Deck 4: Analyzing Financial Statements

Question 1

For a given level of after-tax income, the lower the level of equity a firm has, the higher the return on equity its shareholders will earn.

Answer 1

True

Question 2

The most frequent method used for creating a common-size balance sheet is to divide each of the accounts by total assets, expressing each account as a percentage of total assets.

Answer 2

True

Question 3

The higher the times-interest-earned ratio, the more comfortable a firm is in meeting its interest obligations.

Answer 3

True

Question 4

A typical way in which a common-size income statement is constructed is by dividing all expense items in an income statement by net income.

Question 5

Financial statement analysis can help us determine why a firm's cash flows are increasing or decreasing.

Question 6

A firm that has no debt will have its return on assets (ROA) equal to its return on equity (ROE).

Question 7

Managers' decisions regarding financing, investment, and working capital are reflected in the financial statements.

Question 8

Stockholders are primarily concerned on the value of their stock, but not on how much cash they can expect to receive from dividends and/or capital appreciation over time.

Question 9

The equity multiplier of a firm is computed by dividing the total equity by its total assets.

Question 10

Financial leverage refers to the use of preferred stock in a firm's capital structure.

Question 11

A company can improve its liquidity by increasing its accounts payable, while maintaining the other accounts constant.

Question 12

For a given share price of a firm's stock, the lower the EPS the lower the price-earnings ratio.

Question 13

Total asset turnover is more relevant for service-industry firms, while the fixed asset turnover ratio is more relevant for manufacturing industry firms.

Question 14

Liquidity ratios are concerned with a firm's ability to pay its current bills without putting the firm in financial difficulty.

Question 15

A firm increased its day's sales outstanding from 35 days to 43 days. This implies the firm is more efficient in collecting the debts.

Question 16

Turnover ratios are useful for managers in identifying inefficient use of current and long-term assets.

Question 17

The purchase of additional inventory by a firm should decrease a firm's quick ratio.

Question 18

A firm's current ratio changed from 1.4 times in the previous year to 1.6 times in the current year. Based on this information, we can conclude that the firm's liquidity has improved.

Question 19

The DuPont equation relates a firm's net profit margin, total asset turnover ratio, and equity multiplier to determine its return on equity.

Question 20

A financial statement analysis conducted over a period of time is called trend analysis.

Question 21

Which of the following does NOT change a firm's current ratio?

A) The firm collects its accounts receivables.
B) The firm purchases inventory by taking a short-term loan.
C) The firm pays down its accounts payables.
D) None of the above.

Question 22

Which of the following is NOT true about the inventory turnover ratio?

A) It is calculated by dividing inventory by cost of goods sold.
B) It measures how many times the inventory is turned over into saleable products.
C) The more times a firm can turnover its inventory, the better.
D) Too high a turnover or too low a turnover could be a warning sign.

Question 23

A firm's management analyzes financial statements so that:

A) they can get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements.
B) similar to shareholders, they can focus on profitability, dividend, capital appreciation, and return on investment.
C) they can get more stock options.
D) Both a and b

Question 24

Which of the following is NOT true of common-size balance sheets?

A) Each asset and liability item on the balance sheet is standardized by dividing it by total assets.
B) Balance sheet accounts are represented as percentages of total assets.
C) Each asset and liability item on the balance sheet is standardized by dividing it by sales.
D) Common-size balance sheets allow us to make meaningful comparisons between the balance sheets of two firms that are different in size.

Question 25

Common-size financial statements:

A) are a specialized application of ratio analysis.
B) allow us to make meaningful comparisons between the financial statements of two firms that are different in size.
C) are prepared by having each financial statement item expressed as a percentage of some base number, such as total assets or total revenues.
D) All of the above are true.

Question 26

All else being equal, which of the following will decrease a firm's current ratio?

A) A decrease in the net fixed assets
B) A decrease in depreciation expense
C) An increase in accounts payable
D) None of the above

Question 27

Which of the following is NOT true of liquidity ratios?

A) They measure the ability of a firm to meet short-term obligations with short-term assets without putting the firm in financial trouble.
B) There are two commonly used ratios to measure liquidity-current ratio and quick ratio.
C) For manufacturing firms, quick ratios will tend to be much larger than current ratios.
D) The higher the liquidity ratios, the more liquid the firm and the better its ability to pay its short-term bills.

Question 28

The Standard Industrial Classification (SIC) codes are four-digit numbers in which the last two digits describe the type of business or industry in which the firm is engaged.

Question 29

The three different perspectives on financial statement analysis are those of the:

A) manager, regulator, and bondholder.
B) manager, shareholder, and creditor.
C) regulator, shareholder, and creditor.
D) shareholder, creditor, and regulator.

Question 30

Which of the following is a benefit of a common-size income statement?

A) It is very useful to assess how effectively a firm collected its accounts receivable.
B) It reveals a great deal of information about the adequacy of a firm's net working capital.
C) It can tell the analyst a great deal about a firm's efficiency and profitability.
D) It reveals how effectively a firm has increased its assets.

Question 31

Which of the following is true of ratio analysis?

A) A ratio is computed by dividing one balance sheet item or income statement item by another.
B) The choice of the scale determines the story that can be garnered from the ratio.
C) Ratios can be calculated based on the type of firm being analyzed or the kind of analysis being performed.
D) All of the above are true.

Question 32

Which of the following is true about the quick ratio?

A) The quick ratio is calculated by dividing the least liquid of current assets by current liabilities.
B) Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios.
C) Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets.
D) Quick ratios will tend to be much larger than current ratio for manufacturing firms or other industries that have a lot of inventory.

Question 33

Firms with a lower return on assets (ROA) and higher leverage will have a lower return on equity (ROE) than firms with a higher return on assets (ROA) and lower leverage.

Question 34

Which of the following is NOT true of common-size income statements?

A) Each income statement item is standardized by dividing it by total assets.
B) Income statement accounts are represented as percentages of net sales.
C) Each income statement item is standardized by dividing it by net sales.
D) Common-size income statements analysis is a specialized application of ratio analysis.

Question 35

The creditors of a firm analyze financial statements so that they can focus on:

A) the firm's amount of debt.
B) the firm's ability to generate sufficient cash flows to meet its legal obligations first and still have sufficient cash flows to meet debt repayment and interest payments.
C) the firm's ability to meet its short-term obligations.
D) All of the above.

Question 36

An individual analyzing a firm's financial statements should do all but which one of the following?

A) Use unaudited financial statements
B) Perform a trend analysis
C) Perform a benchmark analysis
D) Compare the firm's performance to that of its direct competitors

Question 37

Anyone analyzing a firm's financial statements should:

A) use audited financial statements.
B) do a trend analysis.
C) perform a benchmark analysis.
D) All of the above.

Question 38

Shareholders analyze financial statements in order to:

A) assess the cash flows that the firm will generate from its operations.
B) determine the firm's profitability, their return for that period, and the dividend they are likely to receive.
C) focus on the value of the stock they hold.
D) All of the above

Question 39

While doing an industry group analysis, you form the comparison group by choosing firms that are larger than the firm being compared.

Question 40

In a peer group analysis, the benchmark for financial statement analysis is the performance of a competitor that is roughly the same size and that offer a similar range of products.

Question 41

Trident Corp., has debt of $3.35 million with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times-interest-earned ratio? Round your final answer to nearest number.

A) 13 times
B) 12 times
C) 11 times
D) None of the above

Question 42

Gateway Corp. has an inventory turnover ratio of 5.6. What is its day's sales in inventory? Round your final answer to nearest day.

A) 65 days
B) 64 days
C) 61 days
D) 57 days

Question 43

Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of $197,333. What is the firm's quick ratio? Round your final answer to two decimal places.

A) 0.72
B) 1.20
C) 1.92
D) None of the above

Question 44

If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables? Round your final answer to the nearest dollar.

A) $881,234
B) $13,403,567
C) $1,340,357
D) $81,234

Question 45

Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and its current ratio now is 2.1. The firm plans to acquire additional inventory to meet an unexpected surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement, if their total current assets equal $3.5 million? Round your final answer to the nearest dollar.

A) $0
B) $777,777
C) $1 million
D) None of the above

Question 46

Which of the following statements is correct?

A) The lower the level of a firm's debt, the higher the firm's leverage.
B) The lower the level of a firm's debt, the lower the firm's equity multiplier.
C) The lower the level of a firm's debt, the higher the firm's equity multiplier.
D) The tax benefit from using debt financing reduces a firm's risk.

