Full file at https://TestBanksCafe.

eu/
Test Bank for CFIN 4 4th Edition Besley, Brigham
Complete downloadable file at:
https://TestBanksCafe.eu/Test-Bank-for-CFIN-4-4th-Edition-Besley,-Brigham
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Incomestatement

2.Thebalancesheetis afinancialstatementmeasuringtheflowoffundsintoandoutofvariousaccountsovertime
whiletheincomestatementmeasurestheprogressofthefirmat apointin time.
a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Financialstatements

3.Anincreaseinanassetaccountisasourceofcash,whereasanincreaseinaliabilityaccountisauseofcash. a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Sourcesandusesofcash

4.Depreciation,asshownontheincomestatement,isregardedasauseofcashbecauseitisanexpense. a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Sourcesandusesofcash

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 Full file at https://TestBanksCafe.eu/

5.Whenafirmpaysoffaloanusingcash,thesourceoffundsisthedecreaseintheassetaccount,cash,whiletheuse
offundsinvolvesa decreaseina liabilityaccount,debt.
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Sourcesanduses

6.Non-cashassetsareexpectedtoproducecashovertimebuttheamountofcashtheyeventuallyproducecouldbe
higherorlowerthanthevaluesatwhichtheassetsarecarriedonthebooks.
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Non-cashassets

7.Taxes,paymentpatterns,andreportingconsiderations,aswellascreditsalesandnon-cashcosts,arereasonswhy
operatingcashflowscandifferfromaccountingprofits.
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Operatingcashflows

8.Ratioanalysisinvolvesa comparisonof therelationshipsbetweenfinancialstatementaccountsso as toanalyzethe

financialpositionand strengthofafirm.
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Ratioanalysis

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 Full file at https://TestBanksCafe.eu/

9.Thecurrentratioandinventoryturnoverratiomeasuretheliquidityof a firm.Thecurrentratiomeasurestherelation of
afirm'scurrentassetstoits
currentliabilitiesandtheinventoryturnoverratiomeasureshowrapidlyafirmturnsitsinventorybackintoa"quick"assetor cash.
a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Liquidityratios

10.Ifafirmhashighcurrentandquickratios,thisalwaysisagoodindicationthat afirmis managingitsliquidityposition well.

a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Currentratio

11.A declinein theinventoryturnoverratiosuggeststhat thefirm'sliquiditypositionisimproving. a.True

b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Inventoryturnoverratio

12.Thedegreetowhichthemanagersofa firmattempttomagnifythereturnstoowners'capitalthroughtheuseof
financialleverageiscapturedindebtmanagementratios.
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Debtmanagementratios

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 Full file at https://TestBanksCafe.eu/

13.Profitabilityratiosshowthe combinedeffectsofliquidity,assetmanagement,anddebtmanagementonoperations. a.True

b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Profitabilityratios

14.Determiningwhethera firm'sfinancialpositionisimprovingordeterioratingrequiresanalysisofmorethanoneset of
financialstatements.Trendanalysisis onemethodofmeasuringafirm'sperformanceovertime.
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Trendanalysis

15.Theinformationcontainedintheannualreportisusedby investorstoformexpectationsaboutfutureearningsand dividends.

a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Annualreport

16.Thebalancesheetpresentsasummaryofthefirm'srevenuesandexpensesoveranaccountingperiod. a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Financialstatements

17.On the balancesheet,totalassetsmustequaltotalliabilitiesplusstockholdersequity. a.True

b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Balancesheet

18.Oneofthebiggestnoncashitemsontheincomestatementis depreciationwhichneedsto besubtractedfromnet incometo

determinecashflowsforthefirm.
a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Cashflows

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 Full file at https://TestBanksCafe.eu/
19.Afirm'snetincomereportedonitsincomestatementmustequaltheoperatingcashflowsonthestatementofcash flows.
a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Accountingprofitandcashflows

20.Astatementreportingtheimpactof afirm'soperating,investing,andfinancingactivitieson cashflowsoveran

accountingisthestatementofcashflows.
a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Statementofcashflows

21.Whena firmconductsa seasonedequityoffering,it increasesanequityaccountwhichisanexampleofa sourceof funds.

a.True
b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Sourcesandusesofcash

22.Whena firmconductsa stockrepurchase,it increasesanequityaccountwhichisanexampleofa sourceoffunds. a.True

b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Sourcesandusesofcash

23.Aliquidassetisan assetthatcanbe easilyconvertedintocashwithoutasignificantlossof its originalvalue. a.True

b.False

ANSWER: True
DIFFICULTY: Easy
TOPICS: Liquidityratios

24.GenzymeCorporationhasseenitsdayssalesoutstanding(DSO)declinefrom38dayslastyearto 22daysthis
implyingthatmoreofthefirm'ssuppliersarebeingpaidontime.
a.True
b.False

ANSWER: False
DIFFICULTY: Easy
TOPICS: Dayssalesoutstanding(DSO)

25.Fundssuppliedbycommonstockholdersmainlyincludescapitalstock,paid-incapital,andretainedearnings,while
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page5
 Full file at https://TestBanksCafe.eu/
totalequityiscomprisedofcommonequitypluspreferredstock.
a.True
b.False

ANSWER: True
DIFFICULTY: Medium
TOPICS: Total equity

26.Retainedearningsisthecashthathasbeengeneratedbythefirmthroughitsoperationswhichhasnotbeenpaidout
tostockholdersasdividends.Retainedearningsarekeptincashornearcashaccountsandthus,thesecash
accounts,whenaddedtogether,willalwaysbeequalto thetotalretainedearningsofthefirm.
a.True
b.False

ANSWER: False
DIFFICULTY: Medium
TOPICS: Retainedearnings

27.Thefinancialpositionofcompanieswhosebusinessisseasonalcanbedramaticallydifferentdependinguponthe
timeof yearchosentoconstructfinancialstatements.Thistimesensitivityisespeciallytruewithrespecttothefirm's
balancesheet.
a.True
b.False

