Deck 4: Financial Analysis-Sizing up Firm Performance

Question 1

If you were given the components of current assets and of current liabilities, what ratios could you compute?

A) Profitability ratios
B) Capital structure ratios
C) Asset management ratios
D) Liquidity ratios

Answer 1

D

Question 2

Common size financial statements represent all figures on the financial statements

A) in inflation adjusted dollars from a base year.
B) as if all companies being compared had the same total revenue.
C) as if all companies being compared had the same total assets.
D) as a percentage of either sales or total assets.

Answer 2

D

Question 3

Financial analysis is equally important to large corporations and small businesses.

Answer 3

True

Question 4

If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?

A) Acid test or quick ratio
B) Average collection period
C) Current ratio
D) Both A and C
E) All of the above

Question 5

Which of the following parties would perform an external financial analysis?

A) a firm's compensation committee
B) a financial analyst forecasting the next period's borrowing needs
C) a firm's creditors
D) a CFO comparing the performance of the firm's various divisions

Question 6

Individuals who do not work for a company rarely have enough information to perform a detailed financial analysis of the company.

Question 7

Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is

A) 90 days.
B) 45 days.
C) 75 days.
D) 60 days.

Question 8

Which of the following parties would be interested in an analysis of the firm's financial statements?

A) investors
B) creditors
C) the firm's managers
D) all of the above

Question 9

On a common size income statement, EBIT is equal to 100%.

Question 10

On a common size balance sheet, total assets are equal to 100%.

Question 11

Which of the following transactions does NOT affect the quick ratio?

A) Land held for investment is sold for cash.
B) Equipment is purchased and is financed by a long-term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a credit basis.

Question 12

Which of the following parties would perform an internal financial analysis?

A) a financial analyst forecasting the next period's borrowing needs
B) a firm's competitors
C) a firm's creditors
D) analysts for investment companies.

Question 13

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

Question 14

By using common size income statements, firms can determine how various expenses as a percentage of total sales changed from period to period.

Question 15

The debt ratio is a measure of a firm's

A) leverage.
B) profitability.
C) liquidity.
D) efficiency.

Question 16

Common size balance sheets represent all figures on the balance sheet

A) as a percentage change from the previous year.
B) percentages of the current year's sales.
C) as a percentage of peer group sales.
D) as a percentage of total assets.

Question 17

Common size income statements represent all figures on the income statement

A) as a percentage change from the previous year.
B) percentages of the current year's sales.
C) as a percentage of some benchmark figure.
D) as a percentage of total assets.

Question 18

What is the purpose of using common size balance sheets and common size income statements?

Question 19

The principal reason for preparing common size statements is

A) to make meaningful comparisons between firms that are not the same size.
B) to make meaningful comparisons between different quarters within the fiscal year.
C) to eliminate the effects of inflation.
D) to make meaningful comparisons between firms in different industries.

Question 20

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Question 21

Kingsbury Associates has current assets as follows: Cash $3,000
Accounts receivable $4,500
Inventories $8,000
If Kingsbury has a current ratio of 3.2, what is its quick ratio?

A) 2.07
B) 1.55
C) 0.48
D) 0.96

Question 22

Which of the following is included in the numerator of the times-interest-earned ratio?

A) Net income
B) Net Operating Income
C) Interest expense
D) Gross profit

Question 23

A firm's average collection period has decreased significantly from the previous year. Which of the following could possibly explain the results?

A) Customers are paying off their accounts quicker.
B) Customers are taking longer to pay for purchases.
C) The firm has a stricter collection policy.
D) Both A and C.

Question 24

Water Works, Inc. has a current ratio of 1.33, current liabilities of $540,000, and inventory of $400,000. What is Water Works, Inc.'s quick ratio?

A) 1.11
B) 0.86
C) 1.90
D) 0.59

Question 25

Based on the information in Table 1, the net profit margin is

A) 4.61%.
B) 2.94%.
C) 1.97%.
D) 5.33%.

