Question 1

Financial statement analysis:
A)is primarily used to identify account values that meet the normal standards.
B)is limited to internal use by a firm's managers.
C)provides useful information that can serve as a basis for forecasting future performance.
D)provides useful information to shareholders but not to debtholders.
E)is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods

Accepted Answer

Financial statement analysis provides useful information that can be used to forecast future performance. It involves examining financial statements and related data to make business decisions. The goal is to assess the financial health of a company by analyzing its financial statements such as balance sheets, income statements, and cash flow statements. By understanding these financial statements, companies can forecast future performance and drive long-term growth.

Question 2

You would like to borrow money three years from now to build a new building.In preparation for applying for that loan,you are in the process of developing target ratios for your firm.Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?
A)Times interest earned = 1.7; debt-equity ratio = 1.6
B)Times interest earned = 1.5; debt-equity ratio = 1.2
C)Cash coverage ratio = .8; debt-equity ratio = .8
D)Cash coverage ratio = 2.6; debt-equity ratio = .3
E)Cash coverage ratio = .5; total debt ratio = .2

Accepted Answer

The answer of You would like to borrow money three...

Question 3

Motor Works has total assets of $919,200,long-term debt of $264,500,total equity of $466,900,net fixed assets of $682,800,and sales of $1,021,500.The profit margin is 6.2 percent.What is the current ratio?
A).79
B).84
C)1.01
D)1.26
E)1.19

Accepted Answer

To find the current ratio, we first need to calculate the current assets and current liabilities. Total assets are $919,200, and net fixed assets are $682,800, so current assets = $919,200 - $682,800 = $236,400. Total equity is $466,900, and long-term debt is $264,500, so total liabilities = $919,200 - $466,900 = $452,300. Current liabilities = total liabilities - long-term debt = $452,300 - $264,500 = $187,800. Current ratio = current assets / current liabilities = $236,400 / $187,800 ≈ 1.26.

Question 4

Oil Field Services has net income of $120,400,total assets of $1,219,000,total equity of $694,100,and total sales of $1,521,700.What is the common-size percentage for the net income?
A)9.00 percent
B)7.91 percent
C)15.53 percent
D)12.10 percent
E)8.62 percent

Accepted Answer

The common-size percentage for net income is calculated by dividing the net income by total sales and then multiplying by 100. So, ($120,400 / $1,521,700) * 100 = 7.91 percent.

Question 5

All else held constant,which one of the following will decrease if a firm increases its net income?
A)Return on assets
B)Profit margin
C)Return on equity
D)Price-sales ratio
E)Price-earnings ratio

Accepted Answer

The answer of All else held constant,which one of the...

Question 6

Delmont Movers has a profit margin of 7.1 percent and net income of $63,700.What is the common-size percentage for the cost of goods sold if that expense amounted to $522,600 for the year?
A)12.19 percent
B)23.50 percent
C)53.25 percent
D)61.06 percent
E)58.25 percent

Accepted Answer

The answer of Delmont Movers has a profit margin of...

Question 7

A firm can increase its sustainable rate of growth by decreasing its:
A)profit margin.
B)dividends.
C)total asset turnover.
D)target debt-equity ratio.
E)equity multiplier

Accepted Answer

The sustainable rate of growth is the maximum rate at which a firm can grow without having to increase its debt-to-equity ratio. The formula for sustainable growth rate is: Sustainable Growth Rate = (Net Income / Total Equity) x (1 - Dividend Payout Ratio). Therefore, decreasing dividends will increase the sustainable growth rate by reducing the amount of net income paid out to shareholders, allowing the company to reinvest more in the business without increasing the debt-to-equity ratio.

Question 8

Which ratio was primarily designed to monitor firms with negative earnings?
A)Price-sales ratio
B)Market-to-book ratio
C)Profit margin
D)ROE
E)ROA

Accepted Answer

The price-sales ratio is primarily designed to monitor firms with negative earnings because it measures a company's stock price relative to its revenue, rather than its earnings. This ratio is often used for startups or young companies that are not yet profitable but have strong revenue growth potential.

Question 9

The sustainable growth rate is based on the premise that:
A)an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued.
B)no additional equity will be added to the firm.
C)the debt-equity ratio will be held constant.
D)the dividend payout ratio will be zero.
E)the dividend payout ratio will increase at a steady rate.

