Iapm10e CH 10

CHAPTER 10—ANALYSIS OF FINANCIAL STATEMENTS
TRUE/FALSE
1. Financial Accounting Standards Board (FASB) recognizes that it would be improper for all companies
to use identical and restrictive accounting principles.
ANS: T PTS: 1
2. The balance sheet shows what assets the firm controls at a point in time and how it financed the assets.
ANS: T PTS: 1
3. The income statement indicates the flow of sales, expenses, and earnings during a period of time.
ANS: T PTS: 1
4. The statement of cash flows shows the effect on the firm's cash flows of earnings and changes in the
assets, current liabilities, long-term liabilities and net worth.
ANS: T PTS: 1
5. Cash flow from operations = Net Income + Non cash revenue and expenses - Changes in net working
capital.
ANS: F PTS: 1
6. Free cash flow = Cash flow from operations - Capital expenditures + Disposition of property and
equipment.
ANS: T PTS: 1
7. Traditional cash flow and Free cash flow are equivalent concepts.
ANS: F PTS: 1
8. It is important to compare a firm's performance relative to: the aggregate economy, its industry, its
major competitors and its past performance.
ANS: T PTS: 1
9. The current ratio, receivables turnover and total asset turnover are measures of internal liquidity.
ANS: F PTS: 1
10. Inventory turnover, net fixed asst turnover and equity turnover are measures of operating efficiency.
ANS: F PTS: 1
11. According to the DuPont system ROE (return on equity) can be decomposed into the profit margin
ratio and the total asset turnover ratio.
ANS: F PTS: 1
12. Some factors that determine business risk include sales variability and debt to equity ratio.
ANS: F PTS: 1
13. Some factors that determine financial risk include interest coverage and cash flow coverage.
ANS: T PTS: 1
14. The growth of business depends on the percentage of earnings reinvested and the return on equity.
ANS: T PTS: 1
15. Financial ratios are used in stock and bond valuation models.
ANS: F PTS: 1
16. Financial ratios can be used to estimate systematic risk.
ANS: T PTS: 1
17. Bond rating agencies include the analysis of financial ratios in arriving at corporate bond ratings.
ANS: T PTS: 1
18. Financial ratios can be used to identify firms that might default on a loan or declare bankruptcy.
ANS: T PTS: 1
19. A cross-sectional analysis compares a firm to a subset of industry firms comparable in size or
characteristics.
ANS: T PTS: 1
20. In common size analysis all assets and liabilities on the balance sheet are divided by total sales.
ANS: F PTS: 1
21. Financial risk is the uncertainty of operating income caused by the firm's industry.
ANS: F PTS: 1
22. Cross-sectional analysis is a useful technique for estimating future performance that involves
examining a firm's relative performance over time.
ANS: F PTS: 1
23. The DuPont equation breaks down a firm's return on equity into three components, which are profit
margin, total asset turnover, and financial leverage.
ANS: T PTS: 1
MULTIPLE CHOICE
1. The comparisons with which ratios should be made include the following, except
a. The firm's own past performance.
b. The firm's major competitor within the industry.
c. The firm's suppliers and customers.
d. The firm's industry or industries.
e. The aggregate economy.
ANS: C PTS: 1 OBJ: Multiple Choice
2. The five major classes of ratios include the following, except

a. Internal liquidity.
b. Risk analysis.
c. Growth analysis.
d. Market performance.
e. Operating performance.
ANS: D PTS: 1 OBJ: Multiple Choice
3. Which of the following is not a flow ratio?

a. Interest coverage
b. Fixed charge coverage
c. Debt/equity
d. Cash flow/long term debt
e. Cash flow/total debt
4. Which ratio is considered an internal liquidity ratio?

a. Total asset turnover
b. Net fixed asset turnover
c. Receivables turnover
d. Equity turnover
e. Inventory turnover
5. Operating performance is divided into which two subcategories of ratios?

a. Efficiency and profitability
b. Efficiency and debt
c. Profitability and growth
d. Debt and equity
e. Liquidity and leverage
ANS: A PTS: 1 OBJ: Multiple Choice
6. Which of the following is not a component of return on equity (ROE)?

a. Net income/sales
b. Total assets/equity
c. Equity/sales
d. Sales/total assets
e. Net Profit Margin
7. Which equation is valid?
a. g = Percent of earnings retained  Return on equity
b. g = Return on equity  Percent of earnings retained
c. g = Return on equity  Return on total assets
d. g = Percent of earnings retained  Return on equity
e. g = Total assets  Return on total assets
8. Determinants of market liquidity include all except the

a. Number of shares traded.
b. Dollar value of shares traded.
c. Bid-ask spread.
d. Number of security owners.
e. Market price per share.
ANS: E PTS: 1 OBJ: Multiple Choice
9. Which of the following is not a use of financial ratios?

a. Stock valuation
b. Assigning credit quality ratings on bonds
c. Predicting insolvency
d. Identification of internal corporate variables that affect a stock's systematic risk
e. None of the above (that is, all are uses of financial ratios)
10. Limitations on the use of ratios include

a. Accounting comparability.
b. Company homogeneity.
c. Consistent results.
d. A reasonable range within the industry.
e. All of the above
11. Business risk is a function of

a. Sales variability.
b. Operating leverage.
c. Financial leverage.
d. a and b.
e. b and c.
12. A common-size balance sheet expresses all balance sheet items

a. As a percentage of Current Assets.
b. As a percentage of Fixed Assets.
c. As a percentage of Total Assets.
d. As a percentage of Net Income.
e. As a percentage of Sales.
13. A common-size income statement expresses all income statement items

a. As a percentage of Current Assets.
b. As a percentage of Fixed Assets.
c. As a percentage of Total Assets.
d. As a percentage of Net Income.
e. As a percentage of Sales
14. An estimate of the discounted value of future lease payments can be obtained by:
a. Discounting future lease payments at the firm's cost of debt.
b. Discounting future lease payments at the firm's cost of capital.
c. Applying a multiple to forthcoming minimum lease payments.
d. a or b.
e. a or c.
15. Financial risk is the additional uncertainty of returns to equity holders due to
a. The firm's use of fixed financial obligations
b. The firm's level of fixed productions costs
c. Business risk
d. a and b.
e. b and c.
16. The market liquidity of a security can be measured using

a. Trading turnover.
b. Bid-Ask spread.
c. Price of the security.
d. a and b.
e. b and c.
17. Which of the following factors would be an indication of high quality earnings?
a. Earnings are close to cash.
b. Earnings are the result of repeat business.
c. Revenue recognition is based on the installment principle.
d. All of the above.
e. None of the above.
18. Which of the following factors would be indicative of a high quality balance sheet?
a. Book value is greater than market value.
b. The presence of off-balance sheet liabilities
c. Market value is greater than book value.
d. Very little unused borrowing capacity.
e. None of the above.
19. Which of the following ratios is not a measurement of the firm's liquidity?
a. Current ratio
b. Cash ratio
c. Receivables turnover
d. Inventory turnover
e. Total asset turnover
20. DuPont Analysis breaks down return on equity into major areas that can be used to identify a firm's
strengths or weaknesses with respect to
a. Profitability
b. Leverage
c. Liquidity
d. Efficiency
e. All of the above are broken out in the basic DuPont equation.
21. Which of the following statements regarding financial risk and business risk is true?
a. The acceptable level of financial risk for a firm depends on its business risk.
b. A firm with a greater degree of business risk has the ability to take on more debt.
c. A firm with a greater degree of financial risk typically takes on less business risk.
d. Financial risk and business risk are both important but they are not related in any way.
e. Financial risk is more important for small firms and business risk is more important for
large firms.
22. Financial ratios are only useful when they are compared to other ratios. All of the following are useful
means of examining relative performance except
a. Aggregate economy
b. Industries
c. Competitors
d. Historical performance
e. All of the above are relevant comparison measures for financial ratios
23. The practice of comparing the firm to a subset of industry firms comparable in size or characteristics is
referred to as
a. Common size analysis
b. Cross-sectional analysis
c. DuPont analysis
d. Proforma analysis
e. Time-series analysis
ANS: B PTS: 1 OBJ: Multiple Choice
Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
BMC CORPORATION INCOME STATEMENT

