Deck 3: Financial Analysis

Question 1

As long as prices continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise.

Answer 1

True

Question 2

The stock market tends to move up when inflation goes up.

Answer 2

False

Question 3

To compute the quick ratio, accounts receivable are not included in current assets.

Answer 3

False

Question 4

Ratios are used to compare different firms in the same industry.

Question 5

Profitability ratios are distorted by inflation because profits are stated in current dollars and assets and equity are stated in historical dollars.

Question 6

In analyzing ratios, the age of the firm's assets need not be considered.

Question 7

Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital.

Question 8

Ratios are not distorted by inflation.

Question 9

Absolute values taken from financial statements are more useful than relative values.

Question 10

Asset utilization ratios describe how capital is being utilized to buy assets.

Question 11

Liquidity ratios indicate how fast a firm can generate cash to pay bills.

Question 12

Heavy use of long-term debt can be of benefit to a firm.

Question 13

The term "inventory profits" refers to profits made in the process of selling finished goods at prices higher than their cost of goods sold.

Question 14

Under generally acceptable accounting principles, two companies with identical operating results may not report identical net incomes.

Question 15

A banker or trade creditor is most concerned about a firm's profitability ratios.

Question 16

Return on equity will be higher than return on assets if there is debt in the capital structure.

Question 17

Asset utilization ratios measure the returns on various assets such as return on total assets.

Question 18

Higher debt utilization ratios will always increase a firm's return on equity given a positive return on assets.

Question 19

The DuPont system of profitability analysis emphasizes that profit generated by assets can be derived by various combinations of profit margins and asset turnover.

Question 20

A current ratio of 2 to 1 is always acceptable, for a company in any industry.

Question 21

Fiercely competitive industries such as the computer industry have had lower profit margins and return on equity in recent years even though they are under extreme pressure to maintain high profitability.

Question 22

Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power.

Question 23

Ratios are only useful for those areas of business that involve investment decisions.

Question 24

Return on equity (ROE) will not change if the firm increases its use of debt.

Question 25

Asset utilization ratios relate balance sheet assets to income statement sales.

Question 26

Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets, but not a combination of both.

Question 27

During disinflation, stock prices tend to go up because the investor's required rate of return goes down.

Question 28

Return on equity for a very risky firm should be higher than return on equity for a less risky firm.

Question 29

Intangible assets are becoming an important part of the assets in company financial statements because accountants are recognizing the growing impact of brand names.

Question 30

Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are one time events, and do not measure annual operating performance.

Question 31

A firm with heavy long-term debt can benefit during inflationary times, as debt can be repaid with "cheaper" dollars.

Question 32

The current ratio is a more severe test of a firm's liquidity than the quick ratio.

Question 33

FIFO will cause inflated profits during deflation.

Question 34

The use of capital assets will affect the equity multiplier.

Question 35

LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue.

Question 36

Asset utilization ratios can be used to measure the effectiveness of a firm's managers.

Question 37

LIFO inventory valuation is responsible for much of the inventory profits caused by inflation.

Question 38

Industries most sensitive to inflation-induced profits are those with cyclical products such as lumber, copper, etc.

Question 39

Financial ratios are used to weigh and evaluate the operational performance of the firm.

Question 40

Receivables turnover is the reciprocal of the collection period times 365.

Question 41

Total asset turnover indicates the firm's

A) liquidity.
B) debt position.
C) ability to use its assets to generate sales.
D) profitability.

Question 42

The ______________ method of inventory costing is least likely to lead to inflation-induced profits.

A) FIFO
B) LIFO
C) Weighted average
D) Lower of cost or market

Question 43

Which of the following is not an asset utilization ratio?

A) Inventory turnover
B) Return on assets
C) Capital asset turnover
D) Average collection period

Question 44

A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's capital asset turnover is

A) 3.0x
B) 12.0x
C) 2.4x
D) 5.0x

Question 45

Which two ratios are used in the DuPont system to create return on assets?

A) Return on assets and asset turnover
B) Profit margin and asset turnover
C) Return on total capital and the profit margin
D) Inventory turnover and return on capital assets

Question 46

Which of the following is a potential problem of utilizing ratio analysis?

A) trends and industry averages are historical in nature.
B) financial data may be distorted due to price-level changes.
C) firms within an industry may not use similar accounting methods.
D) all of the other answers are correct

Question 47

In addition to comparison with industry ratios, it is also helpful to analyze ratios using

A) trend analysis.
B) historical comparisons.
C) neither; only industry ratios provide valid comparisons.
D) two of the answers are correct.

Question 48

If a firm has both interest expense and lease payments,

A) times interest earned will be smaller than fixed charge coverage.
B) times interest earned will be greater than fixed charge coverage.
C) times interest earned will be the same as fixed charge coverage.
D) fixed charge coverage cannot be computed.

Question 49

A firm has operating profit of $120,000 after deducting lease payments of $20,000. Interest expense is $40,000. What is the firm's fixed charge coverage?

A) 6.00x
B) 4.00x
C) 3.50x
D) 2.33x

Question 50

Asset utilization ratios

A) relate balance sheet assets to income statement sales.
B) measure how much cash is available for reinvestment into current assets.
C) are most important to shareholders.
D) measures the firm's ability to generate a profit on sales.

