Question 1

In a common size statement, the statement of ﬁnancial position may be expressed as a percentage of ____________ while the statement of comprehensive income may be expressed as a
Percentage of ____________.
A) liabilities plus equity; net income
B) assets; net income
C) sales; liabilities plus equity
D) liabilities plus equity; sales
E) liabilities; sales

Accepted Answer

In a common size statement, the statement of financial position is expressed as a percentage of total liabilities and equity. This is because it provides a clearer picture of the composition of the company's resources and how they are being financed.

The statement of comprehensive income, on the other hand, is expressed as a percentage of sales. This allows for a clearer understanding of how much of the revenue is being converted into profits and how much is being spent on expenses. Therefore, the correct answer is D - liabilities plus equity for the statement of financial position and sales for the statement of comprehensive income.

Question 2

A Halifax ﬁrm has an interval measure of 83. This means that the ﬁrm must:
A) Pay its creditors within the next 83 days or go bankrupt.
B) Get additional ﬁnancing within the next 83 days or possibly face closing the ﬁrm.
C) Sell all of its common stock in the next 83 days or become privately owned.
D) Pay a dividend to its shareholders every 83 days.
E) Pay interest on its debt every 83 days.

Accepted Answer

An interval measure of 83 means that the Halifax firm has 83 days before it runs out of cash to pay its bills. This means that the firm must get additional financing within the next 83 days to ensure its survival, or it may potentially face closure or bankruptcy. This is why choice B, getting additional financing within the next 83 days or possibly facing closure, is the best option.

Question 3

Ratios that measure a ﬁrm's ﬁnancial leverage are known as _____ ratios.
A) Asset management.
B) Long-term solvency.
C) Short-term solvency.
D) Proﬁtability.
E) Market value

Accepted Answer

The ratios that measure a firm's financial leverage are known as long-term solvency ratios. These ratios assess a firm's ability to meet its long-term obligations, including debt payments. Examples of long-term solvency ratios include debt-to-equity ratio, interest coverage ratio, and the times interest earned ratio.

Question 4

An increase in the receivables turnover means that:
A) The majority of customers are paying slower.
B) The prices of items purchased are rising.
C) The days' sales in receivables are rising.
D) Proﬁt margins are rising.
E) Customers are paying their bills faster.

Accepted Answer

An increase in receivables turnover means that customers are paying their bills faster, which leads to quicker collection of revenues and better liquidity for the company.

Question 5

The ___________ breaks down return on equity into three component parts: operating eﬃciency of the ﬁrm, its asset use eﬃciency, and ﬁnancial leverage.
A) Du Pont identity
B) Return on assets
C) Statement of cash ﬂows
D) Asset turnover ratio
E) Equity multiplier

Accepted Answer

The Du Pont identity is a financial ratio that breaks down return on equity (ROE) into three components: operating efficiency, asset use efficiency, and financial leverage. Therefore, option A is the best choice. Option B (return on assets) only measures the profitability of a company's assets, and options C, D, and E are not related to breaking down ROE into its components.

Question 6

The function described as the proﬁt margin times the total asset turnover times the equity multiplier is known as the:
A) Du Pont identity.
B) Return on assets.
C) Statement of cash ﬂows.
D) Asset turnover ratio.
E) Interval measure.

Accepted Answer

The function described is known as the Du Pont identity, which is a method of decomposing return on equity into its constituent parts.

Question 7

Ratios that measure the ﬁrm's ﬁnancial leverage are known as:
A) Asset management ratios.
B) Long-term solvency ratios.
C) Short-term solvency ratios.
D) Proﬁtability ratios.
E) Market value ratios.

Accepted Answer

Long-term solvency ratios measure the firm's ability to meet its long-term obligations and include ratios that measure financial leverage, such as debt-to-equity ratio and interest coverage ratio. Asset management ratios focus on how efficiently the firm is using its assets, short-term solvency ratios measure the firm's ability to meet its short-term obligations, profitability ratios measure the efficiency in generating profits, and market value ratios measure the firm's market value relative to its financial performance.

Question 8

A source of cash is deﬁned as:
A) Any transaction which increases the value of an asset account.
B) Any statement of ﬁnancial position account which increases in value.
C) The change in a ﬁrm's liquid accounts over a stated period of time.
D) Any activity which brings in cash to the ﬁrm.
E) Any activity which decreases the liabilities of a ﬁrm.

