Analyzing Financial Statements Chapter 4 Test Bank Docx

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 4 Analyzing Financial Statements

1) Financial statement analysis can help us determine why a firm's cash flows are increasing or decreasing.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

2) Trend analysis is a method of analyzing financial data to discover changes in a firm's performance over time.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

3) Stockholders of a firm are primarily concerned about the value of their shares but not about how much cash they expect to receive from dividends and/or capital appreciation over time.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

4) The shareholders of a firm are most interested in knowing if the firm is generating enough cash flows to meet all of its required obligations.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

5) Financial statements reflect managers' decisions regarding financing, investment, and working capital.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

6) A financial statement analysis conducted over a period of time is called trend analysis.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

7) A typical way in which a common-size income statement is constructed is by dividing all expense items by net income reported in an income statement.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

8) Common-size balance sheets are those that are prepared with each item reflecting the common measures of a firm's revenues.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

9) A balance sheet can be standardized by expressing each asset and liability as a percentage of total assets.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

10) The most frequent method used for creating a common-size balance sheet is to divide each of the accounts by fixed assets.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

11) Liquidity ratios illustrate the firm's ability to generate sufficient cashflow from operations to meet its short-term obligations without putting the firm in financial difficulty.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

12) Efficiency ratios or asset turnover ratios (such as inventory and asset turnover ratios) measure how efficiently a firm uses its assets.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

13) Leverage ratios measure the extent to which a firm uses equity rather than debt financing and show the firm's ability to meet its short-term obligations without making the firm insolvent.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

14) A firm's current ratio changed from 1.4 times in the previous year to 1.6 times in the current year. Based on this information, we can conclude that the firm's liquidity has improved.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

15) A company can improve its liquidity by increasing its accounts payable, while maintaining the other accounts constant.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

16) A company can increase its equity multiplier by increasing its debt-to-equity ratio, holding everything else constant in the balance sheet.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

17) When a firm finances the purchases of additional inventory with accounts payable, the firm's quick ratio should decrease.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

18) Asset turnover ratios are useful for managers in identifying how efficient management is in using current and long-term assets to generate sales.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

19) A firm increased its days' sales outstanding from 35 days to 43 days. This implies the firm is more efficient in converting credit sales into cash.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

20) Total asset turnover is more relevant for service-industry firms, while the fixed asset turnover ratio is more relevant for manufacturing-industry firms.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

21) Financial leverage refers to the use of preferred stocks in a firm's capital structure.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

22) The equity multiplier can be determined by dividing a firm's total equity by its total assets.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

23) The higher the times interest earned ratio, the greater the ability the firm has in meeting its interest payment obligations.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

24) For a given share price of a firm's stock, a lower EPS will lead to a lower price-to-earnings ratio.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

25) A firm with no debt will have its return on assets (ROA) equal to its return on equity (ROE).

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

26) One of the three major shortcomings of return on equity is that it ignores risk.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

27) For a given level of after-tax income, the lower the level of equity a firm has, the higher the return on equity its shareholders will earn.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

28) A firm's ROE can be determined by the firm's ROA and its use of financial leverage.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

29) The DuPont equation relates a firm's net profit margin, total asset turnover ratio, and equity multiplier with its return on equity.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

30) The DuPont equation shows the combined impact of a firm's efficiency in operation and in asset and debt utilizations on its return on equity.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

31) Firms with a lower return on assets (ROA) but higher leverage will always have a lower return on equity (ROE) than firms with a higher return on assets (ROA) but lower leverage.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

32) In a peer group analysis, the benchmark for financial statement analysis for a particular firm is the performance of a competitor that is roughly the same size and that offers a similar range of products.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

33) To establish a benchmark for an industry group analysis, a comparison group is formed by choosing firms that are larger than the firm being compared.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

34) The Standard Industrial Classification (SIC) codes are four-digit numbers in which the last two digits describe the type of business or industry the firm is engaged in.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

35) The three different perspectives on financial statement analysis are those of the:

A) managers, regulators, and bondholders.

B) managers, shareholders, and creditors.

C) regulators, shareholders, and creditors.

D) bondholders, creditors, and regulators.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

36) Shareholders analyze financial statements in order to:

A) determine the ability of the firm to pay interest rather than dividends.

B) perform their fiduciary responsibilities to management.

C) determine the best board structure for the firm.

D) determine the total cash dividend distribution they are likely to receive.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

37) Bondholders primarily analyze financial statements to:

A) assess the cash flows that the firm will generate from its financing activities.

B) determine the firm's profitability.

C) focus on the value of the company stock.

D) determine the likelihood that the firm will have sufficient cash to pay their interest and principal at maturity.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

38) The creditors of a firm analyze financial statements so that they can better understand the firm's:

A) commitment to paying interest rather than principal on debt.

B) ability to generate sufficient cash flows to meet its legal obligations first and still have sufficient cash flows to pay dividends.

C) ability to meet only its long-term debt obligations.

D) ability to meet its short-term obligations.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

39) A firm's management analyzes financial statements so that they can:

A) get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements.

B) focus on profitability, dividend, capital appreciation, and return on investment.

C) get more stock options.

D) get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements, and focus on profitability, dividend, capital appreciation, and return on investment.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

40) Anyone analyzing a firm's financial statements should:

A) ignore trends, because the future is unpredictable.

B) ignore benchmarks because firms are unique.

C) not consider competitors performance and focus on the firm.

D) use audited financial statements.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

41) An individual analyzing a firm's financial statements should do all of the following except:

A) use unaudited financial statements.

B) perform a trend analysis.

C) perform a benchmark analysis.

D) compare the firm's performance to that of its direct competitors.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

42) Which of the following would be unrelated to analyzing a firm's trend over time?

A) The relative ratios of the major competitors

B) The sales growth

C) The control of the firm's expenses

D) The efficient use of the firm's assets

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

43) Which of the following is NOT true of common-size balance sheets?

A) Each asset and liability item on the balance sheet is standardized by dividing it by total assets.

B) Balance sheet accounts are represented as percentages of total assets.

C) Each asset and liability item on the balance sheet is standardized by dividing it by sales.

D) Common-size balance sheets allow us to make meaningful comparisons between the balance sheets of two firms that are different in size.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

44) Which of the following is NOT true of common-size income statements?

A) Each income statement item is standardized by dividing it by total assets.

B) Income statement accounts are represented as percentages of net sales.

C) Each income statement item is standardized by dividing it by net sales.

D) Common-size income statements analysis is a specialized application of ratio analysis.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

45) Common-size financial statements:

A) are not related to ratio analysis.

B) prevent comparisons between different sized firms.

C) are prepared by having each financial statement item expressed as a percentage of total equity.

D) are prepared by having each financial statement item expressed as a percentage of some base number, such as total assets or total revenues.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

46) Which of the following is the best advantage of a common-size income statement?

A) It is very useful to assess how effectively a firm collected its accounts receivable.

B) It reveals a great deal of information about the adequacy of a firm's net working capital.

C) It can tell the analyst a great deal about a firm's efficiency and profitability.

D) It reveals how effectively a firm has increased its assets.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

47) Which of the following is the best advantage of a common-size balance sheet?

A) It is very useful to assess how effectively a firm collected its accounts receivable.

B) It reveals a great deal of information about how the firm is controlling its expenses.

C) It can tell the shareholders how dividends have changed over time.

D) It reveals how the firm has managed its tax payments.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

48) Which of the following is true of ratio analysis?

A) Ratios are not generally used to analyze profitability.

B) The choice of the scale has no affect on the information garnered from the ratio.

C) Ratios are not adjustable for different types of firms.

D) A ratio is computed by dividing one balance sheet item or income statement item by another.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

49) Which of the following actions would increase a firm's quick ratio?

A) Offer price reductions that would enable the firm to sell some of its inventory.

B) Issue new common stocks and use the proceeds to increase inventories.

C) Speed up the collection of receivables and use the cash generated to increase inventories.

D) Use some of its cash to purchase additional inventories.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

50) A company's current ratio is 2.0. Which of the following actions would lower the company's current ratio, assuming everything else remains the same?

A) Borrow using short-term notes payable and use all of the proceeds to reduce accruals.

B) Borrow using short-term notes payable and use part of the proceeds to reduce long-term debt.

C) Use cash to reduce accruals.

D) Use cash to reduce accounts payable.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

51) You observe that a firm's ROE has increased from the previous year, but both its profit margin and equity multiplier are below the previous year's levels. Which of the following statements is CORRECT?

A) Its total assets turnover must be higher than the previous year.

B) Its return on assets must be lower than the previous year.

C) Its TIE ratio must be higher than the previous year.

D) Its total assets turnover must be lower than the previous year.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

52) Which of the following is NOT true of liquidity ratios?

A) They measure the ability of a firm to meet short-term obligations with short-term assets without putting the firm in financial trouble.

B) There are two commonly used ratios to measure liquidity—current ratio and quick ratio.

C) For manufacturing firms, quick ratios will tend to be much higher than current ratios.

D) The higher the liquidity ratios, the more liquid the firm and the better its ability to pay its short-term bills.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

53) Which of the following is TRUE about the quick ratio?

A) The quick ratio is calculated by dividing the least liquid of current assets by current liabilities.

B) Service firms that tend not to carry too much inventory will have significantly higher quick ratios than current ratios.

C) Inventory, not being very liquid, is subtracted from total current assets to determine the most liquid assets for a quick ratio calculation.

D) Quick ratios will tend to be much larger than current ratio for manufacturing firms or other industries that have a lot of inventory.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

54) Which of the following does NOT change a firm's current ratio?

A) The firm collects its accounts receivables.

B) The firm purchases inventory by taking a short-term loan.

C) The firm pays down its accounts payables.

D) The firm accrues expenses by the end of the reporting period.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

55) All else being equal, which of the following will decrease a firm's current ratio?

A) A decrease in the net fixed assets

B) A decrease in depreciation expense

C) An increase in accounts payable

D) An increase in prepaid expense

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

56) Which of the following is NOT true about the inventory turnover ratio?

A) It is calculated by dividing inventory by cost of goods sold.

B) It measures how many times the inventory is turned over into saleable products.

C) The more times a firm can turn over its inventory, the better.

D) Too high or too low an inventory turnover could be a warning sign.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

57) Which one of the following statements is NOT true?

A) The accounts receivable turnover ratio measures how quickly the firm collects its credit sales.

B) One ratio that measures the efficiency of a firm's collection policy is days' sales outstanding.

C) The more days that it takes a firm to collect its receivables, the more efficient the firm is.

D) Days' sales outstanding measures how many days a firm takes to convert its receivables into cash.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

58) Which of the following statements is NOT true of the asset turnover ratio?

A) Asset turnover ratio measures the dollar amount of sales per dollar of assets that the firm has.

B) The fixed assets turnover ratio is less significant for equipment-intensive manufacturing industry firms than the total assets turnover ratio.

C) The higher the total asset turnover, the more efficiently management is using total assets.

D) The ratio is quite useful in identifying the inefficient use of current and long-term assets.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

59) Which of the following statements is correct?

A) The lower the level of a firm's debt, the higher the firm's leverage.

B) The lower the level of a firm's debt, the lower the firm's equity multiplier.

C) The lower the level of a firm's debt, the higher the firm's equity multiplier.

D) The tax benefit from using debt financing reduces a firm's risk.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

60) If firm A has a higher debt-to-equity ratio than firm B, then:

A) firm A has a lower equity multiplier than firm B.

B) firm B has a lower equity multiplier than firm A.

C) firm B has higher financial leverage than firm A.

D) firm B does not have any financial leverage.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

61) Which one of the following statements is NOT correct?

A) A leveraged firm is riskier than a firm that has no leverage.

B) A leveraged firm is less risky than a firm that has no leverage.

C) A firm that uses debt magnifies the return on equity ratio.

D) A firm that does not use debt incurs an opportunity cost of increasing the value of shares.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

62) Coverage ratios, like times interest earned and cash coverage ratio, allow a firm's:

A) management to assess how well they meet short-term liabilities.

B) shareholders to assess how well the firm will meet its short-term liabilities.

C) creditors to assess how well the firm will meet its interest obligations.

D) creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

63) Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of $378,454. What is the quick ratio? Round your final answer to two decimal places.

A) 1.65

B) 0.64

C) 1.01

D) 0.99

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

64) Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm's current ratio? Round your final answer to two decimal places.

A) 1.83

B) 0.73

C) 1.67

D) 0.55

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

65) Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of $197,333. What is the firm's quick ratio? Round your final answer to two decimal places.

A) 0.72

B) 1.20

C) 1.92

D) 0.84

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

66) The firm's current ratio now is 2.1. The firm plans to acquire additional inventory to meet a surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement, to maintain current ratio of 1.75 if their total current assets equal $3.5 million? Round your final answer to the nearest dollar.

A) $0

B) $777,777

C) $1 million

D) $437,500

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

67) A company's current ratio is 0.5. Everything else held constant, which of the following actions would increase the company's current ratio?

A) Borrow long-term debts to reduce accounts payable

B) Use cash to reduce accruals

C) Use cash to reduce accounts payable

D) Use cash to reduce short-term notes payable

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

68) Pedro & Co. has $720,000 of assets and is all-equity financed. The new CFO wants to use enough debt to raise the total debt to total capital ratio to 40 percent, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

A) $273,600

B) $288,000

C) $302,400

D) $317,520

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

69) Pedro & Son's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?

A) 14.82%

B) 15.60%

C) 16.42%

D) 17.28%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

70) If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its accounts receivable turnover? Round your final answer to two decimal places.

A) 0.34 times

B) 1.78 times

C) 2.95 times

D) 2.50 times

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

71) If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of accounts receivables? Round your final answer to the nearest dollar.

A) $881,234

B) $13,403,567

C) $1,340,357

D) $81,234

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

72) Gateway Corp. has an inventory turnover ratio of 5.6. What is its days' sales in inventory? Round your final answer to nearest day.

A) 65 days

B) 64 days

C) 61 days

D) 57 days

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

73) Viera Industries has net sales of $200,000, accounts receivable of $18,500, and gives its customers 25 days to pay. The industry average DSO is 27 days based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to change to the industry average, and if it earns 8.0 percent on any cash freed-up by this change, how would that affect its net income assuming other things are held constant?

A) $241.45

B) $254.16

C) $267.54

D) $298.08

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

74) An all-equity new firm is developing its business plan. It has $615,000 of common equity and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5 percent, but the bank requires it to have a TIE of at least 4.0. The firm will use debt and common equity for financing. What is the maximum debt to capital ratio (measured as debt/total common equity) the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt to capital ratio.)

A) 44.15%

B) 46.47%

C) 48.92%

D) 51.49%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

75) Water Inc.'s net sales last year were $315,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the total assets turnover ratio down to the industry average without affecting sales. By how much will the assets need to be reduced to bring the total assets turnover ratio to the industry average, holding sales constant?

A) $201,934

B) $212,563

C) $223,750

D) $234,938

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

76) Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and raise the return on equity to 15.0 percent. What profit margin would the firm need in order to achieve the 15 percent ROE, holding everything else constant?

A) 9.45%

B) 9.93%

C) 10.42%

D) 10.94%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

77) Jet, Inc., has net sales of $712,478 and accounts receivable of $167,435. What are the firm's accounts receivable turnover and days' sales outstanding? Round your accounts receivable turnover to two decimal places and days' sales outstanding to nearest day.

A) 0.24 times; 79 days

B) 4.26 times; 86 days

C) 5.20 times; 61 days

D) 2.50 times; 146 days

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

78) Ellicott City Manufacturers, Inc., has sales of $6,344,210, and a gross profit margin of 67.3 percent. What is the firm's cost of goods sold? Round your final answer to the nearest dollar.

A) $2,074,557

B) $2,745,640

C) $274,560

D) $4,269,653

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

79) Deutsche Bearings has total sales of $9,745,923, inventories of $2,237,435, cash and equivalents of $755,071, and days' sales outstanding of 49 days. If the firm's management wanted its days' sales outstanding (DSO) to be 35 days, by how much will the accounts receivable have to change? Round your final answer to two decimal places.

A) $373,816.23

B) -$373,816.23

C) -$379,008.12

D) $379,008.12

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

80) Trident Corp., has debt of $3,350,000 with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times interest earned ratio? Round your final answer to nearest number.

A) 13 times

B) 12 times

C) 11 times

D) 10 times

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

81) Sectors, Inc., has EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio? Round your final answer to two decimal places.

A) 15.42 times

B) 18.34 times

C) 14.15 times

D) 11.80 times

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

82) Fahr Company has depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833. What are the times interest earned and cash coverage ratios for this company? Round your final answers to one decimal place.

A) 19.4 times; 12.7 times

B) 17.3 time; 11.4 times

C) 13.8 times; 19.4 times

D) 12.5 times; 18.3 times

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

83) Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? Round your final answer to two decimal places.

A) 0.60

B) 1.47

C) 1.74

D) 3.47

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

84) What will be a firm's equity multiplier given a debt ratio of 0.45? Round your final answer to two decimal places.

A) 1.82

B) 1.28

C) 2.22

D) 2.43

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

85) Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio? Round your final answers to two decimal places.

A) 2.31; 1.31, respectively

B) 1.75; 0.75, respectively

C) 0.75; 1.75, respectively

D) 1.31; 2.31, respectively

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

86) RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.

A) 4.87 times

B) 8.12 times

C) 5.17 times

D) 6.23 times

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

87) Perez Electronics Corp. has reported that its net income for the year is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price? Round your intermediate and final answer to two decimal places.

A) $34.05

B) $3.68

C) $11.20

D) $36.80

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

88) Juventus Corp. has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's return on assets (ROA)? Round intermediate calculations to nearest dollar and percentage answer to one decimal place.

A) 15.6%

B) 25.6%

C) 27.4%

D) 34.3%

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

89) GenTech Pharma has reported the following information:

Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36%

What are the firm's profit margin and equity multiplier? Round your profit margin answer to one decimal place, and equity multiplier answer to two decimal places.

A) 7.1%; 0.53

B) 7.1%; 1.90

C) 3.72%; 0.53

D) 3.72%; 1.90

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

90) Tigger Corp. has reported the financial results for the year. Based on the information given, calculate the firm's gross profit margin and operating profit margin. Round your final answers to one decimal place.

Net sales = $4,156,700 Net income = $778,321

Cost of goods sold = $2,715,334 EBIT = $1,356,098

A) 34.7%; 32.6%, respectively

B) 32.6%; 18.7%, respectively

C) 34.7%; 18.7%, respectively

D) 32.6%; 34.7%, respectively

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: FSA

AICPA: Measurement

91) Andrade Corp. has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.

A) 7.1%

B) 34.7%

C) 28.1%

D) 43.2%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

92) Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

A) The quick ratio more accurately reflects a firm's profitability.

B) It leaves out the least liquid current asset from the numerator of the ratio.

C) The current ratio does not include accounts receivable.

D) It measures how "quickly" cash flows through the firm.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

93) In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30 percent and has total assets of $3,000,000. What is Photon's return on equity? (Round your percentage answer to one decimal place.)

A) 13.1%

B) 14.6%

C) 22.5%

D) 18.7%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

94) Which of the following is true of a firm that has no debt in its capital structure?

A) Its return on equity (ROE) will be greater than its return on asset (ROA).

B) Its return on equity (ROE) will be lesser than its return on asset (ROA).

C) Its return on equity (ROE) will be equal to its return on asset (ROA).

D) Its return on equity (ROE) will not be related to return on asset (ROA).

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

95) Which of the following is true of a firm that has both debt and equity?

A) Its return on equity (ROE) will be greater than its return on asset (ROA).

B) Its return on equity (ROE) will be lesser than its return on asset (ROA).

C) Its return on equity (ROE) will be equal to its return on asset (ROA).

D) Its return on equity (ROE) will not be related to return on asset (ROA).

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

96) Which one of the following statements is NOT correct?

A) The DuPont system is based on two equations that relate a firm's return on asset (ROA) and return on equity (ROE).

B) The DuPont system is a set of related ratios that links the items of balance sheet and the income statement.

C) Both management and shareholders can use this tool to understand the factors that drive a firm's return on equity (ROE).

D) The DuPont system includes the current ratio.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

97) The DuPont equation shows that a firm's return on equity (ROE) is determined by three factors:

A) net profit margin, total asset turnover, and the equity multiplier.

B) operating profit margin, return on assets (ROA), and the total assets turnover.

C) net profit margin, total asset turnover, the return on assets (ROA).

D) return on assets (ROA), total assets turnover, and the equity multiplier.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: FSA

AICPA: Measurement

98) Which of the following is a criticism of a policy of maximizing the firm's return on equity (ROE)?

A) ROE is based on pre-tax earnings.

B) ROE does consider risk.

C) ROE is based on cash flows.

D) ROE ignores the size of the initial investment as well as future cash flows.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

99) Which one of the following is NOT an advantage of using return on equity (ROE) as a goal?

A) ROE is highly correlated with shareholder wealth maximization.

B) ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses.

C) ROE does not consider risk.

D) Leverage connects ROA and ROE.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

100) Last year Viera Corp had $155,000 of assets, $305,000 of sales, $20,000 of net income, and a debt to total capital ratio of 37.5 percent. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, total invested capital, sales, and the debt to capital ratio would not be effected. By how much would the cost reduction improve the ROE?

A) 11.51%

B) 12.11%

C) 12.75%

D) 13.42%

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

101) Last year Gray Corp. had net sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total debt to total-capital ratio was 45.0 percent. The firm uses only debt and common equity as financing. Based on the DuPont equation, what was the ROE?

A) 13.8%

B) 14.5%

C) 15.2%

D) 16.0%

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

102) Covent Gardens Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets to be $200,000, and its tax rate to be 35 percent. Under Plan A it would use 25 percent debt and 75 percent common equity. The interest rate on the debt would be 8.8 percent, but under a contract with existing bondholders the times interest earned (TIE) ratio would have to be maintained at or above 4.5. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?

A) 3.45%

B) 2.59%

C) 15.85%

D) 13.26%

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

103) Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53 times, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income? Round your final answer to two decimal places.

A) $75,281.25

B) $514,250.00

C) $51,425.00

D) $7,528.10

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

104) Sorenstam Corp. has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA. Round your percentage answer to two decimal places.

A) 6.23%

B) 4.53%

C) 7.48%

D) 5.79%

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

105) Which one of the following statements about trend analysis is NOT correct?

A) A firm's historical performance determines the benchmark for trend analysis.

B) Trend analysis allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.

C) Trend analysis uses the Standard Industrial Classification (SIC) System to benchmark firms.

D) A ratio value that is changing typically prompts the financial manager to sort out the issues surrounding the change.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

106) Peer group analysis can be performed by:

A) management choosing a set of firms that are similar in size or sales, or who compete in the same market.

B) using the average ratios of this peer group, which would then be used as the benchmark.

C) identifying firms in the same industry that are grouped by size, sales, and product lines in order to establish benchmark ratios.

D) Only A and B relate to peer group analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

107) Which of the following is NOT a method of "benchmarking"?

A) Conducting an industry group analysis

B) Evaluating a single firm's performance at a point in time

C) Considering similar ratios between firms

D) Identifying a group of firms that compete with the company being analyzed

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

108) Last year Camden Corp. had sales of $500,000, operating costs of $450,000, and year-end assets (which is equal to its total invested capital) of $395,000. The debt to total capital ratio was 17 percent, the interest rate on the debt was 7.5 percent, and the firm's tax rate was 35 percent. The new CFO wants to see how the ROE would have been affected if the firm had used a 50 percent debt to total capital ratio. Assume that sales, operating costs, total assets, total invested capital, and the tax rate would not be effected, but the interest rate would rise to 8.0 percent. By how much would the ROE change in response to the change in the capital structure?

A) 1.71%

B) 1.90%

C) 2.11%

D) 2.34%

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: FSA

AICPA: Measurement

109) Which of the following is a limitation of ratio analysis?

A) Ratios depend on current market values data rather than historical costs.

B) Not being comparable between firms of different sizes.

C) Trend analysis being inaccurate because it is not influenced by inflation.

D) Differences in accounting practices like FIFO versus LIFO make comparison difficult.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: FSA

AICPA: Measurement

110) There are people who believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

A) Ratio analysis requires the analyst to evaluate a firm's performance over a period of time.

B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.

C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret.

D) Ratio analysis requires the analyst to utilize accounting data that is based on historical value instead of current market values.

Learning Objective: LO 6

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

111) Compare how a firm's creditor would analyze a firm's financial statements with a firm's shareholders' analysis.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

112) What are some of the main limitations of ratio analysis?

Learning Objective: LO 6

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

113) Explain the different ways that a firm's ratios can be benchmarked.

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: FSA

AICPA: Measurement

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