Question 1

If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm:
A)may have short-term, but not long-term debt.
B)is using its assets as efficiently as possible.
C)has no net working capital.
D)has a debt-equity ratio of 1.0.
E)has an equity multiplier of 1.0.

Accepted Answer

The answer of If a firm produces a twelve percent...

Question 2

Which one of the following statements is correct?
A)If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.
B)Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C)The debt-equity ratio can be computed as 1 plus the equity multiplier.
D)An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E)An increase in the depreciation expense will not affect the cash coverage ratio.

Accepted Answer

The cash coverage ratio is calculated by adding depreciation and amortization back to earnings before interest and taxes (EBIT), then dividing by the interest expense. Since depreciation is added back in the calculation, an increase in depreciation expense will not affect the cash coverage ratio.

Question 3

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations?
A)payment to supplier
B)payment to employee
C)payment of interest to a lender
D)payment of principle to a lender
E)payment of a dividend to a shareholder

Accepted Answer

The cash coverage ratio measures a firm's ability to pay interest to a lender using its operating cash flow. This ratio evaluates the amount of cash flow available to cover interest payments on outstanding debt.

Question 4

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)turnover

Accepted Answer

Profitability ratios measure how efficiently a firm generates net income, whereas asset management and turnover ratios measure how efficiently a firm manages its assets and operations to generate revenue. Long-term solvency ratios measure a firm's ability to meet its long-term obligations, and short-term solvency ratios measure a firm's ability to meet its short-term obligations.

Question 5

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?
A)accounts payable
B)cash
C)inventory
D)accounts receivable
E)fixed assets

Accepted Answer

The quick ratio is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. Increasing accounts receivable improves the quick ratio without affecting the cash ratio, which is calculated as (Cash + Marketable Securities) / Current Liabilities.

Question 6

Over the past year, the quick ratio for a firm increased while the current ratio remained constant. Given this information, which one of the following must have occurred? Assume all ratios have positive values.
A)current assets increased
B)current assets decreased
C)inventory increased
D)inventory decreased
E)accounts payable increased

Accepted Answer

The quick ratio is a more stringent measure of liquidity compared to the current ratio as it does not include inventory in its calculation. Therefore, if the quick ratio increased while the current ratio remained constant, it means that there was a decrease in inventory. A decrease in inventory would have a positive impact on the quick ratio and no impact on the current ratio. The other options do not necessarily have a direct impact on the quick ratio.

Question 7

Shareholders probably have the most interest in which one of the following sets of ratios?
A)return on assets and profit margin
B)long-term debt and times interest earned
C)price-earnings and debt-equity
D)market-to-book and times interest earned
E)return on equity and price-earnings

Accepted Answer

Shareholders are typically concerned with the return on their investment, which is reflected in the return on equity ratio. Additionally, they may be interested in the price-earnings ratio, as it indicates the market's perception of the company's future earnings potential.

Question 8

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?
A)pay all of its debts that are due within the next 48 hours
B)pay all of its debts that are due within the next 48 days
C)cover its operating costs for the next 48 hours
D)cover its operating costs for the next 48 days
E)meet the demands of its customers for the next 48 hours

Accepted Answer

An interval measure of 48 means that the firm has sufficient liquid assets to cover its operating costs for the next 48 days. It does not necessarily mean that the firm can pay off all of its debts that are due within the next 48 days, as there may be other factors that affect the firm's ability to do so.

Question 9

A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit?
A)current
B)cash
C)debt-equity
D)quick
E)total debt

Accepted Answer

The answer of A supplier, who requires payment within ten...

Question 10

An increase in which of the following will increase the return on equity, all else constant?
I. sales
II. net income
III. depreciation
IV. total equity
A)I only
B)I and II only
C)II and IV only
D)II and III only
E)I, II, and III only

Accepted Answer

The return on equity (ROE) is calculated as net income divided by total equity. An increase in sales or net income will directly increase the numerator of this ratio, resulting in a higher ROE. Therefore, options I and II are correct. Depreciation does not directly impact net income, but it does lower the value of assets on the balance sheet over time, which can increase the return on equity. Option III is also correct. However, an increase in total equity without a corresponding increase in net income will not necessarily increase the return on equity, so option IV is incorrect.

Question 11

Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?
A)Al's has more net income than Ben's.
B)Ben's is increasing its earnings at a faster rate than the Al's.
C)Al's has a higher market value per share than does Ben's.
D)Ben's has a lower market-to-book ratio than Al's.
E)Al's has a higher net income than Ben's.

Accepted Answer

The PEG ratio is the price-earnings ratio divided by the earnings growth rate. If Al's has a higher PEG ratio than Ben's despite having the same price-earnings ratio, it means that either Al's earnings growth rate is lower than Ben's, or Al's stock price is higher relative to its earnings growth rate. Therefore, if Al's has a higher PEG ratio, it must be that Ben's is increasing its earnings at a faster rate than Al's, making option B the correct answer.

