SMARTBOOK #3

Which of the following items are among the items used to compute the current ratio? - Accounts payable, - Cash, - Earnings, - Equipment

- Accounts payable, - Cash,

Which of the following are sources of cash? (check all that apply) - An increase in notes payable, - A decrease in accounts receivable, - Purchasing an asset, - A decrease in notes payable

- An increase in notes payable, - A decrease in accounts receivable,

Which of the following are traditional financial ratio categories? - Asset management ratios, - Real options ratios, - Profitability ratios, - Market value ratios

- Asset management ratios, - Profitability ratios, - Market value ratios

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

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

Which three of the following are most apt to create problems when comparing financial statements for multiple firms? - Seasonality, - Differing accounting methods, - Differing levels of cash, - Differing fiscal years

- Seasonality,- Differing accounting methods,-Differing fiscal years

Which two of the following groups are most interested in liquidity ratios? - Stock analysis, - Tax authorities such as the IRS, - Suppliers, - Bankers

- Suppliers, - Bankers

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. - leverage; liquidity. - liquidity; leverage. - liquidity; profitability. - leverage; profitability.

- liquidity; leverage.

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

365.

The days' sales in inventory are equal to _____ days divided by the inventory turnover. (Enter your answer as a numerical value.)

365.

A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales. A.) 6.8 B.) 0.32 C.) 0.68 D.) 3.2

A.) 6.8

How are firms classified into peer groups for ratio analysis? A.) According to Standard Industrial Classification codes. B.) By the Risk Management Association (RMA). C.) By the Bureau of Labor Statistics. D.) By GAAP.

A.) According to Standard Industrial Classification codes.

________ ________ are the prime source of information about a firm's financial health. A.) Financial statements. B.) Historical returns. C.) Stock prices. D.) Stock brokers.

A.) Financial statements.

Which one of the following does not affect ROE according to the DuPont identity? A.) Investor sentiment. B.) Financial leverage. C.) Asset use efficiency. D.) Operating efficiency

A.) Investor sentiment.

What will happen to the current ratio if current assets increase, while everything else remains unchanged? A.) It will increase. B.) It may either increase or decrease. C.) It will not be affected. D.) It will decrease.

A.) It will increase.

If a company has inventory, the quick ratio will always be ______ the current ratio. A.) Less than, B.) Equal to, C.) Greater than

A.) Less than.

______ financial statements provide for comparison of firms that differ in size. A.) Standardized. B.) Original. C.) Restated. D.) Compressed.

A.) Standardized.

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. A.) True. B.) False.

A.) True.

A firm with a market-to-book ratio that is greater than 1 is said to have ______ value for shareholders. A.) created. B.) reduced. C.) destroyed. D.) maintained.

A.) created.

The information needed to compute the profit margin can be found on the ____. A.) income statement. B.) balance sheet. C.) cash flow statement.

A.) income statement.

Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator. A.) total equity. B.) net income. C.) total debt. D.) current assets.

A.) total equity.

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. A.) $0.03. B.) $0.30. C.) $0.70. D.) $0.07.

B.) $0.30.

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way. A.) Ratio. B.) DuPont. C.) Dilution. D.) Bourne.

B.) DuPont.

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

B.) False.

As long as all sales requests are being met, a ______ inventory turnover ratio is better. A.) Lower. B.) Higher.

B.) Higher.

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. A.) Short. B.) Long.

B.) Long.

The price-earnings (PE) ratio is a ______ ratio. A.) leverage. B.) Market value. C.) Turnover. D.) Liquidity.

B.) Market value.

Whenever ___________ information is available, it should be used instead of accounting data. A.) Any other. B.) Market. C.) Historical. D.) Trivial.

B.) Market.

At the most fundamental level, firms generate cash and: A.) Create jobs. B.) Spend it. C.) Employ accountants. D.) Delegate Authority.

B.) Spend it.

What does it mean when a company reports ROA of 12 percent? A.) The company generates $12 in net income for every $100 of debt. B.) The company generates $12 in net income for every $100 invested in assets. C.) The company generates $12 in sales for every $100 invested in assets. D.) The company generates $12 in sales for every $100 of debt.

B.) The company generates $12 in net income for every $100 invested in assets.

Profitability measures such as return on assets (ROA) and return on equity (ROE) are ___ rates of return. A.) market. B.) accounting. C.) meaningless. D.) cash flow.

B.) accounting.