Accepted Answer

A source of cash refers to any activity that brings cash into the firm, such as revenue from sales or financing activities.

Question 9

The long-term debt ratio is probably of most interest to a ﬁrm's:
A) Credit customers.
B) Employees.
C) Suppliers.
D) Debt holders.
E) Shareholders.

Accepted Answer

Debt holders are most interested in the long-term debt ratio as it indicates the firm's ability to meet its long-term obligations, which directly affects their investment's security.

Question 10

Second Cups has a price-earnings ratio of 16. Tam Hortons has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Tam Hortons':
A) Has a higher market price than one share of stock in Second Cups.
B) Has a higher market price per dollar of earnings than one share of Second Cups.
C) Sells at a lower price per share than one share of Second Cups.
D) Represents a larger percentage of ﬁrm ownership than does one share of Second Cups' stock.
E) Earns a greater proﬁt per share than does one share of Second Cups' stock.

Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. Therefore, Tam Hortons' higher price-earnings ratio indicates that its market price is higher relative to its earnings than that of Second Cups. So, one share of Tam Hortons' stock has a higher market price per dollar of earnings than one share of Second Cups' stock.

Question 11

Tellus and Rojers Corp. are close competitors. Last year, both had the same level of cost of goods sold, but Tellus turned its inventory over ﬁve times during the year while Rojers Corp. turned its
Inventory over every 65 days. If the objective is to keep inventory as low as possible (on average),
Which of the following is true?
A) Tellus did a better job since its inventory turnover was lower.
B) Rojers Corp, did a better job since its days' sales in inventory was lower.
C) Tellus a better job since its days' sales in inventory was lower.
D) Rojers Corp. did a better job since its inventory turnover was lower.
E) Tellus did a better job since its level of inventory was lower.

Accepted Answer

Inventory turnover and days' sales in inventory are two different measures of inventory management. A higher inventory turnover means a company is selling and replenishing its inventory at a faster rate, which can lead to lower inventory carrying costs. On the other hand, a lower days' sales in inventory means that a company has less inventory on hand relative to its sales volume, which can also result in lower inventory carrying costs. In this case, Rojers Corp. had a lower days' sales in inventory (65 days) compared to Tellus (365/5 = 73 days), indicating that Rojers Corp. was able to maintain a lower level of inventory without negatively impacting its sales or customer demand. Therefore, Rojers Corp. did a better job of managing its inventory if the objective is to keep inventory as low as possible.

Question 12

Financial ratios that measure the ﬁrm's ability to pay its bills over the short run without undue stress are known as:
A) Asset management ratios.
B) Long-term solvency ratios.
C) Short-term solvency ratios.
D) Proﬁtability ratios.
E) Market value ratios.

Accepted Answer

Short-term solvency ratios measure a company's ability to meet its short-term obligations, such as paying bills and debts, without causing financial stress. Examples of short-term solvency ratios include the current ratio and the quick ratio. Asset management ratios measure a company's efficiency in managing and utilizing its assets, long-term solvency ratios assess a company's ability to meet its long-term obligations, profitability ratios gauge how well a company is generating profits, and market value ratios evaluate a company's stock price performance.

Question 13

The total asset turnover ratio is measured as:
A) Sales minus total assets.
B) Sales divided total assets.
C) Sales times total assets.
D) Total assets divided by sales.
E) Total assets plus sales.

Accepted Answer

The total asset turnover ratio is calculated by dividing the company's net sales by its total assets. This ratio measures how efficiently a company uses its assets to generate sales.

Question 14

All else the same, which of the following occurs when a ﬁrm buys inventory with cash?
A) The quick ratio goes up if it was greater than one before the change.
B) The current ratio goes down if it was greater than one before the change.
C) The current ratio goes down if it was lower than one before the change.
D) The quick ratio goes up if it was lower than one before the change.
E) The quick ratio declines but the current ratio remains unchanged.

Accepted Answer

The answer of All else the same, which of the...

Question 15

Ratios that measure how eﬃciently a ﬁrm uses its assets to generate sales are known as:
A) Asset management ratios.
B) Long-term solvency ratios.
C) Short-term solvency ratios.
D) Proﬁtability ratios.
E) Market value ratios.

Accepted Answer

Asset management ratios assess how well a firm utilizes its assets to generate sales. This includes ratios like inventory turnover, accounts receivable turnover, and total asset turnover. Long-term solvency ratios measure a firm's ability to meet long-term debt obligations, short-term solvency ratios evaluate a firm's ability to meet short-term debt obligations, profitability ratios focus on a firm's ability to earn a profit, and market value ratios assess the market value of a firm's stock.

