Deck 13: Measuring and Evaluating Financial Performance

Question 1

It is usually better to compare the ratio data from one company with the average of the industry rather than to compare the data with specific competitors.

Answer 1

False

Question 2

The times interest earned ratio is a measure of liquidity.

Answer 2

False

Question 3

Unlike solvency rates,liquidity ratios relate to the company's long-run survival.

Answer 3

False

Question 4

Time-series analysis is an example of trend analysis.

Question 5

The elements of financial statements include concepts like assets and liabilities,and revenues and expenses.

Question 6

A high P/E ratio may mean that shareholders have pushed the price of the shares up in anticipation of higher future net income.

Question 7

Gains and losses due to changes in foreign currency rates are not included in net income.

Question 8

Trend data are always in dollars while ratio data are always in percentages.

Question 9

In general,P/E ratios are fairly consistent across industries,regardless of the goods or services sold.

Question 10

Liquidity measures the ability of a company to meet its current financial obligations.

Question 11

If EPS (earnings per share)decreases,it must mean that the company's net income has fallen.

Question 12

P/E ratios can be calculated using the average EPS from the last four quarters.

Question 13

If the debt-to-assets ratio is 0.63,it means that 37% of the company's financing has been provided by shareholders' equity.

Question 14

Industries differ greatly in terms of the percentage of sales made on credit.This means some measures of liquidity are less relevant to companies in some industries than in others.

Question 15

The fixed asset turnover ratio is a measure of the efficiency of a company.

Question 16

Both liquidity ratios and solvency ratios measure a company's ability to meet its financial obligations.

Question 17

If a company is expanding its facilities,its fixed asset turnover ratio is likely to fall temporarily.

Question 18

Analysts typically use a running four-week average for the shares price in the P/E ratio.

Question 19

The P/E ratio indicates how much investors are willing to pay for a share as a multiple of current earnings.

Question 20

Trend data can be measured in dollar amounts or percentages.

Question 21

The low current ratio is typical for industries where suppliers give a more favourable payment terms on its Accounts Payable.

Question 22

Changes brought about by new accounting standards have expanded the income statement reporting of comprehensive income.

Question 23

Companies may deviate from general accounting practices by using industry specific procedures when these procedures are better suited to their industry.

Question 24

The full disclosure principle requires every transaction to be explained in detail:

Question 25

Vertical analysis is one means of analyzing change over time.

Question 26

EPS = (ROE * Average Shareholders equity)/(Average number of common shares outstanding)

Question 27

Horizontal analysis is identical to trend analysis.

Question 28

Nonrecurring items such as discontinued operations and extraordinary events are presented above the income tax expense line on the income statement because they are subject to income taxes just like any other sources of income.

Question 29

ASPE and IFRS require that items be recorded only after an exchange between the company and another party

Question 30

Most home improvement retailers have low levels of accounts receivable relative to sales revenue because they collect the majority of their sales immediately in cash:

Question 31

Common size statements contain only percentages,no dollar amounts.

Question 32

When a company is growing overall,it is not difficult to tell from the dollar amounts whether the proportions within each financial statement category are changing.

Question 33

The fixed asset turnover ratio indicates the amount of sales revenue generated for each dollar invested in current assets during the period:

Question 34

Comprehensive income is used under ASPE,but not under IFRS.

Question 35

Turnover ratios are remarkably consistent from one industry to the next.

Question 36

Benchmarks involves comparing one company to itself over time or to another company or industry average.

Question 37

The return on equity ratio compares the amount of net income to shareholders' equity:

Question 38

Vertical analysis could be used to determine the dollar amount and percentage by which cost of goods sold increased this year,relative to prior years.

Question 39

Horizontal analysis is analogous with time-series analysis.

Question 40

A company's fixed asset turnover ratio is equivalent to its receivables turnover multiplied by the average net receivables,all divided by average net fixed assets.

Question 41

Which of the following measures would assist in assessing the liquidity of a company?

A)Price/earnings ratio
B)Fixed asset turnover ratio
C)Receivables turnover ratio
D)Times interest earned ratio

Question 42

Net income was $364,000 in 2017 and $418,600 in 2018.The year- to-year percent change in net income is:

A)15%.
B)$54,600.
C)87%.
D)13%. (418600-364000)/364000 = 15%.

Question 43

Company X has net sales revenue of $1,250,000,cost of goods sold of $760,000,and all other expenses of $290,000.The beginning balance of shareholders' equity is $400,000 and the beginning balance of fixed assets is $361,000.The ending balance of shareholders' equity is $600,000 and the ending balance of fixed assets is $389,000.What is the Return On Equity of the company?

A)0.53
B)2.50
C)3.33
D)0.40

Question 44

If an analyst wants to examine a company's short-run ability to survive,which of the following would best be considered?

A)Liquidity
B)Market share
C)Profitability
D)Solvency

Question 45

Company X has net sales revenue of $780,000,cost of goods sold of $343,200,and all other expenses of $327,600.The net profit margin is:

A)0.32
B)0.56
C)0.86
D)0.14

Question 46

Company X has net sales revenue of $780,000,cost of goods sold of $343,200 and all other expenses of $327,600 for the current year.At the beginning of the year,503,000 shares of common shares were outstanding,and,at the end of the year,537,000 shares of common shares were outstanding.The basic EPS for the company is:

A)$1.50
B)$0.84
C)$0.21
D)$0.87

Question 47

If an analyst wants to examine a company's current ability to generate income,which of the following would best be considered?

A)Liquidity
B)Market share
C)Profitability
D)Solvency

Question 48

Which of the following measures would assist in assessing the solvency of a company?

A)Debt-to-assets ratio
B)Fixed asset turnover ratio
C)Return on equity ratio
D)None of the answers assess solvency

Question 49

Net income was $418,600 in 2017 and $364,000 in 2018.The year-to- year dollar change in net income is:

A)15%.
B)87%.
C)-$54,600.
D)$418,600.

Question 50

When using ratio data for comparison to other companies,analysts should:

A)not assume that all companies in the industry are in direct competition.
B)not interpret the data as a way of determining which companies will survive and outperform others.
C)only use data from one time period.
D)use industry averages,rather than individual companies,for the comparison.

Question 51

Company X has net sales revenue of $780,000,cost of goods sold of $343,200,and all other expenses of $327,600.The gross profit percentage is:

A)32%
B)56%
C)86%
D)14% Gross profit% = (Net Sales - COGS)/Net Sales ($780,000 - $343,200)/$780,000 = 56%.

Question 52

If an analyst wanted to examine a company's long-run ability to survive,which of the following would best be considered?

A)Liquidity
B)Market share
C)Profitability
D)Solvency

Question 53

Which of the following are the constraints on how broadly accounting rules can be applied?

A)Industry practices constraint and cost-benefit constraint.
B)Disclosure principle constraint and cost-benefit constraint.
C)Industry practices constraint and disclosure principle constraint.
D)Cost-benefit constraint and disclosure principle constraint.

Question 54

Which of the following measures would assist in assessing the profitability of a company?

A)Debt-to-assets ratio
B)Fixed asset turnover ratio
C)Receivables turnover ratio
D)Current ratio

Question 55

During the current accounting period,revenue from credit sales is $671,000.The accounts receivable balance is $51,480 at the beginning of the period and $52,200 at the end of the period.Which of the following statements is true?

A)The receivables turnover ratio is 12.9.
B)On average,it takes 12.9 days to collect payment from credit customers.
C)The receivables turnover ratio is 28.3.
D)On average,the company sells its inventory every 28.4 days. Avg.net receivables = (Prior EB receivables + Current EB receivables)/2($51,480 + $52,200)/2 = $51,840
Receivables turnover ratio = Net sales revenue/Avg.net receivables
$671,000/$51,840 = 12.9

Question 56

Data from ratio analysis can be:

A)compared to particular competitors in the industry.
B)compared to the company ratio data in previous years.
C)compared to industry averages.
D)all of the answers are acceptable.

