Question 1

A total asset turnover measure of 0.84 means that a firm has $0.84 in
A)sales for every $1 in total assets.
B)total assets for every $1 in sales.
C)total assets for every $1 in total equity.
D)total assets for every $1 in cash.
E)long-term assets for every $1 in total assets.

Accepted Answer

A total asset turnover measure of 0.84 means that for every $1 in total assets, the firm generates $0.84 in sales. Therefore, the correct option is A, which states that the firm has $0.84 in sales for every $1 in total assets.

Question 2

Which one of the following statements is correct concerning ratio analysis?
A)Ratios cannot be used for comparison purposes over extended periods of time.
B)Ratios do not address the problem of size differences among firms.
C)Only a very limited number of ratios can be used for analytical purposes.
D)Each ratio has a specific formula that is used consistently by all analysts.
E)A single ratio is often computed differently by different individuals.

Accepted Answer

Ratios can be computed differently by different individuals due to variations in definitions, interpretations, or data sources, leading to different results.

Question 3

Which cash coverage ratio would a lender prefer its borrower have?
A)−1.5
B)−0.5
C)0
D)0.5
E)1.5

Accepted Answer

A positive cash coverage ratio indicates that the borrower's cash flows are more than sufficient to cover its debt obligations, which is favorable from the lender's perspective. Therefore, a lender would prefer its borrower to have a cash coverage ratio of at least 1.0, and preferably greater than 1.0. Choice (E) has a cash coverage ratio of 1.5, which is the highest among the given options and therefore the best choice from the lender's perspective.

Question 4

On a common-size income statement,depreciation will be
A)omitted since it is a noncash expense.
B)added back to convert net income to cash flows.
C)expressed as a percentage of total assets.
D)expressed as a percentage of sales.
E)expressed as a percentage of gross fixed assets.

Accepted Answer

Depreciation is a noncash expense that reduces net income but does not affect cash flow. However, it is still included in a common-size income statement and expressed as a percentage of sales to show its impact on profitability.

Question 5

If Textile Cloth stockholders want to know how much net profit the firm is making on a percentage basis on their investment in that firm,the shareholders should refer to the
A)profit margin.
B)return on assets.
C)return on equity.
D)equity multiplier.
E)EV multiple.

Accepted Answer

Return on Equity (ROE) measures the amount of net profit relative to shareholders' equity, indicating how effectively the company is generating profits from the investments made by its shareholders. It's a key indicator for stockholders to assess the profitability of their investment in the firm.

Question 6

A common-size balance sheet will express accounts receivable as a percentage of
A)sales.
B)current assets.
C)net working capital.
D)total assets.
E)total owners' equity.

Accepted Answer

The answer of A common-size balance sheet will express accounts...

Question 7

All of the following are financial leverage ratios except the
A)current ratio.
B)cash coverage ratio.
C)total debt ratio.
D)times interest earned ratio.
E)equity multiplier.

Accepted Answer

The current ratio measures a company's ability to pay its short-term debts with its current assets and does not involve any debt or leverage. The other answer choices all use debt or interest expenses to analyze a company's leverage.

Question 8

Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10?
A)It takes the firm 36.5 days to pay its creditors.
B)It takes the firm 36.5 days to sell its inventory and collect payment from the sale.
C)It takes the firm 36.5 days to collect payment for a sale.
D)The firm has 10 times more in accounts receivable than it does in cash.
E)It takes an average of 10 days to collect payment from the firm's customers.

Accepted Answer

Accounts receivable turnover measures how quickly a company collects payment from its customers. A higher turnover ratio indicates that the company is collecting payments more quickly. A turnover ratio of 10 means that the company is collecting payment every 36.5/10 = 3.65 days, on average. Therefore, statement C is correct: it takes the firm 36.5 days to collect payment for a sale.

Question 9

A supplier,who requires payment this week,should be most concerned about which one of its customer's ratios?
A)Current ratio
B)Debt-equity ratio
C)Cash ratio
D)Quick ratio
E)Total debt ratio

Accepted Answer

The cash ratio is the most relevant metric for a supplier requiring payment in the short term, as it measures a company's ability to pay off short-term liabilities with its cash and cash equivalents, directly indicating the customer's immediate liquidity and ability to make payments.

Question 10

Assume J.K.Lumber increases its operating efficiency such that costs decrease while sales remain constant.As a result,given all else constant,the
A)equity multiplier will decrease.
B)return on assets will decrease.
C)profit margin will decline.
D)return on equity will increase.
E)total asset turnover will increase.

Accepted Answer

If J.K. Lumber increases its operating efficiency and decreases costs, it can lead to an increase in return on equity (ROE) as net income increases. The formula for ROE is net income divided by equity, so if net income increases, ROE increases. Additionally, all other options are incorrect as they are not directly affected by changes in operating efficiency while keeping sales constant.

Question 11

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as
A)asset management ratios.
B)liquidity measures.
C)leverage ratios.
D)profitability ratios.
E)utilization ratios.

Accepted Answer

Liquidity measures focus on a firm's ability to meet its short-term financial obligations, such as paying bills and debts as they become due. Therefore, financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as liquidity measures.

Question 12

From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?
A)Times interest earned ratio
B)Cash coverage ratio
C)Cash ratio
D)Quick ratio
E)Debt-equity ratio

Accepted Answer

The cash coverage ratio measures a firm's ability to pay interest on its debts by analyzing the amount of cash available to cover interest expenses. This ratio considers both operating income and non-operating income when calculating the numerator, which is the cash available to pay interest. Therefore, it provides a more accurate picture of a firm's ability to pay interest than the times interest earned ratio, which only considers operating income.

Question 13

The lower a firm's inventory turnover,the
A)longer it takes the firm to collect payment on its sales.
B)faster the firm collects payment on its sales.
C)faster the firm sells its inventory.
D)longer inventory sits on the firm's shelves.
E)smaller the amount of inventory held by the firm.

Accepted Answer

The lower a firm's inventory turnover, the longer inventory sits on the firm's shelves. This means that inventory is not being sold as quickly as it should be, which can lead to potential issues such as increased storage costs and potentially obsolete inventory.

Question 14

The quick ratio is calculated as
A)current assets divided by current liabilities.
B)current assets minus inventory,divided by current liabilities.
C)net working capital divided by current liabilities.
D)cash on hand divided by current liabilities.
E)current liabilities divided by current assets.

Accepted Answer

The quick ratio, also called the acid-test ratio, is a measure of a company's ability to meet its short-term obligations with its most liquid assets. It excludes inventory from current assets since inventory may not be easily converted into cash in the short term. The formula for the quick ratio is (Current Assets - Inventory) / Current Liabilities. Therefore, the correct answer is B, current assets minus inventory divided by current liabilities.

Question 15

If Brewster's produces a return on assets of 14 percent and also a return on equity of 14 percent,then the firm
A)has no net working capital.
B)is using its assets as efficiently as possible.
C)has no debt of any kind.
D)also has a current ratio of 14.
E)has an equity multiplier of 1.4.

Accepted Answer

When a firm's return on assets equals its return on equity, it indicates that the firm has no debt, as the equity multiplier (which reflects financial leverage) is 1.

Question 16

A common-size income statement expresses dividends as 3.6 percent.This means that dividends represent 3.6 percent of
A)net income.
B)total assets.
C)sales.
D)taxable earnings.
E)total owners' equity.

Accepted Answer

A common-size income statement expresses all items as a percentage of sales. Therefore, if dividends are expressed as 3.6 percent, it means that they represent 3.6 percent of the company's total sales.

Question 17

EBITDA is the abbreviation for earnings before
A)insurance,taxes,depreciation,and accounting expenses.
B)interest,taxes,depreciation,and accrued expenses.
C)insurance,taxes,depreciation,and accrued expenses.
D)interest,taxes,depreciation,and amortization.
E)interest,taxes,and deferred accounting overhead.

Accepted Answer

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's operating performance and is used to compare profitability between companies and industries.

Question 18

A firm has a total debt ratio of 0.47.This means the firm has $0.47 in debt for every
A)$.53 in equity.
B)$1.47 in total assets.
C)$1.53 in total assets.
D)$1 in total equity.
E)$1.47 in total equity.

Accepted Answer

Total debt ratio is calculated by dividing total debt by total assets. Therefore, if the total debt ratio is 0.47, it means that $0.47 is debt for every $1 in total assets. To find the equity ratio, we subtract the total debt ratio from 1: 1 - 0.47 = 0.53. This means that for every $1 in total assets, the firm has $0.53 in equity. Therefore, the correct answer is A.

Question 19

A decrease in which one of the following accounts increases a firm's current ratio as well as its quick ratio?
A)Accounts payable
B)Cash
C)Accounts receivable
D)Inventory
E)Fixed assets

Accepted Answer

A decrease in accounts payable means the company is paying off its debts and increasing the amount of cash it has available. This increase in cash will improve the current ratio and quick ratio, as these ratios measure a company's ability to pay off its current liabilities.

Question 20

Which one of these best measures a firm's long-run ability to meet its obligations?
A)Cash ratio
B)Total asset turnover
C)EV multiple
D)Return on equity
E)Equity multiplier

Accepted Answer

The equity multiplier measures a firm's use of debt financing to support its assets. A higher equity multiplier indicates a higher level of debt, which can increase financial risk but also potentially increase returns. Therefore, a firm with a stable or increasing equity multiplier over time indicates that it is able to meet its obligations in the long run.

Quiz 3: Financial Statements Analysis and Financial Models

A total asset turnover measure of 0.84 means that a firm has $0.84 in

Which one of the following statements is correct concerning ratio analysis?

Which cash coverage ratio would a lender prefer its borrower have?

On a common-size income statement,depreciation will be

If Textile Cloth stockholders want to know how much net profit the firm is making on a percentage basis on their investment in that firm,the shareholders should refer to the

A common-size balance sheet will express accounts receivable as a percentage of

All of the following are financial leverage ratios except the

Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10?

A supplier,who requires payment this week,should be most concerned about which one of its customer's ratios?

Assume J.K.Lumber increases its operating efficiency such that costs decrease while sales remain constant.As a result,given all else constant,the

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

From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?

The lower a firm's inventory turnover,the

The quick ratio is calculated as

If Brewster's produces a return on assets of 14 percent and also a return on equity of 14 percent,then the firm

A common-size income statement expresses dividends as 3.6 percent.This means that dividends represent 3.6 percent of

EBITDA is the abbreviation for earnings before

A firm has a total debt ratio of 0.47.This means the firm has $0.47 in debt for every

A decrease in which one of the following accounts increases a firm's current ratio as well as its quick ratio?

Which one of these best measures a firm's long-run ability to meet its obligations?