Deck 4: Financial Statement Analysis

Question 1

The debt ratio is classified as which type of ratio?

A) Owner
B) Liquidity
C) Efficiency
D) Productivity
E) Financial Leverage

Answer 1

Financial Leverage

Question 2

The price-earnings ratio is classified as which type of ratio?

A) Owner
B) Liquidity
C) Efficiency
D) Productivity
E) Financial Leverage

Answer 2

Owner

Question 3

The gross profit margin is classified as which type of ratio?

A) Owner
B) Liquidity
C) Efficiency
D) Productivity
E) Financial Leverage

Answer 3

Efficiency

Question 4

Inventory turnover, accounts receivable turnover, fixed asset turnover, and total asset turnover are all classified as which type of ratio?

A) Owner
B) Liquidity
C) Efficiency
D) Productivity
E) Financial Leverage

Question 5

Which of the following statements would most likely be considered false?

A) Analysts can utilize individual ratios on their own.
B) Other dimensions of the company must be looked at when analyzing ratios.
C) A company's historical ratios, or the trend in its ratios, adds context when analyzing ratios.
D) Ratios of comparable companies or industry average ratios give context to a company's ratios.

Question 6

ABC Company attempts to manage its earnings by extending the useful life of all of its equipment. Which of the following will not be an outcome of this choice by management?

A) Income will be higher than it would have been under prior accounting methods.
B) Equipment values will be higher than they would have been without the change.
C) Depreciation expense will be lower than it would have been under prior accounting methods.
D) Depreciation expense will be higher than it would have been under prior accounting methods.

Question 7

How easily something can be converted into cash is referred to as:

A) liquidity
B) quick assets
C) current assets
D) working capital
E) operating cycle

Question 8

Days of sales in inventory + Days sales outstanding is best described as the:

A) operating cycle.
B) cash conversion cycle.
C) average collection period.
D) number of days of inventory.

Question 9

The average number of days the company has inventory in its possession in the form of raw materials, work-in-process, and finished goods is best described as the:

A) operating cycle.
B) cash conversion cycle.
C) day's sales in inventory.
D) day's sales outstanding.

Question 10

It is important for a company to know the level of sales at which it covers all its variable and fixed operating costs. This level of sales is best described as the:

A) gross profit margin.
B) contribution margin.
C) operating break even.
D) operating profit margin.

Question 11

If Hunter Inc. has the following account balances,
Hunter, Inc.'s working capital ratio closest to

A) 0.29
B) 0.37
C) 0.53
D) 0.63

Question 12

Given the following account balances:
Hunter, Inc.'s quick ratio is closest to:

A) 0.28
B) 0.72
C) 1.56
D) 2.94

Question 13

Given the following account balances,
Hunter's the current ratio, is closest to:

A) 0.29
B) 2.94
C) 3.53

Question 14

Given the following information for Hunter, Inc.,
Hunter's net working capital is closest to:

A) 50
B) 65
C) 175
D) 500

Question 15

Given the following financial information,
the working capital ratio is closest to:

A) 0.15
B) 0.26
C) 0.52
D) 0.72

Question 16

Given the following financial information,
the quick ratio is closest to:

A) .15
B) .47
C) .62
D) 1.17

Question 17

Given the following financial information,
the current ratio is closest to:

A) 0.26
B) 1.17
C) 1.83
D) 2.31

Question 18

Given the following financial information,
the net working capital is closest to:

A) 9
B) 44
C) 175
D) 200

Question 19

Given the following information,
the gross profit margin is closest to:

A) 11%
B) 15%
C) 42%
D) 58%
E) 173%

Question 20

Given the following information,
the net profit margin is closest to:

A) 15%
B) 19%
C) 27%
D) 33%

Question 21

Given the following information,
the gross profit margin is closest to:

A) 48%
B) 49%
C) 50%
D) 51%

Question 22

Given the following information,
the net profit margin is closest to:

A) 11%
B) 48%
C) 49%
D) 51%

Question 23

Given the following information,
the inventory turnover ratio is closest to:

A) 0.14
B) 0.19
C) 5.40
D) 7.36

Question 24

Given the following information,
The accounts receivable turnover ratio is closest to:

A) 12.8
B) 21.3
C) 25.5
D) 34.1

Question 25

Given the following information,
the fixed asset turnover ratio is closest to:

A) 0.28
B) 0.58
C) 2.04
D) 3.54

Question 26

Given the following information,
the total assets turnover ratio is closest to:

A) 1.29
B) 2.23
C) 4.28
D) 7.42

Question 27

Given the following information,
the inventory turnover ratio is closest to:

A) 13.8
B) 14.4
C) 17.6
D) 26.7

Question 28

The accounts receivable turnover ratio is closest to:

A) 13.8
B) 14.4
C) 17.6
D) 26.7

Question 29

Given the following financial information:
the fixed asset turnover ratio is closest to:

A) 1.8
B) 2.7
C) 3.6

Question 30

Given the following financial information,
the total assets turnover ratio is closest to:

A) 1.37
B) 1.85
C) 2.67
D) 3.63

Question 31

Consider the following financial information:
The debt ratio is closest to:

A) 18%
B) 25%
C) 30%
D) 70%

Question 32

Consider the following financial information:
The debt-equity ratio of this company is closest to:

A) 25%
B) 43%
C) 57%
D) 75%

Question 33

Consider the following financial information:

The equity multiplier is closest to:

A) 0.70
B) 1.00
C) 1.43
D) 1.80

Question 34

Consider the following financial information:
The times interest earned is closest to:

A) 2.45
B) 3.95
C) 4.95

Question 35

Consider the following financial information:
The debt ratio is closest to:

A) 31%
B) 46%
C) 48%
D) 58%

Question 36

Consider the following financial information:
The debt-equity ratio is closest to:

A) 31%
B) 46%
C) 58%
D) 85%

Question 37

Consider the following financial information:

The equity multiplier is closest to:

A) 0.5
B) 1.0
C) 1.6
D) 1.8

Question 38

Consider the following financial information:
The times interest earned is closest to:

A) 2.6
B) 4.5
C) 5.5

Question 39

Consider the following financial information:
The book value per share is closest to:

A) $1.50
B) $4.50
C) $10.00
D) $14.30
E) $31.90

Question 40

Consider the following financial information:
The market to book value is closest to:

A) 0.49
B) 3.00
C) 4.50
D) 9.18

Question 41

Consider the following financial information:
The price earnings ratio is closest to:

A) 0.18
B) 1.41
C) 2.04
D) 9.18

Question 42

Consider the following financial information:
The dividend payout is closest to:

A) 1%
B) 10%
C) 15%
D) 31%
E) 69%

Question 43

Consider the following financial information:
The dividend yield is closest to:

A) 1%
B) 3%
C) 15%
D) 31%

Question 44

Consider the following financial information:
The book value per share is closest to:

A) $1.80
B) $20.00
C) $36.90
D) $98.70

Question 45

Consider the following financial information:
The market to book value is closest to:

A) 0.52
B) 0.90
C) 1.73

Question 46

Consider the following financial information:
The price earnings ratio is closest to:

A) .17
B) .18
C) 1.73
D) 1.92

Question 47

Consider the following financial information:
The dividend payout is closest to:

A) 2%
B) 10%
C) 19%
D) 24%

Question 48

Consider the following financial information:
The dividend yield is closest to:

A) 2%
B) 10%
C) 11%
D) 19%

Question 49

Which "bottom line" ratio best measures how well a company's management has put the company's assets to work to produce a profit?

A) Return on equity
B) Return on assets
C) Net profit margin
D) Gross profit margin

Question 50

Useful approaches to using financial ratios include all of the following except:

A) the DuPont System.
B) examining individual ratios.
C) comparisons of ratios across time.
D) comparisons of ratios across companies.
E) looking at changes going on in the company.

