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Finance Ch 3

Which of the following ratios would not be classified as an asset management ratio?
A) Current ratio
B) Inventory turnover ratio
C) Accounts payable period
D) Capital intensity ratio
A) Current ratio
Which of the actions listed below would cause a firm’s current ratio to increase?
A) Accounts receivable are paid in cash.
B) Notes payable are paid off with cash.
C) Inventory is sold on account.
D) Inventory is purchased on account.
B) Notes payable are paid off with cash.
The formula for which of the following ratios has a denominator of total liabilities?
a. Current ratio
b. Acid-test ratio
c. Ratio of stockholders’ equity to total liabilities
d. Asset turnover
c. Ratio of stockholders’ equity to total liabilities
Which of the following is NOT a quick asset?
a. Cash
b. Accounts receivable
c. Marketable securities
d. Merchandise inventory
d. Merchandise inventory
. Which of the following transactions, when considered by itself, will not change the current ratio?
a. Collecting an account receivable that was previously written off through the allowance for doubtful accounts
b. Paying a current liability with cash
c. Purchasing merchandise inventory on credit
d. Adjusting the Supplies account for the supplies used during the period
a. Collecting an account receivable that was previously written off through the allowance for doubtful accounts
Which of the following ratios is a measure of profitability, operating results, and efficiency?
a. Rate of return on total assets
b. Ratio of stockholders’ equity to total equities
c. Inventory turnover
d. Book value per share of common stock
a. Rate of return on total assets
Current asset MINUS current liabilities is the
a. Current ratio
b. Net Worth
c. Working Capital
c. Working Capital
Current assets DIVIDED BY current liabilities is the
a. Current ratio
b. Net Worth
c. Working Capital
a. Current ratio
The quick ratio EXCLUDES which of the following?
a. Accounts Receivable
b. Inventory
c. Cash
b. Inventory
Which of the following are likely to have the reported amounts on the balance sheet being close to their current value?
a. Current Assets
b. Long term assets
c. Stockholders equity
a. Current Assets
Free cash flow is the cash provided by operating activities minus the cash used by financing activities.
True
False
False
These ratios measure the relationship between a firm’s liquid (or current) assets and its current liabilities.
A. cross-section
B. internal growth
C. liquidity
D. market value
C. liquidity
. This ratio measures the dollars of current assets available to pay each dollar of current liabilities.
A. cross-section
B. current
C. internal-growth
D. quick or acid test
B. current
This ratio measures a firm’s ability to pay off short-term obligations without relying on inventory sales.
A. cash
B. current
C. internal-growth
D. quick or acid test
D. quick or acid test
This ratio measures a firm’s ability to pay short-term obligations with its available cash and market securities.
A. cash
B. current
C. internal-growth
D. quick or acid test
A. cash
Which statement is true?
A. The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress.
B. The lower the liquidity ratios, the less liquidity risk a firm has.
C. Liquid assets generate profits for the firm.
D. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.
D. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.
These ratios measure how efficiently a firm uses its assets, as well as how efficiently the firm manages its accounts payable.
A. asset management
B. cash
C. internal-growth
D. quick or acid test
A. asset management
This ratio measures the number of dollars of sales produced per dollar of inventory.
A. asset management
B. cash
C. internal-growth
D. inventory turnover
D. inventory turnover
Which of these statements is true?
A. A low inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.
B. A high inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.
C. A low inventory turnover ratio or a high days’ sales in inventory is a sign of good inventory management.
D. A high inventory turnover ratio or a high days’ sales in inventory is a sign of good inventory management.
B. A high inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.
This measures the number of days accounts receivable are held before the firm collects cash from the sale.
A. Accounts receivable turnover
B. Average collection period
C. Average payment period
D. Accounts payable turnover
B. Average collection period
This measures the number of days that the firm holds accounts payable before it has to extend cash to buy raw materials.
A. Accounts receivable turnover
B. Average collection period
C. Average payment period
D. Accounts payable turnover
C. Average payment period
This measures the number of dollars of sales produced per dollar of fixed assets.
A. fixed asset to working capital ratio
B. fixed asset turnover ratio
C. fixed asset management ratio
D. sales to working capital ratio
B. fixed asset turnover ratio
Which of these statements is true?
A. The age of a firm’s cash will affect the current ratio level.
B. The age of a firm’s accounts receivable will affect the current ratio level.
C. The age of a firm’s fixed assets will affect the fixed asset turnover ratio level.
D. The age of a firm’s fixed assets will affect the current ratio level.
C. The age of a firm’s fixed assets will affect the fixed asset turnover ratio level.
Which of these statements is true?
