Question 1

Assume you are a banker who has loaned money to a firm,but that firm is now facing increased competition and reduced cash flows.Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?
A) current ratio
B) debt-to-equity ratio
C) times-interest-earned ratio
D) times-burden-covered ratio
E) None of the above.

Accepted Answer

D

Question 2

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
A) asset turnover and control
B) financial leverage
C) coverage
D) profitability
E) None of the above.

Accepted Answer

Asset turnover ratios measure how efficiently a firm uses its assets to generate sales, while control ratios measure how efficiently a firm manages its costs and expenses.

Question 3

Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014.The firm's current asset accounts remained constant.Given this information,which one of the following statements must be true?
A) The total asset turnover rate increased.
B) The days' sales in receivables increased.
C) The inventory turnover rate increased.
D) The fixed asset turnover decreased.
E) The collection period decreased.

Accepted Answer

E

Question 4

Which of these ratios,or levers of performance,are the determinants of ROE?
I.profit margin
II.financial leverage
III.times interest earned
IV.asset turnover
A) I and IV only
B) II and IV only
C) I,II,and IV only
D) I,II,and III only
E) I,III,and IV only

Accepted Answer

ROE (Return on Equity) is determined by three main factors: profit margin (how much profit is generated from sales), financial leverage (the use of borrowed funds to increase the return on equity), and asset turnover (how efficiently assets are used to generate sales). Times interest earned is a measure of a company's ability to meet its interest payments, which does not directly determine ROE.

Question 5

An inventory turnover ratio of 10 means that,on average,items are held in inventory for 10 days.

Accepted Answer

An inventory turnover ratio of 10 means that the entire inventory is sold and replaced 10 times in a given period (usually a year), not that items are held in inventory for 10 days on average. The inventory holding period can be calculated by dividing the number of days in the period by the inventory turnover ratio. So, if the period is a year (365 days), the inventory holding period for a company with an inventory turnover ratio of 10 would be 36.5 days on average.

Question 6

The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

Accepted Answer

The times-interest-earned ratio measures a company's ability to meet its interest payments, while the times-burden-covered ratio measures a company's ability to cover all fixed commitments, such as interest payments, principal payments, and lease payments. Since the times-interest-earned ratio only looks at interest payments, it is typically higher than the times-burden-covered ratio, which takes into account all fixed commitments. Therefore, the statement is true.

Question 7

A company's price-to-earnings ratio is always equal to one minus its earnings yield.

Accepted Answer

The correct formula is P/E ratio = 1/earnings yield, not 1 minus earnings yield. Therefore, the statement is false.

Question 8

All else equal,an increase in a company's asset turnover will decrease its ROE.

Accepted Answer

An increase in a company's asset turnover generally indicates more efficient use of its assets to generate sales, which can lead to an increase in Return on Equity (ROE) if all else remains equal, as it suggests the company is generating more revenue per dollar of assets.

Question 9

Klamath Corporation has asset turnover of 3.5,a profit margin of 5.2%,and a current ratio of 0.5.What is Klamath Corporation's return on equity?
A) 8.7%
B) 9.1%
C) 18.2%
D) Insufficient information to find ROE.

Accepted Answer

The given information (asset turnover, profit margin, and current ratio) does not directly allow us to calculate the Return on Equity (ROE) without additional data such as the equity amount or the debt-to-equity ratio.

Question 10

Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets?
A) current ratio
B) debt-to-equity
C) retention
D) asset turnover
E) return on assets

Accepted Answer

Asset turnover ratio identifies the amount of sales generated for every $1 in assets. It is calculated by dividing revenue by total assets. A higher asset turnover ratio indicates that a company is using its assets more efficiently to generate revenue.

Question 11

At the end of 2014,Stacky Corp.had $500,000 in liabilities and a debt-to-assets ratio of 0.5.For 2014 Stacky had an asset turnover of 3.0.What were annual sales for Stacky in 2014?
A) $333,333
B) $1,200,000
C) $1,800,000
D) $3,000,000

Accepted Answer

Liabilities/Assets = 0.5 = $500,000/$1,000,000
So Assets = $1,000,000
Then,Sales/$1,000,000 = 3
So sales = $3,000,000

Question 12

Which one of the following statements is correct?
A) If the debt-to-assets ratio is greater than 0.50,then the debt-to-equity ratio must be less than 1.0.
B) Long-term creditors would prefer the times-interest-earned ratio be 1.4 rather than 1.5.
C) The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.
D) To realize the best risk and reward profile,financial leverage should be maximized.
E) None of the above.

Accepted Answer

The assets-to-equity ratio is calculated as 1 plus the debt-to-equity ratio, which reflects the relationship between total assets and shareholders' equity.

Question 13

All else equal,a firm would prefer to have a higher gross margin.

Accepted Answer

A higher gross margin means that a firm is earning more revenue per unit of product sold, which can lead to higher profits and financial stability. Therefore, all else equal, a firm would prefer to have a higher gross margin.

Question 14

A times-interest-earned ratio of 3.5 indicates that the firm:
A) pays 3.5 times its earnings in interest expense.
B) has interest expense equal to 3.5% of EBIT.
C) has interest expense equal to 3.5% of net income.
D) has EBIT equal to 3.5 times its interest expense.

Accepted Answer

A times-interest-earned ratio of 3.5 means that the firm has EBIT (earnings before interest and taxes) equal to 3.5 times its interest expense. This indicates that the firm's operating income is significantly higher than its interest expense, which is a positive sign for creditors and investors.

Question 15

Breakers Bay Inc.has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level.Assume that both the cost per unit and the selling price per unit also remained constant.All else held constant,how will this accomplishment be reflected in the firm's financial ratios?
A) decrease in the fixed asset turnover rate
B) decrease in the financial leverage ratio
C) increase in the inventory turnover rate
D) increase in the days' sales in inventory
E) decrease in the total asset turnover rate

Accepted Answer

The increase in the amount of goods sold while holding the inventory level constant means that the inventory turnover rate will increase. This indicates that the company is efficiently managing its inventory, which is generally viewed positively by investors and lenders. The other answer choices are not directly impacted by the given scenario.

Question 16

In comparison to industry averages,Okra Corp.has a low inventory turnover,a high current ratio,and an average quick ratio.Which of the following would be the most reasonable inference about Okra Corp.?
A) Its current liabilities are too low.
B) Its cost of goods sold is too low.
C) Its cash and securities balance is too low.
D) Its inventory level is too high.

Accepted Answer

A low inventory turnover indicates that the company is not selling its inventory fast enough, which could indicate that its inventory level is too high. A high current ratio indicates that the company has a lot of current assets relative to its current liabilities, which could be due to a high inventory level or a low level of current liabilities. An average quick ratio suggests that the company has a moderate level of liquid assets to cover its current liabilities. Neither A, B, nor C are supported by the information given.

Question 17

A company's return on assets will always equal or exceed its profit margin.

Accepted Answer

Return on assets (ROA) and profit margin are different financial metrics. Profit margin measures how much out of every dollar of sales a company actually keeps in earnings, while ROA indicates how efficiently a company's management is using its assets to generate earnings. A company's profit margin does not necessarily equal or exceed its ROA, as they are calculated differently and represent different aspects of financial health.

Question 18

Which of the following ratios are measures of a firm's liquidity?
I.fixed asset turnover ratio
II.current ratio
III.debt-equity ratio
IV.acid test
A) I and III only
B) II and IV only
C) III and IV only
D) I,II,and III only
E) I,III,and IV only

Accepted Answer

The current ratio and acid test (also known as quick ratio) are both measures of a firm's liquidity. The current ratio is a measure of a company's ability to meet short-term debt obligations, while the acid test measures a company's ability to pay off current liabilities without relying on the sale of inventory.

The fixed asset turnover ratio and debt-equity ratio are not measures of liquidity. The fixed asset turnover ratio is a measure of a company's efficiency in using its fixed assets to generate sales, while the debt-equity ratio measures a company's financial leverage.

Question 19

The most popular yardstick of financial performance among investors and senior managers is the:
A) profit margin.
B) return on equity.
C) return on assets.
D) times-burden-covered ratio.
E) earnings yield.

Accepted Answer

Return on equity (ROE) is a widely used measure of financial performance that indicates how well a company is generating profits from the shareholders' investments. It is calculated by dividing net income by shareholder's equity. ROE is preferred by investors and senior managers because it shows how efficiently a company is using its equity to generate profits. Companies with higher ROE are considered to be more profitable and attractive to investors.

Question 20

Return on assets can be calculated as profit margin times asset turnover.

Accepted Answer

Return on assets (ROA) is calculated as net income divided by total assets. Net income can be broken down into profit margin (net income divided by total revenue) and asset turnover (total revenue divided by total assets). Therefore, ROA can be calculated as profit margin times asset turnover.

Quiz 2: Evaluating Financial Performance

Assume you are a banker who has loaned money to a firm,but that firm is now facing increased competition and reduced cash flows.Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014.The firm's current asset accounts remained constant.Given this information,which one of the following statements must be true?

Which of these ratios,or levers of performance,are the determinants of ROE? I.profit margin II.financial leverage III.times interest earned IV.asset turnover

An inventory turnover ratio of 10 means that,on average,items are held in inventory for 10 days.

The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

A company's price-to-earnings ratio is always equal to one minus its earnings yield.

All else equal,an increase in a company's asset turnover will decrease its ROE.

Klamath Corporation has asset turnover of 3.5,a profit margin of 5.2%,and a current ratio of 0.5.What is Klamath Corporation's return on equity?

Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets?

At the end of 2014,Stacky Corp.had $500,000 in liabilities and a debt-to-assets ratio of 0.5.For 2014 Stacky had an asset turnover of 3.0.What were annual sales for Stacky in 2014?

Which one of the following statements is correct?

All else equal,a firm would prefer to have a higher gross margin.

A times-interest-earned ratio of 3.5 indicates that the firm:

In comparison to industry averages,Okra Corp.has a low inventory turnover,a high current ratio,and an average quick ratio.Which of the following would be the most reasonable inference about Okra Corp.?

A company's return on assets will always equal or exceed its profit margin.

Which of the following ratios are measures of a firm's liquidity? I.fixed asset turnover ratio II.current ratio III.debt-equity ratio IV.acid test

The most popular yardstick of financial performance among investors and senior managers is the:

Return on assets can be calculated as profit margin times asset turnover.