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Chapter 3 PDF
Chapter 3 PDF
[A] :What is the relationship between the debt-equity ratio and the equity multiplier? Review
section 3.3.
[B] :What is the relationship between the debt-equity ratio and the equity multiplier? Review
section 3.3
[C] :You have this reversed. Review section 3.3
[D] :You are correct!
[E] :Net income is not related to the equity multiplier. Review section 3.3.
2) When the inventory turnover rate increases, the number of days it takes to sell inventory
also increases.
[A] True
[B] False
[A] :An increase in the inventory turnover rate decreases the number of days in inventory.
Review section 3.3.
[B] :You are correct!
3) Which one of the following is a financing activity on a typical statement of cash flows?
[A] :This will decrease, not increase the return on equity. Review section 3.4.
[B] :You are correct!
[C] :This will decrease, not increase the return on equity. Review section 3.4.
[D] :This is not a component of return on equity. Review section 3.4.
[E] :This will decrease, not increase, the return on equity. Review section 3.4.
5) Asset utilization ratios are intended to measure how efficiently or intensively a firm uses its
assets to generate sales.
[A] True
[B] False
6) Which of the following are correct statements about the price-earnings ratio?
I. A high P/E ratio is often assumed to mean the firm has significant prospects for future
growth.
II. A P/E ratio of 15 means investors are willing to pay $15 for each $1 of current earnings.
III. Care must be taken in interpreting very high P/E ratios since they can result from a firm
having very low earnings.
IV. A firm with high earnings per share must also have a very high P/E ratio.
[A] :Correct, but there's also one more. Review section 3.3.
[B] :Correct, but there's also one more. Review section 3.3.
[C] :You are correct!
[D] :One of these is incorrect. Review section 3.3.
[E] :One of these is incorrect. Review section 3.3.
[A] True
[B] False
8) Which one of the following is frequently used as a measure of the cash flow available to
meet the financial obligations of a firm?
[A] :Fixed assets are only a part of total assets. Review section 3.3.
[B] :The length of time is not measured by the fixed asset turnover ratio. Review section 3.3.
[C] :Net income is not a part of the fixed asset turnover. Review section 3.3.
[D] :This is a part of a common-size balance sheet, but not the fixed asset turnover ratio.
Review section 3.3.
[E] :You are correct!
10) Which one of the following is a financing activity on a typical statement of cash flows?
[A] depreciation
[B] change in net fixed assets
[C] change in inventory
[D] change in accounts payable
[E] dividends paid
11) The Du Pont identity decomposes return on equity into the profit margin, total asset
turnover, and the current ratio.
[A] True
[B] False
[A] :The current ratio is not a part of the Du Pont identity. Review section 3.4.
[B] :You are correct!
12) A firm has return on equity of 15 percent, earnings before taxes of $30,000, total asset
turnover of .80, a profit margin of 4.5 percent, and a tax rate of 35 percent. What is the return
on assets?
[A] :Correct, but there is at least one more correct option. Review sections 3.2 and 3.5.
[B] :Correct, but there is at least one more correct option. Review sections 3.1 and 3.5.
[C] :Correct, but there is at least one more correct option. Review section 3.2.
[D] :Almost, but you need to add the last option also. Review section 3.5.
[E] :You are correct!
[A] True
[B] False
[A] :The quick ratio is known as the acid-test ratio. Review section 3.3 to find out why.
[B] :You are correct!
16) If a firm has only current assets and no fixed assets of any kind, its times interest earned
ratio must exceed its cash coverage ratio.
[A] True
[B] False
[A] :With no fixed assets, depreciation will be zero and the ratios will be identical. Review
section 3.3.
[B] :You are correct!
17) Tron, Inc. has a times interest earned ratio of 4.0. Based on this ratio, a creditor knows
that Tron's EBIT must decline by more than _____ before Tron will be unable to cover its
interest expense.
[A] 33 percent
[B] 40 percent
[C] 67 percent
[D] 75 percent
[E] 80 percent
[A] :Suppose EBIT is $400 and interest expense is $100. By what percentage must EBIT
decline to become $100? Review section 3.3.
[B] :Suppose EBIT is $400 and interest expense is $100. By what percentage must EBIT
decline to become $100? Review section 3.3.
[C] :Suppose EBIT is $400 and interest expense is $100. By what percentage must EBIT
decline to become $100? Review section 3.3.
[D] :You are correct!
[E] :Suppose EBIT is $400 and interest expense is $100. By what percentage must EBIT
decline to become $100? Review section 3.3.
[A] cash
[B] fixed assets
[C] accounts payable
[D] salary expense
[E] inventory
[A] :An increase in an asset account, including the cash account, is a use of cash. Review
section 3.1.
[B] :Do you spend or receive cash when you purchase new equipment? Review section 3.1.
[C] :You are correct!
[D] :Don't you use cash when you pay employees their salary? Review section 3.1.
[E] :Do you spend or receive cash when you purchase inventory? Review section 3.1.
19) While financial statements have many uses outside of the company, they are not useful
internally.
[A] True
[B] False
[A] :It can be used in evaluating the performance of a manager or a company division.
Review section 3.5.
[B] :You are correct!
20) _____ ratios are designed to determine a firm's long-run ability to meet its obligations.
[A] Liquidity
[B] Asset-utilization
[C] Profitability
[D] Financial leverage
[E] Market value
[A] :These are a measure of short-run, not long-run solvency. Review section 3.3.
[B] :These measure how a firm utilizes its assets. Review section 3.3.
[C] :These measure how efficiently a firm uses its assets to generate profits. Review section
3.3.
[D] :You are correct!
[E] :These measure investors' perceptions of company performance, not the firm's long-run
ability to meet its obligations. Review section 3.3.
21) A common-base year statement is a standardized financial statement presenting all items
relative to their respective base-year amounts.
[A] True
[B] False
22) Which one of the following actions will increase a firm's current ratio if the ratio is
presently 1.5?
[A] :This would reduce both inventory and the current ratio. Review section 3.3.
[B] :Will this change current assets? Review section 3.3.
[C] :You are correct!
[D] :Will either current assets or current liabilities change? Review section 3.3.
[E] :Because the current ratio is presently greater than one, this action would reduce the
current ratio, not increase it. Review section 3.3.
[A] average percentage of total daily sales that are credit sales.
[B] average number of days it takes to collect payment from a credit customer.
[C] average number of days it takes for a firm to pay its' suppliers.
[D] number of times during the year that a firm collects and reloans its receivables.
[E] number of days it takes before a firm uses all of its' working capital.
[A] :The total asset turnover will increase and the equity multiplier will decrease by exactly
offsetting amounts. Review section 3.4.
[B] :If a denominator declines won't the ratio increase? Review section 3.4.
[C] :The equity multiplier will decrease. Review section 3.4.
[D] :You are correct!
[E] :The profit margin is unaffected by a change in assets. Review section 3.4.
25) If a firm has a current ratio of 2 and a quick ratio of 1, then inventory must equal half of
the total current assets.
[A] True
[B] False
26) Of the ratios below, the best overall measure of management's ability to judge the
creditworthiness of the customers it chooses to extend trade credit to is the:
[A] :How does this relate to extending credit to customers? Review section 3.3.
[B] :You are correct!
[C] :How does this relate to extending credit to customers? Review section 3.3.
[D] :How does this relate to extending credit to customers? Review section 3.3.
[E] :How does this relate to extending credit to customers? Review section 3.3.
28) Total debt plus total equity is the same thing as total capitalization.
[A] True
[B] False
[A] :Total capitalization includes only long-term debt, not total debt. Review section 3.3.
[B] :You are correct!
[A] :Why should historical costs take precedence over current market values? Review section
3.5.
[B] :You are correct!
[C] :Why do historical costs reflect current values? Review section 3.5.
[D] :Why should historical costs take precedence over current market values? Review section
3.5.
[E] :Why should historical costs take precedence over current market values? Review section
3.5.
32) CatchaTan Co. had net sales of $900,000 and average accounts receivables of $60,000
last year. How long on average does it take their credit customers to pay their bills?
33) Which one of the following types of ratios is most apt to reveal a firm's inability to control
operating expenses?
[A] liquidity
[B] profitability
[C] market value
[D] asset utilization
[E] long-term solvency
[A] :How do liquidity ratios reflect operating expenses? Review section 3.3.
[B] :You are correct!
[C] :How do market value ratios reflect operating expenses? Review section 3.3.
[D] :How do asset utilization ratios reflect operating expenses? Review section 3.3.
[E] :How do long-term solvency ratios reflect operating expenses? Review section 3.3.
34) A company has sales of $300, costs of goods sold of $150, other costs of $90,
depreciation of $35, and taxes of $10. What is the profit margin?
[A] 3 percent
[B] 5 percent
[C] 8 percent
[D] 10 percent
[E] 15 percent
[A] :Did you get net income of $15? Review section 3.3.
[B] :You are correct!
[C] :Did you get net income of $15? Review section 3.3.
[D] :Did you get net income of $15? Review section 3.3.
[E] :Did you get net income of $15? Review section 3.3.
35) Which of the following factors make it difficult to perform financial statement analysis?
I. Many firms are conglomerates with diverse operations.
II. The financial statements of firms outside the US do not necessarily conform to GAAP.
III. Firms may use different accounting procedures for inventory and depreciation.
IV. Firms with seasonal operations may have differing fiscal years.
[A] :These are only some of the factors making financial statement analysis difficult. Review
section 3.5.
[B] :These are only some of the factors making financial statement analysis difficult. Review
section 3.5.
[C] :These are only some of the factors making financial statement analysis difficult. Review
section 3.5.
[D] :These are only some of the factors making financial statement analysis difficult. Review
section 3.5.
[E] :You are correct!
36) The sales of Ace Sporting Goods have increased recently and inventory has declined
slightly. All else equal, a financial analyst would expect to find that:
[A] both the inventory turnover and the days' sales in inventory have increased.
[B] both the inventory turnover and the days' sales in inventory have decreased.
[C] the inventory turnover has increased while the days' sales in inventory have decreased.
[D] the current ratio has increased.
[E] the interval measure has increased.
[A] :How can the number of days increase when you sell inventory faster? Review section
3.3.
[B] :These are conflicting results. Review section 3.3.
[C] :You are correct!
[D] :If all else is equal, then less inventory means less current assets. Review section 3.3.
[E] :If all else is equal, then less inventory means less current assets. Review section 3.3.
37) Which of the following are uses of cash?
I. increase in accounts receivable
II. decrease in accounts payable
III. increase in common stock
IV. decrease in fixed assets in excess of the annual depreciation
[A] considers all assets and liabilities with a life of one year or less.
[B] incorporates all current assets except inventory.
[C] excludes only the cash account from current assets in its computation.
[D] will always be larger than the current ratio.
[E] compares total assets minus inventory to total liabilities.
[A] :This would include inventory, which is incorrect. Review section 3.3.
[B] :You are correct!
[C] :The cash account is included in the quick ratio. Review section 3.3.
[D] :No, it is generally smaller than the current ratio. Review section 3.3.
[E] :Are long-term assets and liabilities included in the quick ratio? Review section 3.3.
39) A firm has net income of $390, interest expense of $40, and depreciation of $50. The
corporate tax rate is 35 percent. What is the cash coverage ratio?
[A] 9.75
[B] 10.67
[C] 11.00
[D] 14.41
[E] 17.25
[A] :The first step is to compute taxable income. Did you get $600 for this? Review section
3.3.
[B] :The first step is to compute taxable income. Did you get $600 for this? Review section
3.3.
[C] :Are you confusing net income with EBIT? Review section 3.3
[D] :The first step is to compute taxable income. Did you get $600 for this? Review section
3.3.
[E] :You are correct!
[A] True
[B] False
41) Vendors providing trade credit to a firm tend to be most interested in the firm's:
42) Which of the following are directly incorporated into the calculation of the Du Pont
identity?
I. debt-equity ratio
II. equity multiplier
III. total asset turnover
IV. profit margin
[A] :Only one of these is included in the Du Pont identity. Review section 3.4.
[B] :Correct, but there is a third part also. Review section 3.4.
[C] :One of these three is incorrect. Review section 3.4.
[D] :One of these three is incorrect. Review section 3.4.
[E] :You are correct!
43) Market value ratios are measures of financial performance that can only be computed for
publicly traded companies.
[A] True
[B] False
[A] :Correct, but there's at least one more. Review section 3.3.
[B] :One of these is incorrect. Review section 3.3.
[C] :Why isn't the return on equity considered a measure of profitability as well? Review
section 3.3.
[D] :You are correct!
[E] :At least one of these is incorrect. Review section 3.3.
45) Long-term solvency ratios are intended to address a firm's ability to meet its financial
obligations over the next twelve months.
[A] True
[B] False
[A] :These ratios deal with the long run, not the short run. Review section 3.3.
[B] :You are correct!
46) In a common-size income statement, all accounts are expressed as a percentage of:
[A] sales.
[B] EBIT.
[C] EBIT plus depreciation.
[D] net income less dividends paid.
[E] cost of goods sold.
[A] :Income statement accounts are expressed as a percentage of sales Review section 3.2.
[B] :All balance sheet accounts are expressed as a percentage of total assets. Review
section 3.2.
[C] :Balance sheet accounts are expressed as a percentage of total assets. Review section
3.2.
[D] :What is the difference between a common-size statement and a common-base
statement? Review section 3.2.
[E] :You are correct!
49) The return on equity equals the return on assets when the:
[A] :If the firm has current liabilities, the ROE will exceed the ROA. Review section 3.3.
[B] :In this case, the ROE will exceed the ROA. Review section 3.3.
[C] :If the firm has current liabilities the ROE will exceed the ROA. Review section 3.3.
[D] :This does not preclude the ROA from being a different amount. Review section 3.3.
[E] :You are correct!
50) Jensen's, Inc. has a current ratio of 1.5. This implies that if the firm liquidates its current
assets in order to pay off its current liabilities in full, it can sell the current assets for as little as
_____ of book value.
[A] 15 percent
[B] 25 percent
[C] 33 percent
[D] 67 percent
[E] 150 percent
[A] :Assume current assets are $150 and current liabilities are $100. $100 is what percentage
of $150? Review section 3.3.
[B] :Assume current assets are $150 and current liabilities are $100. $100 is what percentage
of $150? Review section 3.3.
[C] :Assume current assets are $150 and current liabilities are $100. $100 is what
percentage of $150? Review section 3.3.
[D] :You are correct!
[E] :Assume current assets are $150 and current liabilities are $100. $100 is what percentage
of $150? Review section 3.3.
51) One of the problems with financial statement analysis is that it’s hard to define when a
ratio is too high or too low.
[A] True
[B] False
52) A firm has current liabilities of $250, a current ratio of 1.2, and a quick ratio of 0.80. How
much inventory does this firm have?
[A] $45
[B] $50
[C] $100
[D] $120
[E] $200
[A] :Did you get current assets of $300? Review section 3.3.
[B] :Did you get current assets of $300? Review section 3.3.
[C] :You are correct!
[D] :Did you get current assets of $300? Review section 3.3.
[E] :Did you get current assets of $300? Review section 3.3.
53) The net change in cash over a period of time is equal to:
[A] operating cash flow plus the change in net working capital.
[B] the investment activity minus the operating activity.
[C] net income plus depreciation, minus taxes and dividends.
[D] ending cash minus changes in long-term debt minus additions to fixed assets.
[E] cash flow from operating activities plus net cash from investment and financing activities.
[A] :You need to review the statement of cash flows in section 3.1.
[B] :You need to review the statement of cash flows in section 3.1.
[C] :You need to review the statement of cash flows in section 3.1.
[D] :You need to review the statement of cash flows in section 3.1.
[E] :You are correct!
54) The times interest earned ratio is considered a long-term solvency measure.
[A] True
[B] False
[A] :Did you use net working capital and the quick ratio to get inventory of $216? Review
section 3.3.
[B] :You are correct!
[C] :Did you use net working capital and the quick ratio to get inventory of $216? Review
section 3.3.
[D] :Did you use net working capital and the quick ratio to get inventory of $216? Review
section 3.3.
[E] :Did you use net working capital and the quick ratio to get inventory of $216? Review
section 3.3.
56) If a firm uses cash to purchase inventory, its quick ratio will increase.
[A] True
[B] False
[A] :Inventory is excluded from the quick ratio, so the numerator of the ratio is decreased.
Review section 3.3.
[B] :You are correct!
57) Which one of the following can be computed with the use of only a balance sheet?
[A] :You need operating costs to compute this. Review section 3.3.
[B] :You are correct!
[C] :You need sales to compute this. Review section 3.3.
[D] :You need EBIT and interest expense to compute this. Review section 3.3.
[E] :You need net income to compute this. Review section 3.3.
[A] :This statement would be correct if it were reversed. Review section 3.3.
[B] :You are correct!
[C] :The total asset turnover does not relate assets to net income. Review section 3.3.
[D] :The total asset turnover does not relate assets to net income. Review section 3.3.
[E] :The total asset turnover does not address the replacement of fixed assets. Review
section 3.3.
[A] True
[B] False
63) It is difficult to compare the financial statements of two firms when the firms use different
accounting procedures.
[A] True
[B] False
64) If you want to find out how long it will take before your firm runs out of cash, assuming no
additional cash is received, you should look at the:
[A] :Does this consider the daily operating costs? Review section 3.3.
[B] :Does this consider the daily operating costs? Review section 3.3.
[C] :Does this consider the daily operating costs? Review section 3.3.
[D] :Does this consider the daily operating costs? Review section 3.3.
[E] :You are correct!
[A] The smaller the current ratio, the more liquid the firm.
[B] Since inventory is less liquid than the other current assets, it is excluded from the quick
ratio.
[C] A current ratio greater than one indicates net working capital is negative.
[D] In firms that carry an inventory, the quick ratio will always exceed the current ratio.
[E] The current ratio is frequently less than zero.
[A] :The reverse of this is generally considered true. Review section 3.3.
[B] :You are correct!
[C] :Do current liabilities exceed current assets when the current ratio is greater than 1?
Review section 3.3.
[D] :The reverse of this is true. Review section 3.3.
[E] :This would require either current assets or current liabilities to be negative. Review
section 3.3.
68) Which one of the following correctly identifies the activity categories found on a statement
of cash flows?
[A] :The income statement is a separate accounting report. Review section 3.1.
[B] :There is no purchasing category. Review section 3.1.
[C] :The income statement is a separate accounting report. Review section 3.1.
[D] :You are correct!
[E] :There is no category known as "noncash". Review section 3.1.
69) Which one of the following measures the amount that investors are willing to pay per
dollar of earnings for one share of stock?
[A] :Does this consider the market value of a share of stock? Review section 3.3.
[B] :Does this include the earnings per share? Review section 3.3.
[C] :Does this consider the market value of a share of stock? Review section 3.3.
[D] :You are correct!
[E] :Does this include either the price of stock or the earnings per share? Review section 3.3.
70) A firm has sales of $500, total assets of $300, and a debt-equity ratio of 2.00. If the return
on equity is 15 percent, what is the net income?
[A] $7.50
[B] $15.00
[C] $22.50
[D] $32.50
[E] $50.00
[A] :Did you get equity of $100 using the balance sheet identity and the debt-equity ratio?
Review section 3.3.
[B] :You are correct!
[C] :Did you get equity of $100 using the balance sheet identity and the debt-equity ratio?
Review section 3.3.
[D] :Did you get equity of $100 using the balance sheet identity and the debt-equity ratio?
Review section 3.3.
[E] :Did you get equity of $100 using the balance sheet identity and the debt-equity ratio?
Review section 3.3.
72) A firm has sales of $15 million, net income of $1.2 million, retained earnings of $17
million, and total equity of $35 million. What is the return on equity?
[A] :Is inventory more related to sales or cost of goods sold? Review section 3.3.
[B] :You are correct!
[C] :Are inventory and accounts payable more related to sales or costs of goods sold?
Review section 3.3.
[D] :Is inventory more related to sales or cost of goods sold? Review section 3.3.
[E] :Is accounts payable more related to sales of cost of goods sold? Review section 3.3.
74) TopNotch Limo Corp. has an average collection period of 36.5 days. Sales are $300,000.
What is the average accounts receivable balance?
[A] $4,441
[B] $8,219
[C] $10,000
[D] $30,000
[E] $36,500
75) Jorge Corp. has 100,000 shares of common stock outstanding. EBIT is $1 million and
interest paid is $200,000. If the corporate tax rate is 34 percent, what are Jorge's earnings per
share?
[A] $2.72
[B] $3.40
[C] $5.28
[D] $6.60
[E] $10.00
[A] :Did you get net income of $528,000? Review section 3.3.
[B] :Did you get net income of $528,000? Review section 3.3.
[C] :You are correct!
[D] :You appear to be forgetting about interest expense. Review section 3.3.
[E] :You are forgetting about interest and tax expenses. Review section 3.3.
76) A firm's accounts receivable declined by $25,000 while cash increased by $25,000. All
else equal, the current ratio:
78) Hilton Publishing and Jordan Publishing have identical debt-to-equity ratios and profit
margins. However, Hilton's ROA is higher than Jordan's. Therefore, it must be true that:
[A] :This conclusion is incorrect. Review the Du Pont identity in section 3.4.
[B] :This conclusion is incorrect. Review the Du Pont identity in section 3.4.
[C] :You are correct!
[D] :This conclusion is incorrect since they have the same profit margin. Review the Du Pont
identity in section 3.4.
[E] :Based on what is stated in the question, there is no basis for this conclusion. The most
important consideration is total assets relative to sales. Review the Du Pont identity in section
3.4.
79)
59. Which of the following are financial leverage ratios?
I. debt-equity ratio
II. cash coverage ratio
III. times interest earned ratio
IV. equity multiplier
[A] :Correct, but at least one other choice is also a financial leverage ratio. Review section
3.3.
[B] :How are the debt-equity ratio and the equity multiplier related? Review section 3.3.
[C] :Isn't interest related to debt? Review section 3.3.
[D] :How are debt and equity related to financial leverage? Review section 3.3.
[E] :You are correct!
[A] II only
[B] II and III only
[C] I and II only
[D] I and III only
[E] I, II, and III
[A] :There is at least one other correct option. Review sections and 3.1 and 3.3.
[B] :How do you determine the sources and uses of cash? Review section 3.1.
[C] :Where do you get the information to compute financial ratios? Review section 3.3
[D] :Where do you get the information to compute common-size statements? Review section
3.2.
[E] :You are correct!
[A] :True, but there is at least one more component listed. Review section 3.4.
[B] :True, but there is at least one more component listed. Review section 3.4.
[C] :One of these options is incorrect. Review section 3.4.
[D] :You are correct!
[E] :Are you confusing return on equity with the return on assets? Review section 3.4.
82) Companies publish financial ratios in their annual reports. When using these ratios to
compare two companies, you must consider the:
I. accounting methods used by each firm.
II. nature of the operations of each firm.
III. fiscal year of each firm.
[A] I only
[B] II only
[C] II and III only
[D] I and II only
[E] I, II, and III
[A] :Correct, but this is only part of the answer. Review section 3.5.
[B] :Correct, but this is only part of the answer. Review section 3.5.
[C] :Correct, but there is one more correct option also. Review section 3.5.
[D] :Correct, but there is one more correct option also. Review section 3.5.
[E] :You are correct!
83) Martin's has a current ratio of 2, a quick ratio of 1.8, net income of $180,000, a profit
margin of 10 percent, and an accounts receivable balance of $150,000. What is the firm's
average collection period?
[A] :How can you use the profit margin to find sales? Review section 3.3.
[B] :How can you use the profit margin to find sales? Review section 3.3.
[C] :You are correct!
[D] :How can you use the profit margin to find sales? Review section 3.3.
[E] :How can you use the profit margin to find sales? Review section 3.3.
84) To evaluate a firm, you often must choose a benchmark for comparison purposes. Peer
group analysis is one means of establishing a benchmark.
[A] True
[B] False
85) A firm has total equity of $400, net income of $50, total liabilities of $200, and sales of
$500. What is the return on assets?
[A] -$320
[B] $160
[C] $380
[D] $440
[E] $840
87) Which one of the following statements concerning the current ratio is correct?
[A] Using book values to compute the current ratio is unacceptable because the market
values of the current assets tend to deviate from the book values.
[B] The current ratio is computed by dividing current liabilities by current assets.
[C] The current ratio will always be greater than the quick ratio in companies that carry
inventory.
[D] The current ratio measures the long-run liquidity position of a firm.
[E] The higher the current ratio, the higher the level of cash in a firm.
[A] :This is one of the few ratios where book and market values are typically fairly close to
one another. Review section 3.3.
[B] :You are reversing the numerator and denominator. Review section 3.3.
[C] :You are correct!
[D] :How do short-term assets and liabilities signal long-run performance? Review section
3.3.
[E] :This does not have to be true. Review section 3.3.
88) In the most general sense, which one of the following would you expect to be true?
[A] If current assets and current liabilities both increase by the same amount then there is a
net use of funds.
[B] If fixed assets decrease by the amount of depreciation for the year then there is a net
use of funds.
[C] Changes in income and expense accounts do NOT affect sources and uses of cash.
[D] If a liability account increases and an asset account decreases by the same amount,
there is a net source of funds.
[E] An increase in the common stock account is a use of cash.
[A] :In this case, the sources of cash equal the uses of cash. Review section 3.1.
[B] :How can you use funds if there is no change other than that caused by a noncash
expense? Review section 3.1.
[C] :Yes, they do. Review section 3.1.
[D] :You are correct!
[E] :Doesn't a firm receive cash when it sells stocks? Review section 3.1.
89) Comparison of the financial statements of two firms in the same general industry may be
difficult if the:
I. size of the two firms varies.
II. firms have identical product lines and operations.
III. financial statements are prepared using different fiscal year-ends.
[A] I only
[B] III only
[C] I and II only
[D] I and III only
[E] I, II, and III
[A] :Correct, but this is only half of the answer. Review section 3.5.
[B] :Correct, but this is only half of the answer. Review section 3.5.
[C] :At least one of these choices is incorrect. Review section 3.5.
[D] :You are correct!
[E] :At least one of these choices is incorrect. Review section 3.5.
90) A firm has 2,500 shares of common stock outstanding, a return on equity of 10 percent,
and a price-earnings ratio of 20. The net income for the year is $5,000. What is the market
price per share of stock?
[A] $5
[B] $20
[C] $40
[D] $100
[E] $200
[A] :What are the earnings per share? Review section 3.3.
[B] :What are the earnings per share? Review section 3.3.
[C] :You are correct!
[D] :What are the earnings per share? Review section 3.3.
[E] :What are the earnings per share? Review section 3.3.
91) Which of the following will result in a lower profit margin, all else equal?
I. decreasing cost of goods sold
II. increasing the corporate tax rate
III. doubling the amount of long-term debt while decreasing common equity by the same
amount
[A] I only
[B] II only
[C] III only
[D] I and III only
[E] II and III only
[A] :This will increase the profit margin. Review section 3.3.
[B] :Correct, but another choice is also correct. Review section 3.3.
[C] :Correct, but another choice is also correct. Review section 3.3.
[D] :At least one of these choices is incorrect. Review section 3.3.
[E] :You are correct!
92) If a firm has a total debt ratio of 0.5, what is its equity multiplier?
[A] 0.50
[B] 0.67
[C] 1.00
[D] 1.50
[E] 2.00
[A] :If total assets are $2 and total debt is $1, what is total equity? Review section 3.3.
[B] :If total assets are $2 and total debt is $1, what is total equity? Review section 3.3.
[C] :If total assets are $2 and total debt is $1, what is total equity? Review section 3.3.
[D] :If total assets are $2 and total debt is $1, what is total equity? Review section 3.3.
[E] :You are correct!
93) On a typical statement of cash flows, fixed asset acquisitions are classified under the
heading of:
[A] :There is no such category on a typical statement of cash flows. Review section 3.1.
[B] :These activities include cash flows related to operations and current accounts, not fixed
assets. Review section 3.1.
[C] :You are correct!
[D] :These activities include cash flows related to long-term debt and equity, not fixed assets.
Review section 3.1.
[E] :There is no such category on a typical statement of cash flows. Review section 3.1.
94) All else equal, which of the following would explain a decrease in the fixed asset turnover
ratio?
I. an increase in sales
II. the replacement of old, fully-depreciated equipment with new equipment
III. selling more dollars worth of fixed assets than you purchase
[A] I only
[B] II only
[C] III only
[D] I and III only
[E] II and III only
[A] :This would increase the ratio, not decrease it. Review section 3.3.
[B] :You are correct!
[C] :This would increase the ratio, not decrease it. Review section 3.3.
[D] :These would increase the ratio, not decrease it. Review section 3.3.
[E] :At least one of these choices is incorrect. Review section 3.3.
95) Your firm has a profit margin of 10 percent, return on equity of 20 percent, a debt-equity
ratio of 1.5, and assets of $200. How much are your sales?
[A] $10
[B] $160
[C] $250
[D] $640
[E] $1,000
[A] :Did you get an equity multiplier of 2.5? Did you use the Du Pont formula? Review section
3.4.
[B] :You are correct!
[C] :Did you get an equity multiplier of 2.5? Did you use the Du Pont formula? Review section
3.4.
[D] :Did you get an equity multiplier of 2.5? Did you use the Du Pont formula? Review section
3.4.
[E] :Did you get an equity multiplier of 2.5? Did you use the Du Pont formula? Review section
3.4.
96) If a firm uses part of the cash it receives from payment of an account receivable to buy
inventory and leaves the rest in its bank account, its current ratio will remain unchanged.
[A] True
[B] False
97) A firm has a total book value of equity of $2 million, a market-to-book ratio of 2, and a
book value per share of $5.00. What is the total market value of the firm's equity?
[A] $10
[B] $500,000
[C] $2 million
[D] $4 million
[E] $20 million
[A] :This is the market value per share, but not the total market value of equity. Review
section 3.3.
[B] :You need to review this computation in section 3.3.
[C] :This is the book value not the market value. Review section 3.3.
[D] :You are correct!
[E] :You need to review this computation in section 3.3.
98) Peterson's, Inc. has current liabilities of $340, a quick ratio of 1.8, an inventory turnover of
4.0, and a current ratio of 3.3. What is the cost of goods sold?
[A] $2,040
[B] $3,060
[C] $3,999
[D] $4,180
[E] $5,888
100) A firm has an 8 percent return on assets, sales of $100, and total assets of $75. What is
the profit margin?
[A] :Did you get a total asset turnover rate of 1.3333? Review section 3.4.
[B] :Did you get a total asset turnover rate of 1.3333? Review section 3.4.
[C] :You are correct!
[D] :Did you get a total asset turnover rate of 1.3333? Review section 3.4.
[E] :Did you get a total asset turnover rate of 1.3333? Review section 3.4.
101) Golf Inc. and Golfanatics Corp. are close competitors. Last year, both had the same
level of cost of goods sold, but Golf Inc. turned its inventory 5 times during the year while
Golfanatics turned its inventory every 65 days. Which one of the following statements is true if
the objective is to keep average inventory as low as possible?
[A] Golf Inc. did a better job since its inventory turnover was lower.
[B] Golfanatics did a better job since its days sales in inventory was lower.
[C] Golf Inc. did a better job since its days sales in inventory was lower.
[D] Golfanatics did a better job since its inventory turnover was lower.
[E] Golf Inc. did a better job since its level of inventory was lower.
[A] :Its inventory turnover rate was lower, but is this what they wanted? Review section 3.3.
[B] :You are correct!
[C] :Golf Inc.'s days' sales in inventory are higher than that of Golfanatics. Review |section
3.3.
[D] :Golfanatics inventory turnover was higher than that of Golf, Inc. Review section 3.3.
[E] :Golfanatics has the lower level of inventory. Review section 3.3.
102) A firm has a times interest earned ratio of 2.7. This means the:
[A] firm generates enough cash to cover its interest expense 2.7 times.
[B] firm has sufficient EBIT to cover its interest expense 2.7 times.
[C] interest expense exceeds earnings before taxes by 2.7 times.
[D] net income is sufficient to cover the interest expense 2.7 times.
[E] firm earned $1.00 in net income for every $2.70 it paid out in interest.
[A] :Changes in cash are not a part of the times interest earned ratio. Review section 3.3.
[B] :You are correct!
[C] :Earnings before taxes are not part of the times interest earned ratio. Review section 3.3.
[D] :Net income is not a part of the times interest earned ratio. Review section 3.3.
[E] :Net income is not a part of the times interest earned ratio. Review section 3.3.