ANSWER: True
DIFFICULTY: Medium
TOPICS: Balancesheetchanges

28.Inorderto accuratelyestimatecashflowfromoperations,depreciationmustbeaddedbackto netincome.The

reasonforthisis thateventhoughdepreciationis deductedfromrevenueitis reallyanon-cashcharge.
a.True
b.False

ANSWER: True
DIFFICULTY: Medium
TOPICS: Cashflows

29.Inaccounting,emphasisisplacedondeterminingnet income.Infinance,the primaryemphasisalsoisonnet income

becausethatiswhatinvestorsusetovaluethefirm.However,asecondaryconsiderationiscashflowbecausethat's
whatisusedtorunthebusiness.
a.True
b.False

ANSWER: False
DIFFICULTY: Medium
TOPICS: Cashflowandnetincome

30.Currentcashflowfromexistingassetsis highlyrelevantto theinvestor.However,thevalueofthefirmdepends

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page6
 Full file at https://TestBanksCafe.eu/
primarilyuponitsgrowthopportunities.Asa result,profitprojectionsfromthoseopportunitiesaretheonlyrelevant
futureflowswithwhichinvestorsareconcerned.
a.True
b.False

ANSWER: False
DIFFICULTY: Medium
TOPICS: Futurecashflows

31.IfthecurrentratioofFirmAisgreaterthanthecurrentratioofFirmB,wecannotbesurethatthequickratioof
FirmAisgreaterthanthatofFirmB.However,ifthequickratioofFirmAexceedsthatofFirmB,wecanbe
assuredthatFirmA'scurrentratioalsoexceedsB'scurrentratio.
a.True
b.False

ANSWER: False
DIFFICULTY: Medium
TOPICS: Liquidityratios

32.Theinventoryturnoverandcurrentratiosarerelated.Thecombinationof ahighcurrentratioandalowinventory
turnoverratiorelativeto theindustrynormmightindicatethat thefirmis maintainingtoohighaninventorylevelor
thatpartoftheinventoryis obsoleteordamaged.
a.True
b.False

ANSWER: True
DIFFICULTY: Medium
TOPICS: Inventoryturnoverratio

33.Wecanusethefixedassetturnoverratiotolegitimatelycomparefirmsindifferentindustriesas longas all thefirms

beingcomparedareusingthesameproportionoffixedassetstototalassets.
a.True
b.False

ANSWER: False
DIFFICULTY: Medium
TOPICS: Fixedassetturnover

34.Supposetwofirmswiththesameamountofassetspaythesameinterestrateontheirdebtandearnthesamerate
ofreturnontheirassets,andthatROAispositive.However,onefirmhasa higherdebtratio.Underthese
conditions,thefirmwiththehigherdebtratiowillalsohaveahigherrateof returnon commonequity.
a.True
b.False

ANSWER: True
DIFFICULTY: Medium
TOPICS: ROAandROE

35.Supposea firmwantstomaintaina specificTIEratio.Ifthefirmknowsthelevelof its debt,theinterestrateitwill payon

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 Full file at https://TestBanksCafe.eu/
thatdebtandtheapplicabletaxrate,thefirmcanthencalculatetheearningslevelrequiredtomaintainits targetTIEratio.
a.True
b.False

ANSWER: True
DIFFICULTY: Medium
TOPICS: TIEratio

36.Thefixedchargecoverageratiorecognizesthatfirmsoftenleaseequipmentundercontractandthus,somefirms
mustmeetmorethanjusttheirscheduledinterestpaymentsoutofearnings.Therefore,thefixedchargecoverageis
moreinclusivethanthe TIEratio.
a.True
b.False

ANSWER: True
DIFFICULTY: Medium
TOPICS: Fixedchargecoverageratio

37.Ifsalesdecreaseandfinancialleverageincreases,wecansaywithcertaintythattheprofitmarginonsaleswill decrease.
a.True
b.False

ANSWER: False
DIFFICULTY: Medium
TOPICS: Profitmarginandleverage

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 Full file at https://TestBanksCafe.eu/

38.Sellingnewstockisan equitytransaction;it doesnotaffectanyassetor liabilityaccountandtherefore,doesnot

appearonthestatementofcashflows.
a.True
b.False

ANSWER: False
DIFFICULTY: Medium
TOPICS: Financingactivities

39.Otherthingsheldconstant,whichofthefollowingwillnotaffectthequickratio?(Assumethatcurrentassetsequal
currentliabilities.)
a.Fixedassetsaresoldforcash.
b.Cashis usedto purchaseinventories.
c.Cashisusedtopayoffaccountspayable.
d.Accountsreceivablearecollected.
e.Long-termdebtis issuedto payoffashort-termbankloan.

ANSWER: d
RATIONALE: Thequickratioiscalculatedasfollows:

The only action that

doesn'taffectthequickratioisstatementd.Whilethisactiondecreasesreceivables(acurrent
asset),itincreasescash(alsoacurrentasset).Theneteffectisnochangeinthequickratio.
DIFFICULTY: Easy
TYPE:Conceptual
TOPICS: Quickratio

40.Onewouldcalculatechangesinbalancesheetaccountsfor a.A
typicalratioanalysis.
b. Proformabalancesheetconstruction.
c.Statementof cashflowsconstruction.
d.Profitandlossanalysis.
e.Proformaincomestatementconstruction.

ANSWER: c
DIFFICULTY: Easy
TOPICS: Statementofcashflows

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 Full file at https://TestBanksCafe.eu/

41.Allof thefollowingrepresentcashoutflowstothefirmexcept
a.Taxes.
b.Interestpayments.
c.Dividends.
d.Purchaseofplantandequipment.
e.Depreciation.

ANSWER: e
DIFFICULTY: Easy
TOPICS: Cashflows

42.Otherthingsheldconstant,ifafirmholdscashbalancesinexcessof theiroptimallevelinanon-interestbearing
account,thiswilltendtolowerthe firm's
a.Profitmargin.
b.Totalassetturnover.
c.Returnonequity.
d.Allof theabove.
e.Answersbandcabove.