FISCAL YEAR ENDING 12/31/2004
(DOLLARS IN THOUSANDS)
Net Sales $1025

Cost of Goods Sold 682
Gross Profit Margin 343
Depreciation 31
Operating Expense 103
Administrative Expense 127
Operating Profit 82
Interest 27
Profit Before Tax 55
Taxes 17
Net Income $ 38
BMC CORPORATION BALANCE SHEET

Assets Liabilities
Cash $ 61 Notes payable $ 223
Accts rec 286 Accounts payable 152
Inventory 354 Accruals 32
Ttl cur assts 701 Total current liabilities 407
Net fixed assets 802 Long term debt 306
Common stock ($1.50 par) 102
Paid in surplus 226
Retained earnings 462
Total liabilities and
Total assets $1503 Stockholders' equity $1503
24. Refer to Exhibit 10.1. What was BMC'S return on equity in 2004?
a. 4.8%
b. 5.9%
c. 6.7%
d. 8.3%
e. 11.6%
ANS: A
ROE = 38  790 = 0.048= 4.8%
Where equity = 102 + 226 + 462 = $790
PTS: 1 OBJ: Multiple Choice Problem
25. Refer to Exhibit 10.1. What was BMC'S quick ratio for 2004?
a. 1.72
b. 1.37
c. 1.02
d. 0.85
e. 0.55
ANS: D
Quick Ratio = (701 - 354)  407 = 0.85
26. Refer to Exhibit 10.1. What was BMC'S interest coverage for 2004?
a. 6.82
b. 3.04
c. 2.74
d. 2.04
e. 1.41
ANS: B
Interest Coverage = 82  27 = 3.04
27. Refer to Exhibit 10.1. What was BMC'S total asset turnover for 2004?
a. 0.23
b. 1.28
c. 1.46
d. 0.87
e. 0.68
ANS: E
Total asset turnover = 1025  1503 = 0.68
28. Refer to Exhibit 10.1. What was BMC'S current ratio at year-end 2004?
a. 0.852
b. 1.000
c. 1.368
d. 1.722
e. 1.943
ANS: D
Current ratio = 701  407 = 1.722
29. Refer to Exhibit 10.1. What was BMC'S net profit margin?
a. 0.058
b. 0.037
c. 0.125
d. 0.015
e. 0.165
ANS: B
Net profit margin = 38  1025 = 0.037
30. Refer to Exhibit 10.1. What was BMC'S fixed asset turnover ratio?
a. 0.680
b. 0.780
c. 1.278
d. 1.874
e. 8.220
ANS: C
Fixed asset turnover ratio = 1025  802 = 1.278
31. Refer to Exhibit 10.1. What was the financial leverage multiplier used in the BMC system?
a. 2.058
b. 2.289
c. 3.014
d. 1.903
e. 0.904
ANS: D
Financial leverage multiplier = 1503  790 = 1.903
1503 - 306 - 407 = 790
32. Refer to Exhibit 10.1. What is BMC'S traditional cash flow?

a. 69
b. 86
c. 38
d. 55
e. 701
ANS: A
Traditional Cash Flow = 38 + 31 = 69
33. Refer to Exhibit 10.1. What is BMC'S operating profit margin?

a. 0.800
b. 0.054
c. 0.080
d. 0.540
e. 5.480
ANS: C
Operating profit margin = 82  1025 = 0.080
Exhibit 10.2
STAR CORPORATION INCOME STATEMENT

Net Sales $1075

Cost of Goods Sold 706
Gross Profit Margin 369
Depreciation 30
Operating Expense 109
Administrative Expense 129
Operating Profit 101
Interest 29
Profit Before Tax 72
Taxes 21
Net Income $ 51
STAR CORPORATION BALANCE SHEET