A. In general, the lower the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.
B. In general, the lower the total asset turnover and the higher the capital intensity ratio, the more efficient the overall asset management of the firm will be.
C. In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.
D. In general, the higher the total asset turnover and the higher the capital intensity ratio, the more efficient the overall asset management of the firm will be.
C. In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.
These ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets.
A. debt management ratios
B. equity ratios
C. financial ratios
D. liquidity ratios
A. debt management ratios
. This ratio measures the percentage of total assets financed by debt.
A. debt
B. debt-to-equity
C. equity multiplier
D. liquidity
A. debt
This refers to the amount of debt versus equity a firm has on its balance sheet.
A. capital coverage
B. capital structure
C. debt structure
D. financial structure
B. capital structure
Which of these is NOT considered a coverage ratio?
A. Cash coverage ratio
B. Current ratio
C. Fixed-charge coverage ratio
D. Times Interest Earned
B. Current ratio
These ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm.
A. Liquidity
B. Coverage
C. Financial
D. Profitability
D. Profitability
This measures the operating return on the firm’s assets, irrespective of financial leverage and taxes.
A. Basic earnings power ratio
B. Profit margin
C. Return on assets
D. Return on equity
A. Basic earnings power ratio
For publicly traded firms, these ratios measure what investors think of the company’s future performance and risk.
A. Liquidity ratios
B. Market value ratios
C. Price value ratios
D. Profitability ratios
B. Market value ratios
These can be used by interested parties to identify changes in corporate performance.
A. common-size financial statements
B. industrialized financial statements
C. sanitized financial statements
D. None of these
A. common-size financial statements
This is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings.
A. internal growth rate
B. retained earnings growth rate
C. sustainable growth rate
D. weighted growth rate
C. sustainable growth rate
To interpret financial ratios, managers, analysts, and investors use the follow type of benchmarks:
A. competitive analysis
B. cross-industry analysis
C. time-industry analysis
D. time series analysis
D. time series analysis
Which is true? Ratio analysis:
A. can provide useful information on a firm’s current position but should never be used to forecast future performance.
B. can provide useful information on a firm’s current position and hint at future performance.
C. can provide useful information on a firm’s past but not current position.
D. can provide useful information on a firm’s past and current position, but should never be used to forecast future performance.
B. can provide useful information on a firm’s current position and hint at future performance.
Which of the following will increase a firm’s quick ratio assuming no other accounts change?
A. A reduction in accounts payable.
B. An increase in accounts receivable.
C. An increase in inventory.
D. All of these statements will increase a firm’s quick ratio.
D. All of these statements will increase a firm’s quick ratio.
Which of the following statements is correct?
A. The cash ratio measures a firm’s ability to pay long-term debt with its available cash and marketable securities.
B. Holding extremely high levels of liquidity to guard against liquidity crises is an inappropriate goal for the firm.
C. The quick (or acid-test) ratio measures a firm’s ability to pay off short-term obligations with long-term debt.
D. The current ratio is a more stringent measure of liquidity than the quick (or acid-test) ratio.
B. Holding extremely high levels of liquidity to guard against liquidity crises is an inappropriate goal for the firm.
Which of the following statements is correct?
A. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity.
B. An extremely low average collection period will maximize net income.
C. In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible.
D. All of these statements are correct.
A. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity.
Which ratio assesses how efficiently a firm uses its fixed assets?
A. Capital intensity ratio
B. Current ratio
C. Average collection period
D. Fixed asset turnover
D. Fixed asset turnover
Which ratio measures how many days inventory is held before the final product is sold?
A. Inventory turnover
B. Days’ sales in inventory
C. Total asset turnover
D. Inventory intensity ratio
B. Days’ sales in inventory
Which of the following statements is correct?
A. The use of debt in the capital structure results in tax benefits to the firm.
B. Debt is referred to as “financial leverage” because it magnifies returns to shareholders.
C. Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing.
D. All of these statements are correct.
D. All of these statements are correct.
Which of the following statements is correct?
A. Performing cross-sectional ratio analysis refers to assessing how a firm performed over a certain section of time.
B. Performing cross-sectional analysis is easy since industries are usually clustered with firms that are identical.
C. Time-series analysis is useless in assessing improvement or deterioration of ratios since the data is historical.
D. To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry.
To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry.
Common-size financial statements:
A. Allow for an easy comparison of balance sheets and income statements across firms in the industry.
B. Provide quantitative clues about the direction that the firm is moving.
C. Are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets.
D. All of these.
D. All of these.
Firm A and Firm B have the same total assets, ROA and profit margin. However, Firm B has a higher debt ratio and interest expense than Firm A. Which of the following statements is correct?
A. Firm B must have a higher ROE than firm A.
B. Firm B must have a higher capital intensity ratio than Firm A.
C. Firm B must have a higher fixed asset turnover than Firm A.
D. Firm B must have a lower ACP than Firm A.
A. Firm B must have a higher ROE than firm A.
Which ratio measures the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes?
A. Times interest earned
B. Fixed-charge coverage ratio
C. Cash coverage ratio
D. Operating coverage ratio
C. Cash coverage ratio
The term “capital structure” refers to
A. the amount of current versus long-term debt on the balance sheet.
B. the amount of current versus fixed assets on the balance sheet.
C. the amount of debt versus equity on the balance sheet.
D. None of these.
C. the amount of debt versus equity on the balance sheet.
Which ratio measures the operating return on the firm’s assets irrespective of financial leverage and taxes?
A. Basic earning power ratio
B. Profit margin
C. Return on Assets
D. Operating Leverage Return
A. Basic earning power ratio
Which company has the most risk from an investor’s standpoint? Firm A has a PE of 92 times and Firm B has a PE of 16 times. Assume both firms operate in the same industry. Firm A has fewer shares outstanding than Firm B.
A. Firm A because it has the higher PE ratio.
B. Firm B because it has a lower PE ratio.
C. Firm A because it has fewer shares outstanding.
D. Firm B because it has more shares outstanding.
A. Firm A because it has the higher PE ratio.
. The maximum growth rate that can be achieved financing asset growth with new debt and retained earnings is called the __________.
A. internal growth rate
B. retention rate
C. sustainable growth rate
D. operating expansion rate
C. sustainable growth rate
The maximum growth rate that can be achieved by financing asset growth with internal financing or retained earnings is called the ____________.
A. internal growth rate
B. retention rate
C. sustainable growth rate
D. operating expansion rate
A. internal growth rate
Which of the following is NOT one of the cautions in using ratios to evaluate firm performance?
A. The firm has seasonal cash flow differences.
B. The firm has different accounting procedures.
C. The firm has a different capital structure.
D. The firm had a one-time event.
C. The firm has a different capital structure.
A firm that is efficient in inventory management will have ____________.
A. a high inventory turnover ratio and a low days sales in inventory ratio
B. a low inventory turnover ratio and a low days sales in inventory ratio
C. a high inventory turnover ratio and a high days sales in inventory ratio
D. a low inventory turnover ratio and a high days sales in inventory ratio
A. a high inventory turnover ratio and a low days sales in inventory ratio
Which of the following statements is correct?
A. A low average payment period and a high accounts payable turnover are a sign of good management.
B. A high average payment period and a low accounts payable turnover are a sign of good management.
C. A high average payment period and a high accounts payable turnover are a sign of good management.
D. A low average payment period and a low accounts payable turnover are a sign of good management.
B. A high average payment period and a low accounts payable turnover are a sign of good management.
This ratio measures the overall return on the firm’s assets inclusive of financial leverage and taxes.
A. ROA
B. ROE
C. Basic earning power
D. Profit margin
A. ROA
The term “spreading the financial statements” refers to _____________.
A. creating common-size financial statements
B. comparing the statements to the industry average
C. calculating the internal and sustainable growth rate
D. evaluating the debt levels
A. creating common-size financial statements
This ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm’s debt.
A. Fixed charge coverage ratio
B. Times interest earned
C. Cash coverage ratio
D. ROA
B. Times interest earned
This ratio measures the number of dollars of operating earnings available to meet the firm’s interest dollars and other fixed charges.
A. Times interest earned
B. Basic earning power
C. Fixed charge coverage ratio
D. ROA
C. Fixed charge coverage ratio
Which one of the following is unlikely to have a high capital intensity ratio?
A. Railroad
B. Automobile manufacturer
C. Law firm
D. Shipbuilder
C. Law firm
All of the following are users of financial ratios except ___________.
A. Managers
B. Investors
C. Analysts
D. Auditors
D. Auditors
A strong liquidity position means that ______________.
A. the firm is able to meet its short-term obligations
B. the firm uses little debt in its capital structure
C. the firm pays out a large portion of its net income in the form of dividends
D. the firm pays its creditors on time
A. the firm is able to meet its short-term obligations
An investor wanting large returns will be interested in companies that have ____.
A. high ROAs
B. high ROEs
C. high current ratios
D. high times interest earned
B. high ROEs
Another name for Gross Profit is
EBIT

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