Question 47

Ellicott City Manufacturers, Inc., has sales of $6,344,210, and a gross profit margin of 67.3 percent. What is the firm's cost of goods sold? Round your final answer to the nearest dollar.

A) $2,074,557
B) $2,745,640
C) $274,560
D) None of the above.

Question 48

Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? Round your final answer to two decimal places.

A) 0.60
B) 1.47
C) 1.74
D) 3.47

Question 49

Coverage ratios, like times interest earned and cash coverage ratio, allow:

A) a firm's management to assess how well they meet short-term liabilities.
B) a firm's shareholders to assess how well the firm will meet its short-term liabilities.
C) a firm's creditors to assess how well the firm will meet its interest obligations.
D) a firm's creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

Question 50

Jet, Inc., has net sales of $712,478 and accounts receivable of $167,435. What are the firm's accounts receivable turnover and day's sales outstanding? Round your accounts receivable turnover to two decimal places and day's sales outstanding to nearest day.

A) 0.24 times; 79 days
B) 4.26 times; 86 days
C) 5.2 times; 61 days
D) None of the above.

Question 51

Which one of the following statements is NOT true?

A) The accounts receivables turnover ratio measures how quickly the firm collects its credit sales.
B) One ratio that measures the efficiency of a firm's collection policy is day's sales outstanding.
C) The more days that it takes a firm to collect on its receivables, the more efficient the firm is.
D) Day's sales outstanding measures in days, the time a firm takes to convert its receivables into cash.

Question 52

Deutsche Bearings has total sales of $9,745,923, inventories of $2,237,435, cash and equivalents of $755,071, and day's sales outstanding of 49 days. If the firm's management wanted its day's sales outstanding (DSO) to be 35 days, by how much will the accounts receivable have to change? Round your final answer to two decimal places.

A) $373,816.23
B) −$373,816.23
C) −$379,008.12
D) $379,008.12

Question 53

Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company? Round your final answers to one decimal place.

A) 19.4 times; 12.7 times
B) 17.3 time; 11.4 times
C) 13.8 times; 19.4 times
D) None of the above

Question 54

Which one of the following statements is NOT correct?

A) A leveraged firm is riskier than a firm that is not leveraged.
B) A leveraged firm is less risky than a firm that is not leveraged.
C) A firm that uses debt magnifies the return to its shareholders.
D) A firm that does not use debt incurs opportunity cost of increasing value of shares.

Question 55

If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its accounts receivable turnover? Round your final answer to two decimal places.

A) 0.34 times
B) 1.78 times
C) 2.95 times
D) None of the above

Question 56

Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm's current ratio? Round your final answer to two decimal places.

A) 1.83
B) 0.73
C) 1.67
D) None of the above

Question 57

Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio? Round your final answer to two decimal places.

A) 15.42 times
B) 18.34 times
C) 14.15 times
D) None of the above

Question 58

Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of $378,454. What is the quick ratio? Round your final answer to two decimal places.

A) 1.65
B) 0.64
C) 1.01
D) None of the above

Question 59

If firm A has a higher debt-to-equity ratio than firm B, then:

A) firm A has a lower equity multiplier than firm B.
B) firm B has a lower equity multiplier than firm A.
C) firm B has higher financial leverage than firm A.
D) None of the above.

Question 60

Which of the following statements is NOT true of the asset turnover ratio?

A) Asset turnover ratio measures the dollar amount of sales per dollar of assets that the firm has.
B) The fixed assets turnover ratio is less significant for equipment-intensive manufacturing industry firms than the total assets turnover ratio.
C) The higher the total asset turnover, the more efficiently management is using total assets.
D) The ratio is quite useful in identifying the inefficient use of current and long-term assets.

Question 61

Which of the following is NOT a method of "benchmarking"?

A) Conducting an industry group analysis.
B) Utilizing the DuPont system to analyze a firm's performance.
C) Evaluating a single firm's performance over time.
D) Identifying a group of firms that compete with the company being analyzed.

Question 62

Which of the following is true of a firm that has both debt and equity?