ANSWER: e
DIFFICULTY: Easy
TOPICS: Excessivecashbalances

43.Otherthingsheldconstant,whichofthefollowingwillnotaffectthecurrentratio,assumingan initialcurrentratio
greaterthan1.0?
a.Fixedassetsaresoldforcash.
b.Long-termdebtis issuedto pay offcurrentliabilities.
c.Accountsreceivablearecollected.
d.Cashisusedtopayoffaccountspayable.
e.Abankloanisobtained,andtheproceedsarecreditedtothefirm'scheckingaccount.

ANSWER: c
DIFFICULTY: Easy
TOPICS: Currentratio

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 Full file at https://TestBanksCafe.eu/

44.Theannualreportcontainsallofthe followingfinancialstatementsexcept
a.incomestatement.
b.statementofchangesinlong-termfinancing.
c.statementofcashflows.
d.balancesheet.
e.statementofretainedearnings.

ANSWER: b
DIFFICULTY: Easy
TOPICS: Annualreport

45.Whichof thefollowingfinancialstatementsshowsafirm'sfinancingactivities(howfundsweregenerated)and
investmentactivities(howfundswereused)overaparticularperiodoftime?
a.balancesheet
b.incomestatement
c.statementofretainedearnings
d.statementofcashflows
e.proxystatement

ANSWER: d
DIFFICULTY: Easy
TOPICS: Financialstatements

46.Whichofthefollowingstatementsshowstheportionofthefirm'searningsthathasbeensavedratherthanpaidout asdividends?
a.balancesheet
b.incomestatement
c.statementofretainedearnings
d.statementofcashflows
e.proxystatement

ANSWER: c
DIFFICULTY: Easy
TOPICS: Financialstatements

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 Full file at https://TestBanksCafe.eu/

47.Whichofthefollowingfinancialstatementsincludesinformationaboutafirm'sassets,equity,andliabilities?
a.Incomestatement
b.Cashflowstatement
c.Balancesheet
d.Statementofretainedearnings
e.Allofthe above

ANSWER: c
DIFFICULTY: Easy
TOPICS: Financialstatements

48.WhenconstructingaStatementof CashFlows,whichof thefollowingactionswouldbe consideredasourceof funds?

a.increaseinthecashaccount
b.decreaseinaccountspayable
c.increaseininventory
d.increasein long-termbonds
e.increaseinfixedassets

ANSWER: b
DIFFICULTY: Easy
TOPICS: Financialstatements

49.Whichofthefollowinggroupsprobablywouldnotbeinterestedin thefinancialstatementanalysisofafirm?
a.creditors
b.managementof thefirm
c.stockholders
d.InternalRevenueService
e.Allof theabovewouldbe interestedinthefinancialstatementanalysis.

ANSWER: d
DIFFICULTY: Easy
TOPICS: Ratioanalysis

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 Full file at https://TestBanksCafe.eu/

50.Whichof thefollowingratiosmeasureshoweffectivelyafirmismanagingits assets?

a.quickratio
b.timesinterestearned
c.profit margin
d.inventoryturnoverratio
e.priceearningsratio

ANSWER: d
DIFFICULTY: Easy
TOPICS: Inventoryturnoverratio

51.Ifyourgoalisdeterminehoweffectivelya firmismanagingitsassets,whichofthe followingsetsofratioswould youexamine?

a.profitmargin,currentratio,fixedchargecoverageratio
b.quickratio,debtratio,timeinterestearned
c.inventoryturnoverratio,dayssalesoutstanding,fixedassetturnoverratio
d.totalassetsturnoverratio,priceearningsratio,returnontotalassets
e.timeinterestearned,profitmargin,fixedassetturnoverratio

ANSWER: c
DIFFICULTY: Easy
TOPICS: Assetmanagementratios

52.Whichof thefollowingratiosmeasurestheextenttowhichoperatingincomecandeclinebeforethefirmisunableto
meetitsannualinterestcosts?
a.fixedchargecoverageratio
b.debtratio
c.times-interest-earnedratio
d.returnonequity
e.profit margin

ANSWER: c
DIFFICULTY: Easy
TOPICS: TIEratio

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 Full file at https://TestBanksCafe.eu/

53.An analysisofa firm'sfinancialratiosovertimethatisusedtodeterminethe improvementordeteriorationinits

financialsituationiscalled
a.sensitivityanalysis
b.DuPontchart
c.ratioanalysis
d.progresschart
e.trendanalysis

ANSWER: e
DIFFICULTY: Easy
TOPICS: Trendanalysis

54.Whichof thefollowingstatementsismostcorrect?
a.Anincreasein afirm'sdebtratio,withnochangesin itssalesandoperatingcosts,couldbeexpectedto lower
itsprofitmarginonsales.
b.Anincreasein DSO,otherthingsheldconstant,wouldgenerallyleadto anincreasein thetotalassetturnover ratio.
c.AnincreaseontheDSO,otherthingsheldconstant,wouldgenerallyleadto anincreasein theROE.
d.Ina competitiveeconomy,whereallfirmsearnsimilarreturnsonequity,onewouldexpecttofindlowerprofit
marginsforairlines,whichrequirealotoffixedassetsrelativeto sales,thanforfreshfishmarkets.
e.It is moreimportantto adjusttheDebt/Assetratiothantheinventoryturnoverratioto accountforseasonal
fluctuations.

