Question 1

_____ A company now has a profit margin for ROCE of 8%. Its asset turnover is 2. It has capital structure leverage of 1.5. Compute the Return on common equity.

Accepted Answer

To compute the Return on Common Equity (

Question 2

Which of the following is most likely a sign that a company has solvency or liquidity problems?

Accepted Answer

A)  A current ratio is low compared to other companies in the industry. 
B)  An interest coverage ratio is high compared to other companies in the industry. 
C)  A ratio of debt to equity that low compared to other companies in the industry. 
D)  A capital structure leverage ratio is low compared to other companies in the industry. 
A)  A current ratio is low compared to other companies in the industry. 
B)  An interest coverage ratio is high compared to other companies in the industry. 
C)  A ratio of debt to equity that low compared to other companies in the industry. 
D)  A capital structure leverage ratio is low compared to other companies in the industry.

Question 3

Financial statements prepared under GAAP are designed to measure the company's current market value as of the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 4

The FASB says that financial statements should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to business enterprises.

Accepted Answer

A) True 
 B)False

Question 5

The Freire Corp. has sales of $1,000, operating expenses of $840, interest expense of $20, and tax expense of $40. Its net income was $100. The interest coverage ratio equals

Accepted Answer

A)  5 
B)  6 
C)  7 
D)  8 
A)  5 
B)  6 
C)  7 
D)  8

Question 6

The method of comparing financial statement information that involves comparing figures for different accounts, in a single time period, is called "horizontal analysis."

Accepted Answer

A) True 
 B)False

Question 7

Common size balance sheets present all of a company's asset, liabilities, and equity accounts expressed as a percentage of total net income for the year.

Accepted Answer

A) True 
 B)False

Question 8

"Liquidity" and "solvency" mean the same thing. They are two different words for the same concept.

Accepted Answer

A) True 
 B)False

Question 9

On a statement of cash flows prepared using the indirect method, decreases in current assets are typically shown as additions to operating cash flows.

Accepted Answer

A) True 
 B)False

Question 10

Benefits of using ratio analysis include all of the following except:

Accepted Answer

A)  Ratios are usually easy to compute. 
B)  It is always clear what the optimal ratio is for a company. 
C)  Ratios allow analysts to look at one figure in the financial statements in relation to a second one. 
D)  Ratios can be used to compare companies that report results in different currencies. 
A)  Ratios are usually easy to compute. 
B)  It is always clear what the optimal ratio is for a company. 
C)  Ratios allow analysts to look at one figure in the financial statements in relation to a second one. 
D)  Ratios can be used to compare companies that report results in different currencies.

Question 11

Research indicates that all of the following statements are correct, except:

Accepted Answer

A)  Stock price movements are more closely related to income statement information than cash flow information. 
B)  Useful (but not perfect) models exist that use financial statement data to predict company bankruptcy. 
C)  Useful (but not perfect) models exist that use financial statement data to detect improper reporting of financial information. 
D)  Stock price movements are greater when a change in income is due to one-time items than when the change in income is due to persistent items. 
A)  Stock price movements are more closely related to income statement information than cash flow information. 
B)  Useful (but not perfect) models exist that use financial statement data to predict company bankruptcy. 
C)  Useful (but not perfect) models exist that use financial statement data to detect improper reporting of financial information. 
D)  Stock price movements are greater when a change in income is due to one-time items than when the change in income is due to persistent items.

Question 12

The Fan Corp. in 2016 had revenues of $24,000, variable costs of $12,000, fixed operating costs of $4,000, interest expenses of $2,000, no taxes, and net income = $6,000. The financial leverage effect for this company is

Accepted Answer

A)  1.333 
B)  2 
C)  3 
D)  4 
A)  1.333 
B)  2 
C)  3 
D)  4

Question 13

Academic research has shown that, because accounting statements measure income differently than the way economists say it should be measured, stock markets generally ignore news about company earnings.

