Question 1

The book value of an asset is the market value less any accumulated depreciation.

Accepted Answer

A) True 
 B)False

Question 2

A firm whose days sales outstanding is much higher than the industry's average is likely to either be too "tight" in its credit policy or too "loose" in its collection policy.

Accepted Answer

A) True 
 B)False

Question 3

Selling new stock is an equity transaction; it does not affect any asset or liability account and, therefore, does not appear on the statement of cash flows.

Accepted Answer

A) True 
 B)False

Question 4

Makeover Inc.believes that at its current stock price of $16.00 the firm is undervalued in the market.Makeover plans to repurchase 2.4 million of its 20 million shares outstanding.The firm's managers expect that they can repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase.The firm's current earnings are $44 million.If management's assumptions hold, what is the expected market price after repurchase?

Accepted Answer

A)  $16.00 
B)  $17.26 
C)  $18.18 
D)  $20.00 
E)  $24.40 
A)  $16.00 
B)  $17.26 
C)  $18.18 
D)  $20.00 
E)  $24.40

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

In accounting, emphasis is placed on determining net income.In finance, the primary emphasis also is on net income because that is what investors use to value the firm.However, a secondary consideration is cash flow because that's what is used to run the business.

Accepted Answer

A) True 
 B)False

Question 7

Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense.

Accepted Answer

A) True 
 B)False

Question 8

Using the direct method to determine cash flows from operations, start with net income, then add back all expenses not paid in cash and subtract all revenues that do not provide cash.

Accepted Answer

A) True 
 B)False

Question 9

The four basic financial statements included in the annual report are the balance sheet, the income statement, the statement of cash flows, and the statement of reported earnings.

Accepted Answer

A) True 
 B)False

Question 10

The inventory turnover and current ratios are related.The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged.

Accepted Answer

A) True 
 B)False

Question 11

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Accepted Answer

A) True 
 B)False

Question 12

During a period of lowering prices, the FIFO accounting method will produce a higher balance sheet inventory but a lower cost of goods sold than the LIFO accounting method.

Accepted Answer

A) True 
 B)False

Question 13

You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36.What is the return on equity (ROE)?

Accepted Answer

A)  14.0% 
B)  12.5% 
C)  15.0% 
D)  2.5% 
E)  13.5% 
A)  14.0% 
B)  12.5% 
C)  15.0% 
D)  2.5% 
E)  13.5%

Question 14

Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0, while its quick ratio is 2.5.What are Nolan's current assets?

Accepted Answer

A)  $200,000 
B)  $300,000 
C)  $400,000 
D)  $500,000 
E)  $600,000 
A)  $200,000 
B)  $300,000 
C)  $400,000 
D)  $500,000 
E)  $600,000

Question 15

If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Harvey Supplies Inc.has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6.Harvey's total assets are $1 million and its debt ratio is 0.20.The firm has no long-term debt.What is Harvey's sales figure if the total cost of goods sold is 75% of sales?

Accepted Answer

A)  $960,000 
B)  $720,000 
C)  $1,620,000 
D)  $120,000 
E)  $540,000 
A)  $960,000 
B)  $720,000 
C)  $1,620,000 
D)  $120,000 
E)  $540,000

Question 18

From an investor's standpoint, predicting the future is the purpose of financial statement analysis.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following would be classified as a use of cash?

Accepted Answer

A)  An increase in accounts payable. 
B)  A decrease in marketable securities. 
C)  A decrease in accounts receivable. 
D)  An increase in retained earnings. 
E)  An increase in inventories. 
A)  An increase in accounts payable. 
B)  A decrease in marketable securities. 
C)  A decrease in accounts receivable. 
D)  An increase in retained earnings. 
E)  An increase in inventories.

Question 20

A firm's current ratio has steadily increased over the past 5 years, from 1.9 five years ago to 3.8 today.What would a financial analyst be most justified in concluding?

Accepted Answer

A)  The firm's fixed assets turnover probably has improved. 
B)  The firm's liquidity position probably has improved. 
C)  The firm's stock price probably has increased. 
D)  Each of the above is likely to have occurred. 
E)  The analyst would be unable to draw any conclusions from this information. 
A)  The firm's fixed assets turnover probably has improved. 
B)  The firm's liquidity position probably has improved. 
C)  The firm's stock price probably has increased. 
D)  Each of the above is likely to have occurred. 
E)  The analyst would be unable to draw any conclusions from this information.

The book value of an asset is the market value less any accumulated depreciation.

A firm whose days sales outstanding is much higher than the industry's average is likely to either be too "tight" in its credit policy or too "loose" in its collection policy.

Selling new stock is an equity transaction; it does not affect any asset or liability account and, therefore, does not appear on the statement of cash flows.

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

In accounting, emphasis is placed on determining net income.In finance, the primary emphasis also is on net income because that is what investors use to value the firm.However, a secondary consideration is cash flow because that's what is used to run the business.

Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense.

Using the direct method to determine cash flows from operations, start with net income, then add back all expenses not paid in cash and subtract all revenues that do not provide cash.

The four basic financial statements included in the annual report are the balance sheet, the income statement, the statement of cash flows, and the statement of reported earnings.

The inventory turnover and current ratios are related.The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged.

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

During a period of lowering prices, the FIFO accounting method will produce a higher balance sheet inventory but a lower cost of goods sold than the LIFO accounting method.

You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36.What is the return on equity (ROE)?

Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0, while its quick ratio is 2.5.What are Nolan's current assets?

If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease.

Which of the following statements is correct?

Harvey Supplies Inc.has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6.Harvey's total assets are $1 million and its debt ratio is 0.20.The firm has no long-term debt.What is Harvey's sales figure if the total cost of goods sold is 75% of sales?

From an investor's standpoint, predicting the future is the purpose of financial statement analysis.

Which of the following would be classified as a use of cash?

A firm's current ratio has steadily increased over the past 5 years, from 1.9 five years ago to 3.8 today.What would a financial analyst be most justified in concluding?

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 Concepts

Security Valuation and Selection

Filters

Exam 7: Analysis of Financial Statements

The book value of an asset is the market value less any accumulated depreciation.

A firm whose days sales outstanding is much higher than the industry's average is likely to either be too "tight" in its credit policy or too "loose" in its collection policy.

Selling new stock is an equity transaction; it does not affect any asset or liability account and, therefore, does not appear on the statement of cash flows.

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

In accounting, emphasis is placed on determining net income.In finance, the primary emphasis also is on net income because that is what investors use to value the firm.However, a secondary consideration is cash flow because that's what is used to run the business.

Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense.

Using the direct method to determine cash flows from operations, start with net income, then add back all expenses not paid in cash and subtract all revenues that do not provide cash.

The four basic financial statements included in the annual report are the balance sheet, the income statement, the statement of cash flows, and the statement of reported earnings.

The inventory turnover and current ratios are related.The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged.

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

During a period of lowering prices, the FIFO accounting method will produce a higher balance sheet inventory but a lower cost of goods sold than the LIFO accounting method.

You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36.What is the return on equity (ROE)?

Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0, while its quick ratio is 2.5.What are Nolan's current assets?

If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease.

Which of the following statements is correct?

Harvey Supplies Inc.has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6.Harvey's total assets are $1 million and its debt ratio is 0.20.The firm has no long-term debt.What is Harvey's sales figure if the total cost of goods sold is 75% of sales?

From an investor's standpoint, predicting the future is the purpose of financial statement analysis.

Which of the following would be classified as a use of cash?

A firm's current ratio has steadily increased over the past 5 years, from 1.9 five years ago to 3.8 today.What would a financial analyst be most justified in concluding?

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 Concepts

Security Valuation and Selection

Filters