Question 16

A _____________ standardizes items on the statement of comprehensive income and statement of ﬁnancial position as a percentage of total sales and total assets, respectively.
A) Tax reconciliation statement.
B) statement of standardization
C) statement of changes in ﬁnancial position
D) Common-base year statement.
E) Common-size statement.

Accepted Answer

A common-size statement standardizes items on the statement of comprehensive income and statement of financial position as a percentage of total sales and total assets, respectively.

Question 17

Ratios that measure how eﬃciently a ﬁrm's management uses its assets and equity to generate bottom line net income are known as _____ ratios.
A) Asset management
B) Long-term solvency
C) Short-term solvency
D) Proﬁtability
E) Market value

Accepted Answer

The ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as profitability ratios. These ratios include return on assets (ROA), return on equity (ROE), gross profit margin, operating profit margin, and net profit margin. Options A, B, C, and E refer to different types of ratios (asset management, long-term solvency, short-term solvency, and market value) that measure different aspects of a firm's financial performance.

Question 18

A statement that explains the changes in the cash balance of a ﬁrm over time is called a(n):
A) Statement of ﬁnancial position.
B) Statement of comprehensive income.
C) Statement of current assets.
D) Statement of analysis.
E) Statement of cash ﬂows.

Accepted Answer

A statement that explains the changes in the cash balance of a firm over time is called a statement of cash flows. The other options listed are either incorrect or do not specifically address changes in the cash balance.

Question 19

The net working capital turnover ratio is measured as:
A) Sales divided by net working capital.
B) Sales minus net working capital.
C) Sales times net working capital.
D) Net working capital divided by sales.
E) Net working capital plus sales.

Accepted Answer

The net working capital turnover ratio is calculated by dividing sales by net working capital. This ratio shows how effectively a company is using its net working capital to generate sales. A higher ratio suggests that the company is efficiently using its net working capital to generate sales.

Question 20

The ﬁnancial statement that summarizes the sources and uses of cash over a speciﬁed period of time is the:
A) Statement of comprehensive income.
B) Statement of ﬁnancial position.
C) Tax reconciliation statement.
D) Statement of cash ﬂows.
E) Statement of operating position.

Accepted Answer

The statement that summarizes the sources and uses of cash over a specified period of time is the statement of cash flows. Option A is incorrect as it summarizes income and expenses, not cash flows. Option B is incorrect as it shows the financial position of the company, not the sources and uses of cash. Option C is incorrect as it shows the differences between accounting income and taxable income. Option E is not a valid financial statement.

Quiz 3: Working With Financial Statements

In a common size statement, the statement of ﬁnancial position may be expressed as a percentage of while the statement of comprehensive income may be expressed as a Percentage of .

A Halifax ﬁrm has an interval measure of 83. This means that the ﬁrm must:

Ratios that measure a ﬁrm's ﬁnancial leverage are known as _____ ratios.

An increase in the receivables turnover means that:

The ___________ breaks down return on equity into three component parts: operating eﬃciency of the ﬁrm, its asset use eﬃciency, and ﬁnancial leverage.

The function described as the proﬁt margin times the total asset turnover times the equity multiplier is known as the:

Ratios that measure the ﬁrm's ﬁnancial leverage are known as:

A source of cash is deﬁned as:

The long-term debt ratio is probably of most interest to a ﬁrm's:

Second Cups has a price-earnings ratio of 16. Tam Hortons has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Tam Hortons':

Financial ratios that measure the ﬁrm's ability to pay its bills over the short run without undue stress are known as:

The total asset turnover ratio is measured as:

All else the same, which of the following occurs when a ﬁrm buys inventory with cash?

Ratios that measure how eﬃciently a ﬁrm uses its assets to generate sales are known as:

A _____________ standardizes items on the statement of comprehensive income and statement of ﬁnancial position as a percentage of total sales and total assets, respectively.

Ratios that measure how eﬃciently a ﬁrm's management uses its assets and equity to generate bottom line net income are known as _____ ratios.

A statement that explains the changes in the cash balance of a ﬁrm over time is called a(n) :

The net working capital turnover ratio is measured as:

The ﬁnancial statement that summarizes the sources and uses of cash over a speciﬁed period of time is the: