Question 1

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

Accepted Answer

A healthy current ratio, which measures a company's ability to pay its short-term liabilities with its current assets, indicates that the company has enough current assets to cover its current liabilities. However, if the quick ratio, which measures the company's ability to pay its short-term liabilities with its most liquid assets, such as cash and accounts receivable, is unhealthy, it suggests that the company may have too much inventory, which is not easily convertible to cash, and is therefore negatively affecting its ability to pay its short-term debts.

Question 2

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

Accepted Answer

Both return on assets and return on equity are measures of a company's profitability. Return on assets measures the return earned on total assets, while return on equity measures the return earned on shareholder's equity.

Question 3

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

Accepted Answer

Amortization is the process of gradually reducing the value of an intangible asset over its useful life.

Question 4

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

Accepted Answer

The asset turnover ratio measures how efficiently a company uses its assets to generate sales, while the inventory turnover ratio measures how efficiently a company manages its inventory. Both ratios are considered efficiency ratios as they measure how well a company is utilizing its resources to generate revenue.

Question 5

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 commonly used liquidity ratios that assess a company's ability to meet its short-term financial obligations.

Question 6

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 directly show the value of its assets and liabilities. However, information from the income statement can be used to calculate certain financial ratios that can give insight into a firm's asset and liability positions.

Question 7

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

Accepted Answer

The inventory turnover ratio measures how many times inventory is sold and replaced over a period, while average days in inventory indicates how long inventory is held. Their product equals 365 days, representing a full year.

Question 8

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 shareholder's equity, while return on assets (ROA) is calculated as net income divided by total assets. As total assets always includes shareholder's equity, ROA will always be smaller than ROE.

Question 9

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

Accepted Answer

The current ratio includes inventory as part of current assets, while the quick ratio subtracts inventory from current assets.

Question 10

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 11

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

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. Therefore, the difference between current assets and current liabilities is used to determine net working capital.

Question 12

Market value added is the same as economic value added.

Accepted Answer

Market value added (MVA) and economic value added (EVA) are not the same. MVA measures the difference between a company's market value and the capital invested in it, while EVA measures the company's profits after subtracting the cost of capital.

Question 13

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

Accepted Answer

Both receivable turnover ratio and asset turnover ratio are measures of how efficiently a company is utilizing its assets to generate revenue. Receivable turnover ratio measures how quickly a company is able to collect payments from its customers, while asset turnover ratio measures how efficiently a company is able to use its assets (such as property, plant, and equipment) to generate sales. Therefore, both ratios are considered efficiency ratios.

Question 14

Residual income is another term for economic value added.

Accepted Answer

The answer of Residual income is another term for economic...

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 is calculated by subtracting the book value of a company's equity from its market value, so the statement is true.

Question 16

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

Accepted Answer

EVA (Economic Value Added) is a measure of a company's financial performance that calculates the net profit of the firm after adjusting it for the cost of capital. It is calculated as follows: EVA = Net Operating Profit After Taxes (NOPAT) - Capital Charge. Therefore, EVA takes into account the cost of capital and is a better measure of a company's profitability than just the net profit.

Question 17

The net working capital of a firm will decrease when unpaid bills from suppliers are later paid with cash.

Accepted Answer

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

Question 18

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 will decrease a firm's return on assets because it indicates that the company is not collecting cash for its sales as quickly, causing a decrease in its liquidity and potentially increasing bad debt expenses.

Question 19

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

Accepted Answer

Return on equity (ROE) is calculated by dividing net income by shareholder's equity, while return on capital (ROC) is calculated by dividing earnings before interest and taxes (EBIT) by total capital employed. When a firm has no debt, its total capital employed and shareholder's equity are the same. Therefore, ROE and ROC will also be the same.

Question 20

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 ratio indicates that the company is generating more income to cover its interest expense.

Quiz 4: Measuring Corporate Performance