Deck 14: Financial Analysis and Long-Term Financial Planning

Question 1

Bond ratios are one of the five basic categories of ratios.

Answer 1

False

Question 2

Liability management ratios are one of the five basic categories of ratios.

Answer 2

False

Question 3

Accounting standards often differ among firms in an industry.

Answer 3

True

Question 4

Potential creditors of a firm might analyze financial statements to gauge the firm's ability to make timely payments of interest and principal.

Question 5

Cross-sectional analysis is used to evaluate a firm's performance over time.

Question 6

Asset management ratios are one of the five basic categories of ratios.

Question 7

It is possible that the results of financial statement analysis could reflect the non-financial operations of a firm.

Question 8

Cost ratios are one of the five basic categories of ratios.

Question 9

Ratio analysis is a financial technique that involves dividing various financial statements numbers into one another.

Question 10

The five basic groups of ratios are liquidity ratios, asset management ratios, capital budgeting ratios, profitability ratios, and market value ratios.

Question 11

Debt to asset ratios are one of the five basic categories of ratios.

Question 12

A cross-sectional analysis would be used to evaluate a firm's performance over time.

Question 13

Stock ratios are one of the five basic categories of ratios.

Question 14

Financial leverage ratios are one of the five basic categories of ratios.

Question 15

Industry comparative analysis is used to compare a firm's ratios against average ratios for the S&P 500.

Question 16

Ratios standardize balance sheet and income statement numbers, thus minimizing the effect of firm size.

Question 17

Liquidity ratios are one of the five basic categories of ratios.

Question 18

Market value ratios are one of the five basic categories of ratios.

Question 19

Trend or time series analysis is used to compare the performance of different firms at the same point in time.

Question 20

Profitability ratios are one of the five basic categories of ratios.

Question 21

A current ratio of 2.0 is desirable and it means that a firm has twice as many current liabilities as current assets.

Question 22

Liquidity ratios indicate the ability to meet short-term obligations to creditors as they mature or come due.

Question 23

Asset management ratios indicate the ability to meet short-term obligations to creditors as they come due.

Question 24

Because debt obligations are paid with cash, the firm's cash flows ultimately determine solvency.

Question 25

The current ratio is always positive.

Question 26

Net working capital indicates the percentage of current liabilities to current assets.

Question 27

The current ratio is a measure of a company's ability to pay off its short-term debt as it comes due.

Question 28

The quick ratio is always greater than or equal to one.

Question 29

The average payment period is computed by dividing the year-end accounts payable amount by the firm's average cost of goods sold (COGS) per day.

Question 30

Net working capital is current assets plus current liabilities.

Question 31

The current ratio is always greater than or equal to one.

Question 32

The total asset turnover is computed as net sales divided by total assets.

Question 33

The quick ratio is always positive.

Question 34

A firm would like to have a quick ratio of about 0.50.

Question 35

A 100-Q is a standard filing with the Securities and Exchange Commission (SEC).

Question 36

A low current ratio (low relative to, say, industry norms) may indicate a company may face low difficulty in paying its bills.

Question 37

The quick ratio and the acid test ratio are the same thing.

Question 38

The quick ratio is a stricter measure of liquidity compared to the current ratio.

Question 39

The current ratio is computed by dividing the sum of cash, marketable securities, and accounts receivable by the current liabilities.

Question 40

A larger average payment period is considered to be better.

Question 41

Profitability ratios indicate the extent to which assets are used to support sales.

Question 42

The average collection period is calculated as the average accounts receivable divided by the average net sales per day.

Question 43

The inventory turnover ratio is computed by dividing the cost of goods sold by the average inventory.

Question 44

The operating profit margin is calculated as the firm's net income divided by net sales.

Question 45

The total asset turnover is computed as total assets divided by net sales.

Question 46

The fixed charge coverage ratio indicates the ability of a firm to meet its contractual obligations for interest, leases, and debt principal repayments out of its operating income.

Question 47

The average collection period is measured in weeks.

Question 48

The fixed asset turnover is computed as net fixed assets divided by net sales.

Question 49

The operating profit margin is calculated as the firms earnings before interest and taxes divided by net sales.

Question 50

A firm with total debt to total assets of 50% and an interest coverage ratio of 0.5 times would appear to be safely utilizing financial leverage.

Question 51

Financial leverage ratios indicate the extent to which borrowed funds are used to finance assets.

Question 52

Sinking funds are used to repay investors when a new investment fails.

Question 53

The net profit margin is an example of a market value ratio.

Question 54

A firm's efficiency in utilizing resources at its disposal in generating sales would be measured by profitability ratios.

Question 55

The interest coverage ratio is a stricter measure of a firm's ability to meet its fixed payment obligations than the fixed charge coverage ratio.

Question 56

The fixed charge coverage ratio is a stricter measure of a firm's ability to meet its fixed payment obligations than the interest coverage ratio.

Question 57

The net profit margin is calculated as the firms earnings before interest and taxes divided by net sales.

Question 58

The receivables turnover is computed by dividing annual sales, preferably credit sales, by the year-end accounts receivable.

Question 59

The interest coverage ratio indicates the ability of a firm to meet its contractual obligations for interest, leases, and debt principal repayments out of its operating income.

Question 60

The average collection period is calculated as the year-end accounts receivable divided by the net sales.

Question 61

The price-earnings, or P/E, ratio is sometimes called the earnings residual.

Question 62

Return on total assets is calculated as net income divided by total assets.

Question 63

The price-to-book ratio measures the market's value of the firm relative to balance sheet equity.

Question 64

Increases in ROE solely due to rising debt levels (that is, a rising equity multiplier) are generally viewed favorably.

Question 65

Financial analysis using ratios can assist managers in the firm's long-term financial planning process.

Question 66

Financial planning begins with a sales forecast for one or more years.

Question 67

Internally generated funds for financing new asset investments come from common stock issues.

Question 68

In employing DuPont analysis, the user would break the return on total assets into the profit margin, total asset turnover, and an equity multiplier.

Question 69

Return on total assets = Net profit margin × Total asset turnover.

Question 70

ROE directly reflects a firm's use of leverage.

Question 71

The P/E ratio shows how much investors are willing to pay for each dollar of the firm's EPS.

Question 72

Market value ratios indicate the willingness of investors to value a firm in the marketplace relative to financial statement values.

Question 73

A high price-to-book value ratio would tend to indicate that investors are more optimistic about the market value of firm's asset, and its managers' abilities.

Question 74

The market value ratios indicate the financial markets' assessment of the value of a firm's securities.

Question 75

The price/earnings ratio shows how much investors are willing to pay for each dollar of the firm's current earnings per share.

Question 76

Operating return on assets is calculated as earnings after interest and taxes divided by total assets.

Question 77

The technique of breaking return on assets and return on equity into their component parts is called Deloitte analysis, named after the big accounting firm that popularized it (Deloitte & Touche).

Question 78

In general, a firm's return on assets will be less than its return on equity.

Question 79

Return on equity is calculated as net income divided by the sum of common and preferred equity.

Question 80

Budgets are written financial plans utilized in sales forecasts.