Deck 4: Financial Analysis - Sizing up Firm Performance

Question 1

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

Answer 1

True

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

Common-size income statements represent all figures on the income statement

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

Answer 3

B

Question 4

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

Question 5

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 6

Which of the following statements is true?

A)Current assets consist of cash,accounts receivable,inventory,and net plant,property and equipment.
B)The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
C)For the average firm,inventory is considered to be more "liquid" than accounts receivable.
D)A successful firm's current liabilities should always be greater than its current assets.

Question 7

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

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

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 10

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

Question 11

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

Question 12

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 some benchmark figure.
D)as a percentage of total assets.

Question 13

The question "Did the ordinary shareholders 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 14

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 fiscal years.
C)to eliminate the effects of inflation.
D)to make meaningful comparisons between firms in different industries.

Question 15

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 16

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

Question 17

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 18

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

Question 19

The debt ratio is a measure of a firm's

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

Question 20

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 21

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 22

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 23

The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of

A)cash.
B)inventory.
C)marketable securities.
D)accruals.

Question 24

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 25

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 26

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)both B and C.

Question 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

An increase in ________ will affect shareholders' equity.

A)price per ordinary share
B)retained earnings
C)dividends paid
D)both A and C

Question 37

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 38

Another name for the acid test ratio is the

A)current ratio.
B)quick ratio.
C)inventory turnover ratio.
D)average collection period.

Question 39

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 40

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 41

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)Interest coverage ratio
D)Operating profit margin

Question 42

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

A)accruals
B)ordinary shares
C)average collection period
D)cash

Question 43

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 interest coverage ratio?

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

Question 44

Suppose Phil's Fisheries (PF)has a total asset turnover ratio of 1.90 and a return on total assets of 7.20%.What is PF's net profit margin?

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

Question 45

An increase in ________ will decrease the interest coverage ratio.

A)the tax rate
B)gross profit
C)interest expense
D)ordinary shares

Question 46

Dew Point Demolitions,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 47

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

A)Total liability turnover
B)Interest coverage ratio
C)Return on debt
D)Asset ratio

Question 48

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 49

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 50

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 51

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 52

Sharky's Loan Co.has an annual interest expense of $30,000.If Sharky's interest coverage 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 53

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 54

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 55

An example of a liquidity ratio is the

A)quick ratio.
B)debt ratio.
C)interest coverage ratio.
D)return on assets.

Question 56

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 57

In 2014 Snout and Smith,Inc.had a gross profit of $27,000 on sales of $110,000.S & S's operating expenses for 2014 were $13,000,and its net profit margin was .0585.Snout and Smith had no interest expense in 2014.Using this information,what was S & S's operating profit margin for 2014?

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

Question 58

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 59

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 60

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 61

Colton Corp.has current assets of $4.5 million.The current ratio is 1.25 and the quick ratio is 0.75.What is the amount of Colton's current liabilities (in millions)?

A)$4.5
B)$1.8
C)$2.4
D)$2.9
E)$3.6

Question 62

Kannan Carpets,Inc.has asked you to calculate the company's current ratio for 2001.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
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)0.3
B)0.8
C)1.6
D)2.2

Question 63

A firm has a return on equity of 20% and a total asset turnover of 4.Assuming a debt ratio of 50% and sales of $1,000,000,calculate net income.

A)$25,000
B)$50,000
C)$75,000
D)$100,000

Question 64

Kannan Carpets,Inc.has asked you to calculate the company's quick ratio for 2001.All you have is a partial balance sheet and some assumptions.Using the information provided,calculate Kannan's quick ratio for 2001. 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 65

Which of the following is NOT a driving force of the operating profit margin?

A)The average selling price for each product
B)The ability to control all of the firm's expenses
C)The ability to control general and administrative expenses
D)The number of units of product sold

Question 66

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

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 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 68

Which of the following is NOT a component of return on assets (ROA)?

A)Total assets
B)Cost of goods sold
C)Sales
D)Leverage

Question 69

Corbin,Inc.had net income of $150,000 on sales of $5,000,000 during 2014 In addition,the firm's total assets were $2,500,000,and its capital structure is comprised of 40% debt and 60% equity.What was Corbin's return on equity in 2014?

A)15%
B)2.5%
C)10%
D)Return on equity cannot be determined with the information provided.

Question 70

Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations?

A)The quick ratio (acid test)
B)Return on equity
C)Total asset turnover
D)Operating profit margin

Question 71

Which of the following financial ratios is the best measure of how effectively a firm's management is serving its stockholders?

A)Current ratio
B)Debt ratio
C)Average collection period
D)Return on equity

Question 72

Holding all other variables constant,which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in

A)inventory.
B)long-term debt.
C)accounts receivable.
D)accounts payable.

Question 73

________ indicates management's effectiveness in managing the firm's income statement.

A)Gross profit margin
B)Operating profit margin
C)Net profit margin
D)Return on assets

Question 74

In the interest coverage 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 75

Which of the following will increase return on equity?

A)An increase in sales with a proportionate increase in costs and expenses
B)An increase in sales relative to the asset base
C)A decrease in leverage
D)Both A and C

Question 76

An increase in the current ratio would indicate an increase in

A)leverage.
B)liquidity.
C)return on investment.
D)operating income.

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

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

Question 79

If Challenge Corporation has sales of $2 million per year (all credit)and an average collection period of 35 days,what is its average amount of accounts receivable?

A)$191,781
B)$57,143
C)$5,556
D)$97,222

Question 80

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.