Question 12

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91. Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have similar operations. Based on this information, Dee's must be doing which one of the following?
A)utilizing its fixed assets more efficiently than Sam's
B)utilizing its total assets more efficiently than Sam's
C)generating $1 in sales for every $1.12 in net fixed assets
D)generating $1.12 in net income for every $1 in net fixed assets
E)maintaining the same level of current assets as Sam's

Accepted Answer

Dee's has a higher total asset turnover rate (0.91) compared to Sam's (0.88), indicating that Dee's is utilizing its total assets more efficiently to generate sales.

Question 13

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?
A)decrease in the inventory turnover rate
B)decrease in the net working capital turnover rate
C)no change in the fixed asset turnover rate
D)decrease in the day's sales in inventory
E)no change in the total asset turnover rate

Accepted Answer

If The Corner Hardware is able to increase the amount of goods it sells while holding the amount of inventory on hand at a constant level, then it means that the inventory turnover rate (ITR) has decreased. This is because ITR measures how efficiently a firm is able to manage its inventory by selling it off quickly. If The Corner Hardware is able to sell more without increasing its inventory, then the ITR will naturally be lower. A decrease in ITR would, in turn, lead to a decrease in the day's sales in inventory (DSI), which is the average number of days it takes for a company to sell its inventory. A lower DSI indicates that inventory is being sold off more quickly, which is a positive sign.

Question 14

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?
A)The total asset turnover rate increased.
B)The days' sales in receivables increased.
C)The net working capital turnover rate increased.
D)The fixed asset turnover decreased.
E)The receivables turnover rate decreased.

Accepted Answer

The answer of Jasper United had sales of $21,000 in...

Question 15

Which one of the following accurately describes the three parts of the Du Pont identity?
A)operating efficiency, equity multiplier, and profitability ratio
B)financial leverage, operating efficiency, and profitability ratio
C)equity multiplier, profit margin, and total asset turnover
D)debt-equity ratio, capital intensity ratio, and profit margin
E)return on assets, profit margin, and equity multiplier

Accepted Answer

The three parts of the Du Pont identity are equity multiplier, profit margin, and total asset turnover. Option A is incorrect because it includes operating efficiency which is not a part of the Du Pont identity. Option B is incorrect because it includes financial leverage instead of equity multiplier. Option D is incorrect because it includes debt-equity ratio and capital intensity ratio which are not a part of the Du Pont identity. Option E is incorrect because it includes return on assets instead of total asset turnover.

Question 16

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)book value

Accepted Answer

Long-term solvency ratios measure a firm's ability to meet its long-term financial obligations, which includes its ability to repay its long-term debts. These ratios are, therefore, also known as financial leverage ratios or solvency ratios. Examples of such ratios include debt to equity ratio, interest coverage ratio, and debt to total assets ratio.

Question 17

Which one of the following will decrease if a firm can decrease its operating costs, all else constant?
A)return on equity
B)return on assets
C)profit margin
D)equity multiplier
E)price-earnings ratio

Accepted Answer

The answer of Which one of the following will decrease...

Question 18

Tobin's Q relates the market value of a firm's assets to which one of the following?
A)initial cost of creating the firm
B)current book value of the firm
C)average asset value of similar firms
D)average market value of similar firms
E)today's cost to duplicate those assets

Accepted Answer

Tobin's Q relates the market value of a firm's assets to today's cost to duplicate those assets. It is used to determine if a firm is undervalued or overvalued in the market.

Question 19

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
A)0.0
B)0.5
C)1.0
D)1.5
E)2.0

Accepted Answer

The debt-equity ratio is calculated as total debt divided by total equity. If a firm has a debt-equity ratio of 1.0, it means that for every dollar of equity, there is an equal amount of debt. This can be represented as a total debt ratio of 0.5, which is the amount of debt in relation to total assets. Therefore, the best choice is (B) 0.5.

Question 20

The price-sales ratio is especially useful when analyzing firms that have which one of the following?
A)volatile market prices
B)negative earnings
C)positive PEG ratios
D)a negative Tobin's Q
E)increasing sales

Accepted Answer

The price-sales ratio is particularly useful for analyzing firms with negative earnings because it allows investors to value a company even when it's not profitable, unlike metrics that rely on earnings.

Quiz 3: Working With Financial Statements

If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm:

Which one of the following statements is correct?

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations?

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

Over the past year, the quick ratio for a firm increased while the current ratio remained constant. Given this information, which one of the following must have occurred? Assume all ratios have positive values.

Shareholders probably have the most interest in which one of the following sets of ratios?

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following?

A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit?

An increase in which of the following will increase the return on equity, all else constant? I. sales II. net income III. depreciation IV. total equity

Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91. Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have similar operations. Based on this information, Dee's must be doing which one of the following?

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?

Which one of the following accurately describes the three parts of the Du Pont identity?

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

Which one of the following will decrease if a firm can decrease its operating costs, all else constant?

Tobin's Q relates the market value of a firm's assets to which one of the following?

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

The price-sales ratio is especially useful when analyzing firms that have which one of the following?