Question 1

The difference between the current and quick ratios is that inventory has been subtracted from current assets.

Accepted Answer

The current ratio includes inventory in current assets, while the quick ratio subtracts inventory from current assets.

Question 2

Market value added is the same as economic value added.

Accepted Answer

Market value added refers to the amount by which a company's market value has increased as a result of its investments and operations, while economic value added is a measure of a company's financial performance that calculates the amount of value created by the company's investments after accounting for the cost of financing those investments. While the two concepts are related, they are not the same thing.

Question 3

The asset turnover ratio and inventory turnover ratio are both efficiency ratios.

Accepted Answer

The asset turnover ratio measures the efficiency of a company's use of its assets to generate sales, while the inventory turnover ratio measures how efficiently a company is managing its inventory by indicating how many times inventory has been sold and replaced in a given period. Both ratios are considered efficiency ratios.

Question 4

Other things equal,an increase in average accounts receivable will increase a firm's return on assets.

Accepted Answer

An increase in average accounts receivable means that customers are taking longer to pay, which ties up cash flow and reduces the firm's liquidity. This can also lead to an increase in bad debt expense. Both of these factors can decrease a firm's return on assets.

Question 5

Return on assets is always a larger number than the return on equity.

Accepted Answer

Return on equity (ROE) is calculated as net income divided by shareholders' equity, while return on assets (ROA) is calculated as net income divided by total assets. As a result, ROE is typically a higher percentage than ROA because it only considers the profitability of the company's investment made by shareholders, not those made by creditors.

Question 6

The net working capital to total assets ratio is always a larger number than the current ratio.

Accepted Answer

The net working capital to total assets ratio can be smaller than the current ratio depending on the specific values of net working capital and total assets.

Question 7

ROE is equal to ROA when the firm has no debt.

Accepted Answer

Return on Equity (ROE) is a ratio that indicates the amount of net income returned as a percentage of shareholders' equity. Return on Assets (ROA) is a ratio that indicates the amount of net income returned as a percentage of total assets. When a firm has no debt, its total assets and total equity will be the same, which means that ROE and ROA will also be the same. However, when debt is present, ROE will be higher than ROA due to the financial leverage effect.

Question 8

The income statement of a firm shows the value of its assets and liabilities over a specified period of time.

Accepted Answer

The income statement of a firm shows its revenues, expenses, and net income or loss over a specified period of time. It does not provide information on the value of its assets and liabilities.

Question 9

Receivables turnover ratio and asset turnover ratio are both efficiency ratios.

Accepted Answer

Receivables turnover ratio and asset turnover ratio are both efficiency ratios used to measure how effectively a company is using its assets to generate revenue. Receivables turnover ratio measures how quickly a company collects its outstanding debts from customers, while asset turnover ratio measures how efficiently a company is using its assets to generate revenue.

Question 10

The inventory turnover ratio times the average days in inventory equals 365.

Accepted Answer

This is the formula for calculating the number of days it takes to sell inventory. The inventory turnover ratio measures how many times a company sells its inventory during a period, while the average days in inventory measures the average number of days it takes for inventory to be sold. When these two numbers are multiplied together, the result is 365, which represents a full year.

Question 11

A healthy current ratio and an unhealthy quick ratio may be caused by excess inventory.

Accepted Answer

A healthy current ratio indicates that a company has enough current assets to cover its current liabilities, which includes inventory. However, an unhealthy quick ratio indicates that a company may not have enough liquid assets (i.e. assets that can be easily converted to cash) to cover its current liabilities. Excess inventory can decrease the quick ratio because it is not easily converted to cash. Therefore, it is possible for a company to have a healthy current ratio due to excess inventory, while still having an unhealthy quick ratio.

Question 12

Net working capital is determined from the difference between current assets and current liabilities.

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. Therefore, the statement is true.

Question 13

The reduction in value over time of intangible assets is known as amortization.

Accepted Answer

Amortization refers to the systematic reduction in the value of intangible assets such as patents, trademarks, copyrights, etc. over their useful life.

Question 14

The higher the times interest earned ratio,the higher the interest expense.

Accepted Answer

The higher the times interest earned ratio, the lower the interest expense. This is because a higher times interest earned ratio indicates that the company has enough earnings to cover its interest expense multiple times over, making it less risky for lenders to lend to the company and resulting in lower interest rates.

Question 15

Market value added is the difference between the market value of the firm's equity and its book value.

Accepted Answer

Market value added (MVA) is a financial performance metric that calculates the difference between the current market value of a firm's equity and the total amount of capital that has been invested in the company over time (represented by its book value). MVA is used by investors and analysts to measure the value that a firm has created for its shareholders over and above the original amount of capital that was invested in the business.

Question 16

EVA is the net profit of the firm adjusted for the cost of capital.

Accepted Answer

EVA (Economic Value Added) is a financial metric that calculates the net profit of a firm after deducting the cost of capital. It is used to measure the company's financial performance and shareholder value creation. Therefore, the statement "EVA is the net profit of the firm adjusted for the cost of capital" is true.

Question 17

The net working capital of a firm will decrease when accrued wages are paid with cash.

Accepted Answer

The answer of The net working capital of a firm...

Question 18

Return on assets and return on equity are both profitability ratios.

Accepted Answer

Return on assets (ROA) and return on equity (ROE) are both profitability ratios as they are used to measure the profitability of a company. ROA measures the company's ability to generate profits from its total assets, whereas ROE measures the company's ability to generate profits from its shareholder's equity.

Question 19

Increasing leverage will always act to increase a firm's ROE.

Accepted Answer

Increasing leverage (using more debt) can potentially boost a firm's ROE by magnifying returns on equity, but it can also increase financial risk and interest expense, resulting in a decline in ROE. Therefore, increasing leverage does not always lead to an increase in ROE.

Question 20

Net working capital to total assets and current ratio are both liquidity ratios.

Accepted Answer

Both net working capital to total assets and current ratio are measures of a company's ability to meet its short-term financial obligations and are therefore considered liquidity ratios.

Quiz 4: Measuring Corporate Performance