Accepted Answer

A) True 
 B)False

Question 14

ROCE can be decomposed into three ratios. Which of the following is the correct set of ratios?

Accepted Answer

A)  Gross margin percentage, return on assets, current ratio 
B)  Asset turnover, effective tax rate, capital structure leverage 
C)  Capital structure leverage, asset turnover, profit margin for ROCE 
D)  Asset turnover, Debt to equity ratio, profit margin for ROCE 
A)  Gross margin percentage, return on assets, current ratio 
B)  Asset turnover, effective tax rate, capital structure leverage 
C)  Capital structure leverage, asset turnover, profit margin for ROCE 
D)  Asset turnover, Debt to equity ratio, profit margin for ROCE

Question 15

On a statement of cash flows prepared using the indirect method, an increase in prepaid expenses will be shown as something that increases operating cash flows.

Accepted Answer

A) True 
 B)False

Question 16

Analysts use various different ratios to assess a company's long-term solvency. Which of these ratios is typically measured using average data for the year, rather than year-end data?

Accepted Answer

A)  Current liabilities to assets ratio 
B)  Long term debt to equity ratio 
C)  Liabilities to equity ratio 
D)  Capital structure leverage ratio 
A)  Current liabilities to assets ratio 
B)  Long term debt to equity ratio 
C)  Liabilities to equity ratio 
D)  Capital structure leverage ratio

Question 17

Assume a company now has a current ratio of 3. Just before year end, it decides to pay back some of its current liabilities, using its cash. Which of the following statements is correct regarding the effect of this decision?

Accepted Answer

A)  The current ratio will decrease. 
B)  Its interest coverage ratio will increase. 
C)  Its capital structure leverage ratio will decrease. 
D)  Its return on assets will decrease. 
A)  The current ratio will decrease. 
B)  Its interest coverage ratio will increase. 
C)  Its capital structure leverage ratio will decrease. 
D)  Its return on assets will decrease.

Question 18

The Chi Corp. in 2016 had revenues of $12,000, variable costs of $6,000, fixed operating costs of $2,000, interest expenses of $1,000, no taxes, and net income = $3,000. The operating leverage effect for this company is

Accepted Answer

A)  1.333 
B)  1.5 
C)  3 
D)  4 
A)  1.333 
B)  1.5 
C)  3 
D)  4

Question 19

The FASB's Conceptual Framework says that, to be relevant, information must have predictive value, and that information that only has confirmatory value is never relevant.

Accepted Answer

A) True 
 B)False

Question 20

The financial leverage effect equals operating income divided by interest expense.

Accepted Answer

A) True 
 B)False

_____ A company now has a profit margin for ROCE of 8%. Its asset turnover is 2. It has capital structure leverage of 1.5. Compute the Return on common equity.

Which of the following is most likely a sign that a company has solvency or liquidity problems?

Financial statements prepared under GAAP are designed to measure the company's current market value as of the balance sheet date.

The FASB says that financial statements should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to business enterprises.

The Freire Corp. has sales of $1,000, operating expenses of $840, interest expense of $20, and tax expense of $40. Its net income was $100. The interest coverage ratio equals

The method of comparing financial statement information that involves comparing figures for different accounts, in a single time period, is called "horizontal analysis."

Common size balance sheets present all of a company's asset, liabilities, and equity accounts expressed as a percentage of total net income for the year.

"Liquidity" and "solvency" mean the same thing. They are two different words for the same concept.

On a statement of cash flows prepared using the indirect method, decreases in current assets are typically shown as additions to operating cash flows.

Benefits of using ratio analysis include all of the following except:

Research indicates that all of the following statements are correct, except:

The Fan Corp. in 2016 had revenues of $24,000, variable costs of $12,000, fixed operating costs of $4,000, interest expenses of $2,000, no taxes, and net income = $6,000. The financial leverage effect for this company is

Academic research has shown that, because accounting statements measure income differently than the way economists say it should be measured, stock markets generally ignore news about company earnings.

ROCE can be decomposed into three ratios. Which of the following is the correct set of ratios?

On a statement of cash flows prepared using the indirect method, an increase in prepaid expenses will be shown as something that increases operating cash flows.

Analysts use various different ratios to assess a company's long-term solvency. Which of these ratios is typically measured using average data for the year, rather than year-end data?

Assume a company now has a current ratio of 3. Just before year end, it decides to pay back some of its current liabilities, using its cash. Which of the following statements is correct regarding the effect of this decision?

The Chi Corp. in 2016 had revenues of $12,000, variable costs of $6,000, fixed operating costs of $2,000, interest expenses of $1,000, no taxes, and net income = $3,000. The operating leverage effect for this company is

The FASB's Conceptual Framework says that, to be relevant, information must have predictive value, and that information that only has confirmatory value is never relevant.

The financial leverage effect equals operating income divided by interest expense.

How Accounting Works

Selecting Your Business Structure

Choosing Accounting Software

Accounting for Inventory

Doing Business Day to Day

Tackling the General Ledger

Reconciling Bank and Credit Card Statements

Setting up New Team Members

Understanding Insurance

Other Benefits and Reimbursements

Payroll Taxes

Appendix

Filters

Exam 4: Managing Your Accounts

_____ A company now has a profit margin for ROCE of 8%. Its asset turnover is 2. It has capital structure leverage of 1.5. Compute the Return on common equity.

Which of the following is most likely a sign that a company has solvency or liquidity problems?

Financial statements prepared under GAAP are designed to measure the company's current market value as of the balance sheet date.

The FASB says that financial statements should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to business enterprises.

The Freire Corp. has sales of $1,000, operating expenses of $840, interest expense of $20, and tax expense of $40. Its net income was $100. The interest coverage ratio equals

The method of comparing financial statement information that involves comparing figures for different accounts, in a single time period, is called "horizontal analysis."

Common size balance sheets present all of a company's asset, liabilities, and equity accounts expressed as a percentage of total net income for the year.

"Liquidity" and "solvency" mean the same thing. They are two different words for the same concept.

On a statement of cash flows prepared using the indirect method, decreases in current assets are typically shown as additions to operating cash flows.

Benefits of using ratio analysis include all of the following except:

Research indicates that all of the following statements are correct, except:

The Fan Corp. in 2016 had revenues of $24,000, variable costs of $12,000, fixed operating costs of $4,000, interest expenses of $2,000, no taxes, and net income = $6,000. The financial leverage effect for this company is

Academic research has shown that, because accounting statements measure income differently than the way economists say it should be measured, stock markets generally ignore news about company earnings.

ROCE can be decomposed into three ratios. Which of the following is the correct set of ratios?

On a statement of cash flows prepared using the indirect method, an increase in prepaid expenses will be shown as something that increases operating cash flows.

Analysts use various different ratios to assess a company's long-term solvency. Which of these ratios is typically measured using average data for the year, rather than year-end data?

Assume a company now has a current ratio of 3. Just before year end, it decides to pay back some of its current liabilities, using its cash. Which of the following statements is correct regarding the effect of this decision?

The Chi Corp. in 2016 had revenues of $12,000, variable costs of $6,000, fixed operating costs of $2,000, interest expenses of $1,000, no taxes, and net income = $3,000. The operating leverage effect for this company is

The FASB's Conceptual Framework says that, to be relevant, information must have predictive value, and that information that only has confirmatory value is never relevant.

The financial leverage effect equals operating income divided by interest expense.

How Accounting Works

Selecting Your Business Structure

Choosing Accounting Software

Accounting for Inventory

Doing Business Day to Day

Tackling the General Ledger

Reconciling Bank and Credit Card Statements

Setting up New Team Members

Understanding Insurance

Other Benefits and Reimbursements

Payroll Taxes

Appendix

Filters