Deck 3: Evaluation of Financial Performance

Question 1

Bondholders and other long-term creditors tend to prefer a ____ debt ratio because it provides ____ a major financial problem.

A) low; greater protection in the event of
B) high; greater protection in the event of
C) low; less likelihood of
D) high; less likelihood of

Answer 1

A

Question 2

The data from ____ is especially useful when analyzing smaller firms.

A) Prentice-Hall
B) The Risk Management Association
C) Dan Bradbury Ltd.
D) the Securities and Exchange Commission

Answer 2

B

Question 3

The quick ratio is similar to the current ratio except it does NOT include ____.

A) cash
B) accounts receivable
C) prepaid items
D) inventories

Answer 3

D

Question 4

The fixed asset turnover ratio is influenced by ____.

A) the length of time since acquisition
B) the depreciation policies adopted by the firm
C) the extent to which fixed assets are leased rather than owned
D) All of these are correct

Question 5

The ____ ratio measures the relative profitability of a firm's sales after the cost of sales has been deducted.

A) gross profit margin
B) net profit margin
C) return on investment
D) return on stockholders' equity

Question 6

The earnings per share figure ____.

A) is a comparative ratio
B) is the best measure of a firm's profitability
C) can be computed only if a firm has no debt
D) is part of the price-to-earnings ratio

Question 7

The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.

A) profitability
B) liquidity
C) risk
D) size

Question 8

____ indicate the ability of the firm to meet its short-term financial obligations.

A) Activity ratios
B) Liquidity ratios
C) Leverage ratios
D) Profitability ratios

Question 9

If a firm wanted to report high profits, it would choose which method of inventory accounting in inflationary times?

A) FIFO
B) LIFO
C) FILO
D) GIGO

Question 10

Which of the following financial ratios is market-based?

A) debt-to-equity
B) price-to-earnings
C) return on investment
D) gross profit margin

Question 11

Primary sources of comparative financial data include ____.

A) Dun and Bradstreet
B) New York Times
C) Richard Moore, Inc.
D) Framingham Financial Library

Question 12

A financial ratio is a(n) ____ that indicates something about a company's activities.

A) analysis
B) theory
C) management philosophy
D) relationship

Question 13

Financial ratios can be used to make a comparison of a company's financial condition from ____.

A) day to day
B) period to period
C) purchase to purchase
D) sale to sale

Question 14

A firm wants to receive cash earnings. Management's viewpoint is that cash earnings are ____.

A) stock dividends
B) high quality earnings
C) retained earnings
D) debt retirement

Question 15

In an inflationary period, a firm is likely to show short-lived profit increases because ____.

A) accounts receivable collections increase
B) cash balances decline
C) inventory profits are realized
D) All of these are correct

Question 16

A low financial ratio may be caused by a ____ or a(n) ____.

A) low denominator; accounting error
B) high denominator; accounting error
C) low denominator; high numerator
D) high denominator; low numerator

Question 17

The current ratio is not the most stringent measure of liquidity, because it ____.

A) is difficult to calculate
B) includes some items, such as inventory, that may not be readily liquid
C) requires many years of past data
D) includes many non-current items in its calculation

Question 18

____ indicate the firm's capacity to meet its debt obligations, both short-term and long-term.

A) Liquidity ratios
B) Activity ratios
C) Financial leverage management ratios
D) Profitability ratios

Question 19

Current assets include the cash a firm already has on hand and in the bank plus any assets that can be converted into cash within a "normal" operating period of ____ month(s).

A) 1
B) 6
C) 12
D) 18

Question 20

A firm's return on stockholders' equity is a function of its net profit margin, ____, and equity multiplier.

A) current ratio
B) cost of goods
C) total asset turnover
D) fixed asset turnover

Question 21

Christy would like to improve the current ratio of her firm, which is now 0.5, so that she will have a better chance of obtaining a working capital loan. Which of the following options would improve her current ratio?

A) use cash to pay off notes payable
B) collect some of her accounts receivables
C) purchase additional inventory on credit
D) borrow short-term funds to pay off some payables

Question 22

Which of the following is consistent with an increase in a firm's return on investment?

A) costs increase more than revenues do
B) costs decrease less than revenues do
C) an increase in the asset level required to maintain current sales volume
D) an increase in sales revenue

Question 23

The ratio group most likely to be used to indicate a firm's ability to meet short-term financial obligations would be ____.

A) liquidity ratios
B) financial leverage ratios
C) activity ratios
D) profitability ratios

Question 24

Return on stockholders' equity is equal to ____ times ____ times ____.

A) net profit margin; fixed asset turnover; equity multiplier
B) gross profit margin; total asset turnover; equity multiplier
C) net profit margin; total asset turnover; equity multiplier
D) net profit margin; total asset turnover; debt-to-equity ratio

Question 25

Financial leverage management ratios measure the ____.

A) amount of interest paid by the firm
B) firm's use of fixed-charge financing
C) amount of equity funds retired by the firm
D) static ratio

Question 26

The analysis of financial statements is affected by inflation because ____.

A) the value of long-term debt will increase
B) the value of fixed assets may be understated
C) the life of long-term assets is decreased
D) inventory increases

Question 27

A common-size balance sheet shows the firm's assets and liabilities as a percentage of ____.

A) stockholders' equity
B) industry averages
C) total assets
D) net sales

Question 28

Which of the following ratios would probably not be used to assess the profitability of a firm?

A) return on stockholders' equity
B) return on investment
C) times interest earned
D) None of these are correct

Question 29

In general, firms with ____ risk and ____ earnings growth prospects will have higher P/E multiples.

A) low; low
B) high; low
C) low; high
D) high; high

Question 30

;he ____ ratio, sometimes called the "acid test," is a more stringent measure of ____ than the current ratio.

A) quick; liquidity
B) fixed-asset turnover; activity
C) net profit margin; gross profit margin
D) equity; activity

Question 31

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must ____.

A) decrease its equity multiplier
B) increase its equity multiplier
C) increase sales and increase assets
D) reduce sales and increase assets

Question 32

A fresh fruit wholesaler has high sales volume, with most selling prices not greatly exceeding costs. This wholesaler would normally be expected to have ____.

A) high profit margin and high asset turnover
B) low profit margin and low asset turnover
C) low profit margin and high asset turnover
D) high profit margin and low asset turnover

Question 33

The major types of financial ratios include all of the following EXCEPT ____.

A) market-based
B) liquidity
C) financial leverage management
D) equity

Question 34

The ____ ratio is a more severe measure of a firm's ability to meet fixed financial obligations.

A) acid test
B) debt
C) fixed-charge coverage
D) debt-to-equity

Question 35

An increase in the average collection period may suggest all of the following EXCEPT ____.

A) the company caters to slow-paying customers
B) customers are not paying their bills on time
C) sales have decreased
D) an overly liberal credit policy

Question 36

When considering the quality of a firm's earnings, high quality earnings tend to be ____

A) cash earnings
B) derived from infrequently recurring transactions
C) earnings per sale
D) earnings per share

Question 37

____ ratios indicate how efficiently a firm is using its assets to generate sales.

A) Liquidity
B) Asset management
C) Financial leverage
D) Equity

Question 38

The fixed-charge coverage ratio includes all of the following in the denominator EXCEPT ____ .

A) lease payments
B) preferred dividends before tax
C) Before-tax sinking fund
D) common stock dividends

Question 39

Asset management ratios indicate ____.

A) how well a firm is using its assets to generate sales
B) how efficiently a firm is allocating its liabilities
C) the return on assets
D) the profitability of the firm

Question 40

A common-size income statement shows the firm's income and expense items as a percentage of ____.

A) stockholders' equity
B) net sales
C) industry averages
D) total assets

Question 41

The analysis of the financial performance and condition of a firm with sizable international operations is generally more complicated than analyzing a firm whose operations are largely domestic for all of the following reasons EXCEPT ____.

A) problems with the translation of foreign operating results
B) problems with definition of capital
C) fluctuating exchange rates
D) All of these are correct

Question 42

A trend analysis indicates a firm's performance ____.

A) more accurately than any other type of analysis
B) over time
C) at one given point in time
D) without relying on financial ratios

Question 43

If a firm's price to earnings (P/E) ratio is 10, ____.

A) it is not possible for it to be paying dividends also
B) its market to book ratio has to be at least 2.0
C) its net profit margin is positive
D) its return on stockholders' equity is negative

Question 44

Nuking Gnats Pest Service, Inc. has a debt ratio of 50% and an equity multiplier of 2. What is Nuking Gnats' stockholders' equity if total debt is $100,000?

A) $100,000
B) $150,000
C) $200,000
D) $50,000

Question 45

Which of the following firms would be most likely to pay out a high proportion of its earnings as dividends?

A) a firm with a lot of ongoing high-return investment projects
B) a firm with stable earnings
C) a firm with volatile earnings
D) All of these are equally likely to pay out a high proportion of their earnings as dividends

Question 46

Firms with a positive economic value added (EVA) have a(n) ____.

A) increased growth in earnings
B) increasing rate of return on investment
C) return on capital greater than their cost of capital
D) high return on book value

Question 47

A firm with an equity multiplier of 4.0, will have a debt ratio of ____.

A) 0.25
B) 1.00
C) 0.75
D) 4.00

Question 48

If a firm's current ratio is 1.5, then ____.

A) its current liabilities exceed its current assets
B) it is possible for its quick ratio to be 2.0
C) it is possible for its quick ratio to be 1.0
D) its current assets equal its current liabilities

Question 49

The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.

A) dividend yield
B) payout
C) return on earnings
D) earnings

Question 50

If a firm's total asset turnover ratio is 2.0, then ____.

A) its annual sales are less than its total assets
B) it is possible that its fixed asset turnover ratio is 1.5
C) its total assets are two times its annual sales
D) its annual sales are two times its total assets

Question 51

To increase the return on stockholders' equity, management could increase the ____.

A) current ratio
B) price-to-earnings ratio
C) dividend yield
D) equity multiplier

Question 52

Companies can avoid paying income taxes on inventory profits by using the ____ inventory valuation method.

A) LIFO
B) FIFO
C) Priced out
D) Priced in

Question 53

Stocks with ____ dividend yield often indicate ____ expected future growth.

A) high; high
B) low; low
C) low; high
D) high; low

Question 54

Which of the following is NOT true about generally accepted accounting principles (GAAP)?

A) They are outlined in Statements of Financial Accounting Standards.
B) In the United States, they are issued by the Financial Standards Accounting Board.
C) They are stringent, giving firms little latitude in reporting financial situations.
D) Two firms that both follow GAAP can still have significant differences in how they compute their financial outcomes.

Question 55

Although ratios can provide valuable information, they can also be misleading for which of the following reasons?

A) Ratios are only as reliable as the accounting data on which they are based.
B) Compilation of industry norms often does not report information about the distribution of values.
C) Comparative analysis depends on the availability of data for appropriately defined industries.
D) All of these are correct.

Question 56

Income taxes on inventory profits can be deferred by ____.

A) different tax schedules
B) different inventory valuation methods
C) long-term equipment
D) different cash flow methods

Question 57

If a firm's return on investment (i.e., earnings after taxes divided by total assets) is 7% and the firm has no preferred stock financing, it is ____.

A) possible that its return on stockholders' equity is 10%
B) possible that its return on stockholders' equity is 5%
C) impossible for its debt-to-equity ratio to be 1.0
D) impossible for its net profit margin to be 7%

Question 58

The Market Value Added (MVA) is ____.

A) an indicator of how successful a firm has been at increasing its financing its assets
B) the return on total capital minus cost of capital
C) an indication of an increase in operating efficiency
D) the present value of all expected future EVA

Question 59

Economic value added (EVA) is a measure of operating performance that indicates how successful a firm has been at ____.

A) increasing the growth in earnings
B) increasing the MVA of the enterprise in any given year
C) increasing the rate of return on investment
D) All of these are correct

Question 60

Given the following information, calculate the inventory for Big Show Videos: Quick ratio = 1.2; Current assets = $12,000; Current ratio = 2.5

A) $4,800
B) $6,240
C) $7,200
D) $5,660

Question 61

Trend analysis reveals whether a firm's performance over a given time period has improved or deteriorated relative to ____.