Question 26

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

A) Current ratio
B) Gross profit margin
C) Quick ratio
D) Return on investment

Question 27

Based on the information in Table 1, the debt ratio is

A) 0.70.
B) 0.20.
C) 0.74.
D) 0.42.

Question 28

Why is the quick ratio a more refined measure of liquidity than the current ratio?

A) It measures how quickly cash and other liquid assets flow through the company.
B) Inventories are omitted from the numerator of the ratio because they are generally the least liquid of the firm's current assets.
C) It is a quicker calculation to make.
D) Cash is the most liquid current asset.

Question 29

The DuPont method decomposes return on equity into

A) return on assets and the debt ratio.
B) return on assets and the equity multiplier.
C) operating income and inventory turnover.
D) net profit margin and fixed asset turnover.

Question 30

Which of the following ratios indicates how rapidly the firm's credit accounts are being collected?

A) Debt ratio
B) Gross profit margin
C) Accounts receivable turnover ratio
D) Fixed asset turnover

Question 31

What is the reason for computing the acid test ratio in addition to the current ratio?

A) inventory is the most liquid of the liquid assets.
B) a firm's inventory may not be particularly liquid.
C) inventory is the best collateral for short term loans.
D) compared to accounts receivable, inventory balances may be difficult to verify

Question 32

Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall's debt ratio.

A) 30%
B) 40%
C) 50%
D) 60%

Question 33

Based on the information in Table 1, the inventory turnover ratio is

A) 0.29 times.
B) 2.35 times.
C) 0.43 times.
D) 3.47 times.

Question 34

Which of the following is included in the denominator of the times-interest-earned ratio?

A) Lease payments
B) Principal payments
C) Interest expense
D) Gross profit

Question 35

Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith's quick or acid test ratio?

A) 1.69
B) 0.54
C) 0.74
D) 1.35

Question 36

An increase in ________ will increase common equity.

A) paid in capital
B) retained earnings
C) dividends paid
D) both A and C

Question 37

The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of

A) liquidity ratios.
B) profitability ratios.
C) coverage ratios.
D) leverage ratios.

Question 38

Based on the information in Table 1, the current ratio is

A) 2.97.
B) 1.46.
C) 2.11.
D) 2.23.

Question 39

Based on the information in Table 1, the average collection period is

A) 71 days.
B) 84 days.
C) 64 days.
D) 127 days.

Question 40

If a company's average collection period is higher than the industry average, then the company might be:

A) enforcing credit conditions upon its customers which are too stringent.
B) allowing its customers too much time to pay their bills.
C) too tough in collecting its accounts.
D) too liquid.

Question 41

A decrease in ________ will increase gross profit margin.

A) cost of goods sold
B) depreciation expense
C) interest expense
D) both A and B

Question 42

Sharky's Loan Co. has an annual interest expense of $30,000. If Sharky's times-interest-earned ratio is 2.9, what is Sharky's Earnings Before Taxes (EBT)?

A) $87,000
B) $57,000
C) $117,000
D) $60,000

Question 43

Lorna Dome, Inc. has an annual interest expense of $30,000. Lorna Dome's times-interest-earned ratio is 4.2. What is Lorna Dome's operating income?

A) $96,000
B) $57,000
C) $126,000
D) $57,600

Question 44

Ortny Industries has an accounts receivable turnover ratio of 4.3. If Ortny has an accounts receivable balance of $90,000, what is Ortny's average daily credit sales?

A) $387,000
B) $1,548
C) $1,060
D) $3,521

Question 45

Storm King Associates has a total asset turnover ratio of 1.90 and a return on total assets of 7.20%. What is Storm King's net profit margin?

A) 3.79
B) 13.68
C) 9.10
D) None of the above

Question 46

Skrit Corporation has a net profit margin of 15% and a total asset turnover of 1.7. What is Skrit's return on total assets?

A) 12.3%
B) 25.5%
C) 8.8%
D) 11.1%

Question 47

Snype, Inc. has an accounts receivable turnover ratio of 7.3. Stork Company has an accounts receivable turnover ratio of 5.0. Which of the following statements is correct?

A) Snype's average collection period is less than Stork's.
B) Stork's average collection period is less than Snype's.
C) Snype has a lower accounts receivable account on average than does Stork Company.
D) Stork Company has (on average) a lower accounts receivable account than does Snype.

Question 48

Spinnit, Limited has a debt ratio of .57, current liabilities of $14,000, and total assets of $70,000. What is the level of Spinnit, Limited's total liabilities?

A) $25,900
B) $24,600
C) $39,900
D) $53,900

Question 49

Billing's Pit Corporation has an accounts receivable turnover ratio of 3.4. What is Billing's Pit Corporation's average collection period?

A) 107 days
B) 102 days
C) 73 days
D) 55 days

Question 50

Snort and Smiley Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000, and total assets of $70,000. What is Snort and Smiley's level of current liabilities?

A) $8,400
B) $9,400
C) $12,340
D) $10,600

Question 51

Sputter Motors has sales of $3,450,000, total assets of $1,240,000, cost of goods sold of $2,550,000, and an inventory turnover of 6.38. What is the amount of Sputter's inventory?

A) $421,054
B) $638,112
C) $543,000
D) $399,687

Question 52

In 2012, Snout and Smith, Inc. had a gross profit of $27,000 on sales of $110,000. S & S's operating expenses for 2012 were $13,000, and its net profit margin was .0585. Snout and Smith had no interest expense in 2012. What was S&S's operating profit margin?

A) 0.245
B) 0.118
C) 0.127
D) 0.157

Question 53

A decrease in the return on equity ratio could be caused by an increase in

A) tax rate.
B) cost of goods sold.
C) total assets.
D) any of the above

Question 54

Which of the following is the best indicator of management's effectiveness at managing the firm's balance sheet?

A) Debt ratio
B) Total asset turnover
C) Times-interest-earned
D) Operating profit margin

Question 55

GAAP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of $1,855,062, and a net profit margin of 2.9%. What is GAAP's return on equity? Round to the nearest 0.1%.

A) 8.6%
B) 24.0%
C) 16.4%
D) 4.4%

Question 56

Other things held constant, an increase in ________ will decrease the current ratio. Assume an initial current ratio greater than 1.0.

A) accruals
B) common stock
C) average collection period
D) cash

Question 57

Which of the following is the best indicator of management's effectiveness at generating profits relative to the firm's assets?

A) Quick ratio
B) Fixed assets turnover
C) Return on assets
D) Accounts receivable turnover

Question 58

Smart and Smiley Incorporated has an average collection period of 74 days. What is the accounts receivable turnover ratio for Smart and Smiley?

A) 4.93
B) 2.47
C) 2.66
D) 1.68

Question 59

Which of the following statements is true?

A) As a general rule, management would want to reduce the firm's average collection period.
B) As a general rule, management would want to reduce the firm's accounts receivable turnover ratio.
C) As a general rule, management would want to increase the firm's average collection period.
D) As a general rule, a firm is not financially affected by the amount of time required to collect its accounts receivable.

Question 60

Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.

A) 17.5%
B) 19.5%
C) 21.5%
D) 23.5%

Question 61

In 2016, ABC's average collection period is

A) 30 days.
B) 32.5 days.
C) 25 days.
D) 35 days.

Question 62

Dew Point Dynamite, Inc. generated a 1.23 total asset turnover in its latest fiscal year on assets of $2,112,077. The firm has total liabilities of $950,997. The firm's net profit margin was 10.3%. What is Dew Point's return on equity? Round to the nearest 0.1%.

A) 23.1%
B) 12.6%
C) 5.5%
D) 18.2%

Question 63

Which of the following will help an analyst determine how well a firm is able to service its debt?

