Financial Analysis
Long-term liabilities can be paid (excluding current component): Within one year Within a week Within one month In more than one year
In more than one year
Which of the following is NOT included in operating income? Income tax Net sales Selling expenses Cost of goods sold
Income tax
Goodwill is a(n) .......................... Tangible asset Current asset Liability Intangible asset
Intangible asset
Which of the following is a current asset? Long-term financial investments Property, plant & equipment Intangibles Inventory
Inventory
The quick ratio equals: Sales/Total assets Current assets/Current liabilities (Cash and near cash)/Current liabilities Gross profit/Sales
(Cash and near cash)/Current liabilities
What do we divide cost of goods sold by in order to estimate a firm's inventory turnover? Sales (average) Inventory Cost of goods sold 365
(average) Inventory
We divide accounts receivable turnover by what in order to estimate a firm's average collection period (in days)? 365 Accounts receivable turnover Sales (average) Accounts receivable
365
Which of the following is a current liability? Long-term debts Accounts payable Pension liabilities Deferred income taxes
Accounts payable
Which of the following equations represents the calculation of a firm's liabilities? Assets - Liabilities - Equity Equity - Assets Assets + Equity Assets - Equity
Assets - Equity
Which of the following equations represent the residual claim on a firm's assets? Assets - Liabilities Equity + Liabilities Assets - Liabilities - Equity Assets - Equity
Assets - Liabilities
Which of the following is true? Liabilities = Assets + Equity Equity = Assets + Liabilities Assets = Liabilities + Equity Assets = Liabilities - Equity
Assets=Liabilities + Equity
Debt investors generally want the firm to: invest only in risk-free assets invest in projects that are not too risky relative to the average risk of projects in place Avoid risky projects Invest in very risky projects
Avoid risky projects
Which of the following accurately describes the book value of a company's assets? Book value is dependent on historical cost of assets Book value is difficult to measure Book value always reflects the current value of a company's assets Book value is a better input to firm valuation than the market value of a company's assets
Book value is dependent on historical cost of assets
Debt is generally considered a cheaper form of funding than equity funding? False True
True
The quick ratio will always be equal to, or larger than, the cash ratio. False True
True
Wealth maximization focuses on: Cash flows Accruals Revenues Profit
Cash flows
What accounting method do small businesses tend to use (sole proprietor or partnerships)? Historical cost accounting Acquisition cost accounting Accrual accounting Cash-basis accounting
Cash-basis accounting
Total assets equal: Current assets + non-current assets Cash + accounts receivable Residual claim after all liabilities are repaid Current assets + property plant equipment
Current assets + non-current assets
The current ratio equals: Total debt/Total equity Gross profit/Sales Current assets/Current liabilities Equity/ Current liabilities Total
Current assets/Current liabilities
The current ratio formula is: Current assets/Current liabilities Equity/ Current liabilities Total debt/Total equity Gross profit/Sales
Current assets/Current liabilities
Which of the following must be disclosed in the notes to the profit and loss statement? Disposals of property, plant and equipment or investments Sales revenue Selling expenses Income tax
Disposals of property, plant and equipment or investments
Net income equals: EBIT - interest Operating income EBITDA EBT- tax
EBT- tax
What are the most often quoted and related financial ratios? Earnings per share and Price/Earnings Price/Earnings and gross margin Operating margin and gross margin Earnings per share and Price/Sales
Earnings per share and Price/Earnings
Corporations in consideration of the interest of shareholders (who care about financial gain) should primarily focus on keeping costs low True False
False
If the interest coverage ratio increases from one year to the next, the interest expense for the firm must have fallen. False True
False
Market value is commonly referred to as the book value. True False
False
Market value is commonly referred to as the book value. True False
False
Most well-known large firms use cash basis accounting instead of accrual accounting as it helps to keep track of their large and complex cash positions False True
False
Plant, equipment and inventory are most commonly valued using market value (this is because it is considered a 'fair value'). True False
False
Operating margin measures the: Operating income Firms ability to sell a product for more than the direct and indirect costs of production Gross sales of the firm Firms ability to sell a product
Firms ability to sell a product for more than the direct and indirect costs of production
How do accountants arrive at the book value for an asset? Accountants only use market value to value assets Accountants don't record assets at book value or market value Historical cost Historical cost, less accumulated depreciation
Historical cost, less accumulated depreciation
Which of the following is NOT included in the operating profit figure? Selling, general and administrative expenses Cost of goods sold Net sales Interest expense
Interest expense
Profit maximization: Is sometimes equal to wealth creation for shareholders Is not the focus of corporations Equals wealth creation for shareholders Is a subset of wealth creation for shareholders
Is a subset of wealth creation for shareholders
Why do analysts often prefer to use ROA rather than ROE in their analysis? ROA includes assets ROE includes equity Assets are more important than equity It is not as sensitive to the firm's choice of leverage
It is not as sensitive to the firm's choice of leverage
Which of the following doesn't represent an earnings management method? Acceleration of sales Alterations in shipment schedules Minimizing cash expenses Delaying research and development (R&D) expenditures
Minimizing cash expenses
The 'bottom line' in a profit and loss statement is: Net income (or earnings) Revenues Expenses Gross income
Net income (or earnings)
Earnings per share equals: Gross profit/Assets Net income/Liabilities Net income/Average outstanding number of shares Gross profit/Owners equity
Net income/Average outstanding number of shares
ROA equals: Gross profit/assets Net income/[(average) BV of equity] Net income/[(average) BV of assets] Gross profit/Owners equity
Net income/[(average) BV of assets]
What do businesses focus on when evaluating various business propositions? Terminal value Cost of capital Discount rates Net present value of future cash flows
Net present value of future cash flows
What do businesses focus on when evaluating various business propositions? Cost of capital Discount rates Terminal value Net present value of future cash flows
Net present value of future cash flows
Which of the following is equal to gross profit? EBIT - interest Operating profit + other income EBT - tax Net sales - cost of goods sold
Net sales - cost of goods sold
Which of the following equations is true? Net sales = Revenue - Expenses Net sales = Gross sales - Selling, general and administrative expenses Net sales = Gross sales - Deductions Net sales = Gross sales - Expenses
Net sales = Gross sales - Deductions
When would Price/Earnings ratio equal earnings per share? Always Never Only when net income equals market capitalization Only when share price equals EPS
Only when net income equals market capitalization
What is a disadvantage of accrual accounting? Requires monitoring cash flow separately Makes business more flexible Matches cash received to expenses made There are no disadvantages
Requires monitoring cash flow separately
Operating margin equals: Gross profit/Owners equity Operating income/Sales Gross profit/Assets Operating income/Cost of goods sold
Operating income/Sales
Which of the following would not be a way in which you could overcome the agency problem (Conflict of interest between management and shareholders)? Voting out directors Pay directors higher salaries Informal meetings with management Organizing an AGM
Pay directors higher salaries
Which of the following is not a valid concern when dealing with accrual accounting as opposed to cash basis accounting? Accrual accounting is more complicated than cash accounting An in-depth accounting understanding is required for accrual accounting Payment terms for supplier invoices Business gets paid immediately for goods/services
Payment terms for supplier invoices
Which asset/s cannot be easily valued using market value? Plant, equipment, inventory Investments in debt instruments Investments in options Investments in stocks
Plant, equipment, inventory
Which of the following would NOT be found in the liabilities section of the balance sheet? Pension liability Accounts payable Property plant & equipment Notes payable
Property plant & equipment
The 'top line' in a profit and loss statement is: Net income/earnings Income tax Operating income Sale revenue
Sale revenue
Total asset turnover equals: Current assets/Current liabilities Sales/(average)Total assets Gross profit/Sales Total debt/Total equity
Sales/(average)Total assets
Which of the following is a key characteristic of a public corporation? Private company Separate ownership and management of assets Shareholders are also debtholders Full government ownership
Separate ownership and management of assets
What is the key reason for managers to engage in earnings management? Smooth earnings over time to avoid volatility To increase the company's total assets Smooth cash flow There is no key reason
Smooth earnings over time to avoid volatility
What do efficiency "activity" ratios capture? The firms ability to manage current assets and current liabilities The firms ability to meet short term liabilities The firms ability to effectively use its assets in generating revenue Stock price movements
The firms ability to effectively use its assets in generating revenue
A 'fast-track' analyst price/earnings forecast depends crucially on: The stability of the Price/Earnings ratio Whether the company just listed or not Where the company operates The analyst who forecasted the Price/Earnings ratio
The stability of the Price/Earnings ratio
What is a potential drawback of liquidity measures? They don't take into account cash generated by ongoing operations They don't take into account non-current assets They don't take into account non-current liabilities They only take into account cash transactions
They don't take into account cash generated by ongoing operations
Debt-equity ratio equals: Total equity/Total debt Total debt/Total assets Total assets/Total debt Total debt/Total equity
Total debt/Total equity
A firm that is profitable can still be at risk of liquidity constraints and may go bankrupt. True False
True
The asset section of the balance sheet summarizes: What the company owns Cash transactions Revenues and expenses What the company owes
What the company owns
When should market value be used to value and asset? Never When there is a competitor When market value data is available on financial markets When market value estimates are available at low cost and when they convey information about operating performance
When market value estimates are available at low cost and when they convey information about operating performance