Question 1

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 2

The balance sheet lists ant their fair market value as of midnight on the annual fiscal end date for the firm.

Accepted Answer

A) True 
 B)False

Question 3

Determine the increase or decrease in cash for Rinky Supply Company for last year,given the following information.(Assume no other changes occurred during the past year. ) Decrease in marketable securities = $25
Increase in accounts receivables = $50
Increase in notes payable = $30
Decrease in accounts payable = $20
Increase in accrued wages and taxes = $15
Increase in inventories = $35
Retained earnings = $ 5

Accepted Answer

A)  −$50 
B)  +$40 
C)  −$30 
D)  +$20 
E)  −$10

Question 4

If the current ratio of Firm A is greater than the current ratio of Firm B,we cannot be sure that the quick ratio of Firm A is greater than that of Firm B.However,if the quick ratio of Firm A exceeds that of Firm B,we can be assured that Firm A's current ratio also exceeds B's current ratio.

Accepted Answer

A) True 
 B)False

Question 5

An increase in an asset account is a source of cash,whereas an increase in a liability account is a use of cash.

Accepted Answer

A) True 
 B)False

Question 6

Aurillo Equipment Company (AEC)projected that its ROE for next year would be just 6%.However,the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding.The firm's total debt will remain at $200,000 and the debt ratio will hold constant at 80%,but the interest rate on the refinanced debt will be 10%.The rate on the old debt is 14%.Refinancing will not affect sales which are projected to be $300,000.EBIT will be 11% of sales,and the firm's tax rate is 40%.If AEC refinances its high interest bonds,what will be its projected new ROE?

Accepted Answer

A)  3.0% 
B)  8.2% 
C)  10.0% 
D)  15.6% 
E)  18.7%

Question 7

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

Accepted Answer

A) True 
 B)False

Question 8

Cannon Company has enjoyed a rapid increase in sales in recent years,following a decision to sell on credit.However,the firm has noticed a recent increase in its collection period.Last year,total sales were $1 million,and $250,000 of these sales were on credit.During the year,the accounts receivable account averaged $41,664.It is expected that sales will increase in the forthcoming year by 50 percent,and,while credit sales should continue to be the same proportion of total sales,it is expected that the days sales outstanding will also increase by 50 percent.If the resulting increase in accounts receivable must be financed by external funds,how much external funding will Cannon need?

Accepted Answer

A)  $41,664 
B)  $52,086 
C)  $47,359 
D)  $106,471 
E)  $93,750

Question 9

The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus,some firms must meet more than just their scheduled interest payments out of earnings.Therefore,the fixed charge coverage is more inclusive than the TIE ratio.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%,what is the company's estimated times interest earned ratio?

Accepted Answer

A)  2.40 
B)  4.25 
C)  5.33 
D)  7.12 
E)  7.75

Question 12

Two firms have the same current ratio,0.75,and the same amount of sales.However,Firm A has a higher inventory turnover ratio than Firm B.Therefore,we can conclude that the quick ratio of Firm A will be smaller than that of Firm B.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is correct?

Accepted Answer

A)  In the text,depreciation is regarded as a use of cash because it reduces fixed assets,which then must be replaced. 
B)  If a company uses some of its cash to pay off short-term debt,then its current ratio will always decline,given the way the ratio is calculated,other things held constant. 
C)  During a recession,it is reasonable to think that most companies' inventory turnover ratios will change while their fixed asset turnover ratios will remain fairly constant. 
D)  During a recession,we can be confident that most companies' DSOs (or ACPs)will decline because their sales will probably decline. 
E)  Each of the above statements is false.

Question 14

Lombardi Trucking Company has the following data: Assets: $10,000
Profit margin: 3.0%
Debt ratio: 60.0%
Interest rate: 10.0%
Tax rate: 40%
Total asset turnover: 2.0
What is Lombardi's TIE ratio?

Accepted Answer

A)  0.95 
B)  1.75 
C)  2.10 
D)  2.67 
E)  3.45

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

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Taxes,payment patterns,and reporting considerations,as well as credit sales and non-cash costs,are reasons why operating cash flows can differ from accounting profits.

Accepted Answer

A) True 
 B)False

Question 19

A firm has notes payable of $1,546,000,long-term debt of $13,000,000,and total interest expense of $1,300,000.If the firm pays 8 percent interest on its long-term debt,what rate of interest does it pay on its notes payable?

Accepted Answer

A)  8.2% 
B)  13.1% 
C)  16.8% 
D)  18.0% 
E)  15.3%

Question 20

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Accepted Answer

A) True 
 B)False

Exam 7: Analysis of Financial Statements

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

The balance sheet lists ant their fair market value as of midnight on the annual fiscal end date for the firm.

If the current ratio of Firm A is greater than the current ratio of Firm B,we cannot be sure that the quick ratio of Firm A is greater than that of Firm B.However,if the quick ratio of Firm A exceeds that of Firm B,we can be assured that Firm A's current ratio also exceeds B's current ratio.

An increase in an asset account is a source of cash,whereas an increase in a liability account is a use of cash.

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus,some firms must meet more than just their scheduled interest payments out of earnings.Therefore,the fixed charge coverage is more inclusive than the TIE ratio.

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.

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%,what is the company's estimated times interest earned ratio?

Two firms have the same current ratio,0.75,and the same amount of sales.However,Firm A has a higher inventory turnover ratio than Firm B.Therefore,we can conclude that the quick ratio of Firm A will be smaller than that of Firm B.

Which of the following statements is correct?

Lombardi Trucking Company has the following data: Assets: $10,000 Profit margin: 3.0% Debt ratio: 60.0% Interest rate: 10.0% Tax rate: 40% Total asset turnover: 2.0 What is Lombardi's TIE ratio?

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

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

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

Taxes,payment patterns,and reporting considerations,as well as credit sales and non-cash costs,are reasons why operating cash flows can differ from accounting profits.

A firm has notes payable of $1,546,000,long-term debt of $13,000,000,and total interest expense of $1,300,000.If the firm pays 8 percent interest on its long-term debt,what rate of interest does it pay on its notes payable?

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.