Question 1

The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

Accepted Answer

A) True 
 B)False

Question 2

Since 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.

Accepted Answer

A) True 
 B)False

Question 3

Market value ratios provide management with a current assessment of how investors in the market view the firm's past performance and future prospects.

Accepted Answer

A) True 
 B)False

Question 4

Common stockholders' equity is the current market value of all common shares of stock outstanding.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following actions will cause an increase in the quick ratio in the short run?

Accepted Answer

A)  $1,000 worth of inventory is sold,and an account receivable is created.The receivable exceeds the inventory by the amount of profit on the sale,which is added to retained earnings. 
B)  A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash.(Average company profits are 15 percent of assets. ) 
C)  Marketable securities are sold at cost. 
D)  All of the above. 
E)  Answers a and b above. 
A)  $1,000 worth of inventory is sold,and an account receivable is created.The receivable exceeds the inventory by the amount of profit on the sale,which is added to retained earnings. 
B)  A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash.(Average company profits are 15 percent of assets. ) 
C)  Marketable securities are sold at cost. 
D)  All of the above. 
E)  Answers a and b above.

Question 6

The income statement measures the flow of funds into (i.e.revenue)and out of (i.e.expenses)the firm over a certain time period.It is always based on accounting data.

Accepted Answer

A) True 
 B)False

Question 7

The accrual method of accounting recognizes revenue when ____,and recognizes expenses when ____.

Accepted Answer

A)  they are earned;cash is paid 
B)  cash is received;they are incurred 
C)  they are earned;they are incurred 
D)  cash is received;cash is paid 
A)  they are earned;cash is paid 
B)  cash is received;they are incurred 
C)  they are earned;they are incurred 
D)  cash is received;cash is paid

Question 8

The inventory turnover ratio and days sales outstanding (DSO)are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

Accepted Answer

A) True 
 B)False

Question 9

Suppose a firm wants to maintain a specific TIE ratio.If the firm knows the level of its debt,the interest rate it will pay on that debt and the applicable tax rate,the firm can then calculate the earnings level required to maintain its target TIE ratio.

Accepted Answer

A) True 
 B)False

Question 10

If a firm borrows money from a bank or reduces its level of inventory,these are both examples of sources of funds.

Accepted Answer

A) True 
 B)False

Question 11

Collins Company had the following partial balance sheet and complete income statement information for 2010:   The industry average DSO is 30 (360-day basis).Collins plans to change its credit policy so as to cause its DSO to equal the industry average,and this change is expected to have no effect on either sales or cost of goods sold.If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10% interest rate),what will Collins' debt ratio (Total debt/Total assets)be after the change in DSO is reflected in the balance sheet?

Accepted Answer

A)  33.33% 
B)  45.28% 
C)  52.75% 
D)  60.00% 
E)  65.71% 
A)  33.33% 
B)  45.28% 
C)  52.75% 
D)  60.00% 
E)  65.71%

Question 12

The time dimension is important in financial statement analysis.While the balance sheet and income statements represent the firm's financial position at a point in time,the statement of cash flows reports changes that were made to the firm's accounts over a period of time.

Accepted Answer

A) True 
 B)False

Question 13

Pepsi Corporation's current ratio is 0.5,while Coke Company's current ratio is 1.5.Both firms want to "window dress" their coming end-of-year financial statements.As part of their window dressing strategy,each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account.Which of the statements below best describes the actual results of these transactions?

Accepted Answer

A)  The transactions will have no effect on the current ratios. 
B)  The current ratios of both firms will be increased. 
C)  The current ratios of both firms will be decreased. 
D)  Only Pepsi Corporation's current ratio will be increased. 
E)  Only Coke Company's current ratio will be increased. 
A)  The transactions will have no effect on the current ratios. 
B)  The current ratios of both firms will be increased. 
C)  The current ratios of both firms will be decreased. 
D)  Only Pepsi Corporation's current ratio will be increased. 
E)  Only Coke Company's current ratio will be increased.