A) Its return on equity (ROE) will be greater than its return on asset (ROA).
B) Its return on equity (ROE) will be lesser than its return on asset (ROA).
C) Its return on equity (ROE) will be equal to its return on asset (ROA).
D) None of the above.

Question 63

What will be a firm's equity multiplier given a debt ratio of 0.45? Round your final answer to two decimal places.

A) 1.82
B) 1.28
C) 2.22
D) None of the above

Question 64

There are people who believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

A) Ratio analysis requires the analyst to evaluate a firm's performance over a period of time to be of any value.
B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.
C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret.
D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

Question 65

Which one of the following is a criticism of equating the goals of maximizing the return on equity (ROE) of a firm and maximizing the firm's shareholder wealth?

A) ROE is based on after-tax earnings, not cash flows.
B) ROE does not consider risk.
C) ROE ignores the size of the initial investment as well as future cash flows.
D) All of the above are criticisms of ROE as a goal.

Question 66

The DuPont equation shows that a firm's (return on equity) ROE is determined by three factors:

A) net profit margin, total asset turnover, and the equity multiplier.
B) operating profit margin, return on assets (ROA), and the total assets turnover.
C) net profit margin, total asset turnover, the return on assets (ROA).
D) return on assets (ROA), total assets turnover, and the equity multiplier.

Question 67

Which one of the following statements about trend analysis is NOT correct?

A) The benchmark for trend analysis is based on a firm's historical performance.
B) It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.
C) It uses the Standard Industrial Classification (SIC) System to benchmark firms.
D) A ratio value that is changing typically prompts the financial manager to sort out the issues surrounding the change.

Question 68

In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round your percentage answer to one decimal place.)

A) 13.1%
B) 14.6%
C) 22.5%
D) 18.7%

Question 69

Which one of the following statements is NOT correct?

A) The DuPont system is based on two equations that relate a firm's return on asset (ROA) and return on equity (ROE).
B) The DuPont system is a set of related ratios that links the items of balance sheet and the income statement.
C) Both management and shareholders can use this tool to understand the factors that drive a firm's return on equity (ROE).
D) All of the above are correct.

Question 70

RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.

A) 4.87 times
B) 8.12 times
C) 5.17 times
D) None of the above

Question 71

Which one of the following is NOT an advantage of using return on equity (ROE) as a goal?

A) ROE is highly correlated with shareholder wealth maximization.
B) ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses.
C) ROE does not consider risk.
D) All of the above are advantages of using ROE as a goal.

Question 72

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

A) The quick ratio more accurately reflects a firm's profitability.
B) It omits the least liquid current asset from the numerator of the ratio.
C) The current ratio does not include accounts receivable.
D) It measures how "quickly" cash flows through the firm.

Question 73

Which of the following is true of a firm that has no debt in its capital structure?

A) Its return on equity (ROE) will be greater than its return on asset (ROA).
B) Its return on equity (ROE) will be lesser than its return on asset (ROA).
C) Its return on equity (ROE) will be equal to its return on asset (ROA).
D) None of the above.

Question 74

Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.

A) 7.1%
B) 34.7%
C) 28.1%
D) 43.2%

Question 75

Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price? Round your intermediate and final answer to two decimal places.

A) $34.05
B) $3.68
C) $11.20
D) $36.80

Question 76

Peer group analysis can be performed by:

A) management choosing a set of firms that are similar in size or sales, or who compete in the same market.
B) using the average ratios of this peer group, which would then be used as the benchmark.
C) identifying firms in the same industry that are grouped by size, sales, and product lines in order to establish benchmark ratios.
D) Only a and b relate to peer group analysis.

Question 77

Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio? Round your final answers to two decimal places.

A) 2.31; 1.31
B) 1.75; 0.75
C) 0.75; 1.75
D) 1.31; 2.31

Question 78

Sorenstam Corp. has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA. Round your percentage answer to two decimal places.

A) 6.23%
B) 4.53%
C) 7.48%
D) 5.79%

Question 79

Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53 times, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income? Round your final answer to two decimal places.

A) $75,281.80
B) $514,250.00
C) $51,425.00
D) $7,528.10

Question 80

Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's return on assets (ROA)? Round intermediate calculations to nearest dollar and percentage answer to one decimal place.

A) 25.6%
B) 18%
C) 27.4%
D) None of the above