ANSWER: a
RATIONALE: Statementaistruebecause,ifafirmtakesonmoredebt,itsinterestexpensewillrise,and
thiswillloweritsprofitmargin.Ofcourse,therewillbelessequitythantherewouldhave
been,hencetheROEmightriseeventhoughtheprofitmarginfell.
DIFFICULTY: Medium
TOPICS: Financialstatementanalysis

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 Full file at https://TestBanksCafe.eu/

55.Whichof thefollowingstatementsiscorrect?
a.Theannualreportcontainsfourbasicfinancialstatements:theincomestatement;balancesheet;statementof
cashflows;andstatementof changesinlong-termfinancing.
b.Althoughtheannualreportis gearedtowardtheaveragestockholder,itrepresentsfinancialanalysts'most
completesourceoffinancialinformationaboutthefirm.
c.Thekeyimportanceof annualreportinformationisthatitisusedby investorswhentheyformtheir
expectationsaboutthefirm'sfutureearningsanddividendsandtheriskinessofthosecashflows.
d.Theannualreportprovidesnorelevantinformationforuse byfinancialanalystsorbytheinvestingpublic.
e.Noneoftheabovestatementsiscorrect.

ANSWER: c
DIFFICULTY: Medium
TOPICS: Annualreport

56.Afirm'scurrentratiohassteadilyincreasedoverthepast5 years,from1.9fiveyearsagoto3.8today.Whatwould
afinancialanalystbemostjustifiedinconcluding?
a.Thefirm'sfixedassetsturnoverprobablyhasimproved.
b.Thefirm'sliquiditypositionprobablyhasimproved.
c.Thefirm'sstockpriceprobablyhasincreased.
d.Eachoftheaboveis likelyto haveoccurred.
e.Theanalystwouldbeunabletodrawanyconclusionsfromthisinformation.

ANSWER: b
DIFFICULTY: Medium
TOPICS: Liquidityratios

57.Whichofthe followingactionswillcauseanincreaseinthe quickratiointhe shortrun?

a.$1,000worthofinventoryis sold,andanaccountreceivableis created.Thereceivableexceedstheinventory by
theamountof profitof thesale,whichisaddedtoretainedearnings.
b.A smallsubsidiarywhichwasacquiredfor$100,000twoyearsagoandwhichwasgeneratingprofitsat the
rateof10percentissoldfor$100,000cash.(Averagecompanyprofitsare15percentofassets.)
c.Marketablesecuritiesaresoldatcost.
d.Allof theabove.
e.Answersaandbabove.

ANSWER: e
DIFFICULTY: Medium
TOPICS: Quickratio

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 Full file at https://TestBanksCafe.eu/

58.Whichof thefollowingstatementsiscorrect?
a.Inthetext,depreciationisregardedasauseofcashbecauseitreducesfixedassets,whichthenmustbe replaced.
b.If acompanyusessomeofitscashto payoffshort-termdebt,thenitscurrentratiowillalwaysdecline,given
thewayratioiscalculated,otherthingsheldconstant.
c.Duringa recession,it isreasonabletothinkthatmostcompaniesinventoryturnoverratioswillchangewhile
theirfixedassetturnoverratiowillremainfairlyconstant.
d.Duringa recession,wecanbeconfidentthatmostcompanies'DSOs(orACPs)willdeclinebecausetheir
saleswillprobablydecline.
e.Eachoftheabovestatementsisfalse.

ANSWER: e
DIFFICULTY: Medium
TOPICS: Miscellaneousratiobehavior

59.As a short-termcreditorconcernedwitha company'sabilitytomeetitsfinancialobligationtoyou,whichoneofthe

followingcombinationsofratioswouldyoumostlikelyprefer?

Current Debt

ratio TIE ratio

a. 0.5 0.5 0.33

b. 1.0 1.0 0.50

c. 1.5 1.5 0.50

d. 2.0 1.0 0.67

e. 2.5 0.5 0.71

ANSWER: c
DIFFICULTY: Medium
TOPICS: Ratioanalysis

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 Full file at https://TestBanksCafe.eu/

60.Whichofthe followingstatementsaboutratioanalysisisincorrect?
a.Classifyinga large,well-diversifiedfirmintoa singleindustryoftenisdifficultbecausemanyofthefirm's
divisionsareinvolvedwithdifferentproductsfromdifferentindustries.
b.Asaruleofthumb,itis safeto concludethatanyfirmwithacurrentratiogreaterthan1.0shouldbeableto meetits
currentobligations,thatis, paybillsthatcomedueinthecurrentperiod.[Currentratio=(Current
assets)/(Currentliabilities)]
c.Sometimesfirmsattempttouse"windowdressing"techniquestomaketheirfinancialstatementslookbetter
thantheyactuallyarein thecurrentperiod.
d.Computingthe valuesofthe ratiosisfairlysimple;the toughestandmostimportantpartofratioanalysisis
interpretationofthe valuesderivedfromthe computations.
e.Generalconclusionsabouta firmshouldnotbemadebyexaminingoneora fewratios,ratioanalysisshould
becomprehensive.

ANSWER: b
DIFFICULTY: Medium
TOPICS: Ratioanalysis

61.Yesterday,BickslerCorporationpurchased(andreceived)rawmaterialsoncreditfromitssupplier.Allelse equal,if
Bicksler'scurrentratiowas2.0beforethepurchase,whateffectdidthistransactionhaveonBicksler'scurrent ratio?
a.increased
b.decreased
c.stayedthesame
d.Thereisnotenoughinformationtoanswerthisquestion.
e.Noneoftheaboveisacorrectanswer.

ANSWER: b
DIFFICULTY: Medium
TOPICS: Currentratio

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 Full file at https://TestBanksCafe.eu/

62.BubblesSoapCorporationhasa quickratioof1.0 anda currentratioof2.0 implyingthat

a.thevalueofcurrentassetsis equalto thevalueofinventory.
b.thevalueofcurrentassetsis equalto thevalueofcurrentliabilities.
c.thevalueofcurrentliabilitiesis equalto thevalueofinventory.
d.Allof theabove.
e.Noneoftheabove.

ANSWER: c
DIFFICULTY: Medium
TOPICS: Currentratioandquickratio

63.Whichof thefollowingstatementsismostcorrect?
a.firmswithrelativelylowdebtratioshavehigherexpectedreturnswhenthebusinessisgood.
b.firmswithrelativelylowdebtratiosareexposedtoriskof losswhenthebusinessispoor.
c.firmswithrelativelyhighdebtratioshavehigherexpectedreturnswhenthebusinessisbad.
d.firmswithrelativelyhighdebtratioshavehigherexpectedreturnswhenthebusinessisgood.
e.noneoftheabove.

ANSWER: d
DIFFICULTY: Medium
TOPICS: Debtmanagementratios

64.Allotherthingsconstant,anincreaseina firm'sprofitmarginwould
a.increasetheadditionalfundsneededforfinancingagrowthinoperations.
b.decreasetheadditionalfundsneededforfinancingagrowthinoperations.
c.haveno effecton theadditionalfundsneededforfinancingagrowthinoperations.
d.decreaseitstaxes.
e.noneoftheabove.

ANSWER: b
DIFFICULTY: Medium
TOPICS: Profitmargin

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 Full file at https://TestBanksCafe.eu/

65.Whichof thefollowingstatementsiscorrect?
a.IfCompanyAhasa higherdebtratiothatCompanyB,thenwecanbesurethatAwillhavea lowertimes- interest-
earnedratiothanB.
b.Supposetwocompanieshaveidenticaloperationsintermsof sales,costof goodssold,interestrateon debt,
andassets.However,CompanyAusedmoredebtthanCompanyB;thatis,CompanyAhasa higherdebt
ratio.Undertheseconditions,wewouldexpectB'sprofitmarginto behigherthanA's.
c.TheROEof anycompanywhichisearningpositiveprofitsandwhichhasapositivenetworth(orcommon
equity)mustexceedthecompany'sROA.
d.Statementsa,b,andcarealltrue.
e.Statementsa,b,andcareallfalse.

ANSWER: b
DIFFICULTY: Tough
TOPICS: ROEanddebtratios

66.PepsiCorporation'scurrentratiois0.5,whileCokeCompany'scurrentratiois1.5.Bothfirmswantto"window
dress"theircomingend-of-yearfinancialstatements.Aspartof
theirwindowdressingstrategy,eachfirmwilldoubleitscurrentliabilitiesbyaddingshort-termdebtandplacingthe
fundsobtainedinthe cashaccount.Whichof thestatementsbelowbestdescribestheactualresultsofthesetransactions?
a.Thetransactionswillhavenoeffectonthecurrentratios.
b.Thecurrentratiosofbothfirmswillbeincreased.
c.Thecurrentratiosofbothfirmswillbedecreased.
d.OnlyPepsiCorporation'scurrentratiowillbe increased.
e.OnlyCokeCompany'scurrentratiowillbe increased.

ANSWER: d
RATIONALE: PepsiCorporation:
Before: Current ratio= 50/100= 0.50.
After: Current ratio = 150/200 = 0.75.

CokeCompany:
Before: Current ratio= 150/100= 1.50.
After: Current ratio = 250/200 = 1.25.
DIFFICULTY: Easy
TOPICS: Currentratio

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 Full file at https://TestBanksCafe.eu/

67.TheCharlestonCompanyisarelativelysmall,privatelyownedfirm.Lastyearthecompanyhadafter-taxincomeof
$15,000and10,000shareswereoutstanding.Theownersweretryingto determinethemarketvalueforthestock,
priortotakingthecompanypublic.Asimilarfirmwhichispubliclytradedhad a price/earningsratioof5.0.Using
onlytheinformationgiven,estimatethemarketvalueof oneshareof Charleston'sstock.
a.$10.00
b.$7.50
c.$5.00
d.$2.50
e.$1.50

ANSWER: b
RATIONALE: EPS = $15,000/10,000 = $1.50. P/E = 5.0 = P/$1.50. P = $7.50
DIFFICULTY: Easy
TOPICS: Marketpricepershare

68.IfBoydCorporationhassalesof $2 millionperyear(allcredit)anddayssalesoutstandingof 35 days,whatisits

averageamountofaccountsreceivableoutstanding(assumea 360dayyear)?
a.$194,444
b.$57,143
c.$5,556
d.$97,222
e.$285,714

ANSWER: a
RATIONALE: A/R=(Sales/360)(DSO)=(($2,000,000)/(360))(35)=$194,444.
DIFFICULTY: Easy
TOPICS: Accountsreceivable

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 Full file at https://TestBanksCafe.eu/

69.Afirmhasaprofitmarginof 15 percenton salesof $20,000,000.Ifthefirmhasdebtof $7,500,000,totalassetsof

$22,500,000,andanafter-taxinterestcostontotaldebtof5percent,whatis thefirm'sROA?
a.8.4%
b.10.9%
c.12.0%
d.13.3%
e.15.1%

ANSWER: d
RATIONALE: Netincome=0.15($20,000,000)=$3,000,000.ROA=$3,000,000/$22,500,000=13.3%.
DIFFICULTY: Easy
TOPICS: ROA

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 Full file at https://TestBanksCafe.eu/

70.CollinsCompanyhadthe followingpartialbalancesheetandcompleteincomestatementinformationfor lastyear:

BalanceSheet:
Cash $20
A/R 1,000
Inventories 2,000
Totalcurrentassets $3,020
Netfixedassets 2,980
Totalassets $6,000

Income
Statem $10,000
Costofgoodssold
ent: 9,200
EBIT
Sales $800
Interest(10%) 400
EBT $400
Taxes(40%) 160
NetIncome $240

TheindustryaverageDSOis 30(360-daybasis).Collinsplansto changeitscreditpolicysoasto causeitsDSOto

equaltheindustryaverage,andthischangeisexpectedtohavenoeffectoneithersalesorcostofgoodssold.Ifthe
cashgeneratedfromreducingreceivablesisusedtoretiredebt(whichwasoutstandingalllastyearandwhichhasa
10%interestrate),whatwillCollins'debtratio(Totaldebt/Totalassets)beafterthechangein DSOis reflectedin
thebalancesheet?
a. 33.33%
b. 45.28%
c. 52.75%
d. 60.00%
e.65.71%

ANSWER: e
$1,000
RATIONALE: Current DSO = $10,000⁄360 36 days. Industry average DSO = 30 days.

$10,000
Reduce receivables by6 × ( 360
) = $166.67
Debt = $400/0.10 = $4,000.

𝑇𝐷 $4,000−$166.67
Debt to assets = 𝑇𝐴 = $6,000−$166.67 = 65.71%

DIFFICULTY: Medium
TOPICS: Financialstatementanalysis

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 Full file at https://TestBanksCafe.eu/

71.A firmhastotalinterestchargesof$10,000peryear,salesof$1million,ataxrateof40percent,andanetprofit marginof6

percent.Whatisthefirm'stimes-interest-earnedratio?
a.16times
b.10times
c.7times
d.11times
e.20times

ANSWER: d
RATIONALE: NI=$1,000,000(0.06)=$60,000.
EBT=$60,000/0.6=$100,000.
EBIT=$100,000+$10,000= $110,000.
TIE= EBIT/I= $110,000/$10,000= 11 times.
DIFFICULTY: Medium
TOPICS: TIEratio

72.AlumbatCorporationhas$800,000ofdebtoutstanding,andit paysaninterestrateof10percentannuallyonitsbank
loan.Alumbat'sannualsalesare$3,200,000;itsaveragetaxrateis 40percent;anditsnetprofitmarginonsalesis 6 percent.If
thecompanydoesnotmaintainaTIEratioofat least4times,itsbankwillrefuseto renewitsloan,and
bankruptcywillresult.WhatisAlumbat'scurrentTIEratio?
a. 2.4
b. 3.4
c. 3.6
d. 4.0
e.5.0

ANSWER: e
RATIONALE: TIE=EBIT/I,sofindEBITandI.
Interest=$800,000 ×0.1=$80,000.
Netincome=$3,200,000×0.06=$192,000.
Taxableincome=EBT=$192,000/(1−T)=$192,000/0.6=$320,000.
EBIT=$320,000+$80,000=$400,000.
TIE=$400,000/$80,000=5.0times.
DIFFICULTY: Medium
TOPICS: TIEratio

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 Full file at https://TestBanksCafe.eu/

73.Determinetheincreaseor decreaseincashforRinkySupplyCompanyforlastyear,giventhefollowinginformation.
(Assumenootherchangesoccurredduringthepastyear.)

Decreaseinmarketablesecurities = $25
Increaseinaccountsreceivables = $50
Increaseinnotespayable = $30
Decreaseinaccountspayable = $20
Increaseinaccruedwagesandtaxes = $15
Increaseininventories = $35
Retainedearnings = $5
a.−$50
b.+$40
c.−$30
d.+$20
e.−$10

ANSWER: c
RATIONALE: Statementofcashflows:
CashFlowsfromOperations
Retainedearnings $5
Additions(sourcesof cash):
Increaseinaccruedwagesandtaxes 15
Subtractions(usesofcash):
Increaseinaccountsreceivable (50)
Increasein inventories (35)
Decreaseinaccountspayable (20)
NetCashFlowsfromOperations ($85)

CashFlowsAssociatedwithFinancingActivities
Decreaseinmarketablesecurities $25
Increaseinnotespayable 30
NetCashFlowsfromFinancing 55
NetreductioninCash ($30)

DIFFICULTY: Medium
TOPICS: Changein cashflows

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 Full file at https://TestBanksCafe.eu/

74.CannonCompanyhasenjoyedarapidincreaseinsalesinrecentyears,followingadecisiontosellon credit.
However,thefirmhasnoticeda recentincreaseinits collectionperiod.Lastyear,totalsaleswere$1 million,and
$250,000ofthesesaleswereoncredit.Duringtheyear,theaccountsreceivableaccountaveraged$41,664.Itis
expectedthatsaleswillincreaseintheforthcomingyearby 50 percent,and,whilecreditsalesshouldcontinuetobe
thesameproportionoftotalsales,itis expectedthatthedayssalesoutstandingwillalsoincreaseby50percent.If the
resultingincreaseinaccountsreceivablemustbefinancedbyexternalfunds,howmuchexternalfundingwill Cannonneed?
a.$41,664
b.$52,086
c.$47,359
d.$106,471
e.$93,750

ANSWER: b
RATIONALE: DSO=($41,664/$250,000)/360=60days.
NewA/R=(($250,000)(1.5)/(360))(60)(1.5)=$93,750.
Hence,increaseinreceivables=$93,750−$41,664=$52,086.
DIFFICULTY: Medium
TOPICS: Receivablesincrease

75.TheMerylCorporation'scommonstockcurrentlyis sellingat $100pershare,whichrepresentsaP/Eratioof10.If

thefirmhas100sharesofcommonstockoutstanding,areturnonequityof20percent,andadebtratioof60
percent,whatisitsreturnontotalassets(ROA)?
a.8.0%
b.10.0%
c.12.0%
d.16.7%
e.20.0%

ANSWER: a
RATIONALE: P/E=10=$100/EPS
EPS=$100/10=$10.
Earnings=NI=$10(100shares)=$1,000.
ROE= NI/Equity = $1,000/Equity = 20%
Equity = $1,000/0.20 = $5,000.
Debt ratio = 60%, so Equity ratio=40%=Equity/TA
TA=Equity/0.40=$5,000/0.40=$12,500.
ROA=NI/TA=$1,000/$12,500=0.08=8%.
DIFFICULTY: Medium
TOPICS: ROA

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 Full file at https://TestBanksCafe.eu/

76.SelzerInc.sellsall its merchandiseon credit.Ithasa profitmarginof 4 percent,dayssalesoutstandingequalto60

days,receivablesof$150,000,totalassetsof$3million,anda debtratioof0.64.Whatisthe firm'sreturnonequity (ROE)?
a.7.1%
b.33.3%
c.3.3%
d.71.0%
e.8.1%

ANSWER: c
RATIONALE: (Salesperday)(DSO)=A/R
(Sales/360)(60)=$150,000
Sales=$900,000.

Profitmargin=Net profitaftertax/Sales.
Netprofit=0.4($900,000)=$36,000.
Debtratio=0.64=Total debt/$3,000,000.
Totaldebt=$1,920,000.
Totalequity=$3,000,000−$1,920,000=$1,080,000.
ROE=$36,000/$1,080,000=3.3%.
DIFFICULTY: Medium
TOPICS: ROE

77.Youaregiventhefollowinginformationaboutafirm:Thegrowthrateequals8percent;returnonassets(ROA)is
10percent;thedebtratiois 20percent;andthestockis sellingat $36.Whatis thereturnonequity(ROE)?
a.14.0%
b.12.5%
c.15.0%
d.2.5%
e.13.5%

ANSWER: b
RATIONALE: Debt ratio= TL/TA= 20%, so Equity= (1−0.20)TA=0.80(TA).
ROA=NI/TA=10%.NI=10%(TA)=0.10(TA).
ROE=NI/Equity=[0.10(TA)]/[0.80(TA)]=0.10/0.80=0.125=12.5%.
DIFFICULTY: Medium
TOPICS: ROE

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 Full file at https://TestBanksCafe.eu/

78.AssumeMeyerCorporationis100percentequityfinanced.Calculatethe returnonequity,giventhe following

information:

(1) Earningsbeforetaxes=$1,500; (2)

Sales=$5,000;
(3) Dividendpayoutratio=60%; (4)
Totalassetsturnover= 2.0; (5)
Applicabletaxrate= 30%.
a. 25%
b. 30%
c. 35%
d. 42%
e.50%

ANSWER: d
RATIONALE: NI= $1,500(1−0.3) = $1,050.
Total assets turnover = Sales/TA = 2.0.
TA = Sales/2.0 =$5,000/2.0 = $2,500 = Equity.
ROE = NI/Equity = $1,050/$2,500 = 42%.
DIFFICULTY: Medium
TOPICS: ROE

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 Full file at https://TestBanksCafe.eu/

79.TheAmerCompanyhasthefollowingcharacteristics:

Sales: $1,000
TotalAssets: $1,000
TotalDebt/TotalAssets: 35%
EBIT: $200
Taxrate: 40%
Interestrateontotaldebt: 4.57%

WhatisAmer'sROE?
a. 11.04%
b. 12.31%
c. 16.99%
d. 28.31%
e.30.77%

ANSWER: c
RATIONALE: Calculatedebtandequity:
Debt=D/A×TA=0.35($1,000)=$350.
Equity=TA−Debt=$1,000−$350=$650.
CalculatenetincomeandROE:
Net income= (EBIT−I)(1−T)=[$200−0.0457($350)](0.6)=$110.4.
ROE=$110.4/$650=16.99%.
DIFFICULTY: Medium
TOPICS: ROE

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 Full file at https://TestBanksCafe.eu/

80.AurilloEquipmentCompany(AEC)projectedthatits ROEfornextyearwouldbe just6%.However,thefinancial

staffhasdeterminedthatthefirmcanincreaseitsROEbyrefinancingsomehighinterestbondscurrently
outstanding.Thefirm'stotaldebtwillremainat$200,000andthe debtratiowillholdconstantat80%,butthe interest
rateontherefinanceddebtwillbe10%.Therateontheolddebtis 14%.Refinancingwillnotaffectsaleswhichare projectedto
be$300,000.EBITwillbe11%ofsales,andthefirm'staxrateis 40%.If AECrefinancesitshigh interestbonds,whatwillbe its
projectednewROE?
a.3.0%
b.8.2%
c.10.0%
d.15.6%
e.18.7%

ANSWER: d
RATIONALE: Relevantinformation:
OldROE= NI/Equity= 0.06= 6%.
Sales= $300,000;EBIT=0.11(Sales)=0.11($300,000)=$33,000.
Debt=$200,000;D/A=0.80=80%.
Taxrate=40%.
Interestratechange:Oldbonds14%;newbonds10%.
Calculatetotalassets andequityamounts:
Sincedebt= $200,000,totalassets= $200,000/0.80=$250,000.
E/TA=1−D/A=1−0.80=0.20.
Equity=E/TA×TA=0.20×$250,000=$50,000.
ConstructcomparativeIncomeStatementsfromEBIT,andcalculatenewROE:
Old New
EBIT $33,000 $33,000
Less:Interest 28,000 20,000
EBT 5,000 13,000
Less:Taxes(40%) 2,000 5,200
Netincome $3,000 $7,800
NewROE= NI/Equity= $7,800/$50,000= 0.1560=15.6%.

DIFFICULTY: Medium
ROEandrefinancing
TOPICS:
81.SavelotsStores'currentfinancialstatementsareshownbelow:

Inventories $500 Accountspayable $100

Othercurrentassets 400 Short-termnotespayable 370
Fixedassets 370 Commonequity 800
Totalassets $1,270 Totalliab. andequity $1,270

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 Full file at https://TestBanksCafe.eu/
Sales $2,000
Operatingcosts 1,843
EBIT 157
Less:Interest 37
EBT 120
Less:Taxes(40%) 48
Netincome 72
A recentlyreleasedreportindicatesthatSavelots'currentratioof1.9is in linewiththeindustryaverage.However,
itsaccountspayable,whichhavenointerestcostandwhicharedueentirelyto purchasesofinventories,amountto
only20%ofinventoryversusanindustryaverageof60%.SupposeSavelotstookactionsto increaseitsaccounts payableto
inventoriesratioto the60%industryaverage,butit(1)keptallofitsassetsat theirpresentlevels(thatis,
theassetsideofthebalancesheetremainsconstant)and(2)alsohelditscurrentratioconstantat1.9.Assumethat
Savelots'taxrateis40%,thatitscostofshort-termdebtis10%,andthatthechangeinpaymentswillnotaffect operations.In
addition,commonequitywouldnotchange.Withthechanges,whatwouldbe Savelots'newROE?
a.10.5%
b.7.8%
c.9.0%
d.13.2%
e.12.0%

ANSWER: a
RATIONALE: Thefirmis notusingits"free"tradecredit(thatis,accountspayable(A/P))to the same
extentasothercompanies.Sinceit isfinancingpartofitsassetswith10%notes
payable,itsinterestexpenseishigherthannecessary.

Calculatetheincreasein payables:
Current(A/P)/Inventoriesratio= 100/500= 0.20.
TargetA/P=0.60(Inventories)= 0.60(500)= 300.
Increasein A/P= 300−100=200.

Becausethe currentratioandtotalassetsremainconstant,totalliabilitiesandequitymustbe
unchanged.Theincreaseinaccountspayablemustbematchedbyanequaldecrease in
interestbearingnotespayable.Notespayabledeclineby200.Interestexpense
decreasesby200×0.10= 20.
ConstructcomparativeIncomeStatements:
Old New
Sales $2,000 $2,000
Operatingcosts 1,843 1,843
EBIT 157 157
Less:Interest 37 17
EBT 120 140
Less:Taxes 48 56
Netincome(NI) $72 $84
ROE= NI/Equity= $72/$800= 9%.$84/$800= 10.5%.
NewROE= 10.5%.
DIFFICULTY: Medium

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 Full file at https://TestBanksCafe.eu/
TYPE:Problem
TOPICS: ROEand financing

82.HarveySuppliesInc.hasacurrentratioof3.0,aquickratioof2.4,andaninventoryturnoverratioof6. Harvey's totalassetsare$1

millionandits debtratiois0.20.Thefirmhasno long-termdebt.WhatisHarvey'ssalesfigureif thetotalcostofgoodssoldis
75%ofsales?
a.$960,000
b.$720,000
c.$1,620,000
d.$120,000
e.$540,000

ANSWER: a
RATIONALE: Currentliabilities:(0.2)($1,000,000)=$200,000.
Currentassets:CA/$200,000=3.0;CA= $600,000.
Inventory:($600,000 −I)/$200,000=2.4;I=$120,000.
Sales:(0.75)S/$120,000=6; S=$720,000/0.75=$960,000.
DIFFICULTY: Medium
TOPICS: Salesvolume

83.Giventhefollowinginformation,calculatethemarketpricepershareof WAMInc.

Earningsafterinterestandtaxes= $200,000
Earningspershare= $2.00
Stockholders'equity=$2,000,000
Market/Bookratio=0.20
a.$20.00
b. $8.00
c. $4.00
d. $2.00
e.$1.00

ANSWER: c
RATIONALE: Numberofshares=$200,000/$2.00=100,000.
Bookvaluepershare=$2,000,000/100,000
=$20.Marketvalue=0.2(Bookvalue)=0.2($20)=$4.00pershare.
DIFFICULTY: Medium
TOPICS: Marketpricepershare

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 Full file at https://TestBanksCafe.eu/

84.OnitsDecember31stbalancesheet,LCGCompanyreportedgrossfixedassetsof$6,500,000andnetfixedassets
of$5,000,000.Depreciationfortheyearwas$500,000.Netfixedassetsa yearearlieronDecember31st,hadbeen
$4,700,000.Whatfigurefor "CashFlowsAssociatedwithLong-TermInvestments(FixedAssets)"shouldLCG
reportonitsStatementofCashFlowsforthecurrentyear?
a. $500,000
b. $600,000
c. $700,000
d. $800,000
e.$900,000

ANSWER: d

RATIONALE: Funds =NFA1–NFA0+Depreciation

=$5,000,000–$4,700,000+$500,000=$800,000.
Alternativelong-formsolution:
CurrentYear OneYearAgo
Grossfixedassets $6,500,000 $5,700,000
Accumulateddepreciation 1,500,000 1,000,000
Netfixedassets 5,000,000 4,700,000
AccumulatedassetsYear ago
=$4,700,000+($1,500,000−$500,000)

=$5,700,000.

Fundsusedtopurchase = GFACurrent−GFAYearagofixedassets
=$6,500,000−$5,700,000=$800,000.
DIFFICULTY: Medium
TOPICS: Depreciationcashflows

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 Full file at https://TestBanksCafe.eu/

85.LombardiTruckingCompanyhasthefollowingdata:

Assets: $10,000 Profitmargin: 3.0%

Debtratio: 60.0% Interestrate: 10.0%
Taxrate: 40% Totalassetturnover: 2.0

WhatisLombardi'sTIEratio?
a. 0.95
b. 1.75
c. 2.10
d. 2.67
e.3.45

ANSWER: d

RATIONALE: TATurnover= S/A=2 S/$10,000=2S=$20,000

Debt= $6,000INT= $6,000(0.1)=$600

NI=$600

EBIT $1,600
Int. 600
EBT $1,000
Taxes(40%) 400
NI $600
TIE= $1,600/$600=2.67
DIFFICULTY: Tough
TOPICS: TIEratio

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 Full file at https://TestBanksCafe.eu/

86.RetailersInc.andComputerCorp.eachhaveassetsof$10,000anda returnoncommonequityequalto15%.
RetailershastwiceasmuchdebtandtwiceasmanysalesrelativetoComputerCorp.Retailers'netincomeequals
$750,andits totalassetturnoverisequalto3.WhatisComputerCorp.'sprofitmargin?
a. 2.50%
b. 5.00%
c. 7.50%
d.10.00%
e.12.50%

ANSWER: c
RATIONALE: D = DebtforComputerCorp.; S = SalesforComputerCorp.
2D = DebtforRetailers; 2S = SalesforRetailers

Retailers: $1,500−0.3D=$750D=$2,500Computer

Corp.: NI = $1,125 Retailers:

S=$15,000

DIFFICULTY: Tough
TOPICS: Profitmargin

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