Question 14

You are given the following information: Stockholders' equity = $1,250;price/earnings ratio = 5;shares outstanding = 25;market/book ratio = 1.5.Calculate the market price of a share of the company's stock.

Accepted Answer

A)  $33.33 
B)  $75.00 
C)  $10.00 
D)  $166.67 
E)  $133.32 
A)  $33.33 
B)  $75.00 
C)  $10.00 
D)  $166.67 
E)  $133.32

Question 15

A firm has a debt ratio of 40 percent.Currently,it has interest expense of $500,000 on $5,000,000 of total debt outstanding,and a tax rate of 40 percent.If the firm's ROA is 6 percent,by how many percentage points is the firm's ROE greater than its ROA?

Accepted Answer

A)  0.0% 
B)  4.0% 
C)  5.8% 
D)  7.4% 
E)  10.0% 
A)  0.0% 
B)  4.0% 
C)  5.8% 
D)  7.4% 
E)  10.0%

Question 16

We can use the fixed asset turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct?

Accepted Answer

A)  In a reverse split,a company reduces the number of shares outstanding in order to stabilize and provide a floor for a rapidly declining stock price. 
B)  In theory,dividends are determined as a residual item.Therefore,in order to conserve earnings for better future earnings opportunities,the poorer the firm's investment opportunities,the lower its dividend payments should be. 
C)  The farther to the right the IOS is the higher a firm's dividend payout ratio,other things held constant. 
D)  Even if a stock split has no information content,and even if the dividend per share adjusted for the split does not increase,there can still be a real benefit (i.e. ,a higher value for shareholders)from such a split,but any such benefit is probably small. 
A)  In a reverse split,a company reduces the number of shares outstanding in order to stabilize and provide a floor for a rapidly declining stock price. 
B)  In theory,dividends are determined as a residual item.Therefore,in order to conserve earnings for better future earnings opportunities,the poorer the firm's investment opportunities,the lower its dividend payments should be. 
C)  The farther to the right the IOS is the higher a firm's dividend payout ratio,other things held constant. 
D)  Even if a stock split has no information content,and even if the dividend per share adjusted for the split does not increase,there can still be a real benefit (i.e. ,a higher value for shareholders)from such a split,but any such benefit is probably small.

Question 18

Other things held constant,if a firm holds cash balances in excess of their optimal level in a non-interest bearing account,this will tend to lower the firm's

Accepted Answer

A)  Operating profit margin. 
B)  Total asset turnover. 
C)  Return on equity. 
D)  All of the above. 
E)  Answers b and c above. 
A)  Operating profit margin. 
B)  Total asset turnover. 
C)  Return on equity. 
D)  All of the above. 
E)  Answers b and c above.

Question 19

Which of the following statements is correct?

Accepted Answer

A)  If Company A has a higher debt ratio than Company B,then we can be sure that A will have a lower times-interest-earned ratio than B. 
B)  Suppose two companies have identical operations in terms of sales,cost of goods sold,interest rate on debt,and assets.However,Company A uses more debt than Company B;that is,Company A has a higher debt ratio.Under these conditions,we would expect B's profit margin to be higher than A's. 
C)  The ROE of any company which is earning positive profits and which has a positive net worth (or common equity)must exceed the company's ROA. 
D)  Statements a,b,and c are all true. 
E)  Statements a,b,and c are all false. 
A)  If Company A has a higher debt ratio than Company B,then we can be sure that A will have a lower times-interest-earned ratio than B. 
B)  Suppose two companies have identical operations in terms of sales,cost of goods sold,interest rate on debt,and assets.However,Company A uses more debt than Company B;that is,Company A has a higher debt ratio.Under these conditions,we would expect B's profit margin to be higher than A's. 
C)  The ROE of any company which is earning positive profits and which has a positive net worth (or common equity)must exceed the company's ROA. 
D)  Statements a,b,and c are all true. 
E)  Statements a,b,and c are all false.