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. A.) sales. B.) earnings before interest and taxes. C.) additions to retained earnings. D.) net income.

B.) earnings before interest and taxes.

Which of the following is the correct representation of the total debt ratio? A.) Total equity/Total long-term debt. B.) Long-term debt/Total assets. C.) (Total assets - Total equity)/(Total assets).

C.) (Total assets - Total equity)/(Total assets).

The current ratio shows the relationship between ____. A.) Current and long-term assets. B.) Current assets and long-term liabilities. C.) Current assets and current liabilities. D.) Current and liquid assets.

C.) Current assets and current liabilities.

Long-term solvency ratios are also known as: A.) Turnover ratios. B.) Profitability ratios. C.) Financial leverage ratios. D.) Market value ratios.

C.) Financial leverage ratios.

A(n) ________ in net profit margin will increase ROE. A.) Stagnation. B.) Decrease. C.) Increase.

C.) Increase.

The price-earnings (PE) ratio is a ______ ratio. A.) Liquidity. B.) Turnover. C.) Market Value. D.) Leverage.

C.) Market Value.

How is the price-earnings (PE) ratio computed? A.) Book value per share/Earnings per share B.) Sales price per unit/Earnings per share C.) Market price per share/Earnings per share D.) Total income/Earnings per share

C.) Market price per share/Earnings per share.

How is market-to-book ratio measured? A.) Book value per share/Market value per share B.) Market value of sales/Book value of costs C.) Market value per share/Book value per share D.) Market value of bonds/Book value of bonds

C.) Market value per share/Book value per share

What does it mean when a firm has a days' sales in receivables of 45? A.) The firm is able to collect 55 percent of its credit sales. B.) The firm is able to collect 45 percent of its credit sales. C.) The firm collects its credit sales in 45 days on average. D.) The firm collects its credit sales in 320 (365 - 45) days on average.

C.) The firm collects its credit sales in 45 days on average.

Which one of the following is one way in which financial managers use a common-size balance sheet? A.) To monitor labor costs. B.) To identify changes in operating costs. C.) To track changes in a firm's capital structure. D.) To keep an eye on the firm's profit margin.

C.) To track changes in a firm's capital structure.

Return on equity (ROE) is a measure of _____. A.) leverage. B.) liquidity. C.) profitability. D.) utilization.

C.) profitability.

Financial ratios are ways of comparing and investing ______ . A.) profitability of various college degrees. B.) the impact of marketing on purchase habits. C.) the relationships between pieces of financial information. D.) the skill level of technology managers.

C.) the relationships between pieces of financial information.

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

Cash

Cal's Market has return on equity (ROE) of 15 percent. What does this mean? A.) Cal's paid a dividend of $.15 per share to its shareholders this year. B.) Cal's generated $.15 in profit for every $1 of market value of equity. C.) Cal's generated $.15 in profit for every $1 of sales. D.) Cal's generated $.15 in profit for every $1 of book value of equity.

D.) Cal's generated $.15 in profit for every $1 of book value of equity.

Which one of the following is the correct equation for computing return on assets (ROA)? A.) Net income/Sales. B.) Sales/Total Assets. C.) Total Assets/Net Income. D.) Net Income/Total Assets.

D.) Net Income/Total Assets.

Common-size statements are used for comparing firms with differing _____. A.) Mangement styles. B.) Tax years. C.) Capital structures. D.) Sizes.

D.) Sizes.

______ financial statements provide for comparison of firms that differ in currency type. A.) Restated. B.) Original. C.) Compressed. D.) Standardized.

D.) Standardized.

What does a current ratio of 1.2 mean? A.) The firm has $1.20 in current assets for every $1 in fixed assets. B.) The firm has $1.20 in current liabilities for every $1 in long-term debt. C.) The firm has $1.20 in current liabilities for every $1 in current assets. D.) The firm has $1.20 in current assets for every $1 in current liabilities.

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

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: A.) a congressional investigation. B.) an audit by a CPA. C.) redundant safety measures. D.) further investigation.

D.) further investigation.

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

Industrial.

Liquidity ratios are particularly important to ____ - term creditors.

Short

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

accounting.

The ROE equals the net profit margin multiplied by the total _____ turnover multiplied by the equity multiplier.

asset.

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

current.

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 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 times interest earned ratio equals EBIT divided by _____.

interest.

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.

Long-term solvency ratios are also called financial ____ ratios.

leverage.

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

market.