Question 1

Company A has current assets of $42 billion and current liabilities of $31 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

Accepted Answer

Company A has a current ratio of 1.35 ($42 billion / $31 billion), while Company B has a current ratio of 1.5 ($2.7 billion / $1.8 billion). A higher current ratio indicates better ability to cover short-term liabilities, so Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Question 2

A firm's gross profit is equal to the difference between sales revenues and the costs associated with those sales.

Accepted Answer

This is the definition of gross profit.

Question 3

Use the table for the question(s)below. 
-If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2017 and 2018?

Accepted Answer

If the inventory levels have increased significantly from 2017 to 2018, it may indicate that the company is having difficulties selling its product, leading to unsold stock.

Question 4

Corporate taxes are considered to be an operating expense on the income statement.

Accepted Answer

Corporate taxes are not classified as an operating expense; they are recorded separately on the income statement, typically after operating income, as a component of income before net income.

Question 5

Luther Corporation Consolidated Balance Sheet 30 June 2017 and 2018 (in $ millions)
 
-Refer to the balance sheet above. If on 30 June 2017 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?

Accepted Answer

The answer of Luther Corporation Consolidated Balance Sheet 30 June...

Question 6

Convex Industries has inventories of $150 million, current assets of $1.05 billion, and current liabilities of $400 million. What is its quick ratio?

Accepted Answer

The quick ratio is calculated as (Current Assets - Inventories) / Current Liabilities. For Convex Industries, this is ($1.05 billion - $150 million) / $400 million = $900 million / $400 million = 2.25.

Question 7

Use the table for the question(s)below. 
-Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 25 million shares outstanding, what is its EPS in 2018?

Accepted Answer

The answer of Use the table for the question(s)below. 
-Consider...

Question 8

GenCorp has a total debt of $140 million and shareholders' equity of $50 million. It also has 25 million shares outstanding, with a market price of $3.50 per share. What is GenCorp's market debt-equity ratio?

Accepted Answer

Market value of equity = 25 million shares x $3.50 per share = $87.5 million

Market value of debt = Total debt = $140 million

Market debt-equity ratio = Market value of debt / Market value of equity = $140 million / $87.5 million = 1.60

Question 9

'Gross profit' is calculated as

Accepted Answer

Gross profit is the profit earned after deducting the cost of goods sold from the revenue earned. Therefore, Gross Profit is calculated as Total Sales – Cost of Sales. Option A correctly calculates the gross profit. Option B and C both deduct additional expenses such as Selling, general and administrative expenses, and Depreciation and Amortization, which are not included in gross profit calculation.

Question 10

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

Accepted Answer

The debt-equity or equity multiplier ratio is the best choice to measure the financial health of a firm by assessing its leverage. This ratio compares the amount of debt a company has taken on to the amount of equity it holds. A higher ratio may indicate higher risk, as it means the company has taken on more debt.

Question 11

Use the table for the question(s)below. 
-If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2017 and 2018?

Accepted Answer

The quick ratio has decreased from 1.5 in 2017 to 1.2 in 2018, indicating that the company has a lower ability to meet short-term obligations with its liquid assets. This suggests an increased risk that the company will experience a cash shortfall in the near future.

Question 12

A company has a share price of $24.50 and $118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

Accepted Answer

The answer of A company has a share price of...

Question 13

Use the table for the question(s)below. 
-Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp has 6 million shares outstanding, and its managers and employees have stock options for 1 million shares, what is its diluted EPS in 2018?

Accepted Answer

To calculate the diluted EPS, we first need to consider the total potential shares outstanding, which includes both the current shares outstanding and the shares that could be created from stock options. In this case, that's 6 million shares outstanding + 1 million from stock options = 7 million shares in total. Without the specific income statement details, we can't calculate the exact net income. However, to find the diluted EPS, you divide the net income by the total potential shares outstanding. Given the options, the only logical choice that represents a decrease in EPS due to the dilution from the additional 1 million shares is $2.00, as it would be lower than the basic EPS (which is not provided but implied to be higher).

