Deck 3: Financial Analysis

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

The DuPont system of analysis emphasizes that profit generated by assets can be derived by various combinations of profit margins and asset turnover.

Question 10

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

Question 11

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

Question 12

Heavy use of long-term debt can be of benefit to a firm.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

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

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are one time events, and do not measure annual operating performance.

Question 25

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

Question 26

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

Question 27

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

Question 28

Times interest earned is an example of a profitability ratio.

Question 29

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

Question 30

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

Question 31

Ratios are not distorted by inflation.

Question 32

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

Question 33

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 34

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

Question 35

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 36

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

Question 37

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

Question 38

FIFO will cause inflated profits during deflation.

Question 39

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

Question 40

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

Question 41

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

A) increasing sales.
B) decreasing sales.
C) decreasing account receivable.
D) a and c.

Question 42

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

Question 43

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

A) 60%
B) 20%
C) 25%
D) not enough information

Question 44

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 these are true.

Question 45

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 46

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

A) 60%
B) 16%
C) 30%
D) not enough information

Question 47

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 48

A short-term creditor would be most interested in

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

Question 49

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

Question 50

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 51

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 52

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 53

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 54

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 55

Total asset turnover indicates the firm's

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

Question 56

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 57

F
Or 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 58

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 these

Question 59

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) measures the firm's ability to generate a profit on sales.

Question 60

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 61

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 62

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 63

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 these.

Question 64

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 65

A large extraordinary loss has what effect on cost of goods sold?

A) Raises it
B) Lowers it
C) Has no effect
D) Need more information

Question 66

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 67

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

A) bonds.
B) gold.
C) collectible antiques.
D) text books.

Question 68

If lease payments are reduced:

A) times interest earned goes up.
B) fixed charges coverage goes up.
C) fixed charge coverage stays the same.
D) fixed charge coverage goes down.

Question 69

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 70

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 these

Question 71

Industries most sensitive to inflation-induced profits are those with

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

Question 72

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) a or c.

Question 73

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 74

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 75

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 these.

Question 76

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) All of these.
D) None of these.

Question 77

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 these.

Question 78

Replacement cost accounting (current cost method) 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 these apply.

Question 79

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) both a and b.

Question 80

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