Deck 3: Working With Financial Statements

Question 1

A firm has a current ratio of 1.4 and a quick ratio of 0.9.Given this,you know for certain that the firm:

A)pays cash for its inventory.
B)has more than half its current assets invested in inventory.
C)has more cash than inventory.
D)has more current liabilities than it does current assets.
E)has positive net working capital.

Answer 1

has positive net working capital.

Question 2

The cash coverage ratio is used to evaluate the:

A)liquidity of a firm.
B)speed at which a firm generates cash.
C)length of time that a firm can pay its bills if no additional cash becomes available.
D)ability of a firm to pay the interest on its debt.
E)relationship between the firm's cash balance and its current liabilities.

Answer 2

ability of a firm to pay the interest on its debt.

Question 3

The equity multiplier is equal to:

A)one plus the debt-equity ratio.
B)one plus the total asset turnover.
C)total debt divided by total equity.
D)total equity divided by total assets.
E)one divided by the total asset turnover.

Answer 3

one plus the debt-equity ratio.

Question 4

Which one of the following will increase the profit margin of a firm,all else constant?

A)Increase in interest paid
B)Increase in fixed costs
C)Increase in depreciation expense
D)Decrease in the tax rate
E)Decrease in sales

Question 5

The ratios that are based on financial statement values and used for comparison purposes are called:

A)financial ratios.
B)industrial statistics.
C)equity standards.
D)accounting returns.
E)analytical standards.

Question 6

Which one of the following actions will increase the current ratio,all else constant? Assume the current ratio is greater than 1.0.

A)Cash purchase of inventory
B)Cash payment of an account receivable
C)Cash payment of an account payable
D)Credit sale of inventory at cost
E)Cash sale of inventory at a loss

Question 7

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets.Which one of the following ratios would reflect this relationship?

A)Receivables turnover
B)Equity multiplier
C)Profit margin
D)Return on assets
E)Total asset turnover

Question 8

Which one of the following is the abbreviation for the U.S.government coding system that classifies a firm by its specific type of business operations?

A)BEC
B)SED
C)BID
D)SIC
E)SBC

Question 9

The DuPont identity can be totally defined by which one of the following?

A)Return on equity, total asset turnover, and equity multiplier
B)Equity multiplier and return on assets
C)Profit margin and return on equity
D)Total asset turnover, profit margin, and debt-equity ratio
E)Equity multiplier, return on assets, and profit margin

Question 10

Common-size financial statements present all balance sheet account values as a percentage of:

A)the forecasted budget.
B)sales.
C)total equity.
D)total assets.
E)last year's account value.

Question 11

Fred is the owner of a local feed store.Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?

A)Current ratio
B)Debt ratio
C)Cash coverage ratio
D)Quick ratio
E)Cash ratio

Question 12

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

A)DuPont rate
B)External growth rate
C)Sustainable growth rate
D)Internal growth rate
E)Cash flow rate

Question 13

Which one of the following transactions will increase the liquidity of a firm?

A)Cash purchase of new production equipment
B)Payment of an account payable
C)Cash purchase of inventory
D)Credit sale of inventory at cost
E)Cash payment of employee wages

Question 14

Which one of the following is a measure of long-term solvency?

A)Price-earnings ratio
B)Profit margin
C)Equity multiplier
D)Receivables turnover
E)Quick ratio

Question 15

Builder's Outlet just hired a new chief financial officer.To get a feel for the company,she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes.Which one of the following statements will best suit her purposes?

A)Income statement
B)Balance sheet
C)Common-size income statement
D)Common-size balance sheet
E)Statement of cash flows

Question 16

A common-size balance sheet helps financial managers determine:

A)which customers are paying on a timely basis.
B)if costs are increasing faster or slower than sales.
C)if changes are occurring in a firm's mix of assets.
D)if a firm is generating more or less sales per dollar of assets than in prior years.
E)the rate at which the firm's dividends are changing.

