Deck 10: Analysis of Financial Statements

Question 1

Financial ratios can be used to estimate systematic risk.

Answer 1

True

Question 2

Financial ratios can be used to identify firms that might default on a loan or declare bankruptcy.

Answer 2

True

Question 3

Some factors that determine business risk include sales variability and debt to equity ratio.

Answer 3

False

Question 4

Financial ratios are used in stock and bond valuation models.

Question 5

It is important to compare a firm's performance relative to: the aggregate economy, its industry, its major competitors and its past performance.

Question 6

Some factors that determine financial risk include interest coverage and cash flow coverage.

Question 7

Traditional cash flow and Free cash flow are equivalent concepts.

Question 8

In common size analysis all assets and liabilities on the balance sheet are divided by total sales.

Question 9

The current ratio, receivables turnover and total asset turnover are measures of internal liquidity.

Question 10

The income statement indicates the flow of sales, expenses, and earnings during a period of time.

Question 11

According to the DuPont system ROE (return on equity) can be decomposed into the profit margin ratio and the total asset turnover ratio.

Question 12

A cross-sectional analysis compares a firm to a subset of industry firms comparable in size or characteristics.

Question 13

The growth of business depends on the percentage of earnings reinvested and the return on equity.

Question 14

The statement of cash flows shows the effect on the firm's cash flows of earnings and changes in the assets, current liabilities, long-term liabilities and net worth.

Question 15

Inventory turnover, net fixed asst turnover and equity turnover are measures of operating efficiency.

Question 16

Financial Accounting Standards Board (FASB) recognizes that it would be improper for all companies to use identical and restrictive accounting principles.

Question 17

Free cash flow = Cash flow from operations -Capital expenditures + Disposition of property and equipment.

Question 18

Bond rating agencies include the analysis of financial ratios in arriving at corporate bond ratings.

Question 19

The balance sheet shows what assets the firm controls at a point in time and how it financed the assets.

Question 20

Cash flow from operations = Net Income + Non cash revenue and expenses -Changes in net working capital.

Question 21

The DuPont equation breaks down a firm's return on equity into three components, which are profit margin, total asset turnover, and financial leverage.

Question 22

Which of the following statements regarding financial risk and business risk is true?

A)The acceptable level of financial risk for a firm depends on its business risk.
B)A firm with a greater degree of business risk has the ability to take on more debt.
C)A firm with a greater degree of financial risk typically takes on less business risk.
D)Financial risk and business risk are both important but they are not related in any way.
E)Financial risk is more important for small firms and business risk is more important for large firms.

Question 23

A common-size income statement expresses all income statement items

A)As a percentage of Current Assets.
B)As a percentage of Fixed Assets.
C)As a percentage of Total Assets.
D)As a percentage of Net Income.
E)As a percentage of Sales

Question 24

Which of the following is not a flow ratio?

A)Interest coverage
B)Fixed charge coverage
C)Debt/equity
D)Cash flow/long term debt
E)Cash flow/total debt

Question 25

Operating performance is divided into which two subcategories of ratios?

A)Efficiency and profitability
B)Efficiency and debt
C)Profitability and growth
D)Debt and equity
E)Liquidity and leverage

Question 26

Which of the following factors would be an indication of high quality earnings?

A)Earnings are close to cash.
B)Earnings are the result of repeat business.
C)Revenue recognition is based on the installment principle.
D)All of the above.
E)None of the above.

Question 27

Which of the following is not a component of return on equity (ROE)?

A)Net income/sales
B)Total assets/equity
C)Equity/sales
D)Sales/total assets
E)Net Profit Margin

Question 28

Limitations on the use of ratios include

A)Accounting comparability.
B)Company homogeneity.
C)Consistent results.
D)A reasonable range within the industry.
E)All of the above

Question 29

The five major classes of ratios include the following, except

A)Internal liquidity.
B)Risk analysis.
C)Growth analysis.
D)Market performance.
E)Operating performance.

Question 30

Determinants of market liquidity include all except the

A)Number of shares traded.
B)Dollar value of shares traded.
C)Bid-ask spread.
D)Number of security owners.
E)Market price per share.

Question 31

Which equation is valid?

A)g = Percent of earnings retained / Return on equity
B)g = Return on equity/Percent of earnings retained
C)g = Return on equity/ Return on total assets
D)g = Percent of earnings retained * Return on equity
E)g = Total assets *Return on total assets

Question 32

Which of the following factors would be indicative of a high quality balance sheet?

A)Book value is greater than market value.
B)The presence of off-balance sheet liabilities
C)Market value is greater than book value.
D)Very little unused borrowing capacity.
E)None of the above.

