Question 1

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's fixed asset turnover ratio for 2009 is
A)1.45.
B)1.63.
C)1.20.
D)1.58.

Accepted Answer

$2,500,000/[($2,180,000 + $2,000,000)) 2] = 1.20.

Question 2

__________ is a true statement.
A)During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used
B)During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used
C)After inflation ends, distortion due to LIFO will disappear as inventory is sold
D)During periods of inflation, LIFO overstates earnings relative to FIFO

Accepted Answer

During periods of inflation, the use of LIFO results in lower priced inventory remaining in stock; thus the balance sheet understates the actual inventory values.

Question 3

One problem with comparing financial ratios prepared by different reporting agencies is
A)some agencies receive financial information later than others.
B)agencies vary in their policies as to what is included in specific calculations.
C)some agencies are careless in their reporting.
D)some firms are more conservative in their accounting practices.
E)None of the options

Accepted Answer

One problem with comparing financial ratios prepared by different reporting agencies is agencies vary in their policies as to what is included in specific calculations.

Question 4

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's inventory turnover ratio for 2009 is
A)2.86.
B)1.23.
C)5.96.
D)4.42.
E)4.86.

Accepted Answer

$1,260,000/[($300,000 + $270,000)) 2] = 4.42.

Question 5

Comparability problems arise because
A)firms may use different generally accepted accounting principles.
B)inflation may affect firms differently due to accounting conventions used.
C)financial analysts do not know how to compare financial statements.
D)firms may use different generally accepted accounting principles and inflation may affect firms differently due to accounting conventions used.
E)firms may use different generally accepted accounting principles and financial analysts do not know how to compare financial statements.

Accepted Answer

Firms often select specific generally accepted accounting principles for the desired effect on the financial statements.The analyst must make adjustments in order to compare firms using different account techniques.Often firms adopt specific techniques to offset the negative effects of inflation on the firm.

Question 6

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's return on sales ratio for 2009 is
A)20.2%.
B)21.6%.
C)22.4%.
D)18.0%.

Accepted Answer

$540,000/$2,500,000 = 0.216, or 21.6%.

Question 7

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's current ratio for 2009 is
A)1.82.
B)1.03.
C)1.30.
D)1.65.
E)None of the options

Accepted Answer

$860,000/$660,000 = 1.30.

Question 8

Fundamental analysis uses
A)earnings and dividends prospects.
B)relative strength.
C)price momentum.
D)earnings and dividends prospects and relative strength.
E)earnings and dividends prospects and price momentum.

Accepted Answer

Relative strength and price momentum are technical, not fundamental, tools.

Question 9

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is lower than the industry average
A)The firm pays lower interest on long-term debt than the average firm.
B)The firm has more short-term debt than average.
C)The firm has a high ratio of current assets/current liabilities.
D)The firm has a high ratio of total cash flow/long term debt.
E)None of the options

Accepted Answer

The firm is using more short-term debt, possibly to finance fixed assets, than the average firm.The coverage ratio includes only interest on long-term debt.

Question 10

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense.During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.
A)understate; overstate
B)understate; understate
C)overstate; understate
D)overstate; overstate
E)There is no discernable pattern.

Accepted Answer

Depreciation is based on historic costs; thus during periods of inflation depreciation is understated, which results in the overstatement of income.In periods of inflation, interest rates are high, and thus result in the understatement of the firm's long term earning capacity.

Question 11

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's leverage ratio for 2009 is
A)1.62.
B)1.56.
C)2.00.
D)2.42.
E)2.17.

Accepted Answer

$3,040,000/$1,520,000 = 2.00.

Question 12

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average.
A)The firm expanded plant and equipment in the past few years
B)The firm makes less efficient use of assets than competing firms
C)The firm has a substantial amount of old plant and equipment
D)The firm uses straight-line depreciation

Accepted Answer

If the firm has more old plant and equipment than competing firms, the denominator is deflated, thus producing a higher than average ratio.

Question 13

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's quick ratio for 2009 is
A)1.71.
B)0.78.
C)0.85.
D)1.56.

Accepted Answer

($860,000 - $300,000)/$660,000 = 0.85.

Question 14

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's asset turnover ratio for 2009 is
A)1.86.
B)0.63.
C)0.86.
D)1.63.

Accepted Answer

$2,500,000/[($3,040,000 + $2,770,000)) 2] = 0.86.

Question 15

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's return on equity ratio for 2009 is
A)12.24%.
B)14.63%.
C)15.50%.
D)14.50%.
E)16.9%.

Accepted Answer

$228,000/[($1,520,000 + $1,420,000)) 2] = .155.

Question 16

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's average collection period for 2009 is
A)69.35.
B)69.73.
C)68.53.
D)67.77.
E)68.52.

Accepted Answer

AR turnover = $2,500,000/[($500,000 + $450,000)) 2] = 5.26; ACP = 365/5.26 = 69.35 days.

Question 17

The financial statements of Midwest Tours are given below.  Refer to the financial statements of Midwest Tours.The firm's times interest earned ratio for 2009 is
A)2.897.
B)2.719.
C)3.375.
D)3.462.

Accepted Answer

$540,000/160,000 = 3.375.

Question 18

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) ________current ratio than a firm using FIFO, and the difference will tend to __________ as time passes.
A)higher; increase
B)higher; decrease
C)lower; decrease
D)lower; increase
E)identical; remain the same

Accepted Answer

A firm using LIFO will have lower priced inventory, thus resulting in a lower current ratio.If inflation continues, these differences will increase over time.

Question 19

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average
A)The firm's net profit margin is higher than the industry average.
B)The firm's asset turnover is higher than the industry average.
C)The firm's equity multiplier must be lower than the industry average.
D)The firm's debt ratio is higher than the industry average.
E)None of the options

Accepted Answer

Assets are financed either by debt or equity.The situation described above could occur only if the firm is financing more assets with debt than are industry competitors.

Question 20

__________ is a false statement.
A)During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used
B)During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used
C)During periods of inflation, LIFO overstates earnings relative to FIFO
D)During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used and LIFO overstates earnings relative to FIFO
E)None of the options

Accepted Answer

During periods of inflation, the use of LIFO results in lower priced inventory remaining in stock; thus the balance sheet understates the actual inventory values.

Quiz 19: Financial Statement Analysis

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's fixed asset turnover ratio for 2009 is

__________ is a true statement.

One problem with comparing financial ratios prepared by different reporting agencies is

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's inventory turnover ratio for 2009 is

Comparability problems arise because

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's return on sales ratio for 2009 is

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's current ratio for 2009 is

Fundamental analysis uses

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is lower than the industry average

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense.During periods of high inflation, the level of reported depreciation tends to income, and the level of interest expense reported tends to income.

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's leverage ratio for 2009 is

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average.

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's quick ratio for 2009 is

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's asset turnover ratio for 2009 is

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's return on equity ratio for 2009 is

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's average collection period for 2009 is

The financial statements of Midwest Tours are given below. Refer to the financial statements of Midwest Tours.The firm's times interest earned ratio for 2009 is

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) current ratio than a firm using FIFO, and the difference will tend to __ as time passes.

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average

__________ is a false statement.