Deck 2: Analysis of Financial Statements

Question 1

The book value of the common stock of Zircon Global Ltd. is $34 million. If Zircon has four million shares of common stock outstanding, what is its book value per share?

A)$136.00 per share
B)$8.50 per share
C)$4.00 per share
D)$0.60 per share
E)$30.00 per share

Answer 1

  B

Question 2

Ruby Enterprises Ltd. has long-term bonds worth $20 million, retained earnings of $45 million, accounts payable of $10 million, notes payable of $12 million, and inventory worth $18 million. What is the value of total liabilities of Ruby Enterprises?

A)$42 million
B)$105 million
C)$87 million
D)$60 million
E)$85 million

Answer 2

  A

Question 3

Which of the following financial statements is included in the annual reports of a company?

A)Statement of changes in long-term financing
B)Fund flow statement
C)Statement of principles
D)Proxy statement
E)Statement of cash flows

Answer 3

  E

Question 4

Which of the following is considered as a liability in the balance sheet of a firm?

A)Accounts receivable
B)Corporate bonds
C)Retained earnings
D)Common stock
E)Plant and equipment

Question 5

Which of the following actions can be considered a source of cash when constructing a statement of cash flows?

A)Decrease in equity
B)Decrease in accounts payable
C)Increase in inventory
D)Increase in long-term bonds
E)Increase in fixed assets

Question 6

Which of the following is an example of a current asset?

A)Inventory
B)Retained earnings
C)Accounts payable
D)Plant and equipment
E)Common stock

Question 7

Which of the following mathematical expressions is used to compute the book value per share?

A)Book value per share = Common equity ÷ Total number of shares outstanding
B)Book value per share = Total shares issued × Per share par value
C)Book value per share = Current assets - Current liabilities
D)Book value per share = Total assets ÷ Total number of shares outstanding
E)Book value per share = Earnings available to common stockholders ÷ Total number of shares outstanding

Question 8

Which of the following financial statements includes information about a firm's assets, equity, and liabilities at a specific point in time?

A)Income statement
B)Cash flow statement
C)Balance sheet
D)Statement of retained earnings
E)Statement of changes in long-term financing

Question 9

The funds provided by common stockholders that consist of common stock, paid-in capital, and retained earnings are referred to as the firm's:

A)net worth.
B)net cash flows.
C)cash equivalents.
D)accruals.
E)market value.

Question 10

Amber Devices Ltd. has total assets worth $900 million and total liabilities worth $475 million at the end of December 31. What is the amount of money received by the stockholders, if Amber liquidates all of its assets for $850 and pays off all of its outstanding debt at book value?

A)$850 million
B)$475 million
C)$1,325 million
D)$425 million
E)$375 million

Question 11

_____ is an example of a long-term investment of a firm. 

A)Retained earnings
B)Equipment
C)Accounts receivable
D)Common stock
E)Long-term bonds

Question 12

Which of the following statements is true about the annual report of a company?

A)The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of changes in long-term financing.
B)The annual report does not provide any information about a firm's future prospects.
C)The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends.
D)The annual report provides no relevant information for use by financial analysts or by the investing public.
E)The annual report is a report issued by each of the shareholders to the corporation and it contains information about the performance of the shares of the firm held by the shareholders.

Question 13

Which of the following accounts contains the actual money that can be spent by a firm?

A)Accounts Receivable
B)Notes Payable
C)Net Worth
D)Inventories
E)Cash and Equivalents

Question 14

Which of the following financial statements is prepared to show the changes in the common equity accounts between balance sheet dates?

A)Pro forma statement
B)Income statement
C)Statement of retained earnings
D)Statement of cash flows
E)Proxy statement

Question 15

Which of the following provides information about a firm's performance during the past year and also provides information regarding new developments that will affect the future performance of the firm?

A)Articles of incorporation
B)The annual report
C)Proxy statements
D)A DuPont chart
E)A memorandum of understanding

Question 16

In which order will assets be listed in a balance sheet?

A)In ascending order of the value of the asset
B)In alphabetical order
C)In ascending order of the date of purchase of asset
D)In order of liquidity
E)In order of importance for the company

Question 17

The book value per share of Topaz General Ltd. is $10 per share and the company has a total of 4 million shares. Calculate the total book value of common equity of the company. 

A)$4 million
B)$10 million
C)$400 million
D)$40 million
E)$100 million

Question 18

Which of the following statements is true about net worth?