Question 33

Which of the following is not a use of financial ratios?

A)Stock valuation
B)Assigning credit quality ratings on bonds
C)Predicting insolvency
D)Identification of internal corporate variables that affect a stock's systematic risk
E)None of the above (that is, all are uses of financial ratios)

Question 34

A common-size balance sheet expresses all balance sheet items

A)As a percentage of Current Assets.
B)As a percentage of Fixed Assets.
C)As a percentage of Total Assets.
D)As a percentage of Net Income.
E)As a percentage of Sales.

Question 35

Cross-sectional analysis is a useful technique for estimating future performance that involves examining a firm's relative performance over time.

Question 36

Which ratio is considered an internal liquidity ratio?

A)Total asset turnover
B)Net fixed asset turnover
C)Receivables turnover
D)Equity turnover
E)Inventory turnover

Question 37

The comparisons with which ratios should be made include the following, except

A)The firm's own past performance.
B)The firm's major competitor within the industry.
C)The firm's suppliers and customers.
D)The firm's industry or industries.
E)The aggregate economy.

Question 38

Which of the following ratios is not a measurement of the firm's liquidity?

A)Current ratio
B)Cash ratio
C)Receivables turnover
D)Inventory turnover
E)Total asset turnover

Question 39

Financial risk is the uncertainty of operating income caused by the firm's industry.

Question 40

DuPont Analysis breaks down return on equity into major areas that can be used to identify a firm's strengths or weaknesses with respect to

A)Profitability
B)Leverage
C)Liquidity
D)Efficiency
E)All of the above are broken out in the basic DuPont equation.

Question 41

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was BMC'S current ratio at year-end 2004?

A)0.852
B)1.000
C)1.368
D)1.722
E)1.943

Question 42

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was Star's total asset turnover for 2004?

A)1.65
B)1.21
C)0.92
D)0.033
E)0.70

Question 43

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was BMC'S quick ratio for 2004?

A)1.72
B)1.37
C)1.02
D)0.85
E)0.55

Question 44

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was BMC'S net profit margin?

A)0.058
B)0.037
C)0.125
D)0.015
E)0.165

Question 45

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was the financial leverage multiplier used in the Star system?

A)0.852
B)1.896
C)1.996
D)2.054
E)2.998

Question 46

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was BMC'S interest coverage for 2004?

A)6.82
B)3.04
C)2.74
D)2.04
E)1.41

Question 47

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was Star's fixed asset turnover ratio?

A)1.65
B)1.21
C)1.01
D)0.82
E)0.42

Question 48

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was BMC'S total asset turnover for 2004?

A)0.23
B)1.28
C)1.46
D)0.87
E)0.68

Question 49

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was Star's quick ratio for 2004?

A)0.11
B)0.44
C)0.38
D)0.74
E)0.98

Question 50

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What is BMC'S traditional cash flow?

A)69
B)86
C)38
D)55
E)701

Question 51

Financial ratios are only useful when they are compared to other ratios. All of the following are useful means of examining relative performance except

A)Aggregate economy
B)Industries
C)Competitors
D)Historical performance
E)All of the above are relevant comparison measures for financial ratios

Question 52

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was Star's net profit margin?

A)2.4%
B)3.8%
C)4.2%
D)4.7%
E)5.2%

Question 53

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was Star's return on equity in 2004?

A)5.8%
B)6.3%
C)6.8%
D)7.2%
E)8.1%

Question 54

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was the financial leverage multiplier used in the BMC system?

A)2.058
B)2.289
C)3.014
D)1.903
E)0.904

Question 55

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was BMC'S return on equity in 2004?

A)4.8%
B)5.9%
C)6.7%
D)8.3%
E)11.6%

Question 56

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was Star's interest coverage for 2004?

A)4.99
B)2.58
C)3.48
D)5.16
E)6.02

Question 57

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What was BMC'S fixed asset turnover ratio?

A)0.680
B)0.780
C)1.278
D)1.874
E)8.220

Question 58

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What was Star's current ratio at year-end 2004?

A)1.59
B)1.00
C)0.82
D)0.74
E)0.33

Question 59

Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.1. What is BMC'S operating profit margin?

