Deck 3: Financial Analysis

Question 1

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

Answer 1

False

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

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

FIFO will cause inflated profits during deflation.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

A company can improve their ROE by changing their capital structure.

Question 32

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 33

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 34

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

Question 35

Ratios are not distorted by inflation.

Question 36

If two companies have the same ROE, they will also have the same ROA.

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

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 42

Total asset turnover indicates the firm's

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

Question 43

ABC Co. has an average collection period of 90 days. Total credit sales for the year were $6,000,000. What is the balance in accounts receivable at year-end?

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

Question 44

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 45

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 46

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

Question 47

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 48

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 49

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 50

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 options

Question 51

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 52

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 53

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 54

A firm has current assets of $100,000 and total assets of $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 55

A decreasing average collection period could be associated with (select the one best answer)

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

Question 56

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 57

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)None of the options

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

Times interest earned is an example of a profitability ratio.

Question 60

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)60%
B)20%
C)25%
D)There is not enough information to calculate return on equity.

Question 61

A firm's long-term assets = $100,000, total assets = $400,000, inventory = $50,000 and current liabilities = $200,000.

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 62

A firm has total assets of $3,000,000. It has $1,200,000 in long-term debt. The stockholders equity is $1,000,000. What is the debt-to-total asset ratio?

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

Question 63

A company experiencing rapid price increases for its products would take the most conservative approach by using

A)FIFO accounting.
B)LIFO accounting.
C)average cost accounting.
D)either FIFO or average cost accounting.

Question 64

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)trend analysis and historical comparisons.

Question 65

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 66

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 67

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%, but the exact amount is uncertain.

Question 68

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 69

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 70

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

Question 71

Assuming proper accounting disclosure is used, a large extraordinary loss has what effect on the cost of goods sold?

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

Question 72

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 73

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 74

Industries most sensitive to inflation-induced profits are those with

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

Question 75

If 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)fixed charge coverage goes down.

Question 76

An increasing average 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 77

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

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

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

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 80

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

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