Question 17

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

A)No new external financing of any kind
B)No new debt but additional external equity equal to the increase in retained earnings
C)New debt and external equity in equal proportions
D)New debt and external equity, provided the debt-equity ratio remains constant
E)No new equity and a constant debt-equity ratio

Question 18

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

A)Decrease in the total asset turnover
B)Decrease in the capital intensity ratio
C)Increase in days' sales in receivables
D)Decrease in the profit margin
E)Decrease in the inventory turnover rate

Question 19

Blooming Gardens has an inventory turnover of 16.This means the firm:

A)sells its entire inventory every 16 days.
B)stocks its inventory only every 16 days.
C)buys 16 days of inventory with each order.
D)sells its inventory by granting customers 16 days' credit.
E)sells its inventory an average of 16 times each year.

Question 20

High Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends.Given this,the percentage shown on a common-size income statement for the dividend account will:

A)remain constant over time.
B)be equal to the dividend amount divided by the net income.
C)vary in direct relation to the net profit percentage.
D)vary in direct relation to changes in the sales level.
E)vary but not in direct relation to any other variable.

Question 21

Which of the following are determinants of a firm's sustainable rate of growth?
I.Amount of sales generated from each dollar invested in assets
II.Amount of debt per dollar of equity
III.Amount of current assets per dollar of current liabilities
IV.Percentage of net income distributed as dividends

A)I and III only
B)II and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Question 22

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations,sales,or equity.This reduction will increase which of the following ratios?
I.Capital intensity ratio
II.Return on assets
III.Total asset turnover
IV.Return on equity

A)I and II only
B)II and III only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV

Question 23

Which one of the following statements is correct?

A)Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business.
B)Peer group analysis is easier when seasonal firms have different fiscal years.
C)Peer group analysis is simplified when firms use varying methods of depreciation.
D)Comparing results across geographic locations is easier since all countries now use a common set of accounting standards.
E)Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

Question 24

If a firm has a 100 percent dividend payout ratio,then the internal growth rate of the firm is:

A)zero percent.
B)100 percent.
C)equal to the ROA.
D)negative.
E)infinite.

Question 25

Which one of the following statements is true concerning the price-earnings (PE)ratio?

A)A high PE ratio may indicate that a firm is expected to grow significantly.
B)A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings.
C)PE ratios are unaffected by the accounting methods employed by a firm.
D)The PE ratio is classified as a profitability ratio.
E)The PE ratio is a constant value for each firm.

Question 26

Financial statement analysis:

A)is primarily used to identify account values that meet the normal standards.
B)is limited to internal use by a firm's managers.
C)provides useful information that can serve as a basis for forecasting future performance.
D)provides useful information to shareholders but not to debtholders.
E)is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.

Question 27

Which of the following will increase the sustainable rate of growth for a firm?
I.Decreasing the profit margin
II.Increasing the dividend payout ratio
III.Decreasing the capital intensity ratio
IV.Increasing the target debt-equity ratio

A)I and II only
B)III and IV only
C)II and IV only
D)I, III, and IV only
E)I, II, III, and IV

Question 28

International Travel Services has net income of $48,400,total assets of $219,000,total equity of $154,800,and total sales of $411,700.What is the common-size percentage for the net income?

A)9.00 percent
B)11.76 percent
C)15.53 percent
D)22.10 percent
E)850.62 percent

Question 29

New Century Products is a company that was founded last year.While the outlook for the company is positive,it currently has negative earnings.If you wanted to measure the progress of this firm,which one of the following ratios would probably be best to monitor given the firm's current situation?

A)Price-sales ratio
B)Market-to-book ratio
C)Profit margin
D)ROE
E)ROA

Question 30

A firm has inventory of $11,400,accounts payable of $9,800,cash of $850,net fixed assets of $12,150,long-term debt of $9,500,accounts receivable of $6,600,and total equity of $11,700.What is the common-size percentage for the net fixed assets?

A)19.60 percent
B)26.67 percent
C)39.19 percent
D)42.08 percent
E)48.75 percent

Question 31

The DuPont identity can be used to help a financial manager determine the:
I.degree of financial leverage used by a firm.
II.operating efficiency of a firm.
III.utilization rate of a firm's assets.
IV.rate of return on a firm's assets.

A)II and III only
B)I and III only
C)II, III, and IV only
D)I, II, and III only
E)I, II, III, and IV

Question 32

Earth Fare Foods has total assets of $229,800,net fixed assets of $71,500,long-term debt of $52,000,and total debt of $78,700.If inventory is $45,000,what is the current ratio?

A)0.20
B)0.46
C)0.84
D)1.18
E)5.93

Question 33

You would like to borrow money three years from now to build a new building.In preparation for applying for that loan,you are in the process of developing target ratios for your firm.Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

A)Times interest earned = 1.7; debt-equity ratio = 1.6
B)Times interest earned = 1.5; debt-equity ratio = 1.2
C)Cash coverage ratio = 0.8; debt-equity ratio = 0.8
D)Cash coverage ratio = 2.6; debt-equity ratio = 0.3
E)Cash coverage ratio = 0.5; total debt ratio = 0.2

Question 34

A firm has sales of $529,000 for the year.The profit margin is 3.4 percent and the retention ratio is 60 percent.What is the common-size percentage for the dividends paid?

A)0.99 percent
B)1.18 percent
C)1.21 percent
D)1.36 percent
E)1.42 percent

Question 35

Tom's Hardware has inventory of $318,000,equity of $421,800,total assets of $647,700,and sales of $687,400.What is the common-size percentage for the inventory account?

A)26.81 percent
B)33.66 percent
C)46.26 percent
D)49.10 percent
E)51.68 percent

Question 36

All else constant,which one of the following will decrease if a firm increases its net income?

A)Return on assets
B)Profit margin
C)Return on equity
D)Price-sales ratio
E)Price-earnings ratio

Question 37

Donovan Brothers,Inc.would like to increase its internal rate of growth.Decreasing which one of the following will help the firm achieve its goal?

A)Return on assets
B)Net income
C)Retention ratio
D)Dividend payout ratio
E)Return on equity

Question 38

The T-shirt Hut successfully managed to reduce its general and administrative costs this year.This cost improvement will increase which of the following ratios?
I.Profit margin
II.Return on assets
III.Total asset turnover
IV.Return on equity

A)I and II only
B)I and III only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV

Question 39

Delmont Movers has a profit margin of 6.2 percent and net income of $48,900.What is the common-size percentage for the cost of goods sold if that expense amounted to $379,000 for the year?

A)12.90 percent
B)23.50 percent
C)33.25 percent
D)41.06 percent
E)48.05 percent

Question 40

Peter's Motor Works has total assets of $689,400,long-term debt of $299,500,total equity of $275,000,net fixed assets of $497,800,and sales of $721,500.The profit margin is 4.6 percent.What is the current ratio?

A)0.60
B)0.91
C)1.01
D)1.67
E)2.16

Question 41

A firm has net income of $31,300,depreciation of $5,100,taxes of $14,600,and interest paid of $3,100.What is the cash coverage ratio?

A)8.78
B)10.10
C)14.14
D)16.32
E)17.45

Question 42

Denbo's,Inc.has total equity of $389,600,long-term debt of $116,400,net working capital of $1,600,and total assets of $627,600.What is the total debt ratio?

A)0.19
B)0.38
C)0.67
D)1.49
E)3.85

Question 43

Gently Used Goods has cash of $2,950,inventory of $28,470,fixed assets of $9,860,accounts payable of $11,900,and accounts receivable of $4,660.What is the cash ratio?

A)0.08
B)0.25
C)0.30
D)0.46
E)0.51

Question 44

Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542.The tax rate is 35 percent.What is the times interest earned ratio?

A)0.88
B)1.73
C)3.09
D)5.59
E)9.09

Question 45

Tressler Dry Cleaners has inventory of $1,700,accounts payable of $4,200,cash of $1,950,and accounts receivable of $3,680.What is the cash ratio?

A)0.24
B)0.46
C)0.53
D)0.98
E)1.34

Question 46

Your firm has cash of $3,800,accounts receivable of $8,600,inventory of $33,100,and net working capital of $1,100.What is the cash ratio?

A)0.08
B)0.09
C)0.90
D)1.21
E)3.45

Question 47

The Berry Patch has sales of $438,000,cost of goods sold of $369,000,depreciation of $37,400,and interest expense of $13,800.The tax rate is 35 percent.What is the times interest earned ratio?

A)2.29
B)3.46
C)3.87
D)4.38
E)4.79

Question 48

A firm has net income of $6,850 and interest expense of $2,130.The tax rate is 34 percent.What is the firm's times interest earned ratio?

A)3.22
B)5.19
C)5.38
D)5.87
E)6.33

Question 49

The Universal Network has sales of $496,500,cost of goods sold of $264,900,and inventory of $87,100.What is the inventory turnover rate?

A)1.33
B)3.04
C)5.70
D)7.14
E)8.47

Question 50

Blue Water Cafe has $28,700 in total assets,depreciation of $3,100,and interest of $1,400.The total asset turnover rate is 1.2.Earnings before interest and taxes are equal to 28 percent of sales.What is the cash coverage ratio?

A)6.33
B)7.51
C)9.10
D)10.23
E)10.98

Question 51

A firm has total assets of $523,100,current assets of $186,500,current liabilities of $141,000,and total debt of $215,000.What is the debt-equity ratio?

A)0.48
B)0.70
C)1.10
D)1.43
E)2.13

Question 52

You are analyzing a company that has cash of $11,200,accounts receivable of $27,800,fixed assets of $124,600,accounts payable of $31,300,and inventory of $56,900.What is the quick ratio?

A)0.30
B)0.67
C)0.80
D)1.25
E)1.37

Question 53

Eric & Jared's Department Store has current liabilities of $7,630,net working capital of $2,180,inventory of $2,750,and sales of $51,800.What is the quick ratio?

A)0.79
B)0.84
C)0.93
D)1.09
E)3.50

Question 54

The Undergrounds Coffee Shop has total assets of $85,300 and an equity multiplier of 1.53.What is the debt-equity ratio?

A)0.28
B)0.35
C)0.50
D)0.53
E)0.67

Question 55

A firm has an equity multiplier of 1.5.This means that the firm has a:

A)debt-equity ratio of 0.67.
B)debt-equity ratio of 0.33.
C)total debt ratio of 0.50.
D)total debt ratio of 0.67.
E)total debt ratio of 0.33.

Question 56

A firm has net working capital of $3,800 and current assets of $11,700.What is the current ratio?

A)0.34
B)0.60
C)1.48
D)1.65
E)2.92

Question 57

Wilson's Realty has total assets of $46,800,net fixed assets of $37,400,current liabilities of $6,100,and long-term liabilities of $24,600.What is the total debt ratio?

A)0.41
B)0.60
C)0.66
D)0.78
E)0.86

Question 58

Underwood Homes Sales has total assets of $589,900 and total debt of $318,000.What is the equity multiplier?

A)0.46
B)0.54
C)1.21
D)1.85
E)2.17

Question 59

Fresh Foods has sales of $213,600,total assets of $198,700,a debt-equity ratio of 1.7,and a profit margin of 2.4 percent.What is the equity multiplier?

A)0.70
B)0.73
C)1.93
D)2.70
E)2.84

Question 60

The Space and Rocket Center takes an average of 55 days to sell its inventory and an average of 2.5 days to collect payment on its sales.What is the inventory turnover rate?

A)6.64
B)7.29
C)8.68
D)10.18
E)22.00

Question 61

Kessler,Inc.has accounts receivable of $31,600,total assets of $311,500,cost of goods sold of $208,400,and a capital intensity ratio of 1.08.What is the accounts receivable turnover rate?

A)8.99
B)9.13
C)9.42
D)9.61
E)9.72

Question 62

It takes The Crossroads Boutique an average of 61 days to sell its inventory and 30 days to collect its accounts receivable.The firm has sales of $568,700 and costs of goods sold of $398,800.What is the accounts receivable turnover rate?

A)5.98
B)11.41
C)12.17
D)12.23
E)12.55

Question 63

Tally Ho Inn has annual sales of $737,000.Earnings before interest and taxes is equal to 21 percent of sales.For the period,the firm paid $7,900 in interest.What is the profit margin if the tax rate is 35 percent?

A)12.46 percent
B)12.95 percent
C)13.33 percent
D)15.29 percent
E)16.11 percent

Question 64

The Rainbow Company has total sales of $713,200 and a profit margin of 8.5 percent.Currently,the firm has 12,500 shares outstanding.What are the earnings per share?