Question 57

Solvency ratio data are primarily concerned with the ability of a company to:

A)produce profits.
B)handle its debt.
C)manage its cash flow.
D)provide income for shareholders.

Question 58

Which of the following analysis techniques does not examine significant sustained changes over time?

A)Trend analyses
B)Horizontal analyses
C)Time-series analyses
D)Vertical analyses

Question 59

If you wish to examine the relationships among various items reported in one or more of the financial statements,you are most likely to use:

A)time-series analysis.
B)ratio analysis.
C)horizontal analysis.
D)cross-sectional analysis.

Question 60

Company X has net sales revenue of $1,250,000,cost of goods sold of $760,000,and all other expenses of $290,000.The beginning balance of shareholders' equity is $400,000 and the beginning balance of fixed assets is $361,000.The ending balance of shareholders' equity is $600,000 and the ending balance of fixed assets is $389,000.What is the fixed asset turnover ratio?

A)0.53
B)2.50
C)3.33
D)0.80 Average net assets = (Beginning fixed assets + Ending fixed assets)/2 ($361,000 + $389,000)/2 = $375,000
Fixed asset turnover = Net Sales/Average Net Fixed Assets
$1,250,000/375,000 = 3.33.

Question 61

The patent on a major drug produced by a pharmaceutical company will soon expire.Sales of the drug contribute 10% to the company's net income.Which of the following statements is most likely to be true in these circumstances?

A)The P/E ratio will probably fall when the patent ends.
B)The P/E ratio will probably rise because the share price will rise and the earnings will fall.
C)The P/E ratio will probably fall as investors factor in the future drop in net income.
D)The P/E ratio will probably rise because the share price will fall and the earnings will fall.

Question 62

A company has $72,500 of inventory at the beginning of the year and $65,500 at the end of the year.Sales revenue is $986,400,cost of goods sold is $572,700,and net income is $124,200 for the year.The inventory turnover ratio is:

A)1.8.
B)8.3.
C)6.0.
D)14.3. Avg.inventory = (prior EB inventory + current EB inventory)/2
($72,500 + $65,500)/2 = $69,000
Inventory turnover ratio = COGS/Avg.Inventory
$572,700/$69,000 = 8.3.

Question 63

A decrease in accounts receivable turnover ratio is indicative of:

A)an increase in sales revenue.
B)slower selling inventory.
C)an increase in accounts receivable.
D)a decline in cost of good sold.

Question 64

Judging only from the ratios given,which of the following clothing wholesalers is least likely to have cash flow problems?

A)Company A,who has a receivables turnover of 5,and an inventory turnover of 2
B)Company B,who has a receivables turnover of 2,and an inventory turnover of 5
C)Company C,who has a receivables turnover of 10,and an inventory turnover of 10
D)Company D,who has a receivables turnover of 1,and an inventory turnover of 1

Question 65

An increase in gross profit percentage indicates that:

A)cost of goods sold as a percentage of sales has decreased.
B)cost of goods sold as a percentage of sales has increased.
C)operating expenses as a percentage of sales have increased.
D)operating expenses as a percentage of sales have decreased.

Question 66

If net income is rising,but both sales and the gross profit percentage remain the same,then:

A)operating expenses are falling.
B)operating expenses are rising.
C)cost of goods sold is falling.
D)cost of goods sold is rising.

Question 67

If a company's P/E ratio is 12.5 and the company's share price is $17.50 per share then the company's EPS is:

A)$0.71.
B)$1.40.
C)$5.00.
D)$0.40. 17.50/EPS = 12.5
17)5/12.5 = 1.40.

Question 68

An increase in the inventory turnover rate is indicative of:

A)a reduction in the cost of goods sold.
B)a decrease in the supply of inventory.
C)an increase in the supply of inventory.
D)an increase in sales revenue.

Question 69

A share sells for $20.The company has $64 million in earnings and 200 million outstanding shares.The P/E ratio for the company is:

A)62.5.
B)200.
C)0.31.
D)6.4. EPS = Net Income/Avg.# of common shares outstanding
$64,000,000/200,000,000 = $0.32
P/E ratio = Stock Price (per share)/EPS
$20)00/$0.32 = 62.5.

Question 70

A company has $72,500 in inventory at the beginning of the accounting period and $65,500 at the end of the accounting period.Sales revenue is $986,400,cost of goods sold is $572,700,and net income is $124,200 for the accounting period.On average,this company has inventory on hand for approximately:

A)203 days.
B)44 days.
C)61 days.
D)26 days. Avg.inventory = (prior EB inventory + current EB inventory)/2
($72,500 + $65,500)/2 = $69,000
Inventory turnover ratio = COGS/Avg.Inventory
$572,700/$69,000 = 8.3
Days to sell = 365/Inventory Turnover Ratio
365/8.3 = 44 days.

Question 71

A current ratio of 2.5 means that for every dollar of:

A)accounts payable,there is $2.50 of cash.
B)current liabilities,there is $2.50 of current assets.
C)current assets,there is $2.50 of current liabilities.
D)total liabilities,there is $2.50 of current liabilities.

Question 72

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:

A)large percent of assets and inventory costs are stable.
B)large percent of assets and inventory costs are not stable.
C)small percent of assets and inventory costs are not stable.
D)small percent of assets and inventory costs are stable.

Question 73

If a company's P/E ratio is 24 and the company's EPS is $1.50 then the company's share price is:

A)$36.00.
B)$25.50.
C)$16.00.
D)$6.25. P/1.50 = 24
1)5 * 24 = $36.

Question 74

Company X has a P/E ratio of 16 in year 2017 and 16.5 in 2018.In 2018 its P/E ratio is 24.The best way to interpret these data is to conclude that:

A)the shares are overpriced and should be sold.
B)the shares have great growth capacity and should be bought.
C)other financial results and news should be examined to determine the cause of the P/E ratio change.
D)the shares are under-priced and should be bought.

Question 75

A times interest earned ratio of 11 means that the company's:

A)net income is large enough to pay interest and taxes 11 times.
B)net cash flow from operations before taxes and interest is large enough to pay interest 11 times.
C)net cash flow from operations is large enough to pay interest and taxes 11 times.
D)net income before taxes and interest is large enough to pay interest 11 times.

Question 76

The debt-to-assets ratio is the:

A)ratio of current liabilities to current assets.
B)same calculation as the current ratio,but with total assets instead of short-term assets.
C)ratio of total liabilities to total assets.
D)proportion of total liabilities financed by creditors.

Question 77

A current ratio of less than one is not so much of a concern when the company has a:

A)low fixed asset turnover ratio.
B)high days to collect number.
C)high inventory turnover ratio.
D)all of the answers are acceptable.

Question 78

A company that has a current ratio less than one cannot cover:

A)current liabilities with its current cash flow.
B)current expenses with its current sales revenue.
C)expenses with its current revenues.
D)current liabilities with its current assets.

Question 79

Company X has net sales revenue of $436,000,cost of goods sold of $343,000,and all other expenses of $157,000,if interest expense is $16,000 and income tax expense is zero,the times interest earned ratio is:

A)-3.0
B)+5.0
C)+6.8
D)-4.8

Question 80

How competitors calculate depreciation is most likely to affect comparisons between competitors if property,plant,and equipment:

A)makes up a large percent of assets and average useful lives are fairly different.
B)makes up a small percent of assets and assets are financed in a different way.
C)makes up a small percent of assets and average useful lives are fairly similar.
D)is primarily leased in the industry,not purchased.