PSU Finance- Chapter 2

Which of the following create problems with financial statement analysis?

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

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.

a long time (The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes a long time to sell, because inventory that is held for a long time is not very liquid.)

If a company has had negative earnings for several periods they might choose to use a __________.

price sales ratio

If a company has had negative earnings for several periods they might choose to use a __________.

price-sales ratio

Which of the following functional areas share control of inventory management?

purchasing marketing production

The financing of current assets is measured by the proportion of:

short-term debt and long-term debt used to finance current assets

The cash budget allows the firm to identify:

short-term financial needs short-term financial opportunities

What does maturity hedging involve?

Financing fixed assets with long-term financing and inventories with short-term financing

Which of the following is true about the sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage.

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.

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

dupont

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

income statment

Time-trend analysis is an example of

management by exception

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

sales

Ideally, short-term assets are financed with ___.

short term liabilities

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

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

Which one of these will decrease a firm's sustainable rate of growth?

An increase in the dividend payout ratio

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 items are used to compute the current ratio?

Cash Accounts payable

Which of the following would help a company take action to improve its ratios?

Comparing to major competitors Comparing to aspirant companies Comparing to its own historical ratios Comparing to peer companies

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.

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

The primary tool in short-term financial planning is the _______.

cash budget

Common-size statements are best used for comparing:

competitors- firms of different sizes- year to year for your firm

Financial statement analysis is primarily "management by ________ ."

exception

The main problems with maturity mismatching (financing long-term assets with short-term debt) are that it ___.

is risky requires frequent refinancing

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than

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

may increase or decrease may not change

the retention ration equals one.......the dividend payout ratio.

minus or less

the dupont identity shows that............times total asset turnover times equity multiplier equals ROE

net profit margin

Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?

non-cash expenses

Carrying costs involve:

opportunity costs

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

standardized

The two major elements of a firm's short-term financial policy are ___.

the size of the firm's investment in current assets the financing of current assets

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

total assets

Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

Profit margin Dividend policy Financial policy

Which of the following are traditional financial ratio categories?

Profitability ratios Turnover ratios Financial leverage ratios

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.

The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at ___.

a minimum

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

false (financial ratios can use info from all financial statements.

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.

false (If a company has inventory, the quick ratio will always be less than the current ratio.)

True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.

false (The current ratio will increase if current assets increase, while everything else remains unchanged.)

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.

liquidity

Dividend payments belong to the category of ___.

long-term financing expenses

Ideally, short-term assets are financed with ___.

short-term liabilities