Question 1

The current ratio is measured as:
A) current assets minus current liabilities.
B) current assets divided by current liabilities.
C) current liabilities minus inventory, divided by current assets.
D) cash on hand divided by current liabilities.
E) current liabilities divided by current assets.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations using its current assets. It is calculated by dividing current assets by current liabilities. Option A, C, D and E are incorrect because they either do not involve the current ratio formula or include incorrect components.

Question 2

Ratios that measure a firm's financial leverage are known as ________ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) market value

Accepted Answer

Long-term solvency ratios measure a firm's ability to meet its long-term financial obligations, which includes measuring financial leverage. Ratios such as debt-to-equity ratio and interest coverage ratio are used to assess a company's long-term solvency and financial leverage.

Question 3

The cash ratio is measured as:
A) current assets divided by current liabilities.
B) current assets minus cash on hand, divided by current liabilities.
C) current liabilities plus current assets, divided by cash on hand.
D) cash on hand plus inventory, divided by current liabilities.
E) cash on hand divided by current liabilities.

Accepted Answer

The cash ratio is a measure of a company's ability to pay off its current liabilities using only its cash and cash equivalents. Therefore, the ratio is calculated by dividing the cash on hand by the current liabilities. Option E represents this calculation.

Question 4

The financial ratio days' sales in inventory is measured as:
A) inventory turnover plus 365 days.
B) inventory times 365 days.
C) inventory plus cost of goods sold, divided by 365 days.
D) 365 days divided by the inventory.
E) 365 days divided by the inventory turnover.

Accepted Answer

Days' sales in inventory is calculated by dividing the number of days in a year (365) by inventory turnover. This ratio indicates the average number of days it takes for a company to sell its inventory.

Question 5

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) market value

Accepted Answer

Asset management ratios, such as inventory turnover, accounts receivable turnover, and total asset turnover, evaluate how well a company is using its assets to generate revenue. Long-term solvency ratios measure a firm's ability to meet long-term debt obligations, whereas short-term solvency ratios assess a firm's ability to meet its short-term obligations. Profitability ratios, on the other hand, measure a firm's ability to generate profits from its operations, while market value ratios gauge investor sentiment towards a company by comparing market price to financial metrics such as earnings, book value, or dividends.

Question 6

The equity multiplier ratio is measured as total:
A) equity divided by total assets.
B) equity plus total debt.
C) assets minus total equity, divided by total assets.
D) assets plus total equity, divided by total debt.
E) assets divided by total equity.

Accepted Answer

The equity multiplier ratio is calculated by dividing total assets by total equity. This helps investors calculate the amount of financing that a company has relied upon for its assets. Thus, the correct answer is E, assets divided by total equity.

Question 7

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) market value

Accepted Answer

Short-term solvency ratios, also known as liquidity ratios, measure a company's ability to meet its short-term financial obligations. These ratios assess a company's ability to pay its bills and debts in the short term without putting too much strain on its cash flow. Examples of short-term solvency ratios include the current ratio and the quick ratio.

Question 8

The inventory turnover ratio is measured as:
A) total sales minus inventory.
B) inventory times total sales.
C) cost of goods sold divided by inventory.
D) inventory times cost of goods sold.
E) inventory plus cost of goods sold.

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. It indicates how many times a company's inventory is sold and replaced over a specific period of time. Choice C is the only option that includes the cost of goods sold and inventory in the ratio formula.

Question 9

The debt-equity ratio is measured as total:
A) equity minus total debt.
B) equity divided by total debt.
C) debt divided by total equity.
D) debt plus total equity.
E) debt minus total assets, divided by total equity.

Accepted Answer

The debt-equity ratio is calculated by dividing total debt by total equity, so option C is the correct choice.

Question 10

The financial ratio days' sales in receivables is measured as:
A) receivables turnover plus 365 days.
B) accounts receivable times 365 days.
C) accounts receivable plus sales, divided by 365 days.
D) 365 days divided by the receivables turnover.
E) 365 days divided by the accounts receivablE.

Accepted Answer

The financial ratio days' sales in receivables measures the average number of days that it takes for a company to collect payment from its customers. It is calculated by dividing 365 days by the accounts receivable turnover ratio. Therefore, choice D (365 days divided by the receivables turnover) is the correct measurement.

Question 11

The financial ratio measured as earnings before interest and taxes,plus depreciation,divided by interest expense,is the:
A) cash coverage ratio.
B) debt-equity ratio.
C) times interest earned ratio.
D) gross margin.
E) total debt ratio.

Accepted Answer

The financial ratio described is the cash coverage ratio, which measures a company's ability to pay interest expenses with its earnings before interest, taxes, and depreciation.

Question 12

Projected future financial statements are called:
A) plug statements.
B) pro forma statements.
C) reconciled statements.
D) aggregated statements.
E) None of these.

Accepted Answer

Projected future financial statements are called pro forma statements. They are used for financial planning and forecasting purposes and are based on assumptions about future business performance.

