Financial Analysis Fundamentals

Login Assessment Summary

Below is a scored review of your assessment. All questions are shown.

Imported Questions - 10/06/2017 12:18 PM

Correct Answer Partially Correct Incorrect Answer

1 Which of the following items are not included when determining income from operations?

Your Answer Taxes

Correct Answer Taxes

Explanation
Tax expenses are not part of operating costs, and is not considered when determining the profits from operations.

2 Which ratio would you use to determine the profitability of the goods sold by a company?

Your Answer Gross profit margin

Correct Answer Gross profit margin

Explanation
Profitability from goods sold is determined by gross profit margin, which is (revenue - cost of goods sold) / Sales.

3 When performing a vertical analysis which income statement item do you use to determine the cost contribution for each
expense category? (What is the denominator?)

Your Answer Sales

Correct Answer Sales

Explanation
Sales is the most common denominator used in vertical analysis.

4 Horizontal analysis allows us to analyze performance over:

Your Answer Time

Correct Answer Time

Explanation
Horizontal analysis analyzes variance across time.

5 When calculating the quick ratio or "acid test" which current asset or liability is omitted?

Your Answer Cash

Correct Answer Inventory

Explanation
Inventory is removed from quick ratio because it assumes that inventories cannot be sold as fast as other current
assets.

6 For which organization would you expect to see the highest inventory turnover ratio?

Your Answer Grocery retailer

Correct Answer Grocery retailer

Explanation
Grocery retailer would have the highest inventory turnover because it sells its inventory the fastest.

7 What actions could a company take to reduce its working capital funding gap?

Your Answer Tighten customer credit terms

Correct Answer Tighten customer credit terms

Explanation
Increasing inventory would mean more working capital is tied up, so it would not decrease working capital.

8 The debt to equity ratio indicates:

Your Answer The proportion of the company financed by lenders versus owners

Correct Answer The proportion of the company financed by lenders versus owners

Explanation
Debt to equity ratio looks at the percentage of debt and the percentage of equity in a company.

9 Which of the following items are not included in working capital?

Your Answer Short term investments

Correct Answer Short term investments

Explanation
The 3 components that affect working capital is receivables, payables and inventory.

10 When calculating turnover of property plant & equipment and receivables, which item from the income statement do we
use?

Your Answer Sales

Correct Answer Sales

Explanation
When calculating asset turnovers, we divide it by sales.

11 If a company wanted to finance the purchase of equipment without diluting shareholders equity, which of the following
operation could it consider?

Your Answer Obtaining a loan from a bank

Correct Answer Obtaining a loan from a bank

Explanation
Only pure debt does not dilute equity. All other options would increase shareholder's equity.

12 Working capital movement is included in which section of the cash flow statement?

Your Answer Operating activities

Correct Answer Operating activities

Explanation
Working capital is used in operations, so it should be included in the operations section of the cash flow statement.

13 The debt to tangible net worth ratio is calculated as follows:

Your Answer Interest Bearing Liabilities / (Equity - Intangible Assets)

Correct Answer Interest Bearing Liabilities / (Equity - Intangible Assets)

Explanation
Debt to tangible net worth ratio = Interest bearing liabilities / (Equity - Intangible assets)

14 If the total assets to equity ratio of a company is increasing, it is possible that:

Your Answer The company is increasing the use of debt and getting higher financial leverage

Correct Answer The company is increasing the use of debt and getting higher financial leverage

Explanation
When the total assets to equity ratio is increasing, it is possible that the company is increasing the use of debt and
getting higher financial leverage.

15 Which ratio is not one of the three ratios that multiply together to produce the return on equity ratio?

Your Answer Operating profit margin

Correct Answer Operating profit margin

Explanation
ROE = Total asset turnover x Financial leverage x Net profit margin.

16 Which financial leverage ratio is used with two other ratios to mathematically produce the return on equity ratio?

Your Answer Total Assets / Equity

Correct Answer Total Assets / Equity

Explanation
Financial leverage ratio = total assets / equity

17 Which of the following is a tertiary ratio that drives profitability?

Your Answer SG&A Expense / Sales

Correct Answer SG&A Expense / Sales

Explanation
Only SG&A Expense / Sale is a tertiary ratio.

18 Which ratios indicate how efficiently the company generates sales from its assets?

Your Answer Working capital turnover

Correct Answer Working capital turnover

Explanation
Working capital turnover = net sales / average working capital, so it signifies how much profit that is made compared to
the working capital that is employed.

19 The net profit margin ratio can mathematically be broken down as "Tax impact x Capital structure impact x..."

Your Answer Net profit / Sales

Correct Answer EBIT / Sales

Explanation
Net profit margin ratio = Tax impact x Capital structure impact x Margin impact

Margin Impact = EBIT / Sales

20 Based on the following information from ABC Company’s financial analysis, which one of the following statements is NOT true?

Ratio Year 1 Year 2 Year 3 Year 4 Year 5

Debt to equity 0.05 0.02 0.01 0.01 0.02
Operating income ratio 15.9% 18.6% 17.5% 19.6% 21.3%
Payable turnover ratio 9.75 10.63 11.24 13,15 13.52
Inventory turnover ratio 6.31 5.76 7.28 10.53 15.36
Gross profit ratio 58.3% 52.3% 46.9% 49.5% 41.3%
Net profit ratio 13.2% 15.2% 14.1% 15.9% 16.4%
Current ratio 7.35 4.96 3.28 2.65 3.14

Your Answer The company has very little debt and maybe under-leveraged.

Correct Answer The company’s ability to cover its short-term obligations is getting higher over the five years.

Explanation
This study source was downloaded by 100000803267207 from CourseHero.com on 11-05-2022 02:00:50 GMT -05:00
Inventory turnover ratios measures how quickly the company sells the inventory. The higher the ratio, the quicker the
company is at selling its inventory.
https://www.coursehero.com/file/88238161/Financial-Analysis-Fundamentals-Assessment-Review-pdf/

Debt to equity ratio measures how much leverage the company has. When the ratio is very low, it means that the
company has little debt and maybe underleveraged.

Gross profit ratio shows how much revenue is left over after paying the cost of goods sold. When this ratio decreases,
it means the company is spending more on goods sold.

Current ratio measures the ability of a company to cover its short-term obligations. The lower the ratio, the lower
ability the company has to cover its short-term obligations.

Page 1 of 1

Summary Return to Course

Software by

Version 10.2

Privacy Policy. Assessment content is copyright 2021, Corporate Finance Institute.

Powered by TCPDF (www.tcpdf.org)