A)A firm's net worth should be higher than the stockholders' equity.
B)A firm's net worth should be equal to 50 percent of the value of the total assets of the firm.
C)A firm's net worth is equal to total assets minus total liabilities.
D)A firm's net worth is the amount that the firm's assets can generate on their liquidation.
E)A firm's net worth is the amount to be paid by the shareholders to the firm on liquidation of the firm.

Question 19

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

A)Balance sheet
B)Income statement
C)Statement of retained earnings
D)Statement of cash flows
E)Proxy statement

Question 20

Which of the following mathematical expressions computes the net worth of a firm?

A)Net worth = Current assets minus current liabilities
B)Net worth = Total assets minus current liabilities
C)Net worth = Total liabilities minus current assets
D)Net worth = Total assets minus total liabilities
E)Net worth = Total liabilities minus current liabilities

Question 21

Which of the following is true about the book value and market value of a firm's debt?

A)The book value of a firm's debt generally is higher than the market value of the firm's debt.
B)The book value of a firm's debt generally is either equal to or very close to the market value of the firm's debt.
C)The book value of a firm's debt generally is either equal to or very close to the market value of firm's assets.
D)The market value of a firm's debt generally is higher than the book value of firm's assets.
E)The market value of a firm's debt must equal the market value of a firm's assets.

Question 22

Which of the following mathematical expressions calculates the net cash flow if depreciation is the only noncash item in a firm's income statement?

A)Net cash flow = Net income + Depreciation
B)Net cash flow = Accounting profit - Depreciation
C)Net cash flow = Accounting profit - Operating cash flow
D)Net cash flow = Fixed assets + Depreciation
E)Net cash flow = Operating cash flow - Depreciation

Question 23

Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. The ending balance of retained earnings is:

A)$248 million.
B)$185 million.
C)$170 million.
D)$137 million.
E)$218 million.

Question 24

The equity section of a firm's balance sheet contains _____. 

A)retained earnings
B)current assets
C)corporate bonds
D)dividends
E)noncash assets

Question 25

Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?

A)$1,425 million
B)$1,325 million
C)$750 million
D)$375 million
E)$275 million

Question 26

The statement of retained earnings for Redwood Systems Ltd. shows a retained earnings balance of $300 million on December 31. During the year, Redwood generated net income of $60 million and paid dividends of $20 million to its stockholders. What was the beginning balance of retained earnings at the start of this year?

A)$300 million
B)$260 million
C)$380 million
D)$340 million
E)$220 million

Question 27

A firm's net income as reported on its income statement is also known as the firm's _____. 

A)operating cash flow
B)net cash flow
C)noncash income
D)accounting profit
E)net sales

Question 28

Which of the following mathematical expressions is used to compute the net working capital of a firm?

A)Net working capital = Total liabilities − Retained earnings
B)Net working capital = Total assets − Current assets
C)Net working capital = Total liabilities − Current liabilities
D)Net working capital = Current assets − Current liabilities
E)Net working capital = Total equity − Retained earnings

Question 29

Retained earnings is the total amount of:

A)income that is distributed as dividends to the shareholders.
B)debt not repaid in the current year.
C)accumulated depreciation charged on the firm's assets.
D)income that has been saved and reinvested in assets since the firm started business.
E)profit retained by a firm to pay taxes.

Question 30

Sapphire Industries Ltd. has a net income of $60 million and the total depreciation on its assets is $20 million. The net cash flow of Sapphire Industries is:

A)$80 million.
B)$60 million.
C)$20 million.
D)$40 million.
E)$100 million.

Question 31

Which of the following is an example of a noncash item reported in the income statement of a firm?

A)Taxes
B)Dividends
C)Interest
D)Depreciation
E)Net sales

Question 32

The firm's statement of retained earnings reports changes in:

A)the amount of dividends paid in the current year.
B)the common equity accounts between balance sheet dates.
C)the interest on debt account paid in the current year.
D)the amount of net income earned in the current year.
E)the amount of depreciation charged in the current year.

Question 33

Which of the following items appears at the top of an income statement when determining the net income of a firm?

A)Earnings before tax
B)Operating costs
C)Net sales
D)Gross profit
E)Retained earnings

Question 34

Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

A)Balance sheet
B)Statement of cash flows
C)Statement of retained earnings
D)Income statement
E)Proxy statement

Question 35

Which of the following is true about a common size balance sheet?

A)The assets, liabilities, and equities are reported at their market values.
B)The assets, liabilities, and equities are reported as percentages of common stock.
C)The assets, liabilities, and equities are reported as percentages of total assets.
D)The assets, liabilities, and equities are arranged in the alphabetical order.
E)The assets, liabilities, and equities are reported as percentages of the assets, liabilities, and equities of a competing firm.