Question 13

The quick ratio is measured as:
A) current assets divided by current liabilities.
B) cash on hand plus current liabilities, divided by current assets.
C) current liabilities divided by current assets, plus inventory.
D) current assets minus inventory, divided by current liabilities.
E) current assets minus inventory minus current liabilities.

Accepted Answer

The quick ratio, also known as the acid-test ratio, measures a company's ability to meet its short-term obligations using only its most liquid assets. The formula for calculating the quick ratio is: (Current Assets - Inventory) / Current Liabilities. Therefore, Choice D is the correct answer as it represents this formula. The other choices do not reflect the correct calculation of the quick ratio.

Question 14

The financial ratio measured as earnings before interest and taxes,divided by interest expense is the:
A) cash coverage ratio.
B) debt-equity ratio.
C) times interest earned ratio.
D) gross margin.
E) total debt ratio.

Accepted Answer

The times interest earned ratio measures a company's ability to meet its debt obligations by comparing its earnings before interest and taxes (EBIT) to its interest expenses.

Question 15

Relationships determined from a firm's financial information and used for comparison purposes are known as:
A) financial ratios.
B) comparison statements.
C) dimensional analysis.
D) scenario analysis.
E) solvency analysis.

Accepted Answer

Financial ratios are relationships between different financial data sets that allow for comparison purposes. They are commonly used to evaluate a firm's financial health, profitability, liquidity, and efficiency.

Question 16

One key reason a long-term financial plan is developed is because:
A) the plan determines your financial policy.
B) the plan determines your investment policy.
C) there are direct connections between achievable corporate growth and the financial policy.
D) there is unlimited growth possible in a well-developed financial plan.
E) None of these.

Accepted Answer

A long-term financial plan is developed to establish a financial policy that aligns with the achievable corporate growth. This policy ensures that the business can successfully meet its long-term objectives and goals. The financial policy outlines the company's financial priorities, which may include investment decisions, cost management, and funding sources. By having a long-term plan in place, a company can make critical financial decisions with more confidence and security.

Question 17

A ________ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets,respectively.
A) tax reconciliation statement
B) statement of standardization
C) statement of cash flows
D) common-base year statement
E) common-size statement

Accepted Answer

A common-size statement standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively. This allows for easy comparison of financial statements across companies and time periods. The other options, such as tax reconciliation statement, statement of standardization, statement of cash flows, and common-base year statement do not perform this specific function.

Question 18

The receivables turnover ratio is measured as:
A) sales plus accounts receivable.
B) sales divided by accounts receivable.
C) sales minus accounts receivable, divided by sales.
D) accounts receivable times sales.
E) accounts receivable divided by sales.

Accepted Answer

The receivables turnover ratio is calculated by dividing the net credit sales by the average accounts receivable balance during a particular period of time. This ratio measures the efficiency of a company's collections department in collecting its outstanding receivables. Therefore, the correct formula is sales divided by accounts receivable. Choice B is the only option that matches this formula.

Question 19

The percentage of sales method:
A) requires that all accounts grow at the same rate.
B) separates accounts that vary with sales and those that do not vary with sales.
C) allows the analyst to calculate how much financing the firm will need to support the predicted sales level.
D) Both requires that all accounts grow at the same rate; and separates accounts that vary with sales and those that do not vary with sales.
E) Both separates accounts that vary with sales and those that do not vary with sales; and allows the analyst to calculate how much financing the firm will need to support the predicted sales level.

Accepted Answer

The percentage of sales method separates accounts that vary with sales and those that do not vary with sales, and allows the analyst to calculate how much financing the firm will need to support the predicted sales level. It does not require that all accounts grow at the same rate.

Question 20

The financial ratio measured as total assets minus total equity,divided by total assets,is the:
A) total debt ratio.
B) equity multiplier.
C) debt-equity ratio.
D) current ratio.
E) times interest earned ratio.

Accepted Answer

The total debt ratio is calculated as (Total Assets - Total Equity) / Total Assets, which measures the proportion of a company's assets that are financed by debt.

Quiz 3: Financial Statements Analysis and Financial Models

The current ratio is measured as:

Ratios that measure a firm's financial leverage are known as ________ ratios.

The cash ratio is measured as:

The financial ratio days' sales in inventory is measured as:

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios.

The equity multiplier ratio is measured as total:

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios.

The inventory turnover ratio is measured as:

The debt-equity ratio is measured as total:

The financial ratio days' sales in receivables is measured as:

The financial ratio measured as earnings before interest and taxes,plus depreciation,divided by interest expense,is the:

Projected future financial statements are called:

The quick ratio is measured as:

The financial ratio measured as earnings before interest and taxes,divided by interest expense is the:

Relationships determined from a firm's financial information and used for comparison purposes are known as:

One key reason a long-term financial plan is developed is because:

A ________ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets,respectively.

The receivables turnover ratio is measured as:

The percentage of sales method:

The financial ratio measured as total assets minus total equity,divided by total assets,is the: