Question 1

The values or accounting numbers that are reported on the balance sheet are the same as the market values of the assets.

Accepted Answer

A) True 
 B)False

Question 2

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, whereas the income statement measures the financial position of the firm at a specific point in time.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

Accepted Answer

A) Balance sheet 
B) Income statement 
C) Statement of retained earnings 
D) Statement of cash flows 
E) Proxy statement

Question 4

Which of the following ratios indicate how much investors are willing to pay for a firm's stock for each dollar of reported profits?

Accepted Answer

A) Earnings per share 
B) Market-to-book ratio 
C) Price/earnings ratio 
D) Return on equity 
E) Net profit margin

Question 5

Which of the following mathematical expressions computes the net worth of a firm?

Accepted Answer

A) Net worth = Current assets minus current liabilities 
B) Net worth = Total assets minus current liabilities 
C) Net worth = Total liabilities minus current assets 
D) Net worth = Total assets minus total liabilities 
E) Net worth = Total liabilities minus current liabilities

Question 6

Which of the following ratios shows the relationship between a firm's current assets and its current liabilities?

Accepted Answer

A) Asset management ratios 
B) Liquidity ratios 
C) Debt management ratios 
D) Profitability ratios 
E) Market value ratios

Question 7

Which of the following is true about a common size balance sheet?

Accepted Answer

A) The assets, liabilities, and equities are reported at their market values. 
B) The assets, liabilities, and equities are reported as percentages of common stock. 
C) The assets, liabilities, and equities are reported as percentages of total assets. 
D) The assets, liabilities, and equities are arranged in the alphabetical order. 
E) The assets, liabilities, and equities are reported as percentages of the assets, liabilities, and equities of a competing firm.

Question 8

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

Accepted Answer

A) Fixed assets are sold for cash. 
B) Long-term debt is issued to pay off current liabilities. 
C) Accounts receivable are collected. 
D) Cash is used to pay off accounts payable. 
E) A bank loan is obtained, and the proceeds are credited to the firm's checking account.

Question 9

Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. Alumbat's current times interest earned ratio is:

Accepted Answer

A) 2.4 times. 
B) 3.4 times. 
C) 3.6 times. 
D) 4.0 times. 
E) 5.0 times.

Question 10

Which of the following changes is considered a source of cash when preparing a statement of cash flow?

Accepted Answer

A) An increase in property, plant, and equipment 
B) A decrease in accounts payable 
C) A decrease in inventories 
D) An increase in accounts receivable 
E) A decrease in accrued wages

Exam 2: Analysis of Financial Statements