefer a ____ debt ratio because it provides ____ a major financial problem. a. high; less likelihood of b. low; less likelihood of c. low; greater protection in the event of d. high; greater protection in the event of

b. different depreciation methods for taxes and financial reporting

Deferred taxes may occur due to the use of a. different tax schedules b. different depreciation methods for taxes and financial reporting c. long-term equipment d. different cash flow methods

c. purchase additional inventory on credit

Christy would like to improve the current ratio of her firm, which is not 0.5, so that she will have a better chance of obtaining a working capital loan. Which of the following options would improve her current ratio? a. use cash to pay off notes payable b. collect some of her accounts receivables c. purchase additional inventory on credit d. borrow short term funds to pay off some payables

d. profitability measurements

Common stock prices are dependent on the amount and stability of a firm's cash flows so common stockholders are especially interested in ____. a. earnings after tax b. accounting profits c. NOPAT d. profitability measurements

c. LIFO

Companies can avoid paying income taxes on inventory profits by using the ____ inventory valuation method. a. Priced in b. FIFO c. LIFO d. Priced out

c. 12

Current assets include the cash a firm already has on hand and in the bank plus any assets that can be converted into cash within a "normal" operating period of ____ month(s). a. 1 b. 18 c. 12 d. 6

b. 12

Current assets include the cash a firm already has on hand and in the bank plus any assets that can be converted into cash within a "normal" operating period of ____ month(s). a. 6 b. 12 c. 18 d. 1

a. a single ratio is all that is needed to indicate specific areas of weakness that must be addressed

Each of the following is true of successful financial ratio analysis EXCEPT ____. a. a single ratio is all that is needed to indicate specific areas of weakness that must be addressed b. some industries use special ratios that are unique to the activities of firms in those industries c. ratios must be used in conjunction with other data to obtain meaningful information d. ratios are meaningful only when compared to a standard

b. a single ratio is all that is needed to indicate specific areas of weakness that must be addressed

Each of the following is true of successful financial ratio analysis EXCEPT ____. a. ratios are meaningful only when compared to a standard b. a single ratio is all that is needed to indicate specific areas of weakness that must be addressed c. some industries use special ratios that are unique to the activities of firms in those industries d. ratios must be used in conjunction with other data to obtain meaningful information

b. increasing the MVA of the enterprise in any given year

Economic Value Added (EVA) is a measure of operating performance that indicates how successful a firm has been at: a. increasing the growth in earnings b. increasing the MVA of the enterprise in any given year c. increasing the rate of return on investment d. all of the above

d. firm's use of fixed-charge financing

Financial leverage management ratios measure the ____. a. static ratio b. amount of interest paid by the firm c. amount of equity funds retired by the firm d. firm's use of fixed-charge financing

d. comparative analysis and a trend analysis

Financial ratio analysis is most often performed as a a. comparative analysis b. trend analysis c. point in time analysis d. comparative analysis and a trend analysis

b. period to period

Financial ratios can be used to analyze a firm's performance from a. day to day b. period to period c. purchase to purchase d. sale to sale

a. high; low

Firms with _________ growth rates would be expected to have ________ payout ratios a. high; low b. high; high c. low; low d. low; high

c. have a return on capital greater than their cost of capital

Firms with a positive EVA: a. have increasing growth in earnings b. have an increasing rate of return on investment c. have a return on capital greater than their cost of capital d. have a high return on book value

b. return on stockholders' equity

Heavily using debt to finance assets results in higher _____________________ as compared to ROI. a. return on sales b. return on stockholders' equity c. return on assets d. times interest earned

a. 1.875%

If a firm has a total asset turnover of 8 times and a return on investment of 15%, its net profit margin must be ____. a. 1.875% b. 1.95% c. 2.05% d. 2.25%

a. FIFO

If a firm wanted to report high profits, it would choose which method of inventory accounting in inflationary times? a. FIFO b. LIFO c. FILO d. GIGO

b. increase its equity multiplier

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must a. decrease its equity multiplier b. increase its equity multiplier c. increase sales and increase assets d. reduce sales and increase assets

c. on cost of goods sold as a percentage of sales

If a firm's common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money: a. on total assets as a percentage of long-term liabilities b. on expenses as a percentage of current assets c. on cost of goods sold as a percentage of sales d. on taxes paid as a percentage of stockholders' equity

c. it is possible for its quick ratio to be 1.0

If a firm's current ratio is 1.5, a. its current liabilities exceed its current assets b. it is possible for its quick ratio to be 2.0 c. it is possible for its quick ratio to be 1.0 d. its current assets equal its current liabilities

c. its net profit margin is positive

If a firm's price to earnings ratio is 10, a. it is not possible for it to be paying dividends also b. its market to book ratio has to be at least 2.0 c. its net profit margin is positive d. its return on stockholders' equity is negative

c. possible that its return on stockholders' equity is 10%

If a firm's return on investment (i.e., earnings after taxes divided by total assets) is 7% and the firm has no preferred stock financing, it is ____. a. impossible for its net profit margin to be 7% b. impossible for its debt-to-equity ratio to be 1.0 c. possible that its return on stockholders' equity is 10% d. possible that its return on stockholders' equity is 5%

d. its annual sales are two times its total assets

If a firm's total asset turnover ratio is 2.0, a. its annual sales are less than its total assets b. it is possible that its fixed asset turnover ratio is 1.5 c. its total assets are two times its annual sales d. its annual sales are two times its total assets

c. inventory profits are realized

In an inflationary period, a firm is likely to show temporary profit increases because a. accounts receivable collections increase b. cash balances decline c. inventory profits are realized d. all of the above

c. different inventory valuation methods

Income taxes on inventory profits can be deferred by ____. a. different cash flow methods b. long-term equipment c. different inventory valuation methods d. different tax schedules

a. Statement I only is correct.

Market-based ratios can be which of the following:I. Price-to-earnings ratioII. Dividend yield a. Statement I only is correct. b. Statement II only is correct. c. Both statements I and II are correct. d. Neither statement I nor statement II is correct.

c. a stricter measure that reduces the cash flow by the amount of capital expenditures

Most analysts prefer using price to free cash flow rather than price-to-earnings (P/E) ratio because price to free cash flow is: a. easier to compute b. more accurate than cash flow per share c. a stricter measure that reduces the cash flow by the amount of capital expenditures d. more reliable as a measure of performance

b. problems with definition of capital

The analysis of the financial performance and condition of a firm with sizable international operations is generally more complicated than analyzing a firm whose operations are largely domestic for all of the following reasons except: a. problems with the translation of foreign operating results b. problems with definition of capital c. fluctuating exchange rates d. all of the above are correct reasons

a. Dun and Bradstreet

Primary sources of comparative financial data include ____. a. Dun and Bradstreet b. Framingham Financial Library c. Richard Moore, Inc. d. New York Times

c. net profit margin; total asset turnover; equity multiplier ratio

Return on stockholders' equity is equal to ________ times __________ times ____________. a. net profit margin; fixed asset turnover; equity multiplier ratio b. gross profit margin; total asset turnover; equity multiplier ratio c. net profit margin; total asset turnover; equity multiplier ratio d. net profit margin; total asset turnover; debt-to-equity ratio

d. better performing firms in the industry

The appropriate standard for comparison of financial ratios probably should be the a. best firm in the industry b. worst firm in the industry c. industry average d. better performing firms in the industry

d. return on total assets

The best accounting-based measure of a firm's profitability is a. gross profit margin b. net profit margin c. return on fixed assets d. return on total assets

c. includes some items, such as inventory, that may not be readily liquid

The current ratio is not the most stringent measure of liquidity, because it ____. a. includes many non-current items in its calculation b. requires many years of past data c. includes some items, such as inventory, that may not be readily liquid d. is difficult to calculate

c. low; high

Stocks with _________ dividend yield often indicate _________ expected future growth a. high; high b. low; low c. low; high d. high; low

d. positively related to the present value of all expected future EVA

The Market Value Added (MVA) is the _________. a. indicator of how successful a firm has been at increasing its financing its assets b. return on total capital minus cost of capital c. indication of an increase in operating efficiency d. positively related to the present value of all expected future EVA

d. fixed-charge coverage

The ____ ratio is a more severe measure of a firm's ability to meet fixed financial obligations. a. debt-to-equity b. debt c. acid test d. fixed-charge coverage

b. gross profit margin

The ____ ratio measures the relative profitability of a firm's sales after the cost of sales has been deducted. a. return on investment b. gross profit margin c. return on stockholders' equity d. net profit margin

c. gross profit margin

The ____ ratio measures the relative profitability of a firm's sales after the cost of sales has been deducted. a. return on stockholders' equity b. net profit margin c. gross profit margin d. return on investment

d. quick; liquidity

The ____ ratio, sometimes called the "acid test," is a more stringent measure of ____ than the current ratio. a. net profit margin; gross profit margin b. fixed-asset turnover; activity c. equity; activity d. quick; liquidity

b. payout

The _______________ ratio indicates the percentage of a firm's earnings that are distributed as dividends a. dividend yield b. payout c. return on earnings d. earnings

b. the value of fixed assets may be understated

The analysis of financial statements is affected by inflation because ____. a. the life of long-term assets is decreased b. the value of fixed assets may be understated c. the value of long-term debt will increase d. inventory increases

d. the value of fixed assets may be understated

The analysis of financial statements is affected by inflation because ____. a. the value of long-term debt will increase b. inventory increases c. the life of long-term assets is decreased d. the value of fixed assets may be understated

a. includes some items, such as inventory, that may not be readily liquid

The current ratio is not the most stringent measure of liquidity, because it ____. a. includes some items, such as inventory, that may not be readily liquid b. requires many years of past data c. includes many non-current items in its calculation d. is difficult to calculate

d. paying off some current liabilities with cash and selling bonds and investing the proceeds in marketable securities

The current ratio would normally be increased by a. paying off some current liabilities with cash b. selling bonds and investing the proceeds in marketable securities c. buying treasury stock d. paying off some current liabilities with cash and selling bonds and investing the proceeds in marketable securities

b. Robert Morris Associates

The data from ___________ is especially useful when analyzing small firms a. Prentice-Hall b. Robert Morris Associates c. Dan Bradbury Ltd. d. Securities and Exchange Commission

d. is only one measure of a firm's profitability

The earnings per share figure a. is a comparative ratio b. is the best measure of a firm's profitability c. can only be computed if a firm has no debt d. is only one measure of a firm's profitability

d. all of the above

The fixed asset turnover ratio is influenced by a. the age of the assets employed b. the depreciation method used by the firm c. the firm's choice of a production technology d. all of the above

d. All of these choices are correct

The fixed asset turnover ratio is influenced by ____. a. the depreciation policies adopted by the firm b. the length of time since acquisition c. the extent to which fixed assets are leased rather than owned d. All of these choices are correct

a. common stock dividends

The fixed-charge coverage ratio includes all of the following in the denominator EXCEPT ____. a. common stock dividends b. preferred dividends before tax c. lease payments d. Before-tax sinking fund

d. the firm's net working capital (current assets minus current liabilities) position declines, and the firm sells off some unused assets and pays the proceeds to existing stockholders in the form of an extra dividend

The following policy that is consistent with an increase in a firm's return on total assets is: a. costs increase more than revenues b. the firm's net working capital (current assets minus current liabilities) position declines c. the firm sells off some unused assets and pays the proceeds to existing stockholders in the form of an extra dividend d. the firm's net working capital (current assets minus current liabilities) position declines, and the firm sells off some unused assets and pays the proceeds to existing stockholders in the form of an extra dividend

c. times interest earned

The following ratio(s) that would probably not be used to assess the profitability of a firm is: a. return on stockholders' equity b. return on total assets c. times interest earned d. both return on stockholders' equity and return on total assets

c. risk

The greater the amount of financial leverage used by a firm, the greater its _________, all other things being equal a. profitability b. liquidity c. risk d. size

a. inventories

The quick ratio is similar to the current ratio except it does NOT include ____. a. inventories b. accounts receivable c. cash d. prepaid items

b. an accounting of that portion of a firm's assets that were financed from past earnings

The retained earnings figure represents a. a pool of cash readily available to the firm and its stockholders b. an accounting of that portion of a firm's assets that were financed from past earnings c. a permanent part of the firm's equity base d. a deferred liability owed to preferred stockholders

c. is technically inferior to other commonly used ratios

The sales-to-inventory ratio: a. is superior to the inventory turnover ratio b. as a determination of financial performance, is good comparison tool c. is technically inferior to other commonly used ratios d. was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole

d. profitability ratios

The type of ratio that indicates the firm's ability to provide adequate returns in the form of dividends and share price appreciation is the ____. a. liquidity ratios b. financial leverage management ratios c. asset management ratios d. profitability ratios

a. Profitability ratios

The type of ratio that indicates the firm's ability to provide adequate returns in the form of dividends and share price appreciation is: a. Profitability ratios b. Asset management ratios c. Liquidity ratios d. Financial leverage management ratios

c. constructed in conformity with generally accepted accounting principles (GAAP)