A)0.800
B)0.054
C)0.080
D)0.540
E)5.480

Question 60

The practice of comparing the firm to a subset of industry firms comparable in size or characteristics is referred to as

A)Common size analysis
B)Cross-sectional analysis
C)DuPont analysis
D)Proforma analysis
E)Time-series analysis

Question 61

Exhibit 10.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for the Nelson Corporation.
During 2004 Nelson Corp. made capital expenditures totaling $500 and disposed property worth $800.
Refer to Exhibit 10.7. The firm's cash flow from operating activities for the year 2004 is

A)$2200
B)$2575
C)$2325
D)$2875
E)$1900

Question 62

Exhibit 10.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Zeco Company has the following financial statements for year ending 12/31/2008.
The Zeco Company's industry averages are as follows:
Net Profit Margin = 4.5%; Total Asset Turnover = 0.8; Total Assets/Equity = 1.5
Refer to Exhibit 10.8. Calculate Zeco Company's Net Profit Margin.

A)0.42%
B)0.97%
C)1.50%
D)19.60%
E)25.00%

Question 63

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What is Star's traditional cash flow?

A)81
B)72
C)51
D)102
E)131

Question 64

Exhibit 10.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about Albermarle Corp.

Refer to Exhibit 10.5. Calculate the income tax rate.

A)40.6%
B)25.6%
C)16.8%
D)28.9%
E)44.9%

Question 65

Exhibit 10.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for a company.

Refer to Exhibit 10.3. Calculate the receivables turnover ratio.

A)50
B)25
C)55
D)36
E)27

Question 66

Exhibit 10.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for a company.

Refer to Exhibit 10.3. Calculate the cash conversion cycle.

A)27
B)46
C)27.
D)55
E)22

Question 67

Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Refer to Exhibit 10.2. What is Star's operating profit margin?

A)0.104
B)0.094
C)0.084
D)0.067
E)0.047

Question 68

Exhibit 10.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about Albermarle Corp.

Refer to Exhibit 10.5. Calculate the financial leverage.

A)1.05
B)5.32
C)2.15
D)1.54
E)2.31

Question 69

Exhibit 10.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about MaxCorp.

Refer to Exhibit 10.4. Calculate the sustainable growth rate.

A)27.8%.
B)30.4%
C)20.4%
D)27.8%
E)17.8%

Question 70

Exhibit 10.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about Albermarle Corp.

Refer to Exhibit 10.5. Calculate the operating margin.

A)15.5%
B)5.6%
C)8.6%
D)10.6%
E)6.5%

Question 71

Exhibit 10.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about Albermarle Corp.

Refer to Exhibit 10.5. Calculate the return on equity (ROE).

A)15%
B)12%
C)32%
D)9%
E)7%

Question 72

Exhibit 10.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for the Nelson Corporation.
During 2004 Nelson Corp. made capital expenditures totaling $500 and disposed property worth $800.
Refer to Exhibit 10.7. The firm's free cash flow is

A)$2200
B)$1900
C)$2875
D)$2325
E)$2575

Question 73

Exhibit 10.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Zeco Company has the following financial statements for year ending 12/31/2008.
The Zeco Company's industry averages are as follows:
Net Profit Margin = 4.5%; Total Asset Turnover = 0.8; Total Assets/Equity = 1.5
Refer to Exhibit 10.8. Calculate Zeco Company's Total Asset Turnover.

A)0.59
B)0.78
C)1.28
D)1.70
E)1.97

Question 74

Exhibit 10.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for the Klandy Corporation.
During 2004 Klandy Corp. made capital expenditures totaling $500 and disposed property worth $400.
Refer to Exhibit 10.6. The firm's free cash flow is

A)$2100
B)$1900
C)$1800
D)$1700
E)$1600

Question 75

Exhibit 10.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for the Klandy Corporation.
During 2004 Klandy Corp. made capital expenditures totaling $500 and disposed property worth $400.
Refer to Exhibit 10.6. The firm's cash flow from operating activities for the year 2004 is

A)$2100
B)$1900
C)$1800
D)$1700
E)$1600

Question 76

Exhibit 10.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for a company.

Refer to Exhibit 10.3. Calculate the payables turnover ratio.

A)30.3
B)23.3
C)55.4
D)11.6
E)56.6

Question 77

Exhibit 10.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about MaxCorp.

Refer to Exhibit 10.4. Calculate the return on equity (ROE).

A)20.4%
B)17.8%
C)22.4%
D)27.8%
E)30.4%

Question 78

Exhibit 10.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about Albermarle Corp.

Refer to Exhibit 10.5. Calculate the interest expense rate.

A)7%
B)0.5%
C)1.2%
D)5%
E)2.3%

Question 79

Exhibit 10.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information for a company.

Refer to Exhibit 10.3. Calculate the inventory turnover ratio.

A)27.23
B)23.3
C)55.43
D)8.67
E)11.67

Question 80

Exhibit 10.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information about Albermarle Corp.

Refer to Exhibit 10.5. Calculate the asset turnover ratio.

A)2.2
B)5.6
C)4.2
D)2.9
E)3.9