Question 1

Budgets are written financial plans utilized in sales forecasts.

Accepted Answer

Budgets are written financial plans that guide the operation of businesses and are often used in sales forecasts to help determine expected revenues and expenses.

Question 2

The operating profit margin is calculated as the firm's net income divided by net sales.

Accepted Answer

The operating profit margin is calculated as operating profit (also known as earnings before interest and taxes, or EBIT) divided by net sales.

Question 3

Financial analysis using ratios can assist managers in the firm's financial planning process.

Accepted Answer

Financial ratios such as liquidity ratios, profitability ratios, and solvency ratios can provide insights into the company's financial performance and condition, which can aid in the financial planning process. By analyzing these ratios, managers can identify areas of improvement and make informed decisions about investments, financing, and operations.

Question 4

In employing DuPont analysis,the user would break the return on total assets into the profit margin,total asset turnover,and an equity multiplier.

Accepted Answer

DuPont analysis breaks down the return on equity (not return on total assets) into three components: profit margin, total asset turnover, and the equity multiplier.

Question 5

The contribution margin represents contribution of each unit sold that first goes toward paying fixed costs.

Accepted Answer

The contribution margin is the amount of sales revenue that remains after variable expenses have been deducted. This amount then goes towards paying fixed costs and ultimately contributes to the company's profit.

Question 6

Break-even analysis is used to estimate how many units of products must be sold in order for the firm to have a reasonable profit.

Accepted Answer

Break-even analysis is used to determine the point at which a company's total revenue will be equal to its total expenses, resulting in zero profit or loss. It does not estimate how many units of products must be sold for the firm to have a reasonable profit, as this will depend on various factors such as the product's pricing, production costs, and desired profit margins.

Question 7

Ratio analysis is a financial technique that involves dividing various financial statements numbers into one another.

Accepted Answer

Ratio analysis involves dividing different financial statement numbers to calculate various financial ratios such as liquidity ratios, profitability ratios, and activity ratios. This technique helps in analyzing the financial performance of a company and making informed decisions.

Question 8

Cross-sectional analysis is used to evaluate a firm's performance over time.

Accepted Answer

Cross-sectional analysis is used to evaluate a firm's performance against its competitors or industry benchmarks at a specific point in time, not over time. Time-series analysis is used to evaluate a firm's performance over time.

Question 9

Market value ratios indicate the willingness of investors to value a firm in the marketplace relative to financial statement values.

Accepted Answer

Market value ratios, such as price to earnings ratio, price to book ratio, and market to sales ratio, reflect how much investors are willing to pay for a share of the company's stock based on factors such as perceived growth potential, industry trends, and market sentiment. These ratios compare financial statement values, such as earnings, book value, and sales, to the market price of the stock.

Question 10

The degree of operating leverage measures the sensitivity of operating income to changes in the level of output.

Accepted Answer

This is a correct definition of the degree of operating leverage. It shows how much the operating income will change in response to a change in output level.

Question 11

Financial leverage ratios indicate the extent to which borrowed funds are used to finance assets.

Accepted Answer

Financial leverage ratios such as debt-to-equity and debt-to-capital ratios express the proportion of debt or borrowed funds in relation to the equity or total capital used to finance assets.

Question 12

The net profit margin is an example of a market value ratio.

Accepted Answer

The net profit margin is an example of a profitability ratio, not a market value ratio. Market value ratios include metrics such as price-to-earnings ratio, market-to-book ratio, and price-to-sales ratio.

Question 13

Internally generated funds for financing new asset investments come from common stock issues.

Accepted Answer

Internally generated funds come from retained earnings, not common stock issues. Common stock issues involve selling shares to external investors.

Question 14

It is possible that the results of financial statement analysis could reflect the non-financial operations of a firm.

Accepted Answer

Financial statement analysis can include examination of non-financial factors such as company culture, management style, and industry trends, which can ultimately impact financial performance.

Question 15

The interest coverage ratio indicates the ability of a firm to meet its contractual obligations for interest,leases,and debt principal repayments out of its operating income.

Accepted Answer

The interest coverage ratio specifically measures a company's ability to cover its interest obligations with its earnings before interest and taxes (EBIT), not including lease and debt principal repayments.

Question 16

The average collection period is calculated as the year-end accounts receivable divided by the net sales.

Accepted Answer

The average collection period is calculated as the year-end accounts receivable divided by the average daily credit sales.

Question 17

Asset management ratios indicate the ability to meet short-term obligations to creditors as they come due.

Accepted Answer

Asset management ratios actually measure how effectively a company is utilizing its assets to generate revenue and profits, as well as how efficiently it is managing and controlling its inventories, receivables, and payables. These ratios do not directly indicate the ability to meet short-term obligations to creditors.

Question 18

The price-to-book ratio measures the market's value of the firm relative to balance sheet equity.

Accepted Answer

The price-to-book ratio is calculated by dividing the market price per share by the book value per share. It is a valuation metric that measures the market's value of the firm relative to its equity on the balance sheet. A high price-to-book ratio indicates that the market values the company's equity highly compared to its book value, while a low price-to-book ratio indicates that the market may be undervaluing the firm.

Question 19

Higher levels of fixed costs result in lower levels of operating leverage.

Accepted Answer

Higher levels of fixed costs result in higher levels of operating leverage, as a larger percentage of costs are fixed and therefore do not change with changes in output or sales. This leads to larger changes in operating income with changes in sales volume.

Question 20

Financial planning begins with a sales forecast for one or more years.

Accepted Answer

Financial planning typically involves projecting future revenue, expenses, and profits, which starts with a sales forecast for one or multiple years.

Quiz 14: Financial Analysis and Long-Term Financial Planning