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Chapter 3
Working With Financial Statements
| Question | Answer |
|---|---|
| A statement which presents all items in percentage terms is called a(n): | common-size statement |
| Relationships determined from a firm’s financial information and used for comparison purposes are known as: | financial ratios. |
| Short-term solvency ratios are also referred to as: | liquidity measures |
| The current ratio is defined as current assets | divided by current liabilities. |
| The acid-test ratio is also called the | quick ratio |
| The cash ratio is defined as cash divided by: | current liabilities. |
| Ratios which analyze a firm’s ability to meet its long-term obligations are called: | leverage ratios |
| The ratio which includes all debts of all maturities to all creditors is called the: | total debt ratio. |
| The financial ratio which is defined as earnings before interest and taxes divided by interest paid is called the: | times interest earned ratio. |
| The cash coverage ratio is defined as | earnings before interest and taxes plus depreciation divided by interest paid. |
| Asset utilization ratios are defined as those ratios which measure how efficiently a firm uses its: | assets to generate sales. |
| The inventory turnover ratio is defined as | cost of goods sold divided by inventory. |
| The number of days it takes a firm to sell its inventory is called the: | days’ sales in inventory |
| The number of times a firm collects their outstanding credit accounts and reloans the money in one year is called the | receivables turnover |
| The days’ sales in receivables is defined as | 365 days divided by the receivables turnover. |
| Sales divided by total assets is referred to as the: | total asset turnover. |
| The group of ratios which are focused on net income are referred to as | profitability measures. |
| The ratio related to the amount of profit a firm earns for every $1 in sales is called the: | profit margin |
| The financial ratio measured as net income divided by total assets is known as a firm’s: | return on assets |
| The amount of profit a firm earns for every $1 of equity is referred to as the: | return on equity. |
| The ratios which involve the current price of one share of a firm’s common stock are referred to as: | market value measures. |
| The relationship between a firm’s earnings and the multiple of those earnings which investors are willing to pay to purchase one share of stock is called the: | price-earnings ratio. |
| The relationship between the current selling price of a share of stock and the related accounting value of that share is called the: | market-to-book ratio. |
| When the return on equity is decomposed into three parts, it is referred to as the: | Du Pont identity. |
| The percentage of a firm’s net income that is distributed to shareholders is called the: | dividend payout ratio |
| The percentage of a firm’s net income which is transferred into retained earnings is known as the: | retention ratio |
| The internal growth rate is best described as the __________ growth rate achievable: | maximum; without external financing of any kind. |
| The sustainable growth rate is best described as the __________ growth rate achievable: | maximum; without using any external equity financing, while maintaining a constant debt-equity ratio. |
| When a financial analyst compares the current ratio and the profit margin of a firm over a series of years, the analyst is conducting a type of analysis known as: | time-trend analysis. |
| A peer group analysis is best defined as a comparison of | firms with similar assets, operations, and markets. |
| The U.S. government coding system that classifies firms by their specific type of business operations is known as the: | Standard Industrial Classification (SIC) system |
| Baker & Sons is issuing more shares of common stock and purchasing equipment with the proceeds of the stock offering. On the common-size balance sheet of the firm, this transaction will cause the percentage value for the: | long-term debt account to decrease |
| Which one of the following statements is correct concerning the percentages found on a common-size income statement? | The cost of goods sold percentage should remain relatively constant over time unless the wholesale or retail price of a firm’s inventory changes. |
| Which one of the following transactions will increase the liquidity of a firm? | selling inventory on credit |
| Balance sheet accounts are listed in order of: | decreasing liquidity. |
| Which one of the following actions will increase the current ratio, all else constant? | the payment of an accounts payable |
| A current ratio less than 1.0 means that a firm presently has: | more debts due within the next year than assets that should convert to cash within that same time period. |
| A firm has positive net working capital and carries inventory. All else constant, the quick ratio of this firm will | always be less than the current ratio, but greater than the cash ratio. |
| The cash ratio tells you, in terms of years, how long a firm can: | pay its bills without receiving any more cash. |
| Which of the following are classified as financial leverage measures? I. capital intensity II. cash coverage ratio III. return on equity IV. equity multiplier | II and IV only |
| All else constant, a firm will lower its total debt ratio when it | retains all of its net profits without obtaining any external financing. |
| A firm has a times interest earned ratio of 2. This means that the firm has twice as much: | earnings before interest and taxes as it does interest expense. |
| The equity multiplier is equal to | 1 plus the debt-equity ratio. |
| When a firm increases its inventory turnover rate, it has to be: | selling its inventory in less days, regardless of the level of total sales for the year. |
| A firm has a day’s sales in inventory value of 18. This means that the firm: | has sufficient inventory to support its sales for 18 days. |
| If a manager notices that the firm’s receivables turnover rate is declining, he or she should assume that: | on average, it is taking each customer longer to pay for their purchases. |
| 47. Which one of the following computations will correctly calculate the days’ sales in receivables? | (365 days × accounts receivable) / sales |
| The profit margin is the amount of net profit earned for every $1 of | sales. |
| Which one of the following will increase the profit margin of a firm | decreasing the tax rate |
| Which of the following are correct formulas for computing the return on assets? I. net income divided by total assets II. net income divided by net fixed assets III. profit margin multiplied by the equity multiplier IV. profit margin multiplied by | I and IV only |
| If the total assets of a firm increase while all the other components of ROE remain unchanged, you would expect the firm’s: | total asset turnover to decrease |
| The earnings per share represent the amount of __________ per year per share of outstanding stock. | net income |
| Which one of the following statements is true concerning the price-earnings ratio? | P rice-earnings ratios are sensitive to the accounting methods employed by the firm. |
| A high price-earnings ratio should best be interpreted to mean that a firm: | currently provides less net income per dollar paid for one share of stock than most other firms. |
| A firm has a market-to-book ratio of 4. This means that the market price of the firm’s stock is: | four times greater than the book value per share.The Du Pont identity is comprised of which three of the following? I. equity multiplier II. total debt ratio III. market-to-book ratio IV. profit margin V. total asset turnover |
| The Du Pont identity is comprised of which three of the following? I. equity multiplier II. total debt ratio III. market-to-book ratio IV. profit margin V. total asset turnover | I, IV, and V only |
| Which one of the following is a correct method of computing the Du Pont identity? | (profit margin)(1/capital intensity ratio)(equity multiplier) |
| The Du Pont identity helps financial managers determine: I. the reasons why a firm’s return on equity is unsatisfactory. II. the operating efficiency of a firm. III. the asset use efficiency of a firm. IV. the rate of return on a firm’s assets. | I, II, III, and IV |
| Which one of the following actions will increase the internal growth rate of a firm, all else held constant? | a decrease in the amount of assets required to produce the same amount of net income |
| If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is: | zero percent. |
| To achieve the maximum sustainable rate of growth, a firm must: | maintain a constant debt-equity ratio. |
| The sustainable rate of growth exceeds the internal rate of growth because the: | sustainable rate increases debt as the firm increases its retained earnings, while the internal rate does not. |
| The ability of a firm to sustain growth depends on which of the following factors? I. financial policy II. dividend policy III. profit margin IV. total asset turnover | I, II, III, and IV |
| Which one of the following statements concerning financial statement analysis is correct? | The purchase of inventory using short-term credit will decrease the current ratio. |
| Which of the following represent problems encountered when analyzing financial statements? I. Many firms are conglomerates whose combined operations do not fit neatly into any one industry classification. II. Firms may use different accounting | I, II, and III only |
Created by:
martin.2021