Question 1

A high debt ratio can be favorable because higher leverage may result in a higher return on equity.

Accepted Answer

A) True 
 B)False

Question 2

John Box Inc.has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT).John Box's times-interest-earned ratio is 4.2.What is John Box's net income?

Accepted Answer

A)  $96,000 
B)  $57,000 
C)  $126,000 
D)  $57,600

Question 3

Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
 
-Based on the information in Table 4-1,the acid-test ratio is

Accepted Answer

A)  1.71. 
B)  1.67. 
C)  1.02. 
D)  0.98.

Question 4

Trend analysis is the forecasting of the firm's financial ratios for a future time period by using its own ratios from previous periods.

Accepted Answer

A) True 
 B)False

Question 5

Financial ratios are used by managers inside the company and by lenders,credit-rating agencies,and investors outside of the company.

Accepted Answer

A) True 
 B)False

Question 6

Lower asset turnover ratios are generally indicative of more efficient asset management.

Accepted Answer

A) True 
 B)False

Question 7

In an ideal world,which of the following would be used to evaluate firm performance?

Accepted Answer

A)  book value of assets 
B)  corporate retained earnings from the day of incorporation 
C)  accounting assets and profits 
D)  market value of assets

Question 8

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Accepted Answer

A)  equal to one. 
B)  greater than one. 
C)  less than one. 
D)  greater than or less than one, but not equal to one.

Question 9

Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
 
-Based on the information in Table 4-1,and assuming the company's stock price is $30 per share,the P/E ratio is

Accepted Answer

A)  3.09. 
B)  4.83. 
C)  9.85. 
D)  10.99.

Question 10

Please refer to Table 4-4 for the following questions.
Table 4-4
Wes Donnell, Inc.
Balance Sheet
 
-In addition to the information contained in Table 4-4,you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010.What is Wes Donnell's cash balance for 2010?

Accepted Answer

A)  $2,500 
B)  $13,600 
C)  $4,000 
D)  $6,500

Question 11

Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
 
-Based on the information in Table 4-1,the current ratio is

Accepted Answer

A)  1.92. 
B)  1.98. 
C)  2.86. 
D)  2.88.

Question 12

SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000.What is SNL's times-interest-earned ratio?

Accepted Answer

A)  1.3 
B)  11.4 
C)  8.1 
D)  45.8

Question 13

The balance sheet and income statement for Johnson and Breakwater is presented below.
  
a.Compute the following ratios: Current ratio,Acid test ratio,Debt ratio,Total asset turnover,Operating profit margin,Return on total investments,Times interest earned,Inventory turnover.
b.All other things equal,compute the dollar amount of sales needed to achieve an 18% return on total assets for the coming year.
c.Given Johnson's inventory turnover ratio,find a way of computing the current level of inventory given this ratio and assuming the current level of inventories is unknown.Set up but do not solve.

Accepted Answer

The answer of The balance sheet and income statement for...

Question 14

a.Using the financial statements for GMT Enterprises for 2010 (given below),calculate the return on equity,the debt ratio,and the times interest earned ratio.
b.Suppose the industry average debt ratio is 50%.Give one reason why the debt ratio for GMT Enterprises may be considered favorable,and give one reason why the debt ratio for GMT Enterprises may be considered unfavorable.
GMT Enterprises
2010 Financial Statements

Accepted Answer

The answer of a.Using the financial statements for GMT Enterprises...

Question 15

Standard Inc.has an annual interest expense of $40,000.If Standard's times-interest-earned ratio is 3.0,what is Standard's Earnings Before Taxes (EBT)?

Accepted Answer

A)  $47,000 
B)  $80,000 
C)  $120,000 
D)  $160,000

Question 16

Seasonality causes comparability problems in ratio analysis.A common solution is to use an average account balance as opposed to an ending account balance.

Accepted Answer

A) True 
 B)False

Question 17

Apollo Corp.reported the following balance sheet:

Apollo has sales of $600,000 and net income of $50,000.Apollo's return on equity is

Accepted Answer

A)  5.00%. 
B)  50.00%. 
C)  38.17%. 
D)  41.13%.

Question 18

Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.

Accepted Answer

A) True 
 B)False

Question 19

Operating return on assets captures the effect of taxes and financing costs,and hence provides the broadest possible measure of profitability.

Accepted Answer

A) True 
 B)False

Question 20

All of the following measure liquidity EXCEPT

Accepted Answer

A)  current ratio. 
B)  inventory turnover. 
C)  acid-test ratio. 
D)  operating return on assets.

Exam 4: Evaluating a Firms Financial Performance

A high debt ratio can be favorable because higher leverage may result in a higher return on equity.

John Box Inc.has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT) .John Box's times-interest-earned ratio is 4.2.What is John Box's net income?

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the acid-test ratio is

Trend analysis is the forecasting of the firm's financial ratios for a future time period by using its own ratios from previous periods.

Financial ratios are used by managers inside the company and by lenders,credit-rating agencies,and investors outside of the company.

Lower asset turnover ratios are generally indicative of more efficient asset management.

In an ideal world,which of the following would be used to evaluate firm performance?

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,and assuming the company's stock price is $30 per share,the P/E ratio is

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the current ratio is

SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000.What is SNL's times-interest-earned ratio?

Standard Inc.has an annual interest expense of $40,000.If Standard's times-interest-earned ratio is 3.0,what is Standard's Earnings Before Taxes (EBT) ?

Seasonality causes comparability problems in ratio analysis.A common solution is to use an average account balance as opposed to an ending account balance.

Apollo Corp.reported the following balance sheet: Apollo has sales of $600,000 and net income of $50,000.Apollo's return on equity is

Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.

Operating return on assets captures the effect of taxes and financing costs,and hence provides the broadest possible measure of profitability.

All of the following measure liquidity EXCEPT