Question 1

Which of the following ratios is rated to be a primary measure of liquidity and the highest significance rating of the liquidity ratios according to commercial loan departments?
A)Debt/Equity
B)Current Ratio
C)Degree of Financial Leverage
D)Inventory Turnover in Days
E)Accounts Receivable Turnover in Days

Accepted Answer

The current ratio is the primary measure of liquidity and is given the highest significance rating by commercial loan departments. It measures a company's ability to pay off its short-term liabilities with its short-term assets. The other ratios listed may also be important for assessing a company's overall financial health, but they are not specifically measures of liquidity.

Question 2

Which of the following depreciation methods is considered to be the least conservative?
A)Sum-of-the-Years' Digits
B)Declining-Balance Method
C)Straight-Line
D)each method is equally conservative
E)Sum-of-the-Years' Digits and Declining-Balance Method are equally conservative

Accepted Answer

The straight-line method is considered the least conservative because it spreads the cost of the asset evenly over its useful life, resulting in a consistent depreciation expense each year, unlike accelerated methods which front-load depreciation expenses.

Question 3

Which of the following is not a multiple approach to valuation?
A)Discounted cash flow
B)Price-to-earnings (PE)
C)Price-to-book
D)Price-to-operating cash flow
E)Price-to-sales

Accepted Answer

Discounted cash flow (DCF) is not a multiple approach to valuation. It is a fundamental analysis method that estimates the value of an investment based on its expected future cash flows, discounted back to their present value. In contrast, the other options (B, C, D, E) are all multiple approaches, which involve comparing a company's market value to a key financial metric (e.g., earnings, book value, operating cash flow, sales) to assess its relative valuation.

Question 4

Edward I.Altman developed a multivariate model to predict bankruptcy.The model produces an overall discriminant score called a Z value.Which of the following statements is probably an unreasonable statement relating to the Z value?
A)The sales generating ability of the firm's assets is one of the important considerations in the Z value.
B)The lack of a market value for a company's stock will reduce the significance of the Z value approach.
C)Total assets is an important consideration in the Z value computation.
D)Cumulative profitability over time is considered in the Z value computation.
E)A Z score of 2.00 or below indicates a very healthy company.

Accepted Answer

A Z score of 2.00 or below indicates a company is considered to be in distress and at higher risk of bankruptcy, not a healthy company.

Question 5

Which of the following statements is not true?
A)A review of financial statements,including the notes,will indicate how conservative the statements are in regard to accounting policies.
B)Accounting policies that result in the slowest reporting of income are the most conservative.
C)When a firm has conservative accounting policies,it is said that its earnings are of high quality.
D)Under inflationary conditions,the least conservative inventory method is fifo.
E)Conservative accounting policies always result in the lowest reported income for any given period of time.

Accepted Answer

Conservative accounting policies aim to present a company's financial situation in a cautious manner, but they do not always result in the lowest reported income for any given period. The impact of these policies can vary based on the specific circumstances and choices made, such as the method of depreciation or inventory valuation used.

Question 6

Which of the following ratios is a primary measure of liquidity according to the corporate controller survey?
A)Earnings per Share
B)Debt/Equity Ratio
C)Return on Equity after Tax
D)Current Ratio
E)None of the answers are correct

Accepted Answer

The current ratio, which measures a company's ability to pay its current obligations with current assets, is a primary measure of liquidity according to the corporate controller survey. The other ratios listed are measures of profitability or leverage, not liquidity.

Question 7

Which of the following variables indicates a measure of cumulative profitability over time?
A)Retained earnings (balance sheet)/total assets
B)Earnings before interest and taxes/total assets
C)Working capital/total assets
D)Market value of equity/book value of total debt
E)Sales/total assets

Accepted Answer

Retained earnings on the balance sheet represent the cumulative profits that a company has earned over time and chosen to keep rather than distribute to shareholders as dividends. Dividing by total assets provides a measure of the proportion of profits that have been retained relative to the size of the business.

Question 8

Which of the following is not a reasonable matching?
$$\begin{array} { l l l } 
 &\underline{ \text { Item }} &\underline{ \text { Related Conservative Pollcy }} \
\text { I. }& \text {inventory}& \text {LIFO}\
\text { II. } & \text {fixed assets} & \text { accelerated depreciation } \ 
\text { III. } & \text { intangible assets } & \text { short period of time for amortization } \
\text { IV. } & \text { pensions } & \text { short period of time to amortize prior service cost } \
\text { V } & \text { receivables } & \text { direct write-off method }
\end{array}$$

A)I
B)II
C)III
D)IV
E)V

Accepted Answer

The direct write-off method for receivables is not considered a conservative accounting policy because it recognizes bad debt expense only when specific accounts are deemed uncollectible, which may delay the recognition of expenses. Conservative accounting would prefer the allowance method, which estimates and matches bad debt expense to the periods in which the revenues were earned.

Question 9

Tom Copeland,Tim Keller,and Jack Morrin,on their book Valuation,Measuring and Managing the Value of Companies,observed that acquirers paid too much for companies because of all but one of the following reasons:
A)market potential greater than estimated.
B)overoptimistic appraisal of market potential.
C)overestimation of synergies.
D)poor due diligence.
E)overbidding.

Accepted Answer

The correct reason that does not fit the observation by Copeland, Keller, and Morrin is A) market potential greater than estimated. This is because paying too much for companies is typically associated with overestimations or errors in judgment (like overoptimism, overestimation of synergies, poor due diligence, or overbidding), rather than underestimating a company's market potential.

Question 10

Most of the ratios given a high significance rating by commercial loan officers have a primary measure of liquidity or debt.

Accepted Answer

Commercial loan officers typically give high significance to ratios that measure liquidity (ability to meet short-term obligations) and debt (ability to manage long-term obligations), such as the current ratio, quick ratio, debt-to-equity ratio, and debt service coverage ratio.

Question 11

Which of the following statements is not true?
A)The depreciation method and the period of time selected to depreciate an asset can have a significant influence on income.
B)There are many depreciation methods.
C)The depreciation methods that recognize a large amount of depreciation in the later years of an asset's life are conservative.
D)The straight-line depreciation method recognizes depreciation in equal amounts over each year of the life of the asset.
E)There is sometimes a material difference in the lives used for depreciation between firms.

Accepted Answer

The statement that the depreciation methods that recognize a large amount of depreciation in the later years of an asset's life are conservative is not true. Typically, these methods are considered aggressive because they defer most of the cost of the asset to future periods, leading to higher net income in the early years of the asset's life.

Question 12

Which of the following ratios is given the highest significance rating by controllers?
A)Current Ratio
B)Earning Per Share
C)Return on Equity - After Tax
D)Return on Assets - After Tax
E)Price/Earnings Ratio

Accepted Answer

The answer of Which of the following ratios is given...

Question 13

In financial accounting,which of the following assets is not considered to be an intangible asset?
A)Goodwill
B)Patents
C)Copyrights
D)Trademarks
E)Accounts receivable

Accepted Answer

Accounts receivable is a current asset, not an intangible asset. Intangible assets refer to non-physical assets that have no intrinsic value but represent legal rights or claims to some future benefit, such as patents, copyrights, trademarks, and goodwill.

Question 14

Which financial ratio appears most frequently in loan agreements according to commercial loan officers?
A)Quick Ratio
B)Cash Flow/Total Debt
C)Debt/Equity
D)Times Interest Earned
E)Cash ratio

Accepted Answer

The answer of Which financial ratio appears most frequently in...

Question 15

There are many definitions or descriptions given to financial failure.Which of the following does not appear to be a reasonable definition or description:
A)refinancing of bonds payable.
B)liquidation.
C)deferment of payments to short-term creditors.
D)deferment of payments of interest on bonds.
E)deferment of payments of principal on bonds.

Accepted Answer

Refinancing of bonds payable does not necessarily indicate financial failure. In fact, it could be a strategic move to improve cash flow and reduce interest expenses. The other options all involve delayed or missed payments, which can be a sign of financial distress.

Question 16

Which of the following ratios is given the highest significance rating by Certified Public Accountants?
A)Quick Ratio
B)Debt/Equity
C)Net Profit Margin
D)Current Ratio
E)Times Interest Earned

Accepted Answer

The answer of Which of the following ratios is given...

Question 17

Which of the following ratios appears most frequently in annual reports?
A)Earnings per Share
B)Return on Equity
C)Profit Margin
D)Effective Tax Rate
E)Debt/Equity

Accepted Answer

Earnings per share (EPS) is a commonly used ratio in annual reports as it provides insight into a company's profitability on a per-share basis. It is also required by accounting standards to be reported in the income statement. While the other ratios listed may also appear in annual reports, EPS is generally the most frequently used.

Question 18

The Beaver Study indicated the following ratio (ratios)to be the best for forecasting financial failure:
A)cash flow/total debt.
B)net income/total assets.
C)total debt/total assets.
D)cash flow/total debt and net income/total assets.
E)all of the answers are correct.

Accepted Answer

The answer of The Beaver Study indicated the following ratio...

Question 19

Which of the following is not a discounted cash flow model for valuation?
A)Free cash flow
B)Dividend discount model
C)Discounted cash flow
D)Discounted abnormal earnings
E)All of the answers are discounted cash flow models.

Accepted Answer

The answer of Which of the following is not a...

Question 20

Which of the following ratios is given the highest significance rating by commercial loan officers?
A)Inventory Turnover In Days
B)Degree of Financial Leverage
C)Times Interest Earned
D)Fixed Charge Coverage
E)Debt/Equity

Accepted Answer

Debt/Equity ratio is often given the highest significance by commercial loan officers as it indicates the proportion of debt to equity, reflecting the financial leverage and risk level of a company.

Quiz 11: Expanded Analysis

Which of the following ratios is rated to be a primary measure of liquidity and the highest significance rating of the liquidity ratios according to commercial loan departments?

Which of the following depreciation methods is considered to be the least conservative?

Which of the following is not a multiple approach to valuation?

Edward I.Altman developed a multivariate model to predict bankruptcy.The model produces an overall discriminant score called a Z value.Which of the following statements is probably an unreasonable statement relating to the Z value?

Which of the following statements is not true?

Which of the following ratios is a primary measure of liquidity according to the corporate controller survey?

Which of the following variables indicates a measure of cumulative profitability over time?

Tom Copeland,Tim Keller,and Jack Morrin,on their book Valuation,Measuring and Managing the Value of Companies,observed that acquirers paid too much for companies because of all but one of the following reasons:

Most of the ratios given a high significance rating by commercial loan officers have a primary measure of liquidity or debt.

Which of the following statements is not true?

Which of the following ratios is given the highest significance rating by controllers?

In financial accounting,which of the following assets is not considered to be an intangible asset?

Which financial ratio appears most frequently in loan agreements according to commercial loan officers?

There are many definitions or descriptions given to financial failure.Which of the following does not appear to be a reasonable definition or description:

Which of the following ratios is given the highest significance rating by Certified Public Accountants?

Which of the following ratios appears most frequently in annual reports?

The Beaver Study indicated the following ratio (ratios) to be the best for forecasting financial failure:

Which of the following is not a discounted cash flow model for valuation?

Which of the following ratios is given the highest significance rating by commercial loan officers?