A) that firm's likely performance in the future
B) that firm's performance in earlier time periods
C) companies in other industries
D) other companies in the same industry

Question 62

How much cash and marketable securities does Gray Day Computer Co. have if the firm has a current ratio of 2.5, a quick ratio of 1.2, and current liabilities of $12,000? Gray's credit sales are $98,000, and its average collection period is 40 days? (Assume 365 days per year.)

A) $3,660
B) $14,440
C) $10,740
D) $12,660

Question 63

A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

A) $ 5,000
B) $10,000
C) $15,000
D) $20,000

Question 64

A(n) ____ calculates a firm's earnings after taxes, in dollars.

A) income statement
B) balance sheet
C) common-size balance sheet
D) common-size income statement

Question 65

What is the return on stockholders' equity for a firm with a net profit margin of 5.2 percent, sales of $620,000, an equity multiplier of 1.8, and total assets of $380,000?

A) 8.48%
B) 5.74%
C) 15.27%
D) 9.36%

Question 66

AK, Inc. is considering issuing additional long-term debt to finance an expansion. The company currently has $20 million in 5% debt outstanding. Its earnings after-tax (EAT) are $3.0 million, and its marginal and average tax rate is 40 percent. The company is required by the debt holders to maintain its times interest earned ratio at 3.0 or greater. How much additional 10 percent debt can the company issue now and maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest and taxes remains at its present level.

A) $10 million
B) $ 6 million
C) $ 1 million
D) $5 million

Question 67

If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm's times interest earned ratio (round to two decimals)?

A) 8.17
B) 4.90
C) 13.25
D) 9.17

Question 68

Determine the cost of sales for a firm with the following financial ratios and data: Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times

A) $2,000,000
B) $6,000,000
C) $3,000,000
D) $1,000,000

Question 69

firm with a debt ratio of 0.75, will have an equity multiplier of ____.

A) 0.25
B) 1.00
C) 0.75
D) 4.00

Question 70

Trend analysis requires that ____.

A) asset management ratios be excluded from the analysis
B) financial ratios not be used at all
C) the same ratio be plotted over several years
D) many different ratios be calculated over several years

Question 71

A(n) ____ calculates a firm's total assets and total liabilities and stockholders' equity, in dollars.

A) income statement
B) balance sheet
C) common-size balance sheet
D) common-size income statement

Question 72

What is the market price per share of Big Whoop Inc. if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market-to-book ratio of 1.5?

A) $16.20
B) $10.80
C) $7.20
D) $12.40

Question 73

What is the return on investment for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4?

A) 26.0%
B) 16.9%
C) 6.5%
D) 4.6%

Question 74

If Power-On Inc. has a total asset turnover of 1.8, a fixed asset turnover of 3.2, a debt ratio of 0.5, and a total debt of $200,000, what would fixed assets be?

A) $56,250
B) $711,111
C) $225,000
D) $62,250

Question 75

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

A) $16.80
B) $42
C) $3
D) $28

Question 76

If a firm has a total asset turnover of 8 times and a return on investment of 15%, its net profit margin must be ____.

A) 1.875%
B) 1.95%
C) 2.05%
D) 2.25%

Question 77

Given the following information, determine Salem Company's fixed assets. Sales = $10,000,000
Total asset turnover = 4 times
Current ratio = 2.40
Current liabilities = $500,000
Total assets = current assets + fixed assets

A) $1,200,000
B) $4,800,000
C) $1,300,000
D) Cannot be determined

Question 78

A firm's price-to-earnings ratio is 8 and its market-to-book ratio is 2. If its earnings per share are $4.00, what is the book value per share?

A) $ 8.00
B) $32.00
C) $64.00
D) $16.00

Question 79

What would be the times interest earned of a company if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

A) 2.65
B) 1.1
C) 2.1
D) 1.2

Question 80

What is the cost of sales for a firm with a gross profit margin of 30 percent, a net profit margin of 4 percent, and earnings after taxes of $20,000?

A) $200,000
B) $350,000
C) $150,000
D) $125,000