FIN 370 - Exam 1

Which of the following statements is CORRECT? 1. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative. 2. Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant. 3. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. 4. Common equity includes common stock and retained earnings, less accumulated depreciation. 5. The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.

A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.

Which of the following items is NOT included in current assets?

Bonds

Which of the following statements is CORRECT? 1."Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value. 2. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." 3. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." 4. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing." 5. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."

Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT? 1. Company A trades at a higher P/E ratio. 2. Company A probably has fewer growth opportunities. 3. Company A is probably judged by investors to be riskier. 4. Company A must have a higher market-to-book ratio. 5. Company A must pay a lower dividend

Company A trades at a higher P/E ratio.

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Cost of Goods Sold

On its 2021 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2022. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? 1. Dividends could have been paid in 2022, but they would have had to equal the earnings for the year. 2. If the company lost money in 2022, they must have paid dividends. 3. The company must have had zero net income in 2022. 4. The company must have paid out half of its earnings as dividends. 5. The company must have paid no dividends in 2022

Dividends could have been paid in 2022, but they would have had to equal the earnings for the year.

True or False: A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.

False

True or False: One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increaseand thus make the firm look stronger.

False

True or False: Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

False

True or False: Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

False

True or False: The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

False

True or False: Total net operating capital is equal to net fixed assets.

False

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Increase EBIT while holding sales constant.

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

Which of the following statements is CORRECT? 1. One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital. 2. If a firm reports positive net income, its EVA must also be positive. 3. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. 4. One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital. 5. Actions that increase reported net income will always increase net cash flow from operations.

One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

The company issues new common stock

Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 25%. How much was the firm's taxable income, or earnings before taxes (EBT)?

$3,400.00 Bonds $8,000.00 Interest rate 7.50% Sales $12,500.00 Operating costs excluding depr'n $7,250.00 Depreciation $1,250.00 Operating income (EBIT) $4,000.00 Interest charges −$600.00 Taxable income $3,400.00

Which of the following statements is CORRECT? 1. A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest-lived assets last. 2. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. 3. The balance sheet for a given year tells us how much money the company earned during that year. 4. The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). 5. For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.

A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest-lived assets last.

Which of the following statements is CORRECT? 1. An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin. 2. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. 3. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. 4. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. 5. An increase in the DSO, other things held constant, could be expected to increase the ROE.

An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.

Considered alone, which of the following would increase a company's current ratio?

An increase in accounts receivable.

True or False: Consider the balance sheet of Wilkes Industries as shown below. Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000. Cash $ 50,000 Accounts payable $ 100,000 Inventory 200,000 Accruals 100,000 Accounts receivable 250,000 Total CL $ 200,000 Total CA $ 500,000 Debt 200,000 Net fixed assets $ 900,000 Common stock 200,000 _________ Retained earnings 800,000 Total assets $1,400,000 Total L & E $1,400,000

False

True or False: High current and quick ratios always indicate that a firm is managing its liquidity position well.

False

True or False: In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

False

True or False: Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings.

False

True or False: One problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.

False

True or False: The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

False

True or False: The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.

False

True or False: The fact that 50% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

False

True or False: The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

False

Which of the following statements is CORRECT? 1. A shortcut to calculate free cash flow (FCF) is defined as follows:FCF = Net income + Depreciation and Amortization. 2. Changes in working capital have no effect on free cash flow. 3. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T) + Depreciation and Amortization − Capital expenditures required to sustain operations − Required changes in net operating working capital. 4. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T)+ Depreciation and Amortization + Capital expenditures. 5. Net cash provided (used) by operations is the same as free cash flow (FCF).

Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T) + Depreciation and Amortization − Capital expenditures required to sustain operations − Required changes in net operating working capital.

Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT? 1. Heidee would have higher net income as shown on the income statement than Leaudy. 2. Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income. 3. Heidee would have a lower equity multiplier for use in the DuPont equation than Leaudy. 4. Heidee would have to pay more in income taxes than Leaudy. 5. Heidee would have lower net income as shown on the income statement than Leaudy.

Heidee has a higher ROE than Leaudy.

Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Heidee has a lower times interest earned (TIE) ratio than Leaudy.

Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? 1. Its total assets turnover must equal the industry average. 2. Its total assets turnover must be above the industry average. 3. Its return on assets must equal the industry average. 4. Its TIE ratio must be below the industry average. 5. Its total assets turnover must be below the industry average.

Heidee pays less in taxes than Leaudy.

Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT? 1. Heidee has lower operating income (EBIT) than Leaudy. 2. Heidee has a lower total assets turnover ratio than Leaudy. 3. Heidee has a lower equity multiplier than Leaudy. 4. Heidee has a higher fixed assets turnover ratio than Leaudy. 5. Heidee has a higher ROE than Leaudy.

Heidee would have lower net income as shown on the income statement than Leaudy.

Which of the following statements is CORRECT? 1. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same. 2. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same. 3. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. 4. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio. 5. If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.

If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

Which of the following statements is CORRECT? 1.cIf a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease. 2.cA reduction in inventories held would have no effect on the current ratio. 3. An increase in inventories would have no effect on the current ratio. 4. If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. 5A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

Which of the following statements is CORRECT? 1. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline. 2. If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength. 3. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase. 4. There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. 5. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

Which of the following statements is CORRECT? 1. The more depreciation a firm has in a given year, the higher its EPS, other things held constant. 2. Typically, a firm's DPS should exceed its EPS. 3. Typically, a firm's EBIT should exceed its EBITDA. 4. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share. 5. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.

Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT? 1. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE. 2. Given this information, Leaudy must have the higher ROE. 3. Company Leaudy has a higher basic earning power ratio (BEP). 4. Company Heidee has a higher basic earning power ratio (BEP). 5. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE.

If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE.

Which of the following statements is CORRECT? 1. The maximum federal tax rate on personal income can exceed 50%. 2. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. 3. Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, but dividends received are taxed at a maximum rate of 20%. 4.The maximum federal tax rate on corporate income is 50%. 5. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, but dividends received are taxed at a maximum rate of 20%.

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT? 1. Heidee has more net income than Leaudy. 2. Heidee pays less in taxes than Leaudy. 3. Heidee has a lower equity multiplier than Leaudy. 4. Heidee has a higher ROA than Leaudy. 5. Heidee has a higher times interest earned (TIE) ratio than Leaudy.

Its total assets turnover must be above the industry average.

Which of the following statements is CORRECT? 1. Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits. 2. The more depreciation a firm reports, the higher its tax bill, other things held constant. 3. People sometimes talk about the firm's net cash provided (used) by operations, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line." 4. Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow. 5. Net cash provided (used) by operations is often defined as follows: Net cash provided (used) by operations = Net Income + Noncash Adjustments + Working Capital Adjustments.

Net cash provided (used) by operations is often defined as follows: Net cash provided (used) by operations = Net Income + Noncash Adjustments + Working Capital Adjustments.

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.

If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT? 1. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm. 2. The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm. 3. Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm. 4. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm. 5. The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.

Which of the following statements is CORRECT? 1. All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income. 2. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses. 3. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code. 4. Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income. 5. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

The EBITDA coverage ratio increases

Which of the following statements is CORRECT? 1. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year. 2. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. 3. The balance sheet gives us a picture of the firm's financial position at a point in time. 4. The income statement gives us a picture of the firm's financial position at a point in time. 5. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

The balance sheet gives us a picture of the firm's financial position at a point in time.

Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets: 2022 2021 Common stock $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

The company issued common stock in 2022.

Analysts following Armstrong Products recently noted that the company's net cash provided (used) by operations was positive over the prior year, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

The company made a large investment in a profitable new plant.

Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash provided (used) by operations year, even though the cash on its balance sheet increased?

The company sold a new issue of bonds

Jessie's Bobcat Rentals' cash flow from operations was negative last year, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles?

The company sold some of its fixed assets

The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?

The company's current ratio increased

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its cash flow from operations declined. Which of the following could explain this performance?

The company's depreciation and amortization expenses declined.

Which of the following would indicate an improvement in a company's financial position, holding other things constant?

The current and quick ratios both increase.

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

The division's basic earning power ratio is above the average of other firms in its industry.

DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

The firm's net cash provided (used) by operations would increase.

Which of the following statements is CORRECT? 1. If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. 2. If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. 3. Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be. 4. The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA). 5. If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.

The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).

Which of the following statements is CORRECT? 1. The income statement for a given year is designed to give us an idea of how much the firm earned during that year. 2. The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." 3. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP). 4. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC). 5. If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash provided (used) by operating activities.

The income statement for a given year is designed to give us an idea of how much the firm earned during that year.

Which of the following statements is CORRECT? 1. The statement of cash flows shows how much the firm's cash—the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)—increased or decreased during a given year. 2. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. 3. The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. 4. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. 5. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

The statement of cash flows shows how much the firm's cash—the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)—increased or decreased during a given year.

Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

The tax bill will increase

True of False: The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.

True

True or False: Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

True

True or False: Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

True

True or False: Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

True

True or False: Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

True

True or False: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

True

True or False: Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

True

True or False: Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

True

True or False: On the balance sheet, total assets must always equal total liabilities and equity.

True

True or False: Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

True

True or False: Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

True

True or False: Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

True

True or False: Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, Firm A has a higher debt ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

True

True or False: Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

True

True or False: The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

True

True or False: The current ratio and inventory turnover ratios both help us measure the firm's liquidity. The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

True

True or False: The income statement shows the difference between a firm's income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

True

True or False: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

True

True or False: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

True

True or False: The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

True

True or False: The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings.

True

True or False: The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.

True

True or False: The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

True

True or False: To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

True