Question 1

Which one of the following is a measure of long-term solvency?

Accepted Answer

The cash coverage ratio is a measure of a company's ability to cover its interest obligations, indicating long-term solvency.

Question 2

The ratios that are based on financial statement values and used for comparison purposes are called:

Accepted Answer

Financial ratios are derived from financial statement values and are used to compare different aspects of a company's performance and financial health.

Question 3

The cash ratio is used to evaluate the:

Accepted Answer

C

Question 4

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

Accepted Answer

The sustainable growth rate is the maximum growth rate a firm can achieve without issuing new equity and while maintaining a constant debt-equity ratio.

Question 5

Which one of these transactions will increase the liquidity of a firm?

Accepted Answer

A credit sale of inventory at cost increases liquidity because it converts inventory, a less liquid asset, into accounts receivable, which is more liquid.

Question 6

The DuPont identity can be accurately defined as:

Accepted Answer

The answer of The DuPont identity can be accurately defined...

Question 7

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

Accepted Answer

Paying off an account payable with cash reduces both current liabilities and current assets by the same amount, but since the current ratio is greater than 1.0, the reduction in liabilities has a proportionally larger effect, thus increasing the current ratio.

Question 8

The Wood Shop generates $.97 in sales for every $1 invested in total assets.Which one of the following ratios would reflect this relationship?

Accepted Answer

The total asset turnover ratio measures how efficiently a company uses its assets to generate sales, calculated as sales divided by total assets. Here, $.97 in sales for every $1 in assets indicates a total asset turnover of 0.97.

Question 9

Common-size financial statements present all balance sheet account values as a percentage of:

Accepted Answer

Common-size financial statements express each balance sheet account as a percentage of total assets, allowing for easy comparison across companies or time periods.

Question 10

Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends.Given this, the percentage shown on a common-size income statement for the dividend account will:

Accepted Answer

The percentage shown on a common-size income statement for the dividend account will vary in direct relation to the net profit percentage because dividends are a fixed percentage of net income.

Question 11

If a firm has an inventory turnover of 15, the firm:

Accepted Answer

Inventory turnover of 15 means the firm sells and replaces its entire inventory 15 times in a year.

Question 12

Builder's Outlet just hired a new chief financial officer.To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes.Which one of the following statements will best suit her purposes?

Accepted Answer

A common-size income statement expresses each item as a percentage of sales, allowing the CFO to easily compare trends in sales and costs over multiple years.

Question 13

A firm has a current ratio of 1.4 and a quick ratio of .9.Given this, you know for certain that the firm:

Accepted Answer

The answer of A firm has a current ratio of...

Question 14

The equity multiplier is equal to:

Accepted Answer

The equity multiplier is a financial leverage ratio that is calculated as one plus the debt-equity ratio. It indicates how much of a company's assets are financed by equity.

Question 15

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

Accepted Answer

The internal growth rate is the maximum growth rate a firm can achieve using only retained earnings and without any external financing.

Question 16

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

Accepted Answer

A decrease in the capital intensity ratio indicates that a firm is using fewer assets to generate sales, meaning it is utilizing its assets more efficiently.

Question 17

Which one of the following is the abbreviation for the U.S.government coding system that classifies a firm by its specific type of business operations?

Accepted Answer

The Standard Industrial Classification (SIC) is the system used by the U.S. government to classify industries by a four-digit code.

Question 18

Which one of the following will increase the profit margin of a firm, all else held constant?

Accepted Answer

A decrease in the tax rate will reduce the amount of taxes paid, thereby increasing the net income and consequently the profit margin, assuming all other factors remain constant.

Question 19

Leon is the owner of a corner store.Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

Accepted Answer

The Quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory, which is suitable for assessing how long the store can pay its bills with cash and receivables.

Question 20

A common-size balance sheet helps financial managers determine:

Accepted Answer

A common-size balance sheet expresses each item as a percentage of total assets, allowing financial managers to easily see changes in the firm's asset mix over time.

Quiz 3: Working With Financial Statements