Question 51

The method of analyzing return ratios by breaking down these ratios into their components is:

A) classification.
B) return analysis.
C) the DuPont System.
D) break down method.

Question 52

Which of the following is not a ratio in the DuPont System?

A) Equity multiplier
B) Return on equity
C) Net profit margin
D) Debt to equity ratio
E) Asset turnover ratio

Question 53

Which of the following statements is not true?

A) The DuPont System focuses on owner ratios.
B) The DuPont System was pioneered by the DuPont Corporation.
C) The DuPont System is a way of summarizing a company's key financial ratios.
D) The DuPont System is a method of analyzing return ratios by breaking down these ratios into their components.
E) Return on equity, net profit margin, asset turnover ratio, and the equity multiplier are the major components of the DuPont System.

Question 54

Generic Company has a return on assets of 8% and a return on equity of 15%. Generic Company's equity multiplier is nearest to:

A) 0.1875
B) 0.533
C) 1.875
D) 5.333

Question 55

Consider the following financial information:
The return on assets is closest to:

A) 34%
B) 54%
C) 55%
D) 66%
E) 69%

Question 56

Consider the following financial information:
The return on equity is closest to:

A) 34%
B) 49%
C) 51%
D) 79%
E) 99%

Question 57

Consider the following financial information:
The return on assets is closest to:

A) 28%
B) 38%
C) 49%
D) 59%

Question 58

Consider the following financial information:
The return on equity is closest to:

A) 28%
B) 52%
C) 90%
D) 110%

Question 59

If Company As equity multiplier is 3.65, which of the following would not be true?

A) 3.65 is the financial leverage ratio using the DuPont System.
B) Company As total assets are 3.65 times its shareholders equity.
C) Company A has leveraged every dollar of shareholders' equity into $3.65 of total financing.
D) 3.65 can be multiplied by return on equity for Company A to find Company As return on assets.

Question 60

The current ratio is an example of a ratio that provides information on a company's efficiency.

Question 61

Turnover ratios are often used in the analysis of the productivity of a business enterprise.

Question 62

Because financial ratios are the ratio of two values, the accounting principles are not important because these cancel out in the ratio.

Question 63

A choice of accounting method will only affect a single financial statement.

Question 64

When calculating ratios that involve fixed assets, the use of historical costs does not affect the ratios.

Question 65

Long term assets are also referred to as working capital.

Question 66

You calculate the day's purchases outstanding ratio for XYZ Company and it comes out to 45.13. This means that XYZ Company takes an average of 45.13 days to pay its creditors.

Question 67

Financial leverage magnifies earnings or losses to owners.

Question 68

XYZ Company's dividend payout ratio is .325. This would mean that the company also has a plowback ratio of 0.825.

Question 69

New Venture has a forward P/E ratio of 38.12. Value Company has a forward P/E ratio of 12.25. This means that if EPS stays the same for both companies, the investor will recoup their investment in nearly a third of the time with Value Company that it will take to recoup the investment in New Venture.

Question 70

Trailing P/E is current share price divided by last year's EPS.

Question 71

Total debt is the same as total liabilities.

Question 72

Generally speaking, the larger a company's inventory, the larger the difference between its current ratio and quick ratio.

Question 73

Companies with inventory will always have a quick ratio that is more than their current ratio.

Question 74

If an analyst wanted to look at the age of a company's receivables, they should examine the Days sales outstanding ratio.

Question 75

A customer of your company has a times interest earned ratio of 23.25. This means that for every dollar of interest expense, the customer had $23.25 of income available to pay interest and taxes.

Question 76

The return earned by owners on their investment in a company is return on assets.

Question 77

If a company's return on equity has been declining over time, this could likely be due to a decline in net income or a decline in shareholders' equity.

Question 78

The use of trend analysis may not be appropriate if the company has experienced significant acquisitions or significant divestures.

Question 79

Discuss what an analyst should consider regarding accounting principles when they analyze a company.

Question 80

Complete the following table