The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were: a. an accurate picture of the company's market position b. based on the company's accounting information system (AIS) c. constructed in conformity with generally accepted accounting principles (GAAP) d. developed using management's choice of accounting enhancement techniques

a. times interest earned

Which ratio is frequently used in conjunction with the analysis of a bond's quality? a. times interest earned b. deferred liability ratio c. receivables turnover d. dividend coverage ratio

d. equity multiplier

To increase the return on stockholders' equity, management could increase the a. current ratio b. price-to-earnings ratio c. dividend yield d. equity multiplier

d. many different ratios be calculated over several year

Trend analysis requires that ____. a. financial ratios not be used at all b. the same ratio be plotted over several years c. asset management ratios be excluded from the analysis d. many different ratios be calculated over several years

a. cash earnings

When considering the quality of a firm's earnings, high quality earnings tend to be ____. a. cash earnings b. earnings per share c. derived from infrequently recurring transactions d. earnings per sale

b. cash earnings

When considering the quality of a firm's earnings, high quality earnings tend to be ____. a. derived from infrequently recurring transactions b. cash earnings c. earnings per share d. earnings per sale

d. although there may be accounting differences between companies, these differences do not impact financial ratios

When using financial ratios to analyze a company's ability to maximize shareholders' wealth, all of the following cautions should be considered EXCEPT ____. a. a financial ratio must be dissected to discover its true meaning b. a financial ratio must be compared to some standard c. financial ratios are flags indicating potential areas of strength or weakness d. although there may be accounting differences between companies, these differences do not impact financial ratios

b. although there may be accounting differences between companies, these differences do not impact financial ratios

When using financial ratios to analyze a company's ability to maximize shareholders' wealth, all of the following cautions should be considered EXCEPT ____. a. a financial ratio must be dissected to discover its true meaning b. although there may be accounting differences between companies, these differences do not impact financial ratios c. a financial ratio must be compared to some standard d. financial ratios are flags indicating potential areas of strength or weakness

a. although there may be accounting differences between companies, these differences do not impact financial ratios

When using financial ratios to analyze a company's ability to maximize shareholders' wealth, all of the following cautions should be considered EXCEPT ____. a. although there may be accounting differences between companies, these differences do not impact financial ratios b. a financial ratio must be compared to some standard c. a financial ratio must be dissected to discover its true meaning d. financial ratios are flags indicating potential areas of strength or weakness

d. price-to-earnings

Which of the following financial ratios is market-based? a. return on investment b. gross profit margin c. debt-to-equity d. price-to-earnings

c. a firm with a lot of ongoing high-return investment projects

Which of the following firms would be most likely to pay out a high proportion of its earnings as dividends? a. a firm with stable earnings b. a firm with volatile earnings c. a firm with a lot of ongoing high-return investment projects d. All of these choices are equally likely to pay out a high proportion of their earnings as dividends.

a. an increase in sales revenue

Which of the following is consistent with an increase in a firm's return on investment? a. an increase in sales revenue b. costs increase more than revenues do c. an increase in the asset level required to maintain current sales volume d. costs decrease less than revenues do

b. an increase in sales revenue

Which of the following is consistent with an increase in a firm's return on investment? a. costs decrease less than revenues do b. an increase in sales revenue c. costs increase more than revenues do d. an increase in the asset level required to maintain current sales volume

b. Financial leverage management ratios

____ indicate the firm's capacity to meet its debt obligations, both short-term and long-term. a. Activity ratios b. Financial leverage management ratios c. Liquidity ratios d. Profitability ratios

d. Financial leverage management ratios

____ indicate the firm's capacity to meet its debt obligations, both short-term and long-term. a. Profitability ratios b. Activity ratios c. Liquidity ratios d. Financial leverage management ratios

d. Asset management

____ ratios indicate how efficiently a firm is using its assets to generate sales. a. Financial leverage b. Equity c. Liquidity d. Asset management

c. Asset management

____ ratios indicate how efficiently a firm is using its assets to generate sales. a. Liquidity b. Financial leverage c. Asset management d. Equity

b. liquidity ratios

_________ indicate the ability of the firm to meet its short term financial obligations a. activity ratios b. liquidity ratios c. leverage ratios d. profitability ratios