A) Total liability turnover
B) Times-interest-earned
C) Return on debt
D) Asset ratio

Question 64

Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of $275,000, which consist strictly of notes payable. The firm's operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable. How much is the firm's times-interest-earned?

A) 15.6
B) 45.3
C) 20.2
D) 3.0

Question 65

Wireless Communications has a total asset turnover of 2.66, total liabilities of $1,004,162, and sales revenues of $7,025,000. What is Wireless's debt ratio?

A) 38.0%
B) 14.3%
C) 26.7%
D) 81.1%

Question 66

An example of an asset management efficiency ratio is the

A) total asset turnover ratio.
B) gross profit margin.
C) times-interest-earned.
D) return on assets.

Question 67

Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In addition, this firm's current ratio and fixed asset turnover ratio also meet industry standards. Based on this information, we can conclude that this firm must have excessive

A) current liabilities.
B) fixed assets.
C) long-term debt.
D) current assets.

Question 68

A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined. This may be due to

A) an increase in sales.
B) an increase in cost of goods sold.
C) an increase in inventory purchases.
D) a decrease in inventory purchases.

Question 69

Kannan Carpets, Inc. has asked you to calculate the company's quick ratio for 2016. All you have is a partial balance sheet and some assumptions. Using the information provided, calculate Kannan's quick ratio for 2016. Gross profit margin = 50%
Inventory turnover (COGS/Inv) = 5
2001 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net fixed assets $500 Equity 250
Total assets $900 Total liab. & equity ?

A) 0.2
B) 0.4
C) 0.6
D) 0.8

Question 70

In the times-interest-earned ratio, dividend payments are included in:

A) the numerator.
B) the denominator.
C) both the numerator and the denominator.
D) neither the numerator nor the denominator.

Question 71

An increase in ________ will decrease the times-interest-earned ratio.

A) the tax rate
B) gross profit
C) interest expense
D) common stock

Question 72

In 2016, ABC's inventory turnover is

A) 23.9.
B) 20.3.
C) 15.5.
D) 16.1.

Question 73

In 2016, ABC's fixed asset turnover is

A) 2.78.
B) 5.0.
C) 4.6.
D) 4.8.

Question 74

Since 2015, ABC's efficiency at using its assets has

A) improved.
B) deteriorated.
C) remained the same.
D) been variable across components of the efficiency measures.

Question 75

In 2016, the improvement in ABC's return on equity occurred because

A) ABC used more debt than in 1994.
B) ABC lowered its expenses in 1995 and was, therefore, more profitable.
C) ABC utilized its total assets more efficiently in 1995.
D) None of the above explain the improvement in ABC's return on equity.

Question 76

Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In addition, this firm's current ratio and acid test ratio also meet industry standards. Based on this information, we can conclude that this firm must have excessive

A) accounts receivable.
B) fixed assets.
C) debt.
D) inventory.

Question 77

If the total asset turnover decreases, then the return on equity will

A) decrease.
B) increase.
C) not change.
D) change, but in an indeterminate way.

Question 78

Kannan Carpets, Inc. has asked you to calculate the company's current ratio for 2016. All you have is a partial balance sheet and some assumptions. Using the information provided, calculate Kannan's current ratio for 2001. Gross profit margin = 50%
Inventory turnover (COGS/Inv) = 5
2016 sales = $3,000
Assets Liabilities & Equity
Cash ? Accounts payable $50
AR $40 Accruals ?
Inventory ? Long-term debt $400
Net fixed assets $500 Equity 250
Total assets $900 Total liab. & equity ?

A) 0.3
B) 0.8
C) 1.6
D) 2.2

Question 79

Since 2015, ABC's liquidity has

A) improved.
B) deteriorated.
C) remained the same.
D) been variable across components of the liquidity measures.

Question 80

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

A) Liquidity
B) Leverage
C) Efficiency
D) Profitability