Deck 3: Financial Analysis

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

The DuPont system of analysis emphasizes that profit generated by assets can be derived by a combination of profit levels and how fast an asset can turnover.

Question 11

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

Question 12

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

Question 13

The age of the firm’s assets is not necessary for analyzing ratios..

Question 14

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

Question 15

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

Question 16

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

Question 17

Heavy use of long-term debt can be of benefit to a firm to help expand, although it adds to the firm's overall level of risk.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are one-time events, and can distort annual results from normal operations.

Question 23

LIFO and FIFO are two ways that companies following the generally accepted accounting principles value their inventory. One method may be preferred over the other during inflationary time periods, which results in different profits, even though both methods are legal to use.

Question 24

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 or profits.

Question 25

Ratios are not misleading by inflation.

Question 26

Investors are most concerned with the liquidity ratios of a company.

Question 27

If two companies have the same return on equity (ROE), they will also have the same return on assets (ROA).

Question 28

Trend analysis is used to project the future performance of an industry.

Question 29

Although Apple Computers has a profit margin significantly greater than that of a long-time industry giant such as IBM, IBM continues to have a higher return on equity than Apple. The primary reason for this unusual condition is that IBM has a much greater equity than Apple.

Question 30

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 debt or equity financing.
D) All of the options are true.

Question 31

Industries with cyclical products such as lumber and copperare more sensitive to inflation-induced profits because many sales prices and/or expenses are set by the market.

Question 32

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

Question 33

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

Question 34

A company can improve its return on equity (ROE) by changing its capital structure.

Question 35

Because ratios are historic, they have minimal value to an investor.

Question 36

Times interest earned is an example of a profitability ratio.

Question 37

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

Question 38

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

Question 39

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

Question 40

Economists believe that prices of goods may rise before 2020since the prices of most goods fell during the 2008-2009 recession.

Question 41

The Bubba Corp. had earnings before taxes of $400,000 and sales of $2,000,000. If it is in the 40% tax bracket, its after-tax profit margin is

A) 40%.
B) 12%.
C) 20%.
D) 25%.

Question 42

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 43

XYZ's receivables turnover is 4x. The accounts receivable at year-end are $600,000. The average collection period is 90 days. What was the sales figure for the year assuming all sales are on credit?

A) $60,000
B) $6,000,000
C) $2,400,000
D) $54,000,000

Question 44

A firm only has current assets and fixed assets. Its current assets are $100,000 and total assets are $300,000. The firm's sales are $900,000. The firm's fixed asset turnover is

A) 4.5x.
B) 12.0x.
C) 2.4x.
D) 5.0x.

Question 45

Which two ratios are used in the Du Pont 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 profit margin
D) Inventory turnover and return on fixed assets

Question 46

A firm has a debt-to-equity ratio of 40%, a debt of $250,000, and a net income of $100,000. The return on equity is

A) 60%.
B) 16%.
C) 30%.
D) There's not enough information to determine the return on equity

Question 47

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

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

Question 48

Total asset turnover indicates the firm's

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

Question 49

A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of $50,000. Calculate return on equity.

A) 40%
B) 20%
C) 25%
D) There is not enough information to calculate return on equity.

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 stockholders.
D) measure the firm's ability to generate a profit on sales.

Question 51

A decreasing average receivables collection period could be associated with

A) increasing sales.
B) decreasing sales.
C) decreasing accounts receivable.
D) increasing sales and decreasing accounts receivable.

Question 52

ABC Co. has an average collection period of 90 days for its accounts receivable. If total credit sales for the year were $6,000,000, what is the balance in accounts receivable at year-end? Assume a 360-day calendar year.

A) $150,000
B) $2,250,000
C) $1,500,000
D) $40,000

Question 53

If ABC's sales are $1,000,000, while accounts receivable is $100,000, inventory is $45,000, and fixed assets are $132,000, what is ABC's fixed asset turnover?

A) 7.58
B) 10.00
C) 0.13
D) 22.22

Question 54

A firm's long-term assets = $100,000, total assets = $400,000, inventory = $50,000 and current liabilities = $200,000. What are the firm's current ratio and quick ratio?

A) Current ratio = 0.5; quick ratio = 1.25
B) Current ratio = 1.0; quick ratio = 2.0
C) Current ratio = 1.5; quick ratio = 1.25
D) Current ratio = 2.5; quick ratio = 2.0

Question 55

A quick ratio that is 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

If XYZ's receivables turnover is 4x, what does that mean?

A) XYZ's total sales are rotated four times a year.
B) XYZ has a really good receivables turnover rate.
C) XYZ is able to collect its receivables every 90 days, or 4 times a year.
D) XYZ generates four times as much sales through receivables than sales through cash.

Question 57

Which of the following is not an asset utilization ratio?

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

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

If accounts receivable stays the same, and credit sales go up

A) the average collection period will go up.
B) the average collection period will go down.
C) accounts receivable turnover will decrease.
D) the average collection period will go down and accounts receivable turnover will decrease.

Question 60

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 61

A firm has total assets of $3,000,000 and stockholders equity is $1,000,000. What is the debt-to-total asset ratio?

A) 45%
B) 75%
C) 55%
D) 67%

Question 62

If the company's accounts receivable turnover is increasing, the average collection period
A. is going up slightly.
B. is going down.
C. could be moving in either direction.
D. is going up by a significant amount.

Question 63

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 64

An increasing average receivables collection period indicates

A) the firm is generating more income.
B) accounts receivable are going down.
C) the company is becoming more efficient in its collection policy.
D) the company is becoming less efficient in its collection policy

Question 65

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 options.

Question 66

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) Both of these.
D) None of the options

Question 67

Assuming proper accounting disclosure is used, a large extraordinary loss has what effect on the normal operating profits in the future?

A) It raises it.
B) It lowers it.
C) It has no effect.
D) More information is needed to determine the effect.

Question 68

Disinflation, as compared to inflation, would normally be good for investments in

A) bonds.
B) gold.
C) collectible antiques.
D) textbooks.

Question 69

Industries most sensitive to inflation-induced profits are those with

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

Question 70

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

A) future projections
B) historical data
C) only industry ratios provide valid comparisons.
D) trend analysis and historical comparisons

Question 71

Replacement cost accounting (current cost method) during a period of inflation 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 options apply.

Question 72

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 73

A firm has operating profit of $210,000 after deducting fixed lease payments of $30,000. The fixed interest expense is $50,000. What is the firm's fixed charge coverage ratio?

A) 6.00x
B) 2.33x
C) 2.00x
D) 3.00x

Question 74

If fixed lease payments are reduced and everything else remains constant,

A) times interest earned goes up.
B) fixed charge coverage goes up.
C) fixed charge coverage stays the same.
D) debt to total assets goes down.

Question 75

A conservative company experiencing rapid price increases for its products would use LIFO to try to:

A) Allow the inventory that was just purchased at a higher price to be moved to cost of goods sold, showing a lower net income.
B) Allow the inventory that was just purchased at a higher price to remain in ending inventory values and move older inventory to cost of goods sold, showing a higher net income.
C) Allow the inventory that was just purchased at a lower price to remain in ending inventory values and move older inventory to cost of goods sold, showing a lower net income.
D) Allow the inventory that was just purchased at a lower price to be moved to cost of goods sold, showing a higher net income.

Question 76

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 options are true.

Question 77

If government bonds pay 7.0% interest and insured savings accounts pay 5.0% interest, stockholders in a moderately risky firm would expect return-on-equity values of

A) 5.0%.
B) 7.0%.
C) 9.0%.
D) above 7.0%.

Question 78

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 options

Question 79

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 options

Question 80

If a firm has both a fixed interest expense and fixed lease payments,

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