Question 1

Which one of the following is a measure of long-term solvency?
A)Price-earnings ratio
B)Profit margin
C)Cash coverage ratio
D)Receivables turnover
E)Quick ratio

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:
A)financial ratios.
B)industrial statistics.
C)equity standards.
D)accounting returns.
E)analytical standards.

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:
A)liquidity of a firm.
B)speed at which a firm generates cash.
C)length of time that a firm can pay its bills if no additional cash becomes available.
D)ability of a firm to pay the interest on its debt.
E)relationship between the firm's cash balance and its current liabilities.

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?
A)No new external financing of any kind
B)No new debt but additional external equity equal to the increase in retained earnings
C)New debt and external equity in equal proportions
D)New debt and external equity, provided the debt-equity ratio remains constant
E)No new external equity and a constant debt-equity ratio

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?
A)Cash purchase of new production equipment
B)Payment of an account payable
C)Cash purchase of inventory
D)Credit sale of inventory at cost
E)Cash payment of employee wages

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:
A)Return on equity × Total asset turnover × Equity multiplier.
B)Equity multiplier × Return on assets.
C)Profit margin × Return on equity.
D)Total asset turnover × Profit margin × Debt-equity ratio.
E)Equity multiplier × Return on assets × Profit margin.

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.
A)Cash purchase of inventory
B)Cash payment on an account receivable
C)Cash payment of an account payable
D)Credit sale of inventory at cost
E)Cash sale of inventory at a loss

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?
A)Receivables turnover
B)Equity multiplier
C)Profit margin
D)Return on assets
E)Total asset turnover

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:
A)the forecasted budget.
B)sales.
C)total equity.
D)total assets.
E)last year's account value.

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:
A)remain constant over time.
B)be equal to the dividend amount divided by the net income.
C)vary in direct relation to the net profit percentage.
D)vary in direct relation to changes in the sales level.
E)vary but not in direct relation to any other variable.

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:
A)sells its entire inventory every 15 days.
B)stocks its inventory only once every 15 days.
C)delivers inventory to its customers every 15 days.
D)sells its inventory by granting customers 15 days' of free credit.
E)sells its entire inventory an average of 15 times each year.

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?
A)Income statement
B)Balance sheet
C)Common-size income statement
D)Common-size balance sheet
E)Statement of cash flows

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:
A)pays cash for its inventory.
B)has more than half its current assets invested in inventory.
C)has more cash than inventory.
D)has more current liabilities than it does current assets.
E)has positive net working capital.

Accepted Answer

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

Question 14

The equity multiplier is equal to:
A)one plus the debt-equity ratio.
B)one plus the total asset turnover.
C)total debt divided by total equity.
D)total equity divided by total assets.
E)one divided by the total asset turnover.

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?
A)DuPont rate
B)External growth rate
C)Sustainable growth rate
D)Internal growth rate
E)Cash flow rate

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?
A)A decrease in the total asset turnover
B)A decrease in the capital intensity ratio
C)An increase in days' sales in receivables
D)A decrease in the profit margin
E)A decrease in the inventory turnover rate

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?
A)BEC
B)SED
C)BID
D)SIC
E)SBC

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?
A)Increase in interest paid
B)Increase in fixed costs
C)Increase in depreciation expense
D)Decrease in the tax rate
E)Decrease in sales

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.
A)Current ratio
B)Debt ratio
C)Cash coverage ratio
D)Cash ratio
E)Quick ratio

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:
A)which customers are paying on a timely basis.
B)if costs are increasing faster or slower than sales.
C)if changes are occurring in a firm's mix of assets.
D)if a firm is generating more or less sales per dollar of assets than in prior years.
E)the rate at which the firm's dividend payout is changing.

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

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

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

The cash ratio is used to evaluate the:

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

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

The DuPont identity can be accurately defined as:

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

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

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

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:

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

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

The equity multiplier is equal to:

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

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

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?

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

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.

A common-size balance sheet helps financial managers determine: