Finance Quiz (Ch.1-3)
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+depreciation)/Interest expense
Which of the following is the correct representation of the total debt ratio?
(Total assets - Total equity)/(Total assets)
Long-term liabilities represent obligations of the firm lasting more than _____.
1 year
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
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 of the following are components of cash flow from assets?
Capital spending Operating cash flow Change in net working capital
Which of the following items are used to compute the current ratio?
Cash Accounts payable
True or false: Current assets plus current liabilities equals net working capital.
False
The cash ratio is found by dividing cash by:
current liabilities
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
A business without separate legal authority formed by two or more people is known as a _____.
partnership
the short run is
an imprecise period of time
Liquidity refers to the ease of changing _________.
assets to cash
A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.
average; marginal
On the balance sheet, assets are listed at their _____ value.
book
Under GAAP, assets are generally carried on a firm's balance sheet at ________.
book value historical cost
When a firm smooths earnings to please investors, it is called ________.
earnings management
Financial statement analysis is primarily "management by ________ ."
exception
A bad financial decision is defined as a decision that ______ shareholder wealth.
decreases
The more debt a firm has, the greater its:
degree of financial leverage
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
_____ group analysis is a way to establish a benchmark when using ratios.
peer
One of the most important uses of financial statement information within the firm is:
performance evaluation
Which of the following is NOT one of the basic areas of finance?
personal finance
Ending net fixed assets minus beginning net fixed assets _______ depreciation equals net investment in fixed assets.
plus
The price-earnings ratio is______ per share divided by______ per share.
price; earnings
Which of these topics is not of especial interest to a financial manager?
product development
Return on equity (ROE) is a measure of _____.
profitability
Which one of these is an important mechanism used by unhappy stockholders to replace current management?
proxy fight
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
The market value of an item is:
the cash value you'd get if you sold it
Cash flow refers to:
the difference between the number of dollars that came in and the number that went out
The goal of the financial management is to increase the value of _____.
the existing shares of stock
Changes in capital spending can be negative if
the firm sold more fixed assets than it purchased
A sole proprietor has ______ personal liability for all business debts and obligations.
unlimited
Financial leverage refers to a firm's _________.
use of debt in its capital structure
______ changes as the output of the firm changes.
variable cost
True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.
false
True or false: Financial ratios are computed using only balance sheet information.
false
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
false
True or false: If there is a conflict between market and accounting data, accounting data should be given precedence. True false question.
false
True or false: Inventory turnover is sales divided by inventory.
false
True or false: Market-to-book ratio equals book value per share divided by market value per share.
false
True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.
false
True or false: The price-earnings ratio is price per share times earnings per share.
false
True or false: The times interest earned ratio is EBIT minus interest.
false
True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
false
Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.
fixed assets equipment
Which of the following are considered non-owner stakeholders in a company?
government, employees, and suppliers
The information needed to compute the profit margin can be found on the ____.
income statement
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
increase
A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.
10 cents
According to the current U.S. corporate tax code, the corporate tax rate in effect for 2019 is:
21 percent
Days' sales in receivables is given by the following ratio:
365/Receivables turnover
What does shareholders' equity represent?
A residual claim against the firm's total assets
A general partnership has which of the following characteristics?
All the partners share in gains or losses of the partnership.; Each owner has unlimited liability for all firm debts.
Which of the following is the balance sheet equation?
Assets equal liabilities plus stockholders' equity.
Which of the following are classified as fixed assets on the balance sheet?
Buildings Equipment Trademark
Which of the following would help a company take action to improve its ratios?
Comparing to major competitors Comparing to its own historical ratios Comparing to peer companies Comparing to aspirant companies
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Enron Tyco WorldCom
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase.
Long-term solvency ratios measure what aspect of the firm's financial position?
Its financial leverage
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
Which of the following is the correct equation for return on equity?
Net income/Total equity
Is profit maximization the primary objective of a business?
No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling shares of stock
When a corporation is formed, it is granted which of the following rights?
The ability to issue stock Legal powers to sue
A shareholder's liability is limited to which of these?
The amount the shareholder invested in the corporation
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 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 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.
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.
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
How is the average income tax rate computed?
Total tax bill/Total taxable income
Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
According to GAAP, when is income reported?
