Chapter 3
Which of the following is the correct representation of the total debt ratio?
(Total assets - Total equity)/(Total assets)
A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ______ available to pay interest.
cash
The current ratio computes the relationship between _____
current assets and current liabilities
The cash ratio is found by dividing cash by:
current liabilities
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
false; less than
Long-term solvency ratios are also known as:
financial leverage ratios
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
In a common-size income statement, each item is expressed as a percentage of total
sales
A common-size balance sheet expresses accounts as a percentage of
total assets
True or false: The debt-equity ratio equals the total assets minus total equity all over total assets.
true
The times interest earned ratio is a measure of long-term
solvency
_____ financial statements provide for comparison of firms that differ in size
Standardized
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than; Since the quick ratio excludes inventory, it will always be less than the current ratio.
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
Short-term solvency ratios are also called _______ ratios.
liquidity
Which of the following items are used to compute the current ratio?
- Cash - Accounts payable Current ratio = current assets/current liabilities.
Which of the following are traditional financial ratio categories?
- Financial leverage ratios - Profitability ratios - Turnover ratios
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+depreciation)/Interest expense
How is the inventory turnover ratio computed?
COGS/Inventory
True or false: The DuPont identity is a popular expression breaking ROA into three parts.
False
True or false: Financial ratios are computed using balance sheet information.
False; financial ratios can use information from all financial statements
True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.
False; higher levels of inventory result in less liquidity, all else equal.
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; because inventory that is held for a long time is not very liquid.
True or false: In a common-size income statement, each item is expressed as a percentage of total sales.
True
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 is (are) true of financial ratios?
- They are developed from a firm's financial information - They are used for comparison purposes