Question 1

A relatively high price-earnings ratio indicates investors expect favorable future earnings.

Accepted Answer

A high price-earnings ratio suggests that investors are willing to pay a premium for a company's stock, which is often predicated on the expectation of strong future earnings growth. Therefore, a high P/E ratio can be an indication that investors expect favorable future earnings.

Question 2

A current ratio of greater than 1.0 would indicate that current assets exceed current liabilities.

Accepted Answer

A current ratio of greater than 1.0 means that current assets are larger than current liabilities, which is generally considered a good financial position for a company.

Question 3

In general,managers prefer expenses as a percent of net sales to increase over time.

Accepted Answer

Managers prefer expenses as a percent of net sales to increase over time because it indicates that the company is becoming more efficient in its operations. As a company grows, it should be able to generate more sales with the same or even lower expenses. This is because the company should be able to take advantage of economies of scale and other efficiencies that come with size.

Question 4

Most accounting computer programs,such as QuickBooks,provide common-size analysis reports.

Accepted Answer

QuickBooks and many other accounting software programs offer common-size analysis reports as a standard feature.

Question 5

The total assets dollar amount is typically used as the base for a common-size balance sheet analysis.

Accepted Answer

Common-size analysis involves expressing each item on the balance sheet as a percentage of a base figure. The total assets dollar amount is often used as the base for this type of analysis.

Question 6

If a company's return on assets is higher than its return on shareholders' equity,then it has positive financial leverage.

Accepted Answer

If a company's return on assets is higher than its return on shareholders' equity, it indicates that the company is using more debt or financial leverage to finance its assets. This means that the company has negative financial leverage, as it is relying more on debt to generate profits for its shareholders. Positive financial leverage occurs when the return on equity is higher than the return on assets, indicating that the company is generating higher profits with fewer assets and less debt.

Question 7

Return on assets is calculated as average total assets divided by net income.

Accepted Answer

Return on assets (ROA) is calculated by dividing net income by average total assets, not the other way around.

Question 8

The current ratio is the same as the quick ratio.

Accepted Answer

The current ratio includes all current assets while the quick ratio only includes liquid assets such as cash, marketable securities, and accounts receivable. Therefore, the two ratios are not the same.

Question 9

Most public companies present trend information in their annual reports.

Accepted Answer

Most public companies do present trend information in their annual reports as it helps shareholders and investors to analyze the company's financial performance over time.

Question 10

Belden Company has a profit margin ratio of 10%.This means that for every dollar of net sales the company makes,it generates ten dollars in net income.

Accepted Answer

A profit margin ratio of 10% means that for every dollar of net sales, the company generates 10 cents in net income, not 10 dollars.

Question 11

A trend percentage is calculated as the current year divided by the base year.

Accepted Answer

A trend percentage is calculated by dividing the current year's figure by the base year's figure and then multiplying by 100 to express it as a percentage.

Question 12

Times interest earned indicates the company's ability to cover its interest expense related to long-term debt with current period earnings..

Accepted Answer

Times interest earned (TIE) is a financial ratio that measures a company's ability to cover its interest expenses with its earnings. A higher TIE ratio indicates a greater ability of a company to meet its debt obligations.

Question 13

The debt to assets ratio is calculated as total assets divided by total liabilities.

Accepted Answer

The debt to assets ratio is calculated as total liabilities divided by total assets.

Question 14

Return on assets is a market valuation measure.

Accepted Answer

Return on assets (ROA) is a profitability measure that shows how efficiently a company is using its assets to generate earnings. It is calculated as net income divided by total assets. ROA is not a market valuation measure, as it does not reflect the market's assessment of a company's value. Market valuation measures include price-to-earnings ratio, price-to-book ratio, and market capitalization.

Question 15

A common-size analysis converts each line of financial statement data to an easily comparable amount measured in percent form.

Accepted Answer

A common-size analysis expresses each line item on a financial statement as a percentage of a base amount, such as total assets, total revenue, or total expenses. This allows for easier comparison among companies of different sizes or within the same company over time.

Question 16

The price-earnings ratio measures the premium investors are willing to pay for a company's stock relative to its earnings.

Accepted Answer

This statement is true. The price-earnings ratio, also known as the P/E ratio, is calculated by dividing a company's stock price by its earnings per share (EPS). It is used as a measure of how much investors are willing to pay for each dollar of a company's earnings. A high P/E ratio typically indicates that investors are optimistic about the company's future growth potential, while a low P/E ratio may suggest that the company is undervalued or facing challenges.

Question 17

Companies with higher inventory turnover ratios tend to have lower inventory costs,including lower inventory storage and insurance costs,than companies with lower inventory turnover ratios.

Accepted Answer

This statement is generally true. A higher inventory turnover ratio indicates that a company is selling its inventory quickly, which means it is holding less inventory for a shorter period of time. As a result, the company has less inventory to store and less inventory to insure, which can lead to lower inventory costs.

Question 18

If Company A had earnings per share of $4 and Company B had earnings per share of $3,then it is accurate to conclude that Company A was more profitable.

Accepted Answer

Earnings per share (EPS) is a measure of a company's profitability on a per-share basis, not its total profitability. A company with a higher EPS can have lower total earnings if it has fewer shares outstanding than another company. Profitability is better assessed through net income or other comprehensive profitability measures.

Question 19

In general,managers prefer the profit margin ratio to decrease over time.

Accepted Answer

Managers typically prefer to see an increase in the profit margin ratio over time, as this indicates that the company is able to generate more profit from its sales. A decrease in the profit margin ratio may indicate that the company is facing increased costs or decreased revenue, which can be a cause for concern.

Question 20

The quick ratio is a short-term liquidity ratio.

Accepted Answer

The quick ratio, also known as the acid-test ratio, measures a company's ability to meet its short-term obligations using its most liquid assets. It is considered a short-term liquidity ratio as it evaluates a company's ability to pay its short-term debts quickly.

Quiz 13: How Do Managers Use Financial and Nonfinancial Performance Measures