A)$2.98
B)$3.31
C)$3.56
D)$4.58
E)$4.85

Question 65

Goshen Industrial Sales has sales of $828,900,total equity of $539,200,a profit margin of 4.6 percent,and a debt-equity ratio of 0.55.What is the return on assets?

A)3.89 percent
B)4.56 percent
C)6.67 percent
D)12.86 percent
E)13.33 percent

Question 66

Freedom Health Centers has total equity of $861,300,sales of $1.48 million,and a profit margin of 5.2 percent.What is the return on equity?

A)5.82 percent
B)6.49 percent
C)7.18 percent
D)8.68 percent
E)8.94 percent

Question 67

Martha's Fabric House has sales of $137,200,total equity of $74,400,and a debt-equity ratio of 0.45.What is the capital intensity ratio?

A)0.79
B)0.83
C)1.06
D)1.20
E)1.27

Question 68

The After Life has sales of $428,300,total assets of $389,100,and a profit margin of 7.2 percent.What is the return on assets?

A)6.30 percent
B)6.54 percent
C)6.83 percent
D)7.01 percent
E)7.93 percent

Question 69

Baxter & Baxter has total assets of $710,000.There are 45,000 shares of stock outstanding with a market value of $28 a share.The firm has a profit margin of 7.1 percent and a total asset turnover of 1.29.What is the price-earnings ratio?

A)16.38
B)17.99
C)19.38
D)20.12
E)22.41

Question 70

Galaxy Sales has sales of $746,700,cost of goods sold of $603,200,and inventory of $94,300.How long on average does it take the firm to sell its inventory?

A)6.40 days
B)7.23 days
C)48.68 days
D)57.06 days
E)61.10 days

Question 71

Aardvaark & Co.has sales of $291,200,cost of goods sold of $163,300,net profit of $11,360,net fixed assets of $154,500,and current assets of $89,500.What is the total asset turnover rate?

A)1.08
B)1.11
C)1.19
D)1.24
E)1.28

Question 72

The Green House has a profit margin of 5.6 percent on sales of $311,200.The firm currently has 15,000 shares of stock outstanding at a market price of $11.60 per share.What is the price-earnings ratio?

A)9.98
B)10.02
C)11.50
D)11.93
E)12.84

Question 73

The Medicine Shoppe has a return on equity of 19.2 percent,a profit margin of 11.6 percent,and total equity of $738,000.What is the net income?

A)$85,608
B)$113,875
C)$141,696
D)$146,542
E)$149,897

Question 74

Whitt's BBQ has sales of $348,000,a profit margin of 8.1 percent,and a capital intensity ratio of 0.70.What is the total asset turnover rate?

A)1.04
B)1.08
C)1.13
D)1.29
E)1.43

Question 75

Circle K Stores has net income of $41,000,a profit margin of 3.7 percent,and a return on assets of 9 percent.What is the capital intensity ratio?

A)0.41
B)0.86
C)1.16
D)1.34
E)2.43

Question 76

A firm has $42,900 in receivables and $211,800 in total assets.The total asset turnover rate is 1.40 and the profit margin is 5.2 percent.How long on average does it take the firm to collect its receivables?

A)6.91 days
B)9.45 days
C)11.68 days
D)31.25 days
E)52.81 days

Question 77

Children's Place has a market-to-book ratio of 2.9,net income of $68,400,a book value per share of $37,and 45,000 shares of stock outstanding.What is the price-earnings ratio?

A)24.34
B)28.16
C)55.10
D)63.25
E)70.59

Question 78

Textile Mills has sales of $923,000,cost of goods sold of $748,000,and accounts receivable of $106,700.How long on average does it take the firm's customers to pay for their purchases?

A)8.65 days
B)11.28 days
C)25.01 days
D)42.19 days
E)45.33 days

Question 79

Phil's Hardware sells its inventory in 75 days,on average.Costs of goods sold for the year are $631,800.What is the average value of the firm's inventory?

A)$119,706
B)$129,821
C)$147,132
D)$161,096
E)$182,513

Question 80

Larry's Gun Shop has sales of $189,000,a profit margin of 5.6 percent,and a capital intensity ratio of 0.79.What is the return on assets?

A)4.42 percent
B)6.08 percent
C)6.39 percent
D)6.92 percent
E)7.09 percent