Chapter 3

Which of the following are sources of cash? Purchasing an asset A decrease in accounts receivable A decrease in notes payable An increase in notes payable

A decrease in accounts receivable An increase in notes payable

The inventory ____ is calculated as the COGS divided by the inventory.

turnover

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Differing fiscal years Differing accounting methods Seasonality Differing levels of cash does not create a problem in analyzing peers. It is simply one component we analyze.

A problem with the TIE ratio is that it is based on ____ , which is not really a measure of cash available to pay interest.

EBIT, earning before interest and tax, or earnings before interests and taxes

A problem with the TIE ratio is that it is based on ____, which is not really a measure of cash available to pay interest.

EBIT, earning before interest and tax, or earnings before interests and taxes

True or false: A deteriorating time trend in a financial ratio is always a bad sign.

False

True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.

False

True or false: There is only one method for preparing the statement of cash flows.

False

True or false: When acquiring another firm, financial statement information is not important in identifying potential targets.

False

______ are the prime source of information about a firm's financial health.

Financial statements

Which of the following are uses of cash? (Check all that apply.) Multiple select question. Increases in property, plant and equipment Decreases in accounts payable Decreases in accounts receivable Increases in inventory Decreases in property, plant and equipment

Increases in property, plant and equipment Decreases in accounts payable Increases in inventory

What is the main difference between the cash coverage ratio and the times interest earned ratio?

Noncash expenses

Which one of the following equations defines the total asset turnover ratio?

Sales/Total assets

_______ financial statements provide for comparison of firms that differ in currency type.

Standardized

Which two of the following groups are most interested in liquidity ratios? Multiple select question. Tax authorities such as the IRS Suppliers Bankers Stock analysts

Suppliers Bankers

What does a current ratio of 1.2 mean?

The firm has $1.20 in current assets for every $1 in current liabilities.

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?

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 one of the following is one way in which financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

Profitability measures such as return on assets (ROA) and return on equity (ROE) are ___ rates of return.

accounting

ROA and ROE are common and useful measures, but it is important to remember that they are ____ rates of return.

accounting

A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.

base year; base amount

At the most fundamental level, firms generate ____ and spend it.

cash

The cash ratio is found by dividing ____ by current liabilities.

cash

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:

common-size statements

A firm with a market-to-book ratio that is greater than 1 is said to have ______ value for shareholders.

created

The quick ratio is computed just like the ____ ratio, except that inventory is omitted.

current

The current ratio shows the relationship between ____.

current assets and current liabilities

The cash ratio is found by dividing cash by:

current liabilities

An important accounting goal is to report financial information to users in a way that is useful for _____.

decision making

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

A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

Long-term debt ratio is equal to long-term debt divided by the sum of long-term debt and total

equity

The debt-equity ratio expresses the total debt divided by total equity, while the multiplier expresses the total assets divided by the total equity.

equity

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:

further investigation

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

income statement

One common way to identify potential peers is based on Standard ____ Classification codes.

industrial

The times interest earned ratio equals EBIT divided by

interest

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____.

less than 1

Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______, which demonstrates the proportion of assets financed by long-term obligations.

liquidity; leverage

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

long

Total capitalization equals total equity plus total:

long-term debt

One of the most important uses of financial statement information within the firm is:

performance evaluation

A firm has a total debt ratio of 0.30 times. This means the firm has ___ in total debt for every $1 in total assets.

$0.30 Total debt/Assets =0.3. If assets = $1, then Total debt/1=0.3, so total debt is $0.30

Which of the following is the correct representation of the total debt ratio? Multiple choice question. (Total assets - Total equity)/(Total assets) Total equity/Total long-term debt Long-term debt/Total assets

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

Return on equity (ROE) is a measure of _____.

profitability

The net income as shown on the common-size income statement of Omega Industries for the past three years increased from 3 percent to 6 percent. This indicates that the firm is increasing its ______.

profitability

A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.

26 ROE is Net Income/Equity. With ROE of 26%, if equity is $1, net income will be $0.26.

Days' sales in receivables are calculated as days divided by the receivables turnover. (Enter your answer as a numerical value.)

365

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

Accounts payable Cash

What is the equation for enterprise value?

Market value of stock + book value of liabilities − cash

Which ratios use some information that is not contained in financial statements?

Market value ratios

The EBITDA ratio is similar in spirit to:

PE ratio

How are firms classified into peer groups for ratio analysis?

According to Standard Industrial Classification codes

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. ROE is Net income/Equity. Sales are not considered. If equity is $1, Cal's generates $0.15 in profits.

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

higher

By combining common-size and base year analysis, we eliminate the effect of the _____.

overall growth

At the most fundamental level, firms generate cash and:

spend it

Financial ratios are ways of comparing and investigating ______.

the relationships between pieces of financial information

Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.

total equity

Although ______ are often poor reflections of reality, they are often the best information available.

accounting numbers

What does an inventory turnover ratio of 5 mean?

The entire inventory was sold and replaced 5 times during the year.

As long as all sales requests are being met, a ______ inventory turnover ratio is better.

higher

If a company's common-size income statement shows a lower percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has _____.

raised its prices relative to costs

EBITDA multiple is equal to the enterprise value (divided/multiplied) by EBITDA.

divided

A common-base year financial statement presents items relative to a certain base, which is the _____.

dollar amount of each item during a common base year

Long-term solvency ratios are also known as:

financial leverage ratios

When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.

higher

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

increase

A _____ performance indicator is a measurable value that shows how effectively a company is achieving business objectives.

key

By evaluating the quick ratio, we can see that one sign of possible short-term trouble is the existence of relatively _____ (small/large) inventories.

large

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

less than

Liquidity ratios are particularly important to ____-term creditors.

short

Some financial ratios are based on the market price per share of stock, which is information not contained in the financial statements. As a result, these measures can only be directly calculated for ____ traded companies.

publicly

The price-sales ratio is calculated as the price per ____ divided by the sales per ____.

share; share

Common-size statements are used for comparing firms with differing ____.

sizes

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

Market price per share/Earnings per share

Because we are almost always unable to obtain all of the market information we want, we rely on _____ numbers for much of our financial information.

accounting

Which of the following are uses of cash? (Check all that apply.) Decreases in accounts payable Increases in inventory Increases in property, plant and equipment Decreases in accounts receivable Decreases in property, plant and equipment

-Increases in property, plant and equipment -Decreases in accounts payable -Increases in inventory

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase.

A(n) _____ is a measurable value that shows how effectively a company is achieving a business objective.

KPI (Key Performance Indicator)

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

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.

The interval measure is useful for start-up companies because it indicates how long a company can operate until _____.

it needs another round of financing

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past three years is 30, 34, and 40 percent, respectively. This indicates that the firm has increased its ______.

leverage

The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and ____ value ratios.

market

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

market

The profit margin is equal to net income divided by ______.

sales

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

total assets.

True or false: The interval measure indicates how long a start-up company can operate until it needs more financing.

true

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

market value

When a company has negative earnings for an extended period of time, analysts will often resort to the:

price-sales ratio

Which of the following are traditional financial ratio categories? Multiple select question. Asset management ratios Profitability ratios Real options ratios Market value ratios

Asset management ratios Profitability ratios Market value ratios

Which of the following is the correct representation of the cash coverage ratio?

(EBIT+ Non-cash expenses)/Interest expense

True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.

True