Question 1

A firm has a current ratio of 1.4 and a quick ratio of 0.9.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 current ratio of 1.4 indicates that the firm has more current assets than current liabilities, which means it has positive net working capital.

Question 2

The cash coverage 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

The cash coverage ratio is calculated by dividing a firm's earnings before interest and taxes (EBIT) by its interest expense. This ratio evaluates a company's ability to pay the interest on its debt. A higher cash coverage ratio indicates that the firm can more easily cover its interest payments, indicating greater financial stability.

Question 3

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 calculated by dividing total assets by total equity. This means that the equity multiplier is equal to one plus the debt-equity ratio, which is the amount of debt financing relative to equity financing in a company.

Question 4

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

Decrease in the tax rate will directly increase the profit margin of the firm as it will reduce the amount of tax paid on the firm's earnings.

Question 5

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 calculated based on values from financial statements and are used for comparison purposes to analyze a company's performance and financial health.

Question 6

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 of 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, the ratio will increase.

Question 7

Kelso's Pharmacy generates $2 in sales for every $1 the firm has 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

Total asset turnover reflects the relationship between sales and total assets. A ratio of $2 in sales for every $1 invested in total assets indicates that the total asset turnover ratio is 2:1.

Question 8

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

SIC stands for Standard Industrial Classification, which is the coding system used by the U.S. government to classify businesses by their specific type of operations. BEC (Business Enterprise Classification), SED (Survey of Earned Doctorates), BID (Business Improvement District), and SBC (Small Business Center) are not related to the government coding system for business classification.

Question 9

The DuPont identity can be totally defined by which one of the following?
A)Return on equity, total asset turnover, and equity multiplier
B)Equity multiplier and return on assets
C)Profit margin and return on equity
D)Total asset turnover, profit margin, and debt-equity ratio
E)Equity multiplier, return on assets, and profit margin

Accepted Answer

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

Question 10

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 present all balance sheet account values as a percentage of total assets. This allows for easier comparison of financial ratios across different sized companies or time periods.

Question 11

Fred is the owner of a local feed store.Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?
A)Current ratio
B)Debt ratio
C)Cash coverage ratio
D)Quick ratio
E)Cash ratio

Accepted Answer

The ratio Fred should compute is the Cash Ratio. This ratio measures the amount of cash and cash equivalents a company has in relation to its current liabilities. It indicates the company's ability to pay its immediate bills with its available cash. This is the most specific ratio for Fred's question as it considers only cash, which is what he is interested in knowing about.

Question 12

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 that a firm can achieve without any additional external financing. This rate is based on the firm's retained earnings and the profitability of its operations. Therefore, choice D is the correct answer. The DuPont rate is a measure of a company's profitability that breaks down return on equity into three components: net profit margin, asset turnover, and financial leverage. The external growth rate is the rate at which a firm can grow using external capital, such as debt or equity financing. The sustainable growth rate is the rate at which a company can grow while maintaining its current financial ratios. The cash flow rate is not a commonly used term in finance.

Question 13

Which one of the following 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 into accounts receivable, which is more liquid than inventory.

Question 14

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

Accepted Answer

The equity multiplier measures the degree to which a company relies on debt financing to support its assets. It is calculated by dividing total assets by total equity. A high equity multiplier indicates a greater reliance on debt and therefore may signal a higher level of long-term solvency risk.

Question 15

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

The common-size income statement will allow the CFO to compare Builder's Outlet's sales and costs over the past three years and identify any trends. This statement expresses all income statement items as a percentage of sales, making it easier to compare changes in different line items over time. The balance sheet and statement of cash flows are useful, but not as relevant for the CFO's specific needs in this situation. The common-size balance sheet could be helpful, but is not as directly applicable to her goals as the common-size income statement.

Question 16

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 dividends are changing.

Accepted Answer

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

Question 17

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 equity and a constant debt-equity ratio

Accepted Answer

The sustainable growth rate is the maximum rate at which a firm can grow without any additional external financing. Therefore, the correct choice is E, which states no new equity and a constant debt-equity ratio. Choices A, B, C, and D all involve some form of external financing, which is not consistent with the sustainable growth rate definition.

Question 18

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?
A)Decrease in the total asset turnover
B)Decrease in the capital intensity ratio
C)Increase in days' sales in receivables
D)Decrease in the profit margin
E)Decrease in the inventory turnover rate

Accepted Answer

A decrease in the capital intensity ratio indicates that the firm is using less capital (assets) to generate revenue, which indicates greater efficiency in asset utilization. A decrease in total asset turnover (A) and inventory turnover rate (E) suggests less efficient use of assets. An increase in days' sales in receivables (C) indicates that the firm is taking longer to collect payments, which could indicate problems with cash flow. A decrease in the profit margin (D) suggests decreased profitability, but does not necessarily indicate efficiency in asset utilization.

Question 19

Blooming Gardens has an inventory turnover of 16.This means the firm:
A)sells its entire inventory every 16 days.
B)stocks its inventory only every 16 days.
C)buys 16 days of inventory with each order.
D)sells its inventory by granting customers 16 days' credit.
E)sells its inventory an average of 16 times each year.

Accepted Answer

Inventory turnover ratio measures how many times a company sells its inventory during a specific period (usually a year). A turnover ratio of 16 means that Blooming Gardens sells its inventory an average of 16 times each year.

Question 20

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

Quiz 3: Working With Financial Statements

A firm has a current ratio of 1.4 and a quick ratio of 0.9.Given this,you know for certain that the firm:

The cash coverage ratio is used to evaluate the:

The equity multiplier is equal to:

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

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

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

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets.Which one of the following ratios would reflect this relationship?

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?

The DuPont identity can be totally defined by which one of the following?

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

Fred is the owner of a local feed store.Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?

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 transactions will increase the liquidity of a firm?

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

A common-size balance sheet helps financial managers determine:

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

Blooming Gardens has an inventory turnover of 16.This means the firm:

High 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: