Chapter 14
Financial Analysis and Long-Term Financial Planning

TRUE-FALSE QUESTIONS

1. A cross-sectional analysis would be used to evaluate a firm’s performance over time.

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

2. Ratio analysis is a financial technique that involves dividing various financial statements numbers into one another.

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

3. Trend or time series analysis is used to compare the performance of different firms at the same point in time.

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

4. The five basic groups of ratios are liquidity ratios, asset management ratios, capital budgeting ratios, profitability ratios, and market value ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

5. It is possible that the results of financial statement analysis could reflect the non-financial operations of a firm.

Difficulty Level: Medium

Subject Heading: Financial Statement Analysis

L.O. 14.1

6. Cross-sectional analysis is used to evaluate a firm’s performance over time.

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

7. Ratios standardize balance sheet and income statement numbers, thus minimizing the effect of firm size.

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

8. Liquidity ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

9. Cost ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

10. Asset management ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

11. Liability management ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

12. Financial leverage ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

13. Debt to asset ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

14. Profitability ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

15. Market value ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

16. Stock ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

17. Bond ratios are one of the five basic categories of ratios.

Difficulty Level: Easy

Subject Heading: Types of Financial Ratios

L.O. 14.1

18. Potential creditors of a firm might analyze financial statements to gauge the firm’s ability to make timely payments of interest and principal.

Difficulty Level: Medium

Subject Heading: Financial Statement Analysis

L.O. 14.1

19. Industry comparative analysis is used to compare a firm’s ratios against average ratios for the S&P 500.

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

20. Accounting standards often differ among firms in an industry.

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

21. A 100-Q is a standard filing with the Securities and Exchange Commission (SEC).

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

22. Liquidity ratios indicate the ability to meet short-term obligations to creditors as they mature or come due.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

23. Net working capital is current assets plus current liabilities.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

24. The current ratio is computed by dividing the sum of cash, marketable securities, and accounts receivable by the current liabilities.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

25. The current ratio is always positive.

Difficulty Level: Hard

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

26. The current ratio is always greater than or equal to one.

Difficulty Level: Hard

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

27. The quick ratio is a stricter measure of liquidity compared to the current ratio.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios

L.O. 14.2

28. The quick ratio is always positive.

Difficulty Level: Hard

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

29. The quick ratio is always greater than or equal to one.

Difficulty Level: Hard

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

30. Net working capital indicates the percentage of current liabilities to current assets.

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

31. A current ratio of 2.0 is desirable and it means that a firm has twice as many current liabilities as current assets.

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

32. Because debt obligations are paid with cash, the firm’s cash flows ultimately determine solvency.

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

33. The current ratio is a measure of a company’s ability to pay off its short-term debt as it comes due.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

34. A low current ratio (low relative to, say, industry norms) may indicate a company may face low difficulty in paying its bills.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

35. A firm would like to have a quick ratio of about 0.50.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

36. The quick ratio and the acid test ratio are the same thing.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

37. The average payment period is computed by dividing the year-end accounts payable amount by the firm’s average cost of goods sold (COGS) per day.

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

38. A larger average payment period is considered to be better.

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

39. Asset management ratios indicate the ability to meet short-term obligations to creditors as they come due.

Difficulty Level: Easy

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

40. The total asset turnover is computed as net sales divided by total assets.

Difficulty Level: Easy

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

41. The average collection period is calculated as the year-end accounts receivable divided by the net sales.

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

42. The total asset turnover is computed as total assets divided by net sales.

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

43. The fixed asset turnover is computed as net fixed assets divided by net sales.

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

44. The average collection period is calculated as the average accounts receivable divided by the average net sales per day.

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

45. The average collection period is measured in weeks.

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

46. The receivables turnover is computed by dividing annual sales, preferably credit sales, by the year-end accounts receivable.

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

47. The inventory turnover ratio is computed by dividing the cost of goods sold by the average inventory.

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

48. Financial leverage ratios indicate the extent to which borrowed funds are used to finance assets.

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

49. The interest coverage ratio indicates the ability of a firm to meet its contractual obligations for interest, leases, and debt principal repayments out of its operating income.

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

50. A firm with total debt to total assets of 50% and an interest coverage ratio of 0.5 times would appear to be safely utilizing financial leverage.

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

51. The interest coverage ratio is a stricter measure of a firm’s ability to meet its fixed payment obligations than the fixed charge coverage ratio.

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

52. The fixed charge coverage ratio is a stricter measure of a firm’s ability to meet its fixed payment obligations than the interest coverage ratio.

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

53. The fixed charge coverage ratio indicates the ability of a firm to meet its contractual obligations for interest, leases, and debt principal repayments out of its operating income.

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

54. Sinking funds are used to repay investors when a new investment fails.

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

55. The operating profit margin is calculated as the firm’s net income divided by net sales.

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

56. The operating profit margin is calculated as the firms earnings before interest and taxes divided by net sales.

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

57. The net profit margin is calculated as the firms earnings before interest and taxes divided by net sales.

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

58. Profitability ratios indicate the extent to which assets are used to support sales.

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

59. The net profit margin is an example of a market value ratio.

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

60. A firm’s efficiency in utilizing resources at its disposal in generating sales would be measured by profitability ratios.

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

61. In general, a firm’s return on assets will be less than its return on equity.

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

62. Operating return on assets is calculated as earnings after interest and taxes divided by total assets.

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

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

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

64. Return on equity is calculated as net income divided by the sum of common and preferred equity.

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

65. Market value ratios indicate the willingness of investors to value a firm in the marketplace relative to financial statement values.

Difficulty Level: Easy

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

66. The price-to-book ratio measures the market’s value of the firm relative to balance sheet equity.

Difficulty Level: Easy

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

67. The market value ratios indicate the financial markets’ assessment of the value of a firm’s securities.

Difficulty Level: Easy

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

68. A high price-to-book value ratio would tend to indicate that investors are more optimistic about the market value of firm’s asset, and its managers’ abilities.

Difficulty Level: Medium

Subject Heading: Market Value Ratios

L.O. 14.6

69. The price/earnings ratio shows how much investors are willing to pay for each dollar of the firm’s current earnings per share.

Difficulty Level: Medium

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

70. The price-earnings, or P/E, ratio is sometimes called the earnings residual.

Difficulty Level: Medium

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

71. The P/E ratio shows how much investors are willing to pay for each dollar of the firm’s EPS.

Difficulty Level: Medium

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

72. In employing DuPont analysis, the user would break the return on total assets into the profit margin, total asset turnover, and an equity multiplier.

Difficulty Level: Medium

Subject Heading: DuPont Analysis of Ratio Analysis

L.O. 14.7

73. Return on total assets = Net profit margin × Total asset turnover.

Difficulty Level: Medium

Subject Heading: DuPont Analysis of Ratio Analysis

L.O. 14.7

74. ROE directly reflects a firm’s use of leverage.

Difficulty Level: Medium

Subject Heading: DuPont Analysis of Ratio Analysis

L.O. 14.7

75. The technique of breaking return on assets and return on equity into their component parts is called Deloitte analysis, named after the big accounting firm that popularized it (Deloitte & Touche).

Difficulty Level: Medium

Subject Heading: DuPont Analysis of Ratio Analysis

L.O. 14.7

76. Increases in ROE solely due to rising debt levels (that is, a rising equity multiplier) are generally viewed favorably.

Difficulty Level: Medium

Subject Heading: DuPont Analysis of Ratio Analysis

L.O. 14.7

77. Financial planning begins with a sales forecast for one or more years.

Difficulty Level: Easy

Subject Heading: Long-Term Financial Planning

L.O. 14.8

78. Budgets are written financial plans utilized in sales forecasts.

Difficulty Level: Easy

Subject Heading: Percentage of Sales Technique

L.O. 14.8

79. Internally generated funds for financing new asset investments come from common stock issues.

Difficulty Level: Medium

Subject Heading: Asset Investment Requirements

L.O. 14.8

80. Financial analysis using ratios can assist managers in the firm’s long-term financial planning process.

Difficulty Level: Easy

Subject Heading: Long-Term Financial Planning

L.O. 14.8

81. Financial analysis using ratios is not useful in the firm’s financial planning process.

Difficulty Level: Easy

Subject Heading: Long-Term Financial Planning

L.O. 14.8

82. Using the percentage of sales technique, the remaining dollar amount of asset investments determines the external financing needs (EFN).

Difficulty Level: Medium

Subject Heading: Long-Term Financial Planning

L.O. 14.8

83. External financing needs can be calculated by subtracting the addition to retained earnings and an increase in spontaneous financing from a firm’s change in assets.

Difficulty Level: Medium

Subject Heading: Long-Term Financial Planning

L.O. 14.8

84. Internally generated funds for financing new asset investments come from profits.

Difficulty Level: Medium

Subject Heading: Long-Term Financial Planning

L.O. 14.8

85. Break-even analysis is used to estimate how many units of products must be sold in order for the firm to have a reasonable profit.

Difficulty Level: Easy

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

86. The contribution margin represents contribution of each unit sold that first goes toward paying fixed costs.

Difficulty Level: Easy

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

87. The break-even quantity is inversely related to the level of a firm’s variable costs.

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

88. The break-even quantity occurs where the total revenues line crosses the fixed costs line.

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

89. The numerator of the break-even equation is called the contribution margin.

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

90. The degree of operating leverage measures the sensitivity of operating income to changes in the level of output.

Difficulty Level: Easy

Subject Heading: Degree of Operating Leverage

L.O. 14.10

91. Higher levels of fixed costs result in lower levels of operating leverage.

Difficulty Level: Easy

Subject Heading: Degree of Operating Leverage

L.O. 14.10

92. DOL = Percent change in unit sales / Percent change in EBIT.

Difficulty Level: Easy

Subject Heading: Degree of Operating Leverage

L.O. 14.10

MULTIPLE-CHOICE QUESTIONS

93. The method of evaluating the firm’s performance over time is known as:

a. trend analysis

b. cross-sectional analysis

c. industry comparative analysis

d. Due Pont analysis

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

94. Ratios used to compare different firms at the same point in time belong to a category of analysis called:

a. time series analysis

b. cross-sectional analysis

c. industry comparative analysis

d. just-in-time analysis

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

95. Ratios used to compares a firm’s ratios against average ratios for other companies in the firm’s industry:

a. ratio analysis

b. cross-sectional analysis

c. industry comparative analysis

d. just-in-time analysis

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

96. Financial technique that involves dividing various financial statement numbers into one another:

a. ratio analysis

b. cross-sectional analysis

c. industry comparative analysis

d. break-even analysis

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

97. It is common practice to group ratios into five basic categories. Which one of the following does not belong to these four areas?

a. liquidity ratios

b. asset utilization ratios

c. financial leverage ratios

d. sources and uses of fund ratios

Difficulty Level: Medium

Subject Heading: Types of Financial Ratios

L.O. 14.1

98. Which of the following is not a source of industry information?

a. Dun and Bradstreet

b. Risk Management Association

c. The Federal Trade Commission

d. Financial Accounting Standards Board

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

99. An analyst should be careful when conducting ratio analysis to ensure that

a. the overall performance of the firm is judged on a single ratio.

b. the dates of the financial statements being compared are close in date.

c. unaudited statements are being used.

d. the same accounting procedures were used.

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

100. An analyst should be careful when conducting ratio analysis to ensure that

a. the overall performance of the firm is not judged on a single ratio.

b. the dates of the financial statements being compared are different.

c. audited statements are not being used.

d. different accounting procedures are used.

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

101. Which of the following statements is false?

a. time series analysis evaluates a firm’s performance over time.

b. industry comparative analysis compares a firm’s ratios against average ratios against average ratios for other companies in the industry.

c. the average collection period is calculated as the year-end accounts receivable divided by the net sales.

d. Ratio analysis allows for comparison of firms of different sizes.

Difficulty Level: Hard

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

102. A financial technique that involves dividing various financial statement numbers into one another is called:

a. trend analysis

b. cross sectional analysis

c. ratio analysis

d. percent of sales analysis

Difficulty Level: Easy

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

103. ________ evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.

a. Conclusive

b. Inconclusive

c. Complete

d. Definitive

Difficulty Level: Medium

Subject Heading: Ratio Analysis of Balance Sheet and Income Statement

L.O. 14.1

104. The primary purpose of the liquidity ratios is to determine:

a. the extent to which borrowed funds are used to finance assets

b. the ability of the firm to meet short-term obligations to creditors

c. the extent to which assets are used to support sales

d. none of the above

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

105. The ability of a firm to meet its short-term debt obligations as they come due is indicated by which of the following ratios:

a. liquidity ratios

b. asset utilization ratios

c. financial leverage ratios

d. profitability ratios

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

106. The quick ratio of a firm with current assets of $300,000, current liabilities of $100,000 and inventory of $100,000 is:

a. 1:1

b. 2:1

c. 3:1

d. 4:1

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

107. Which item is not included in the calculation for both the quick ratio and the current ratio?

a. accounts receivable

b. current assets

c. inventories

d. current liabilities

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

108. Management of current assets does not involve which one of the following areas?

a. cash and marketable securities

b. accounts receivable

c. inventory

d. plant and equipment

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

109. Which of the following statements about liquidity ratios is true?

a. the lower the quick ratio relative to the current ratio, the safer a firm is in terms of liquidity.

b. the higher the current ratio, the more likely a firm is able to pay its short-term obligations.

c. the quick ratio is always between 0 and 1.

d. Higher leverage reduces the quick ratio.

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

110. Typically, assets and liabilities with maturities of one _____ or less are considered to be current for financial statement purposes.

a. week

b. month

c. quarter

d. year

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

111. Find the average payment period if accounts payable is $20,000, cost of goods sold is $200,000, and sales are $500,000.

a. 10

b. 36.5

c. 25

d. 14.6

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

112. Find the average payment period if accounts payable is 550,000, cost of goods sold is $654,000, and sales are $5,000,000.

a. 4.0

b. 25.5

c. 31.1

d. None of these

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

113. Which one of the following types of ratios indicates the ability to meet short-term obligations to creditors as they come due?

a. liquidity ratios

b. asset management ratios

c. capital structure ratios

d. profitability ratios

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

114. The current ratio of a firm with current assets of $300,000, current liabilities of $100,000, and inventory of $100,000 is:

a. 1

b. 2

c. 3

d. 4

Difficulty Level: Medium

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

115. Current assets ∕ Current liabilities

a. Current ratio

b. Quick ratio

c. Average payment period

d. Fast ratio

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

116. (Cash + Marketable securities + Accounts receivable) ∕ Current liabilities

a. Current ratio

b. Quick ratio

c. Average payment period

d. Fast ratio

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

117. Accounts payable∕(Cost of goods sold∕365)

a. Current ratio

b. Quick ratio

c. Average payment period

d. Fast ratio

Difficulty Level: Easy

Subject Heading: Liquidity Ratios and Analysis

L.O. 14.2

118. Which one of the following ratios indicates the average number of days that sales are outstanding?

a. average payment period

b. average collection period

c. quick ratio

d. interest coverage

Difficulty Level: Easy

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

119. The extent to which assets are used to support sales is indicated by which of the following ratios:

a. liquidity ratios

b. asset utilization ratios

c. financial leverage ratios

d. profitability ratios

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

120. If a firm’s sales are $2,000,000, its cost of goods sold is $1,500,000, and its total assets are $1,000,000, what is total asset turnover?

a. 2.0 times

b. 1.5 times

c. 0.5 times

d. .67 times

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

121. If a firm’s sales are $2,000,000, its cost of goods sold is $1,500,000, and its fixed assets are $1,000,000, what is fixed asset turnover?

a. 2.0 times

b. 1.5 times

c. 0.5 times

d. .67 times

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

122. If a firm’s inventories on hand are $200,000, its cost of goods sold is $600,000, and its sales are $800,000, what is the inventory turnover?

a. 2 times

b. 3 times

c. 4 times

d. 5 times

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

123. Asset management ratios do not measure which of the following:

a. productivity of fixed assets in terms of sales

b. how current assets are used in the generation of sales

c. earnings generated by efficient asset management

d. how much sales are generated from fixed assets

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

124. A firm with total liabilities and owners’ equity of $100,000 and net sales of $50,000 would have a total asset turnover of:

a. 100

b. .50

c. 2

d. 4

Difficulty Level: Medium

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

125. If a firm has a receivables turnover of 12, on average, which of the following would be the firm’s average collection period?

a. 12 months

b. 1 month

c. 8.33 months

d. 11 months

Difficulty Level: Hard

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

126. Net sales ∕ Total assets

a. Total asset turnover

b. Fixed assets turnover

c. Average collection period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

127. Net sales ∕ Net fixed assets

a. Total asset turnover

b. Fixed assets turnover

c. Average collection period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

128. Accounts receivable ∕ (Net sales ∕ 365)

a. Total asset turnover

b. Fixed assets turnover

c. Average collection period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

129. Cost of goods sold ∕ Inventory

a. Total asset turnover

b. Fixed assets turnover

c. Average collection period

d. Inventory turnover

Difficulty Level: Easy

Subject Heading: Asset Management Ratios and Analysis

L.O. 14.3

130. As part of the measurement of financial leverage, the total debt ratio is calculated as:

a. total liabilities divided by total assets

b. total liabilities times total assets

c. current liabilities divided by total assets

d. total assets minus current liabilities divided by total liabilities divided by total liabilities

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

131. The _______________ ratio is computed as earnings before interest and taxes divided by interest expense:

a. net profit margin

b. fixed charge coverage

c. total asset turnover

d. interest coverage

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

132. Which of the following statements is most correct?

a. larger values of the equity multiplier imply a greater use of leverage by the firm.

b. the receivables turnover is computed by dividing year-end accounts payable by the year-end accounts receivables.

c. the operating return on assets is computed as the earnings after interest and taxes divided by total assets.

d. The quick ratio is computed by dividing current liabilities by owners’ equity.

Difficulty Level: Hard

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

133. Which of the following statements is false?

a. the price-to-book ratio measures the market’s value of the firm relative to balance sheet equity.

b. the equity multiplier ratio is calculated as owners’ equity divided by total assets.

c. the degree of operating leverage measures the sensitivity of operating income to changes in the level of output.

d. Ratio analysis allows for comparison of firms of different sizes.

Difficulty Level: Hard

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

134. The extent to which assets are financed by borrowed funds and other liabilities is indicated by:

a. liquidity ratios

b. asset utilization ratios

c. financial leverage ratios

d. profitability ratios

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

135. Which of the following would not be considered in the fixed charge coverage ratio?

a. sinking fund payments

b. dividend payments

c. lease payments Rent payments

d. rent payments

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

136. Which group of ratios might be most interesting to potential creditors of a firm?

a. asset utilization ratios

b. profitability ratios

c. leverage ratios

d. market value ratios

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

137. Rental or lease payments are included in which one of the following ratios?

a. interest coverage

b. times-interest-earned

c. fixed charge coverage

d. equity multiplier

Difficulty Level: Medium

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

138. The equity multiplier is calculated as:

a. total assets divided by owners’ equity

b. net income divided by owners’ equity

c. net income divided by total assets

d. net sales divided by total assets

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

139. Total debt / Total assets

a. Total debt to total assets

b. Equity multiplier

c. Interest coverage

d. Fixed charge coverage

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

140. Total assets / Total equity

a. Total debt to total assets

b. Equity multiplier

c. Interest coverage

d. Fixed charge coverage

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

141. Earnings before interest & taxes / Interest expense

a. Total debt to total assets

b. Equity multiplier

c. Interest coverage

d. Fixed charge coverage

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

142. (Earnings before interest, lease payments, & taxes ∕ {Interest + Lease payments + [(Sinking fund payment) ∕ (1 – Tax rate)]})

a. Total debt to total assets

b. Equity multiplier

c. Interest coverage

d. Fixed charge coverage

Difficulty Level: Easy

Subject Heading: Financial Leverage Ratios and Analysis

L.O. 14.4

143. The profitability ratio that measures the return that shareholders earned on their investment in the firm is the:

a. operating profit margin

b. return on equity

c. net profit margin

d. return on assets

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

144. Find the net profit margin if earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000.

a. 40%

b. 20%

c. 10%

d. 30%

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

145. What would be the return on total assets of a firm if net income is $50,000, total sales are $100,000, and total assets are $175,000?

a. 35%

b. 28.6%

c. 57.14%

d. 62.8%

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

146. If a firm has no debt and pays no taxes, then the firm’s operating profit margin will be ___________ the firm’s net profit margin.

a. greater than

b. less than

c. the same as

d. we can’t tell

Difficulty Level: Medium

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

147. (Net income ∕ Common equity)

a. Operating profit margin

b. Net profit margin

c. Operating return on assets

d. Return on total assets

e. Return on equity

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

148. (Earnings before interest & taxes ∕ Net sales)

a. Operating profit margin

b. Net profit margin

c. Operating return on assets

d. Return on total assets

e. Return on equity

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

149. (Net income ∕ Net sales)

a. Operating profit margin

b. Net profit margin

c. Operating return on assets

d. Return on total assets

e. Return on equity

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

150. (Earnings before interest & taxes ∕ Total assets)

a. Operating profit margin

b. Net profit margin

c. Operating return on assets

d. Return on total assets

e. Return on equity

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

151. (Net income ∕ Total assets)

a. Operating profit margin

b. Net profit margin

c. Operating return on assets

d. Return on total assets

e. Return on equity

Difficulty Level: Easy

Subject Heading: Profitability Ratios and Analysis

L.O. 14.5

152. The price/earnings ratio (P/E) is calculated as:

a. stock price divided by earnings per share

b. stock price times earnings per share

c. earnings per share divided by stock price

d. stock price divided by the difference between earnings per share and cash dividends per share

Difficulty Level: Easy

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

153. Which one of the following types of financial ratios does not get all of its information from a firm’s income statements and balance sheets?

a. liquidity ratios

b. asset management ratios

c. capital structure ratios

d. market value ratios

Difficulty Level: Easy

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

154. If a firm has sales of $100, total expenses (including interest and taxes) of $50, has a stock that is selling at $50 per share and has 10 shares of stock outstanding, then the firm has a P/E ratio of:

a. 2.00

b. 1.00

c. 10.0

d. 0.20

Difficulty Level: Medium

Subject Heading: Market Value Ratios and Analysis

L.O. 14.6

155. Which one of the following is not a basic component of the DuPont method of ratio analysis?

a. profit margin

b. total asset turnover

c. equity multiplier

d. liquidity margin

Difficulty Level: Easy

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

156. The method of calculating return on assets which highlights the importance of sales, profit margin, and asset turnover is known as:

a. the Gordon model

b. cost-volume profit analysis

c. DuPont analysis

d. break-even analysis

Difficulty Level: Easy

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

157. Which one of the following is not a basic component of the DuPont method of ratio analysis?

a. profit margin

b. total asset turnover

c. equity multiplier

d. liquidity margin

Difficulty Level: Easy

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

158. Which of the following ratios is not a component in the return on equity using DuPont analysis?

a. asset turnover

b. profit margin

c. equity multiplier

d. current ratio

Difficulty Level: Medium

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

159. If a firm has an after-tax profit margin of 5%, an asset turnover of 2.5 times, and no debt, the return on equity is:

a. 2%

b. 8.5%

c. 12.5%

d. 14.8%

Difficulty Level: Medium

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

160. Given the following financial data: net income/sales = 6%; sales/total assets = 3.5; debt/total assets = 30%. The return on total assets is:

a. 15%

b. 21%

c. 30%

d. 36%

Difficulty Level: Medium

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

161. Using the DuPont system of analysis and holding other factors constant, an increase in financial leverage will result in ________ in the return on equity.

a. an increase

b. a decrease

c. no change

d. an undetermined change

Difficulty Level: Medium

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

162. Using the DuPont system of analysis and holding other factors constant, an increase in the net profit margin will result in ________ in the return on equity.

a. an increase

b. a decrease

c. no change

d. an undetermined change

Difficulty Level: Medium

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

163. Using the DuPont system of analysis and holding other factors constant, decrease in total asset turnover will result in ________ in the return on equity.

a. an increase

b. a decrease

c. no change

d. an undetermined change

Difficulty Level: Medium

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

164. Firm A has a total debt to total assets ratio of 50% and an interest coverage ratio of 1.0. Firm B has a total debt total assets ratio of 80% and an interest coverage ratio of 10.0. Based on this limited information firm ________ appears to be in ________ debt management position than firm ________.

a. A, better, B

b. B, better, A

c. A, a comparable, B

d. B, lesser, A

Difficulty Level: Hard

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

165. A firm with total asset turnover lower than the industry average may have

a. excessive debt.

b. excessive cost of goods sold.

c. insufficient sales.

d. insufficient fixed assets.

Difficulty Level: Hard

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

166. A firm with total asset turnover lower than the industry average may have

a. excessive debt.

b. excessive cost of goods sold.

c. lower sales.

d. insufficient fixed assets.

Difficulty Level: Hard

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

167. A firm with a total asset turnover lower than the industry standard and a current ratio which meets the industry standard may have

a. excessive fixed assets.

b. excessive inventory.

c. excessive accounts receivable.

d. excessive debt.

Difficulty Level: Hard

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

168. A firm with a total asset turnover lower than the industry standard and a current ratio which meets the industry standard may have

a. excessive current assets.

b. excessive inventory.

c. excessive accounts receivable.

d. excessive long term assets.

Difficulty Level: Hard

Subject Heading: DuPont Method of Ratio Analysis

L.O. 14.7

169. Which one of the following is not a basic element or component of the percentage of sales approach to long-term financial planning?

a. asset investment requirements

b. internally generated financing

c. spontaneous increases in current liabilities

d. automatic increases in cash inflows

Difficulty Level: Medium

Subject Heading: Percentage of Sales Technique

L.O. 14.8

170. The ________ method of developing a pro forma income statement forecasts sales and values for the cost of goods sold, operating expenses, and interest expense that are expressed as a ratio of projected sales.

a. percent of sales

b. accrual

c. judgmental

d. cash

Difficulty Level: Medium

Subject Heading: Percentage of Sales Technique

L.O. 14.8

171. Ningbo Shipping has prepared the coming year's pro forma balance sheet and has estimated that external financing required would be $230,000. The firm should prepare to

a. repurchase common stock totaling $230,000.

b. arrange for a loan of $230,000.

c. do nothing; the balance sheet balances.

d. invest in marketable securities totaling $230,000.

Difficulty Level: Medium

Subject Heading: Long-Term Financial Planning

L.O. 14.8

172. Ningbo Shipping has prepared the coming year's pro forma balance sheet and has estimated that external financing required would be -$230,000. The firm should prepare to

a. repurchase common stock totaling $230,000.

b. arrange for a loan of $230,000.

c. do nothing; the balance sheet balances.

d. sell an additional $230,000 of common stock.

Difficulty Level: Hard

Subject Heading: Long-Term Financial Planning

L.O. 14.8

173. In cost-volume-profit analysis, a firm “breaks even” when its total revenues:

a. equal variable costs

b. equal total costs

c. equal fixed costs

d. are less than the sum of variable and fixed costs

Difficulty Level: Easy

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

174. Cost-volume-profit analysis can be used to estimate the firm’s operating profits at different levels of:

a. dollar sales

b. unit sales

c. dollar fixed costs

d. unit variable costs

Difficulty Level: Easy

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

175. Earnings before interest and taxes (EBIT) is another way of describing:

a. operating profits

b. net profits before taxes

c. gross profits

d. earnings per share

Difficulty Level: Easy

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

176. All other things being equal, an increase in the amount of fixed operating costs for a firm would:

a. increase the break-even point

b. decrease the break-even point

c. have no impact on the break-even point

d. not enough information given

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

177. All other things being equal, a decrease in the contribution margin for a firm would:

a. increase the break-even point

b. decrease the break-even point

c. have no impact on the break-even point

d. not enough information given

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

178. All other things being equal, a decrease in the selling price of a product for a firm would:

a. increase the break-even point

b. decrease the break-even point

c. have no impact on the break-even point

d. not enough information given

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

179. If a firm's sale price per unit decreases, the firm's operating breakeven point will

a. decrease

b. increase

c. remain unchanged

d. change in an undetermined direction

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

180. Which of the following is a variable cost?

a. CEO Salary

b. rent

c. mortgage payments

d. shipping expenses

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

181. The operating break-even sales level is sensitive to all of the following variables except:

a. fixed operating costs

b. sales price per unit

c. variable operating cost per unit

d. interest expense

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

182. If a firm's variable cost per unit increases, the firm's operating breakeven point will

a. decrease

b. increase

c. remain unchanged

d. change in an undetermined direction

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

183. Sacramento Sandals (SS) has fixed annual operating costs of $75,000. SS retails each pair of sandals for $14.99 each and the variable cost per pair is $4.99. Based on this information, the breakeven sales level in units is

a. 7,500

b. 15,030

c. 5,003

d. 6,250

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

184. Assume a firm is developing, manufacturing, and selling a basic software package at $500 per copy. Raw materials and direct labor total $200 per copy. Fixed costs are $250,000. If the firm sells 5,000 units per year, what will be the operating profit?

a. $1,250,000

b. $1,500,000

c. $2,250,000

d. $2,500,000

Difficulty Level: Hard

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

185. Assume a firm is developing, manufacturing, and selling a basic software package at $300 per copy. Raw material and direct labor total $100 per unit. Fixed costs are $150,000. If unit sales are 3,000 per year, what will be the break-even point in units?

a. 375 units

b. 500 units

c. 750 units

d. 800 units

Difficulty Level: Hard

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

186. Which of the following statements is most correct?

a. higher levels of fixed costs result in lower levels of operating leverage.

b. higher variable costs result in larger contribution margin.

c. higher fixed costs result in larger break-even quantity.

d. Higher leverage results in lower interest costs.

Difficulty Level: Hard

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

187. A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating breakeven point if it desires net operating income of $10,000, not $0 (zero)?

a. 12,500 units

b. 15,000 units

c. 17,500 units

d. 25,000 units

Difficulty Level: Hard

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

188. Sacramento Sandals (SS) has fixed annual operating costs of $75,000. SS retails each pair of sandals for $14.99 each and the variable cost per pair is $4.99. Based on this information, the breakeven sales level in dollars is

a. $125,495

b. $112,425

c. $108,995

d. $103,850

Difficulty Level: Hard

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

189. _____________ costs are a function of quantity sold, not time.

a. fixed

b. depreciation

c. operating

d. variable

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

190. Which of the following is not a variable cost?

a. direct materials

b. direct labor

c. delivery costs

d. rent

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

191. Which of the following is not a variable cost?

a. direct materials

b. direct labor

c. delivery costs

d. rent

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

192. The operating break-even sales level is not sensitive to which of the following variables?

a. fixed operating costs

b. sales price per unit

c. dividend payments

d. sales commissions expense

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

193. A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is

a. 250

b. 400

c. 667

d. 1,000

Difficulty Level: Hard

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

194. A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. With this data, the firm's operating breakeven point during the year, in dollars, is

a. $150,000

b. $176,471

c. $1,000,000

d. $1,425,000

Difficulty Level: Hard

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

195. If a firm's fixed financial costs decrease, the firm's operating breakeven point will

a. decrease

b. increase

c. remain unchanged

d. change in an undetermined direction

Difficulty Level: Medium

Subject Heading: Cost-Volume-Profit Analysis

L.O. 14.9

196. All other things being equal, an increase in the amount of debt for a firm would:

a. increase the degree of operating leverage

b. decrease the degree of operating leverage

c. have no impact on degree of operating leverage

d. reduce owners equity

Difficulty Level: Medium

Subject Heading: Degree of Operating Leverage

L.O. 14.10

197. All other things being equal, an increase in the amount fixed operating costs for a firm would:

a. increase the degree of financial leverage

b. decrease the degree of financial leverage

c. have no impact on degree of financial leverage

d. not enough information given

Difficulty Level: Medium

Subject Heading: Degree of Operating Leverage

L.O. 14.10

198. The degree of operating leverage (DOL) can be measured by the percent change in operating income (EBIT) divided by percent change in:

a. fixed costs

b. variable costs

c. unit sales

d. total costs

Difficulty Level: Medium

Subject Heading: Degree of Operating Leverage

L.O. 14.10