Question 14

Which of the following statements regarding the income statement is INCORRECT?

Accepted Answer

The income statement shows the flow of earnings and expenses over a period of time, usually a fiscal quarter or year, not at a given point in time.

Question 15

Use the table for the question(s)below. 
-If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in shareholders' equity between 2017 and 2018?

Accepted Answer

The changes in shareholders' equity indicate that the company had a net loss in 2018, as indicated by the decrease in retained earnings. Therefore, choice B is the best answer. Choices A and C are not supported by the information provided in the table, and choice D is not a suitable answer as some conclusions can be drawn from the given data.

Question 16

Luther Corporation Consolidated Balance Sheet 30 June 2017 and 2018 (in $ millions)
 
-Refer to the balance sheet above. If on 30 June 2017, Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's enterprise value?

Accepted Answer

The answer of Luther Corporation Consolidated Balance Sheet 30 June...

Question 17

What is a firm's 'net income'?

Accepted Answer

Net income is the profit generated by a firm over a given period, which is calculated as the difference between the revenue generated by the firm and all costs, taxes, and expenses incurred by the firm during that period. It is considered the last or 'bottom' line of the income statement as it represents the final amount of profit that the firm has earned after accounting for all of its expenses. Therefore, all of the answer choices are correct.

Question 18

Use the table for the question(s)below. 
-If the above balance sheet is for a retail company, how has the company's leverage changed between 2017 and 2018?

Accepted Answer

A significant increase in leverage means the company is using more debt compared to its equity to finance its assets. Without specific numbers, the correct choice indicates a scenario where the company has increased its debt levels or reduced its equity, increasing its financial leverage.

Question 19

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

Accepted Answer

The company's market value ($80 million, calculated as 20 million shares at $4 each) is less than its book value ($128 million), indicating investors might believe the company's assets are not likely to be as profitable, hence option D is correct.

Question 20

The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.

Accepted Answer

The income statement is a financial statement that reports a company's revenues and expenses over a specific period, typically a quarter or a year. It also calculates the net income or earnings of the company by subtracting the total expenses from the total revenues. Therefore, the statement provides a summary of a company's performance in terms of profitability during the period covered.

Quiz 2: Introduction to Financial Statement Analysis

Company A has current assets of $42 billion and current liabilities of $31 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

A firm's gross profit is equal to the difference between sales revenues and the costs associated with those sales.

Use the table for the question(s) below. -If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2017 and 2018?

Corporate taxes are considered to be an operating expense on the income statement.

Luther Corporation Consolidated Balance Sheet 30 June 2017 and 2018 (in $ millions) -Refer to the balance sheet above. If on 30 June 2017 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?

Convex Industries has inventories of $150 million, current assets of $1.05 billion, and current liabilities of $400 million. What is its quick ratio?

Use the table for the question(s) below. -Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 25 million shares outstanding, what is its EPS in 2018?

GenCorp has a total debt of $140 million and shareholders' equity of $50 million. It also has 25 million shares outstanding, with a market price of $3.50 per share. What is GenCorp's market debt-equity ratio?

'Gross profit' is calculated as

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

Use the table for the question(s) below. -If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2017 and 2018?

A company has a share price of $24.50 and $118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

Use the table for the question(s) below. -Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp has 6 million shares outstanding, and its managers and employees have stock options for 1 million shares, what is its diluted EPS in 2018?

Which of the following statements regarding the income statement is INCORRECT?

Use the table for the question(s) below. -If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in shareholders' equity between 2017 and 2018?

Luther Corporation Consolidated Balance Sheet 30 June 2017 and 2018 (in $ millions) -Refer to the balance sheet above. If on 30 June 2017, Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's enterprise value?

What is a firm's 'net income'?

Use the table for the question(s) below. -If the above balance sheet is for a retail company, how has the company's leverage changed between 2017 and 2018?

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.