FIN Chapter 3

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

false

True or false: The DuPont identity is a popular expression breaking ROA into three parts.

fasle

Standardized

financial statements enable one to compare firms that differ in size.

The DuPont identity breaks ROE into parts

three

A common-size balance sheet expresses accounts as a percentage of

total assets

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

true

True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.

true

True or false: The total debt ratio equals the total assets minus total equity all over total assets.

true

What is the formula for computing the internal growth rate (IGR)?

(ROA x b)/(1 - ROA x b)

Which of the following is the correct representation of the total debt ratio?

(Total assets - Total equity)/(Total assets)

Which of the following create problems with financial statement analysis?

- The firm or its competitors are global companies. - The firm or its competitors are conglomerates - The firm and its competitors operate under different regulatory environments.

Which of the following is (are) true of financial ratios?

- They are developed from a firm's financial information. - They are used for comparison purposes.

Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.

- may not change - may increase or decrease

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

True or false: Inventory turnover is sales divided by inventory.

False

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

Which of the following best explains why financial managers use a common-size income statement?

The common-size income statement can show which costs are rising or falling as a percentage of sales.

Which one of the following best explains why financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

Which of the following items are used to compute the current ratio?

cash accounts payable

The current ratio computes the relationship between

current assets and current liabilities

True or false: Financial ratios are computed using only balance sheet information.

false

True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.

false

True or false: The dividend payout ratio equals cash dividends divided by sales.

false

Given an internal growth rate of 3 percent, a firm can _____.

grow by 3 percent or less without any additional external financing

The information needed to compute the profit margin can be found on the

income statement

market

information is available, it should be used instead of accounting data.

Time-trend analysis is an example of

management by exception

The price-earnings (PE) ratio is a ____ ratio.

market value

dividend

payout ratio equals cash dividends divided by net income.

he DuPont identity shows that times total asset turnover times equity multiplier equals ROE.

profit margin

In a common-size income statement, each item is expressed as a percentage of total

sales

The profit margin is equal to net income divided by

sales