Question 20

Differences in cash flow cycles and variations in accounting methods among firms can invalidate financial comparisons between firms.

Accepted Answer

A) True 
 B)False

The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

Since 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.

Market value ratios provide management with a current assessment of how investors in the market view the firm's past performance and future prospects.

Common stockholders' equity is the current market value of all common shares of stock outstanding.

Which of the following actions will cause an increase in the quick ratio in the short run?

The income statement measures the flow of funds into (i.e.revenue)and out of (i.e.expenses)the firm over a certain time period.It is always based on accounting data.

The accrual method of accounting recognizes revenue when ,and recognizes expenses when .

The inventory turnover ratio and days sales outstanding (DSO)are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

Suppose a firm wants to maintain a specific TIE ratio.If the firm knows the level of its debt,the interest rate it will pay on that debt and the applicable tax rate,the firm can then calculate the earnings level required to maintain its target TIE ratio.

If a firm borrows money from a bank or reduces its level of inventory,these are both examples of sources of funds.

The time dimension is important in financial statement analysis.While the balance sheet and income statements represent the firm's financial position at a point in time,the statement of cash flows reports changes that were made to the firm's accounts over a period of time.

You are given the following information: Stockholders' equity = $1,250;price/earnings ratio = 5;shares outstanding = 25;market/book ratio = 1.5.Calculate the market price of a share of the company's stock.

A firm has a debt ratio of 40 percent.Currently,it has interest expense of $500,000 on $5,000,000 of total debt outstanding,and a tax rate of 40 percent.If the firm's ROA is 6 percent,by how many percentage points is the firm's ROE greater than its ROA?

We can use the fixed asset turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.

Which of the following statements is correct?

Other things held constant,if a firm holds cash balances in excess of their optimal level in a non-interest bearing account,this will tend to lower the firm's

Which of the following statements is correct?

Differences in cash flow cycles and variations in accounting methods among firms can invalidate financial comparisons between firms.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 7: Analysis of Financial Statements

The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

Since 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.

Market value ratios provide management with a current assessment of how investors in the market view the firm's past performance and future prospects.

Common stockholders' equity is the current market value of all common shares of stock outstanding.

Which of the following actions will cause an increase in the quick ratio in the short run?

The income statement measures the flow of funds into (i.e.revenue)and out of (i.e.expenses)the firm over a certain time period.It is always based on accounting data.

The accrual method of accounting recognizes revenue when ____,and recognizes expenses when ____.

The inventory turnover ratio and days sales outstanding (DSO)are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

Suppose a firm wants to maintain a specific TIE ratio.If the firm knows the level of its debt,the interest rate it will pay on that debt and the applicable tax rate,the firm can then calculate the earnings level required to maintain its target TIE ratio.

If a firm borrows money from a bank or reduces its level of inventory,these are both examples of sources of funds.

The time dimension is important in financial statement analysis.While the balance sheet and income statements represent the firm's financial position at a point in time,the statement of cash flows reports changes that were made to the firm's accounts over a period of time.

You are given the following information: Stockholders' equity = $1,250;price/earnings ratio = 5;shares outstanding = 25;market/book ratio = 1.5.Calculate the market price of a share of the company's stock.

A firm has a debt ratio of 40 percent.Currently,it has interest expense of $500,000 on $5,000,000 of total debt outstanding,and a tax rate of 40 percent.If the firm's ROA is 6 percent,by how many percentage points is the firm's ROE greater than its ROA?

We can use the fixed asset turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.

Which of the following statements is correct?

Other things held constant,if a firm holds cash balances in excess of their optimal level in a non-interest bearing account,this will tend to lower the firm's

Which of the following statements is correct?

Differences in cash flow cycles and variations in accounting methods among firms can invalidate financial comparisons between firms.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

The accrual method of accounting recognizes revenue when ,and recognizes expenses when .