When it is earned or accrued
A balance sheet reflects a firm's:
accounting value on a specific date
Net earnings refers to income earned ______.
after interest and taxes
The conflict of interest between an agent and a principal is called a(n)
agency problem
In the long-run, costs may be considered as ________.
all-variable
In finance, the value of a firm depends on its ability to generate ______.
cash flows
Tax rates for propietorships, partnerships, and LLCs __________ with the passage of the Tax Cuts and Jobs Act of 2017.
changed
Common-size statements are best used for comparing:
competitors firms of different sizes year-to-year for your firm
Which of the following positions generally report to the chief financial officer (CFO)?
controller, treasurer
The four basic areas of finance include investments, financial institutions, international finance, and _____ finance.
corporate
Net capital spending is equal to the change in net fixed assets plus:
depreciation
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
Which of the following is an example of a non-cash item on an income statement?
depreciation
Return on assets equals net income _______ by total assets.
divided
Cash flow to stockholders equals ____.
dividends paid minus net new equity raised
Long-term solvency ratios are also known as:
financial leverage ratios
Which of the following is NOT a component of cash flow from assets?
financing expenses
Costs that do not change in the short run arise because of ______.
fixed commitments
A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.
legal
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:
less than one
Current assets are classified as relatively _______; these assets can be converted to cash within the next 12 months.
liquid
Capital budgeting is concerned with making and managing expenditures on _____.
long-term assets
Time-trend analysis is an example of
management by exception
In a shareholder-manager relationship, who is the agent?
managers
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
The price at which willing buyers and sellers would trade is called ______ value.
market
Whenever ___________ information is available, it should be used instead of accounting data.
market
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
How is the market-to-book ratio measured?
market value per share/book value per share
Current assets (plus/minus) current liabilities equals NWC.
minus
Interest paid (Plus/Minus) net new borrowing equals cash flow to creditors.
minus
A firm may use a price-sales ratio when it has had (negative/positive) earnings over the past year.
negative
The last item (or "bottom line") on the income statement is typically the _________.
net income
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
If a company has had negative earnings for several periods they might choose to use a __________.
price-sales ratio
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
When one owner or creditor sells to another, the transaction takes place in the _________ market Multiple choice question.
secondary
On a balance sheet, total assets must always equal total liabilities plus:
shareholders' equity
How is ownership of a corporation represented?
shares of stock
The times interest earned ratio is a measure of long-term_____
solvency
________ financial statements enable one to compare firms that differ in size.
standardized
Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:
stock options
What is the purpose of the income statement?
to measure performance over a set period of time
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
Shareholders' equity equals ________________.
total assets minus total liabilities
Free cash flow is better described as ____.
total distributable cash flow
A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.
26
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
________ ________ are the prime source of information about a firm's financial health. Multiple choice question.
Financial statements
According to the textbook, which of the following is not one of the three main questions to be addressed if you wanted to start your own business?
How many employees will I need?
Which of these questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm? What is the total amount of assets the firm owns?
Business finance is broadly concerned with which of the following
How to finance long-term investments How to manage day-to-day finances of the firm Which long-term investment to make
Corporations in other countries are often called:
Public limited companies; Joint stock companies; Limited liability companies
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
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.
According to GAAP, when is revenue recognized on an income statement?
When the earnings process is virtually completed When the value of an exchange of goods or services is known or reliably determined
______ budgeting is the process of planning and managing a firm's long-term assets.
capital
What three subjects is the financial manager concerned with?
capital budgeting, capital structure, working capital management
Non-cash items do not affect
cash flow
Product costs are usually shown on the income statement under the heading of _________________ .
cost of goods sold
A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.
created
Assets can be categorized as
current and fixed assets tangible and intangible assets
The current ratio computes the relationship between ____.
current assets and current liabilities
Cash flow to creditors equals:
interest paid minus net new borrowing
Period costs are the costs that are allocated to a specific ______.
interval of time
Inventory turnover is cost of goods sold divided by ______
inventory
Which of the following is a current asset?
inventory
A corporation receives cash from financial markets by selling ______ and ______.
stocks; bonds
Physical assets are termed ______ assets.
tangible
Operating cash flow (Select all that apply.)
tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows is a sign of trouble if negative over a long period of time
True or False: A corporation borrows money in its own name.
true
True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.
true
True or false: Free cash flow is also known as cash flow from assets.
true
True or false: In a common-size income statement, each item is expressed as a percentage of total sales.
true
True or false: In a large corporation, stockholders and managers are usually separate groups.
true
True or false: Interest paid minus net new borrowing equals cash flow to creditors.
true
True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.
true
True or false: Operating cash flow does not include depreciation or interest.
true
True or false: Profit margin equals net income divided by sales. True false question.
true
True or false: The cash ratio is found by dividing cash by current liabilities.
true
True or false: The total debt ratio equals the total assets minus total equity divided total assets.
true