Accepted Answer

The sustainable growth rate is based on the premise that the debt-equity ratio will be held constant. This means that any increase in earnings will be reinvested in the firm, but the existing capital structure will be maintained. The other options, such as no additional equity being added to the firm (B) or a zero dividend payout ratio (D), may not be realistic assumptions for all firms.

Question 10

City Plumbing has inventory of $287,800,equity of $538,800,total assets of $998,700,and sales of $1,027,400.What is the common-size percentage for the inventory account?
A)28.01 percent
B)33.66 percent
C)53.42 percent
D)28.82 percent
E)31.68 percent

Accepted Answer

The answer of City Plumbing has inventory of $287,800,equity of...

Question 11

The DuPont identity can be used to help a financial manager determine the
I.degree of financial leverage used by a firm
II.operating efficiency of a firm
III.utilization rate of a firm's assets
IV.rate of return on a firm's assets
A)II and III only
B)I and III only
C)II, III, and IV only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

The answer of The DuPont identity can be used to...

Question 12

A firm has inventory of $46,500,accounts payable of $17,400,cash of $1,250,net fixed assets of $318,650,long-term debt of $109,500,and accounts receivable of $16,600.What is the common-size percentage of the equity?
A)70.60 percent
B)70.12 percent
C)66.87 percent
D)42.08 percent
E)68.75 percent

Accepted Answer

Common-size percentage of equity = (Total Assets - Total Liabilities) / Total Assets

Total Assets = Inventory + Net Fixed Assets + Accounts Receivable + Cash
Total Liabilities = Accounts Payable + Long-term Debt

Total Assets = $46,500 + $318,650 + $16,600 + $1,250 = $383,000
Total Liabilities = $17,400 + $109,500 = $126,900

Common-size percentage of equity = ($383,000 - $126,900) / $383,000 = 66.87%

Therefore, the answer is C, 66.87 percent.

Question 13

Donovan&rsquo;s would like to increase its internal rate of growth.Decreasing which one of the following will help the firm achieve its goal?
A)Return on assets
B)Net income
C)Retention ratio
D)Dividend payout ratio
E)Return on equity

Accepted Answer

The dividend payout ratio represents the portion of net income paid out to shareholders as dividends. By decreasing the dividend payout ratio, Donovan's would be retaining more earnings, which could be reinvested back into the business to fuel growth. This would in turn increase the firm's internal rate of growth.

Question 14

If a firm has a 100 percent dividend payout ratio,then the internal growth rate of the firm is:
A)zero percent.
B)100 percent.
C)equal to the ROA.
D)negative.
E)infinite

Accepted Answer

The internal growth rate of a firm can be calculated using the formula: Internal Growth Rate = (ROA x Retention Ratio) / (1 - ROA x Retention Ratio).
If the dividend payout ratio is 100 percent, then the retention ratio (1-dividend payout ratio) is zero. This makes the internal growth rate equal to zero percent.

Question 15

Outdoor Gear reduced its general and administrative costs this year.This cost improvement will increase which of the following ratios
I.Profit margin
II.Return on assets
III.Total asset turnover
IV.Return on equity
A)I and II only
B)I and III only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV

Accepted Answer

The answer of Outdoor Gear reduced its general and administrative...

Question 16

Which one of the following statements is correct?
A)Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business.
B)Peer group analysis is easier when seasonal firms have different fiscal years.
C)Peer group analysis is simplified when firms use varying methods of depreciation.
D)Comparing results across geographic locations is easier since all countries now use a common set of accounting standards.
E)Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory

Accepted Answer

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory. This is because the cost of goods sold and gross profit can be significantly impacted by different inventory accounting methods, such as first-in, first-out (FIFO) or last-in, first-out (LIFO). Thus, to accurately compare and analyze the financial statements of peer companies, adjustments need to be made to account for these differences in inventory accounting methods. The other options are either incorrect or not relevant to peer group analysis.

Question 17

Wilberton's has total assets of $537,800,net fixed assets of $412,400,long-term debt of $323,900,and total debt of $388,700.If inventory is $173,900,what is the current ratio?
A)2.01
B).52
C).84
D)1.18
E)1.94

Accepted Answer

Current assets = Total assets - Long-term debt = $537,800 - $323,900 = $213,900

Current liabilities = Total debt = $388,700

Current ratio = Current assets / Current liabilities = $213,900 / $388,700 = 1.94

Question 18

Which one of these statements is true concerning the price-earnings (PE)ratio?
A)A high PE ratio may indicate that a firm is expected to grow significantly.
B)A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings.
C)PE ratios are unaffected by the accounting methods employed by a firm.
D)The PE ratio is classified as a profitability ratio.
E)The PE ratio is a constant value for each firm

Accepted Answer

A high PE ratio is often seen as an indicator that investors are paying more for each dollar of earnings because they expect the firm to have significant growth potential in the future. Option B is incorrect as a PE ratio of 16 means that investors are willing to pay $16 for every $1 of current earnings. Option C is incorrect as the accounting methods employed by a firm can impact its reported earnings, which in turn affects its PE ratio. Option D is incorrect as the PE ratio is a valuation ratio, not a profitability ratio. Option E is incorrect as the PE ratio can fluctuate over time based on changes in stock price and earnings.

Question 19

A firm has sales of $811,000 for the year.The profit margin is 5.1 percent and the retention ratio is 56 percent.What is the common-size percentage for the dividends paid?
A)1.99 percent
B)2.86 percent
C)1.21 percent
D)2.24 percent
E)1.42 percent

Accepted Answer

The answer of A firm has sales of $811,000 for...

Question 20

Sweet Candies reduced its fixed assets this year without affecting the shop's operations,sales,or equity.This reduction will increase which of the following ratios?
I.Capital intensity ratio
II.Return on assets
III.Total asset turnover
IV.Return on equity
A)I and II only
B)II and III only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV

Accepted Answer

The reduction in fixed assets does not affect the shop's operations, sales, or equity, so it will not affect the Capital Intensity ratio (which measures the amount of fixed assets a company has relative to its sales). However, since the shop's operations and sales remain unchanged, the reduction in fixed assets will increase the Total Asset Turnover ratio (which measures how efficiently a company uses its assets to generate sales). The Return on Assets ratio (which measures how effectively a company uses its assets to generate profits) may also increase if the reduction in fixed assets leads to a lower depreciation expense. However, the reduction in fixed assets will not affect the Return on Equity ratio (which measures the return earned by shareholders on their investment in the company's equity). Therefore, choices II and III only are the best options.

Quiz 3: Working With Financial Statements

Financial statement analysis:

Motor Works has total assets of $919,200,long-term debt of $264,500,total equity of $466,900,net fixed assets of $682,800,and sales of $1,021,500.The profit margin is 6.2 percent.What is the current ratio?

Oil Field Services has net income of $120,400,total assets of $1,219,000,total equity of $694,100,and total sales of $1,521,700.What is the common-size percentage for the net income?

All else held constant,which one of the following will decrease if a firm increases its net income?

Delmont Movers has a profit margin of 7.1 percent and net income of $63,700.What is the common-size percentage for the cost of goods sold if that expense amounted to $522,600 for the year?

A firm can increase its sustainable rate of growth by decreasing its:

Which ratio was primarily designed to monitor firms with negative earnings?

The sustainable growth rate is based on the premise that:

City Plumbing has inventory of $287,800,equity of $538,800,total assets of $998,700,and sales of $1,027,400.What is the common-size percentage for the inventory account?

The DuPont identity can be used to help a financial manager determine the I.degree of financial leverage used by a firm II.operating efficiency of a firm III.utilization rate of a firm's assets IV.rate of return on a firm's assets

A firm has inventory of $46,500,accounts payable of $17,400,cash of $1,250,net fixed assets of $318,650,long-term debt of $109,500,and accounts receivable of $16,600.What is the common-size percentage of the equity?

Donovan’s would like to increase its internal rate of growth.Decreasing which one of the following will help the firm achieve its goal?

If a firm has a 100 percent dividend payout ratio,then the internal growth rate of the firm is:

Outdoor Gear reduced its general and administrative costs this year.This cost improvement will increase which of the following ratios I.Profit margin II.Return on assets III.Total asset turnover IV.Return on equity

Which one of the following statements is correct?

Wilberton's has total assets of $537,800,net fixed assets of $412,400,long-term debt of $323,900,and total debt of $388,700.If inventory is $173,900,what is the current ratio?

Which one of these statements is true concerning the price-earnings (PE) ratio?

A firm has sales of $811,000 for the year.The profit margin is 5.1 percent and the retention ratio is 56 percent.What is the common-size percentage for the dividends paid?

Sweet Candies reduced its fixed assets this year without affecting the shop's operations,sales,or equity.This reduction will increase which of the following ratios? I.Capital intensity ratio II.Return on assets III.Total asset turnover IV.Return on equity