Question 1

Common size income statements make it easier to compare firms

Accepted Answer

A)  that use different inventory valuation methods (FIFO vs. LIFO). 
B)  in different industries. 
C)  with different degrees of leverage. 
D)  of different sizes. 
A)  that use different inventory valuation methods (FIFO vs. LIFO). 
B)  in different industries. 
C)  with different degrees of leverage. 
D)  of different sizes.

Question 2

The financial statements of Black Barn Company are given below.   Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company. The firm's return on equity ratio for 2009 is

Accepted Answer

A)  16.88%. 
B)  15.63%. 
C)  14.00%. 
D)  15.00%. 
E)  16.24%. 
A)  16.88%. 
B)  15.63%. 
C)  14.00%. 
D)  15.00%. 
E)  16.24%.

Question 3

The financial statements of Midwest Tours are given below.   Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm's fixed asset turnover ratio for 2009 is

Accepted Answer

A)  1.45. 
B)  1.63. 
C)  1.20. 
D)  1.58. 
A)  1.45. 
B)  1.63. 
C)  1.20. 
D)  1.58.

Question 4

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average?

Accepted Answer

A)  The firm's net profit margin is higher than the industry average. 
B)  The firm's asset turnover is higher than the industry average. 
C)  The firm's equity multiplier must be lower than the industry average. 
D)  The firm's debt ratio is higher than the industry average. 
E)  None of the options are correct. 
A)  The firm's net profit margin is higher than the industry average. 
B)  The firm's asset turnover is higher than the industry average. 
C)  The firm's equity multiplier must be lower than the industry average. 
D)  The firm's debt ratio is higher than the industry average. 
E)  None of the options are correct.

Question 5

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

Accepted Answer

A)  understate; overstate 
B)  understate; understate 
C)  overstate; understate 
D)  overstate; overstate 
E)  There is no discernible pattern. 
A)  understate; overstate 
B)  understate; understate 
C)  overstate; understate 
D)  overstate; overstate 
E)  There is no discernible pattern.

Question 6

Proceeds from a company's sale of stock to the public are included in

Accepted Answer

A)  par value. 
B)  additional paid-in capital. 
C)  retained earnings. 
D)  par value and additional paid-in capital. 
E)  All of the options are correct. 
A)  par value. 
B)  additional paid-in capital. 
C)  retained earnings. 
D)  par value and additional paid-in capital. 
E)  All of the options are correct.

Question 7

One technique a firm can use to improve its economic value added (EVA) is to ____________________.

Accepted Answer

A)  focus on leverage. 
B)  produce return above the cost of debt. 
C)  Increase prospective capacity. 
D)  reduce assets employed. 
A)  focus on leverage. 
B)  produce return above the cost of debt. 
C)  Increase prospective capacity. 
D)  reduce assets employed.

Question 8

A firm has a higher asset turnover ratio than the industry average, which implies

Accepted Answer

A)  the firm has a higher P/E ratio than other firms in the industry. 
B)  the firm is more likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm is more profitable than other firms in the industry. 
D)  the firm is utilizing assets more efficiently than other firms in the industry. 
E)  the firm has higher spending on new fixed assets than other firms in the industry. 
A)  the firm has a higher P/E ratio than other firms in the industry. 
B)  the firm is more likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm is more profitable than other firms in the industry. 
D)  the firm is utilizing assets more efficiently than other firms in the industry. 
E)  the firm has higher spending on new fixed assets than other firms in the industry.

Question 9

The financial statements of Midwest Tours are given below.   Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm's market-to-book value for 2009 is

Accepted Answer

A)  0.24. 
B)  0.95. 
C)  0.71. 
D)  1.12. 
A)  0.24. 
B)  0.95. 
C)  0.71. 
D)  1.12.

Question 10

Which of the following are issues when dealing with the financial statements of international firms?I) Many countries allow firms to set aside larger contingency reserves than the amounts allowed for U.S. firms.II) Many firms outside the U.S. use accelerated depreciation methods for reporting purposes, whereas most U.S. firms use straight-line depreciation for reporting purposes.III) Intangibles, such as goodwill, may be amortized over different periods or may be expensed rather than capitalized.IV) There is no way to reconcile the financial statements of non-U.S. firms to GAAP.

Accepted Answer

A)  I and II 
B)  II and IV 
C)  I, II, and III 
D)  I, III, and IV 
E)  I, II, III, and IV 
A)  I and II 
B)  II and IV 
C)  I, II, and III 
D)  I, III, and IV 
E)  I, II, III, and IV

Question 11

Common size balance sheets make it easier to compare firms

Accepted Answer

A)  with different degrees of leverage. 
B)  of different sizes. 
C)  in different industries. 
D)  that use different inventory valuation methods (FIFO vs. LIFO). 
A)  with different degrees of leverage. 
B)  of different sizes. 
C)  in different industries. 
D)  that use different inventory valuation methods (FIFO vs. LIFO).

Question 12

The financial statements of Black Barn Company are given below.   Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company. The firm's current ratio for 2009 is

Accepted Answer

A)  2.31. 
B)  1.87. 
C)  2.22. 
D)  2.46. 
A)  2.31. 
B)  1.87. 
C)  2.22. 
D)  2.46.

Question 13

The financial statements of Snapit Company are given below.   Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company. The firm's asset turnover ratio for 2009 is

Accepted Answer

A)  1.60. 
B)  3.16. 
C)  3.31. 
D)  4.64. 
A)  1.60. 
B)  3.16. 
C)  3.31. 
D)  4.64.

Question 14

Using EVA to evaluate the financial performance of a movie is not a good idea because ____________.

Accepted Answer

A)  a movie is a short lived project. 
B)  the cost of capital cannot be determined. 
C)  the assets employed are too low. 
D)  net income in future years cannot be forecasted. 
A)  a movie is a short lived project. 
B)  the cost of capital cannot be determined. 
C)  the assets employed are too low. 
D)  net income in future years cannot be forecasted.

Question 15

The financial statements of Midwest Tours are given below.   Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm's P/E ratio for 2009 is

Accepted Answer

A)  20.53. 
B)  6.63. 
C)  5.21. 
D)  5.00. 
A)  20.53. 
B)  6.63. 
C)  5.21. 
D)  5.00.

Question 16

The financial statements of Black Barn Company are given below.   Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company. The firm's quick ratio for 2009 is

Accepted Answer

A)  1.69. 
B)  1.52. 
C)  1.23. 
D)  1.07. 
E)  1.00. 
A)  1.69. 
B)  1.52. 
C)  1.23. 
D)  1.07. 
E)  1.00.

Question 17

The financial statements of Midwest Tours are given below.   Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm's average collection period for 2009 is

Accepted Answer

A)  69.35. 
B)  69.73. 
C)  68.53. 
D)  67.77. 
E)  68.52. 
A)  69.35. 
B)  69.73. 
C)  68.53. 
D)  67.77. 
E)  68.52.

Question 18

The financial statements of Midwest Tours are given below.   Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm's inventory turnover ratio for 2009 is

Accepted Answer

A)  2.86. 
B)  1.23. 
C)  5.96. 
D)  4.42. 
E)  4.86. 
A)  2.86. 
B)  1.23. 
C)  5.96. 
D)  4.42. 
E)  4.86.

Question 19

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) ________current ratio than a firm using FIFO, and the difference will tend to __________ as time passes.

Accepted Answer

A)  higher; increase 
B)  higher; decrease 
C)  lower; decrease 
D)  lower; increase 
E)  identical; remain the same 
A)  higher; increase 
B)  higher; decrease 
C)  lower; decrease 
D)  lower; increase 
E)  identical; remain the same

Question 20

The dollar value of a firm's return in excess of its opportunity costs is called its

Accepted Answer

A)  profitability measure. 
B)  excess return. 
C)  economic value added. 
D)  prospective capacity. 
E)  return margin. 
A)  profitability measure. 
B)  excess return. 
C)  economic value added. 
D)  prospective capacity. 
E)  return margin.

Exam 19: Financial Statement Analysis

Common size income statements make it easier to compare firms

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on equity ratio for 2009 is

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's fixed asset turnover ratio for 2009 is

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average?

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

Proceeds from a company's sale of stock to the public are included in

One technique a firm can use to improve its economic value added (EVA) is to ____________________.

A firm has a higher asset turnover ratio than the industry average, which implies

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's market-to-book value for 2009 is

Common size balance sheets make it easier to compare firms

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's current ratio for 2009 is

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's asset turnover ratio for 2009 is

Using EVA to evaluate the financial performance of a movie is not a good idea because ____________.

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's P/E ratio for 2009 is

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's quick ratio for 2009 is

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's average collection period for 2009 is

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's inventory turnover ratio for 2009 is

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) ________current ratio than a firm using FIFO, and the difference will tend to __________ as time passes.

The dollar value of a firm's return in excess of its opportunity costs is called its

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to income, and the level of interest expense reported tends to income.

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) current ratio than a firm using FIFO, and the difference will tend to __ as time passes.