Question 51

Ratio analysis can be useful for

A) historical trend analysis within a firm.
B) comparison of ratios within a single industry.
C) measuring the effects of financing.
D) All of the other answers are correct

Question 52

ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,285,000. What is the balance in accounts receivable at year-end?

A) $ 54,750
B) $109,500
C) $540,000
D) $547,500

Question 53

Disinflation may cause

A) an increase in the value of gold, silver, and gems.
B) a reduced required return demanded by investors on financial assets.
C) additional profits through falling inventory costs.
D) None of the other answers are correct

Question 54

During inflation, replacement cost accounting will

A) increase the value of assets.
B) Lower the debt to asset ratio.
C) reduce incomes.
D) all of the other answers are correct

Question 55

A quick ratio much smaller than the current ratio reflects

A) a small portion of current assets is in inventory.
B) a large portion of current assets is in inventory.
C) that the firm will have a high inventory turnover.
D) that the firm will have a high return on assets.

Question 56

Industries most sensitive to inflation-induced profits are those with

A) seasonal products.
B) cyclical products.
C) consumer products.
D) high-profit products.

Question 57

Income can be distorted by factors other than inflation. The most important causes of distortion for inter-industry comparisons are:

A) timing of revenue receipts and nonrecurring gains or losses.
B) tax write-off policy and use of different inventory methods.
C) All of the other answers are correct
D) None of the other answers are correct

Question 58

A short-term creditor would be most interested in

A) profitability ratios.
B) asset utilization ratios.
C) liquidity ratios.
D) debt utilization ratios.

Question 59

In examining the liquidity ratios, the primary emphasis is the firm's

A) ability to effectively employ its resources.
B) overall debt position.
C) ability to pay short-term obligations on time.
D) ability to earn an adequate return.

Question 60

Replacement cost accounting (current cost method) will usually

A) increase assets, decrease net income before taxes, and lower the return on equity.
B) increase assets, increase net income before taxes, and increase the return on equity.
C) decrease assets, increase net income before taxes, and increase the return on equity.
D) None of the other answers are correct

Question 61

XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the sales figure for the year?

A) $60,000
B) $6,000,000
C) $7,200,000
D) None of the other answers are correct

Question 62

Which of the following is not considered to be a profitability ratio?

A) profit margin
B) times interest earned
C) return on equity
D) return on assets (investment)

Question 63

A firm's long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000.

A) current ratio = 0.5; quick ratio = 1.5
B) current ratio = 1.0; quick ratio = 2.0
C) current ratio = 1.5; quick ratio = 2.0
D) current ratio = 2.5; quick ratio = 1.0

Question 64

Investors and financial analysts wanting to evaluate the operating efficiency of a firm's managers would probably look primarily at the firm's

A) debt utilization ratios.
B) liquidity ratios.
C) asset utilization ratios.
D) profitability ratios.

Question 65

A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity.

A) 60%
B) 20%
C) 26%
D) not enough information

Question 66

-The firm's debt to asset ratio is

A) 56.1%.
B) 75.61%.
C) 80.49%.
D) None of the other answers are correct

Question 67

-Megaframe's quick ratio is

A) 1:1.
B) 1:2.
C) 1.6:1.
D) 3:1.

Question 68

The higher a firm's debt utilization ratios, excluding debt-to-total assets, the

A) less risky the firm's financial position.
B) more risky the firm's financial position.
C) more easily the firm will be able to pay dividends.
D) None of the other answers are correct

Question 69

The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket its aftertax profit margin is:

A) 5%
B) 12%
C) 20%
D) 25%

Question 70

-What is Megaframe Computer's total asset turnover?

A) 3.680x.
B) 3.18x.
C) 2x.
D) 1.71x.

Question 71

If government bonds pay 8.5% interest and CDIC insured savings accounts pay 5.5% interest, shareholders in a moderately risky firm would expect return-on-equity values of

A) 5.5%.
B) 8.5%.
C) 12%.
D) above 8.5%, but the exact amount is uncertain.

Question 72

-Megaframe's current ratio is

A) 1.9:1.
B) .6:1.
C) 1:1.
D) .86:1.

Question 73

The most rigorous test of a firm's ability to pay its short-term obligations is its

A) current ratio.
B) quick ratio.
C) debt-to-assets ratio.
D) times-interest-earned ratio.

Question 74

Which industry places the most value on intangible assets?

A) professional services
B) manufacturing
C) production
D) all of the other answers are correct

Question 75

A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is

A) 60%.
B) 15%.
C) 30%.
D) not enough information

Question 76

-Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately

A) 15%.
B) 25%.
C) 29%.
D) 34%.

Question 77

-The firm's average collection period is

A) 31 days.
B) 25 days.
C) 12 days.
D) 20 days.

Question 78

For a given level of profitability as measured by profit margin, the firm's return on equity will

A) increase as its debt-to-assets ratio decreases.
B) decrease as its current ratio increases.
C) increase as its debt-to assets ratio increases.
D) decrease as its times-interest-earned ratio decreases.

Question 79

A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders' equity is $900,000. What is the total debt to asset ratio?

A) 45%
B) 40%
C) 55%
D) None of the other answers are correct

Question 80

-Times interest earned for Megaframe Computer is

A) 2x.
B) 5x.
C) 4x.
D) 10x.