Question 1

The higher the inventory turnover measure,the:

Accepted Answer

Inventory turnover measures how fast a firm sells its inventory, so the higher the measure, the faster the firm is selling its inventory.

Question 2

If a firm decreases its operating costs,all else constant,then:

Accepted Answer

Decreasing operating costs increases net income, which improves both return on assets (ROA) and return on equity (ROE) as they are both calculated using net income.

Question 3

A banker considering loaning a firm money for ten years would most likely prefer the firm have a debt ratio of _______ and a times interest earned ratio of _______.

Accepted Answer

A banker would prefer a lower debt ratio and a higher times interest earned ratio, indicating the firm is less leveraged and has a strong ability to cover interest expenses.

Question 4

From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?

Accepted Answer

The cash coverage ratio measures a firm's ability to make interest payments by dividing its operating cash flow by its total interest payments. This provides a more accurate measure of a firm's ability to pay interest than the times interest earned ratio, which only looks at earnings before interest and taxes. The cash ratio and quick ratio measure a firm's liquidity, while the interval measure looks at a firm's ability to cover its operating expenses with its current assets.

Question 5

The three parts of the Du Pont identity can be generally described as: I. operating efficiency,asset use efficiency and firm profitability.
II) financial leverage,operating efficiency and asset use efficiency.
III) the equity multiplier,the profit margin and the total asset turnover.
IV) the debt-equity ratio,the capital intensity ratio and the profit margin.

Accepted Answer

The answer of The three parts of the Du Pont...

Question 6

It is easier to evaluate a firm using its financial statements when the firm:

Accepted Answer

When a firm uses the same accounting procedures as other firms in its industry, it becomes easier to compare and evaluate its financial statements. This is because such firms are likely to report financial information in a similar way, making it easier to identify any discrepancies or differences between them. Having a different fiscal year or engaging in one-time events can make it more difficult to compare financial statements with other firms in the industry. A conglomerate or global firm may have diverse operations, making it more challenging to evaluate their financial statements.

Question 7

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

Accepted Answer

The long-term debt ratio is of most interest to a firm's mortgage holder because it indicates the firm's ability to meet its long-term debt obligations, which is crucial for lenders assessing the risk of lending.

Question 8

Which one of the following statements is correct if a firm has a receivables turnover measure of 10?

Accepted Answer

A receivables turnover measure of 10 indicates that the firm collects its accounts receivable 10 times per year. To determine the average collection period, we divide 365 days (the number of days in a year) by 10 to get 36.5 days. Therefore, choice D is correct. Choice A is incorrect because it assumes that the firm's credit terms with customers are net 10 days. Choice B is incorrect because it refers to inventory turnover, not receivables turnover. Choice C is incorrect because it refers to payables turnover, not receivables turnover. Choice E is incorrect because it makes an unsupported assumption about the firm's cash and accounts receivable balances.

Question 9

The only difference between Joe's and Moe's is that Joe's has old,fully depreciated equipment. Moe's just purchased all new equipment which will be depreciated over eight years. Assuming all else equal:

Accepted Answer

The answer of The only difference between Joe's and Moe's...

Question 10

BGL Enterprises increases its operating efficiency such that costs decrease while sales remain constant. As a result,given all else constant,the:

Accepted Answer

Increasing operating efficiency will lead to a decrease in costs which will result in an increase in net income. As net income increases, return on equity (ROE) will also increase because ROE is calculated as net income divided by total equity.

Question 11

If shareholders want to know how much profit a firm is making on their entire investment in the firm,the shareholders should look at the:

Accepted Answer

Return on equity (ROE) calculates the amount of profit a company generated divided by the total amount of shareholder equity invested in the firm. It is the most appropriate measure for shareholders who want to know how much profit a firm is making on their entire investment in the firm. It gives an idea of how efficiently the company is using shareholders' investment to generate profit.

Question 12

Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus,you can state with certainty that one share of stock in Alfred's:

Accepted Answer

Price-earnings ratio is calculated by dividing the market price per share by the earnings per share. Since Alfred's Co. has a higher price-earnings ratio than Turner's Inc., it means that investors are willing to pay a higher market price per dollar of earnings for Alfred's Co. stock. Therefore, one share of Alfred's Co. has a higher market price per dollar of earnings than one share of Turner's Inc. stock.

Question 13

Which one of the following statements is correct?

Accepted Answer

Financial statements are commonly used for performance evaluations by stakeholders such as investors, creditors, and management. They provide insight into a company's financial health and profitability over time, allowing for comparison to industry benchmarks and trends.

Question 14

A total asset turnover measure of 1.03 means that a firm has $1.03 in:

Accepted Answer

A total asset turnover measure of 1.03 means that for every $1 in total assets, the company generates $1.03 in sales.

Question 15

If a firm produces a 10% return on assets and also a 10% return on equity,then the firm:

Accepted Answer

A 10% return on equity indicates that the firm is not financed by any debt, as the return on equity is equal to the return on assets. This means that all assets are funded entirely by equity, hence the answer is option A.

Question 16

Which one of the following sets of ratios applies most directly to shareholders?

Accepted Answer

The market-to-book ratio and price-earnings ratio are directly related to shareholders as they provide insights into the market valuation of the company relative to its book value and earnings, which are of primary interest to shareholders.

Question 17

Puffy's Pastries generates five cents of net income for every $1 in sales. Thus,Puffy's has a _______ of 5%.

Accepted Answer

The given information of generating 5 cents of net income for every $1 in sales is used to calculate the profit margin, which is the percentage of each dollar of sales that results in net income. Thus, Puffy's has a profit margin of 5%. Choice A) return on assets requires information about the company's total assets and net income to calculate the percentage return. Choice B) return on equity requires information about the company's equity and net income. Choices D) Du Pont measure and E) total asset turnover require multiple financial ratios to be calculated using additional information about the company.

Question 18

Vinnie's Motors has a market-to-book ratio of 3. The book value per share is $4.00. Holding market-to-book constant,a $1 increase in the book value per share will:

Accepted Answer

A market-to-book ratio of 3 means that the market value per share is three times the book value per share. If the book value per share increases by $1, the market value per share is likely to increase by a similar amount, causing the market price per share to rise. Therefore, choice D is correct, while choices A, B, and C are incorrect. The answer to choice E, "only affect book values but not market values," is also incorrect because a change in book value can affect both book and market values.

Question 19

Which two of the following are most apt to cause a firm to have a higher price-earnings ratio?
I. slow industry outlook
II. high prospect of firm growth
III. very low current earnings
IV. investors with a low opinion of the firm

Accepted Answer

A high prospect of firm growth (II) can lead to a higher price-earnings ratio as investors are willing to pay more for future earnings. Very low current earnings (III) can also result in a higher P/E ratio if the price remains high due to expectations of future growth.

Question 20

Last year,Alfred's Automotive had a price-earnings ratio of 15. This year,the price earnings ratio is 18. Based on this information,it can be stated with certainty that:

Accepted Answer

The change in the price-earnings ratio indicates that either the price per share, the earnings per share, or both have changed, but it does not specify which one or how.

Quiz 3: Financial Statements Analysis and Financial Models