Question 36

Which of the following is an example of a firm's long-term debt?

A)Common stock
B)Retained earnings
C)Accounts payable
D)Corporate bonds
E)Accounts receivable

Question 37

Which of the following statements is true about the values recorded in the balance sheet of a firm?

A)The book value of a firm's assets will be equal to the market value of the firm's assets.
B)The equity section of a firm's balance sheet represents the difference between the market value of the firm's assets and the book value of the firm's liabilities.
C)The equity section of a firm's balance sheet represents the difference between the market value of the firm's assets and the market value of the firm's liabilities.
D)The book value of a firm's assets will be higher than the market value of the firm's assets.
E)The book value of a firm's debt generally is equal to or very close to the market value of the firm's liabilities.

Question 38

Which of the following is considered by analysts when comparing the operations of two firms that are financed differently?

A)Total assets
B)Earnings before interest and taxes
C)Net sales
D)Gross profit
E)Retained earnings

Question 39

Which of the following is the most appropriate measure to examine whether management of a firm is pursuing the goal of maximizing the firm's stock price?

A)Retained earnings
B)Net income
C)Cash flows
D)Earnings per share
E)Accounting profits

Question 40

Which of the following mathematical expressions calculates a firm's retained earnings at the end of a year?

A)Retained earnings = Beginning balance of retained earnings − Net income in the current year + Net loss in the previous year
B)Retained earnings = Beginning balance of retained earnings + Net income in the current year + Dividends paid in the current year
C)Retained earnings = Beginning balance of retained earnings + Net income in the current year − Dividends paid in the current year
D)Retained earnings = Beginning balance of retained earnings − Net loss in the previous year − Dividends paid in the current year
E)Retained earnings = Beginning balance of retained earnings − Net income in the current year + Dividends paid in the current year

Question 41

 _____ is an example of cash flow from an investing activity in a cash flow statement. 

A)Payment of dividends
B)Repurchase of stock
C)Purchase of equipment
D)Purchase of inventory
E)Repayment of debt

Question 42

Which of the following ratios is calculated to help determine the liquidity of a firm?

A)Inventory turnover ratio
B)Quick ratio
C)Total assets turnover ratio
D)Debt ratio
E)Net profit ratio

Question 43

Which of the following is considered a part of cash flow from a financing activity in a statement of cash flows?

A)Increase in corporate bonds
B)Decrease in accrued wages
C)Increase in inventories
D)Decrease in accounts payable
E)Increase in fixed assets

Question 44

Which of the following ratios measures how effectively a firm is managing its assets?

A)Quick ratio
B)Times interest earned ratio
C)Profit margin ratio
D)Inventory turnover ratio
E)Price earnings ratio

Question 45

Which of the following ratios shows the relationship between a firm's current assets and its current liabilities?

A)Asset management ratios
B)Liquidity ratios
C)Debt management ratios
D)Profitability ratios
E)Market value ratios

Question 46

If an analyst's goal is to determine how effectively a firm is managing its assets, which of the following sets of ratios would he or she examine?

A)Profit margin, current ratio, and fixed charge coverage ratio
B)Quick ratio, debt ratio, and times interest earned
C)Inventory turnover ratio, days sales outstanding, and fixed asset turnover ratio
D)Total assets turnover ratio, price earnings ratio, and return on total assets
E)Time interest earned, profit margin, and fixed asset turnover ratio

Question 47

A firm has total assets of $500 million, including its accounts receivable, which is worth $120 million. The annual sales of the firm is $650 million. The days sales outstanding (DSO) ratio of the firm is:

A)48.2 days.
B)52.7 days.
C)39.6 days.
D)82.1 days.
E)66.5 days.

Question 48

Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information. (Assume no other changes occurred during the past year.) ​
Dividend payment                                           $25
Increase in accounts receivables                     $50
Increase in notes payable                                $30
Decrease in accounts payable                         $20
Increase in accrued wages and taxes              $15
Increase in inventories                                    $35
Addition to retained earnings                                     $5

A)-$50
B)+$40
C)-$80
D)+$20
E)-$30

Question 49

Which of the following changes is considered a source of cash when preparing a statement of cash flow?

A)An increase in property, plant, and equipment
B)A decrease in accounts payable
C)A decrease in inventories
D)An increase in accounts receivable
E)A decrease in accrued wages

Question 50

A firm's current ratio has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?

A)The firm's fixed assets turnover has improved.
B)The firm's liquidity position has improved.
C)The firm's stock price has increased.
D)The firm's financial leverage has improved.
E)The firm's market value has decreased.

Question 51

If a company has a quick ratio of 1.0 and a current ratio of 2.0, then:

A)the value of current assets is equal to the value of inventory.
B)the value of current assets is equal to the value of current liabilities.
C)the value of current liabilities is more than the value of current assets.
D)the value of current liabilities is equal to the value of inventory.
E)the value of inventory is more than the value of current assets.

Question 52

Which of the following transactions will not affect the quick ratio of a company?

A)Inventory sold on credit
B)Cash purchase of equipment
C)Payment for accounts payable
D)Accounts receivable collected
E)Bank loan repaid

Question 53

Bicksler Corporation has a current ratio of 2.0 on July 21 of the current year. On July 22, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?

A)The value of the current ratio will increase.
B)The value of the current ratio will decrease.
C)The value of the current ratio will equal the value of the quick ratio after the purchase.
D)The value of the quick ratio will be greater than the value of the current ratio after the purchase.
E)The value of the current ratio will not change.

Question 54

A low inventory turnover ratio might indicate that:

A)the firm is using the last-in first-out (LIFO) method of inventory valuation during inflationary periods.
B)the cost of inventory of the firm is lower than that of the similar firms.
C)the firm is holding excess stocks of inventory.
D)the inventory of the firm is sold and restocked very often.
E)the firm purchases all its inventory on credit.

Question 55

Which of the following is considered a use of cash in a cash flow statement?

A)Increase in accrued wages
B)Increase in common stock
C)Decrease in accounts receivable
D)Decrease in inventory
E)Increase in fixed assets

Question 56

An inventory turnover ratio of 8.5 times indicates that:

A)the inventory of the firm turns over every 8.5 days.
B)the value of the inventory of the firm is 8.5 percent of the total assets of the firm.
C)the value of sales of the firm is 8.5 times the cost of goods sold.
D)the firm will restock its inventory every 42.35 days.
E)the firm pays for its inventory once in 42.35 days.

Question 57

The balance sheet of Crimpson Solutions Ltd. has cash of $125 million, accounts receivable of $245 million, inventory of $160 million, and equipment worth $450 million. The company also has accounts payable of $120 million, notes payable of $280 million, and corporate bonds of $365 million. Crimpson's current ratio is:

A)2.5 times.
B)1.56 times.
C)1.325 times.
D)0.565 times.
E)1.855 times.

Question 58

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

A)Fixed assets are sold for cash.
B)Long-term debt is issued to pay off current liabilities.
C)Accounts receivable are collected.
D)Cash is used to pay off accounts payable.
E)A bank loan is obtained, and the proceeds are credited to the firm's checking account.

Question 59

The days sales outstanding (DSO) ratio of a firm identifies:

A)the average length of time a firm must wait after making a credit sale before receiving cash.
B)how effectively the firm uses its plant and equipment to help generate sales.
C)the extent to which a firm's net operating income can safely decline.
D)the profit (earnings) per dollar of sales.
E)how much investors are willing to pay for the firm's stock for each dollar of reported profits.

Question 60

A firm obtains the funds needed to pay its current bills primarily from its:

A)current liabilities.
B)long-term assets.
C)long-term liabilities.
D)equity.
E)liquid assets.

Question 61

Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. Alumbat's current times interest earned ratio is:

A)2.4 times.
B)3.4 times.
C)3.6 times.
D)4.0 times.
E)5.0 times.

Question 62

Suppose a firm has a growth rate equal to 8 percent, return on assets (ROA) of 10 percent, a debt ratio of 20 percent, and a current stock price of $36. The firm's return on equity (ROE) is:

A)14.0%.
B)12.5%.
C)15.0%.
D)2.5%.
E)13.5%.

Question 63

Assume that Meyer Corporation is 100 percent equity financed, and has the following information:
(1) Earnings before taxes = $1,500;
(2) Sales = $5,000;
(3) Dividend payout ratio = 60%;
(4) Total assets turnover = 2.0;
(5) Applicable tax rate = 30%
The firm's return on equity is:

A)25%.
B)30%.
C)35%.
D)42%.
E)50%.

Question 64

A firm's total equity is $10 million and total liabilities is $5 million. During the year, its sales equaled to $75 million. Based on the given information, the total assets turnover ratio of the firm is:

A)10.5 times.
B)13 times.
C)15 times.
D)7.5 times.
E)5 times.

Question 65

Market value ratios indicate:

A)the effect of liquidity, asset management, and debt management on operating results.
B)how much debt the firm has and whether it can take on more debt.
C)the firm's ability to meet its current obligations.
D)how effectively a firm is managing its assets.
E)what investors think of the company's future prospects based on its past performance.

Question 66

Selzer Inc. sells all of its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. The firm's return on equity (ROE) is:

A)7.1%.
B)33.3%.
C)3.3%.
D)71.0%.
E)8.1%.

Question 67

Which of the following ratios recognizes that many firms lease rather than buy a long-term asset?

A)Fixed charge coverage ratio
B)Times interest earned ratio
C)Debt ratio
D)Net profit margin
E)Equity multiplier ratio

Question 68

The extent to which the operating income can decline before a firm is unable to meet its annual interest costs can be found in:

A)the price-earnings ratio.
B)the debt ratio.
C)the times interest earned ratio.
D)the return on equity.
E)the profit margin.

Question 69

Which of the following mathematical expressions calculates the debt ratio?

A)Debt ratio = Net operating income ÷ Total debt
B)Debt ratio = Long-term liabilities ÷ Current liabilities
C)Debt ratio = Sales ÷ Total liabilities
D)Debt ratio = Total liabilities ÷ Total assets
E)Debt ratio = Interest charges ÷ Total liabilities

Question 70

Which of the following ratios indicate how much investors are willing to pay for a firm's stock for each dollar of reported profits?

A)Earnings per share
B)Market-to-book ratio
C)Price/earnings ratio
D)Return on equity
E)Net profit margin

Question 71

If a firm earns a net profit of $100,000 on sales of $2,000,000, its net profit margin is:

A)5%.
B)10%.
C)15%.
D)3.5%.
E)1.5%.

Question 72

The net fixed assets of Auburn Media Ltd. is $850 million. The sales of the firm is $1,420 million. The firm's fixed assets turnover ratio is:

A)1.35 times.
B)2.42 times.
C)1.67 times.
D)2.8 times.
E)3.45 times.

Question 73

Using the information below for WAM Inc., the market value per share is:
Earnings after interest and taxes = $200,000
Earnings per share = $2.00
Stockholders' equity = $2,000,000
Market/Book ratio = 0.20

A)$20.00.
B)$8.00.
C)$4.00.
D)$2.00.
E)$1.00.

Question 74

Which of the following is the formula to calculate a firm's inventory turnover ratio?

A)Inventory Turnover = Sales ÷ Inventory
B)Inventory Turnover = Cost of goods sold ÷ Inventory
C)Inventory Turnover = Inventory ÷ Current assets
D)Inventory Turnover = Inventory ÷ Accounts receivables
E)Inventory Turnover = (Sales - Cost of goods sold) ÷ Inventory

Question 75

The Charleston Company is a relatively small, privately owned firm. Last year, the company had an after-tax income of $15,000 and 10,000 shares were outstanding. The owners were trying to determine the market value for the stock prior to taking the company public. A similar firm, which is publicly traded, had a price/earnings ratio of 5.0. Using only the information given, the market value of one share of Charleston's stock is estimated as:

A)$10.00.
B)$7.50.
C)$5.00.
D)$2.50.
E)$1.50.

Question 76

The proportion of a firm's funds that is provided by shareholders is equal to:

A)the debt ratio minus the times interest earned.
B)1 minus the debt ratio.
C)the times interest earned plus 1.
D)the debt ratio minus the dividends paid.
E)the fixed charge coverage ratio minus 1.

Question 77

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. The firm's times interest earned ratio is:

A)16 times.
B)10 times.
C)7 times.
D)11 times.
E)20 times.

Question 78

A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has a debt of $7,500,000, total assets of $22,500,000, and an interest cost on a total debt of 5 percent, what is the firm's return on total assets (ROA)? (Round answer to two decimal places.)

A)8.47%
B)10.94%
C)12.02%
D)13.33%
E)15.18%

Question 79

Which of the following statements is true regarding debt ratios?

A)Firms with relatively low debt ratios have higher expected returns when business is good.
B)Firms with relatively low debt ratios are exposed to more risk compared to firms with relatively high debt ratios.
C)Firms with relatively high debt ratios have higher expected returns when business is bad.
D)Firms with relatively high debt ratios have higher expected returns when business is good.
E)Firms with relatively low debt ratios have higher expected returns when business is poor.

Question 80

Greenwood Builders Ltd. has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of their total liabilities?

A)$750,000
B)$1,000,000
C)$450,000
D)$262,500
E)$153,200