Assets Liabilities
Cash $ 69 Notes payable $ 231
Accounts receivable 233 Accounts payable 146
Inventory 348 Accruals 31
Total current assets 650 Total current liabilities 408
Net fixed assets 886 Long term debt 318
Common stock ($1.50 par) 111
Paid in surplus 190
Retained earnings 509
Total liabilities and
Total assets $1536 Stockholders' equity $1536
34. Refer to Exhibit 10.2. What was Star's return on equity in 2004?
a. 5.8%
b. 6.3%
c. 6.8%
d. 7.2%
e. 8.1%
ANS: B
ROE = 51  810 = 6.30%
Where equity = 111 + 190 + 509 = $810
35. Refer to Exhibit 10.2. What was Star's quick ratio for 2004?
a. 0.11
b. 0.44
c. 0.38
d. 0.74
e. 0.98
ANS: D
Quick Ratio = (650 - 348)  408 = 0.74
36. Refer to Exhibit 10.2. What was Star's interest coverage for 2004?
a. 4.99
b. 2.58
c. 3.48
d. 5.16
e. 6.02
ANS: C
Interest Coverage = 101  29 = 3.48
37. Refer to Exhibit 10.2. What was Star's total asset turnover for 2004?
a. 1.65
b. 1.21
c. 0.92
d. 0.033
e. 0.70
ANS: E
Total Asset Turnover = 1075  1536 = 0.70
38. Refer to Exhibit 10.2. What was Star's current ratio at year-end 2004?
a. 1.59
b. 1.00
c. 0.82
d. 0.74
e. 0.33
ANS: A
Current Ratio = 650  408 = 1.59
39. Refer to Exhibit 10.2. What was Star's net profit margin?
a. 2.4%
b. 3.8%
c. 4.2%
d. 4.7%
e. 5.2%
ANS: D
Net profit margin = 51  1075 = 4.7%
40. Refer to Exhibit 10.2. What was Star's fixed asset turnover ratio?
a. 1.65
b. 1.21
c. 1.01
d. 0.82
e. 0.42
ANS: B
Fixed asset turnover ratio = 1075  886 = 1.21
41. Refer to Exhibit 10.2. What was the financial leverage multiplier used in the Star system?
a. 0.852
b. 1.896
c. 1.996
d. 2.054
e. 2.998
ANS: B
Financial Leverage Multiplier = 1536  810 = 1.896
1536 - 318 - 408 = 810
42. Refer to Exhibit 10.2. What is Star's traditional cash flow?

a. 81
b. 72
c. 51
d. 102
e. 131
ANS: A
Traditional Cash Flow = 51 + 30 = 81
43. Refer to Exhibit 10.2. What is Star's operating profit margin?

a. 0.104
b. 0.094
c. 0.084
d. 0.067
e. 0.047
ANS: B
Operating profit margin = 101  1075 = 0.094
Exhibit 10.3
You are provided with the following information for a company.
Net Annual Sales 60000

Average Receivables 1200
COGS 35000
Average Inventory 3000
Average Trade Payables 1500
44. Refer to Exhibit 10.3. Calculate the receivables turnover ratio.

a. 50
b. 25
c. 55
d. 36
e. 27
ANS: A
Receivable T/O = 60000/1200 = 50

45. Refer to Exhibit 10.3. Calculate the inventory turnover ratio.
a. 27.23
b. 23.3
c. 55.43
d. 8.67
e. 11.67
ANS: E
Inventory T/O = 35000/3000 = 11.67
46. Refer to Exhibit 10.3. Calculate the payables turnover ratio.

a. 30.3
b. 23.3
c. 55.4
d. 11.6
e. 56.6
ANS: B
Payables T/O = 35000/1500 = 23.3
47. Refer to Exhibit 10.3. Calculate the cash conversion cycle.

a. 27
b. 46
c. 27
d. 55
e. 22
ANS: E
Cash conversion cycle = (365/50 + 365/11.67 + 365/23.3) = 22
Exhibit 10.4
You are provided with the following information about MaxCorp.
Net sales 5000

Total Assets 3000
Depreciation 260
Net Income 600
Long term Debt 2000
Equity 2160
Dividends 160
48. Refer to Exhibit 10.4. Calculate the return on equity (ROE).

a. 20.4%
b. 17.8%
c. 22.4%
d. 27.8%
e. 30.4%
ANS: D
ROE = 600/2160 = 27.8%
49. Refer to Exhibit 10.4. Calculate the sustainable growth rate.

a. 27.8%
b. 30.4%
c. 20.4%
d. 27.8%
e. 17.8%
ANS: C
g = 0.278(1 - 160/600) = 20.4%
Exhibit 10.5
You are provided with the following information about Albermarle Corp.
Income Statement Data

Sales 542
Operating Income 38
Depreciation 3
Interest Expense 3
Pretax Income 32
Income Taxes 13
Net Income after tax 19
Balance Sheet Data

Fixed Assets 41
Total Assets 245
Working Capital 123
Total Debt 16
Equity 159
50. Refer to Exhibit 10.5. Calculate the operating margin.

a. 15.5%
b. 5.6%
c. 8.6%
d. 10.6%
e. 6.5%
ANS: E
Operating margin = (38 - 3)/542 = 6.5%
51. Refer to Exhibit 10.5. Calculate the asset turnover ratio.

a. 2.2
b. 5.6
c. 4.2
d. 2.9
e. 3.9
ANS: A
Asset turnover = 542/245 = 2.2
52. Refer to Exhibit 10.5. Calculate the interest expense rate.

a. 7%
b. 0.5%
c. 1.2%
d. 5%
e. 2.3%
ANS: C
Interest expense rate = 3/245 = 1.2%
53. Refer to Exhibit 10.5. Calculate the financial leverage.

a. 1.05
b. 5.32
c. 2.15
d. 1.54
e. 2.31
ANS: D
Financial leverage = 245/159 = 1.54
54. Refer to Exhibit 10.5. Calculate the income tax rate.

a. 40.6%
b. 25.6%
c. 16.8%
d. 28.9%
e. 44.9%
ANS: A
Income tax rate = 13/32 = 40.6%

a. 15%
b. 12%
c. 32%
d. 9%
e. 7%
ANS: B
ROE = [(6.5)(2.2) - 1.2](1.54)(1 - .406) = 12%
Exhibit 10.6
You are provided with the following information for the Klandy Corporation.
2003 2004
Net Income $1200 $1500
Depreciation $ 200 $ 300
Total Current Assets $ 700 $ 900
Total Current Liabilities $ 500 $ 800
During 2004 Klandy Corp. made capital expenditures totaling $500 and disposed property worth $400.
56. Refer to Exhibit 10.6. The firm's cash flow from operating activities for the year 2004 is
a. $2100
b. $1900
c. $1800
d. $1700
e. $1600
ANS: B
Cash flow from operations = 1500 + 300 + 100 = $1900
57. Refer to Exhibit 10.6. The firm's free cash flow is

a. $2100
b. $1900
c. $1800
d. $1700
e. $1600
ANS: C
Free cash flow = 1900 - 500 + 400 = $1800
Exhibit 10.7
You are provided with the following information for the Nelson Corporation.
2003 2004
Net Income $1500 $2000
Depreciation $ 200 $ 475
Total Current Assets $ 700 $ 900
Total Current Liabilities $ 500 $ 800
During 2004 Nelson Corp. made capital expenditures totaling $500 and disposed property worth $800.
58. Refer to Exhibit 10.7. The firm's cash flow from operating activities for the year 2004 is
a. $2200
b. $2575
c. $2325
d. $2875
e. $1900
ANS: B
Cash flow from operations = 2000 + 475 + 100 = $2575
59. Refer to Exhibit 10.7. The firm's free cash flow is

a. $2200
b. $1900
c. $2875
d. $2325
e. $2575
ANS: C
Free cash flow = 2575 - 500 + 800 = $2875
Exhibit 10.8
Zeco Company has the following financial statements for year ending 12/31/2008.
Sales 1,000,000
Cost of Goods Sold 750,000
Gross Profit 250,000
Depreciation 100,000
Operating Expenses 70,000
Administration Exp. 65,000
Operating Profit 15,000
Interest Expense 8,000
Profit Before Taxes 7,000
Taxes 2,800
Net Income 4,200
Dividends 3,200
Assets Liabilities
Cash 50,000 Notes Payable 250,000
Accounts Receivable 250,000 Accounts Payable 350,000
Inventory 325,000 Total Current Liab. 800,000
Total Current Assets 825,000 Long Term Debt 225,000
Net Fixed Assets 450,000 Common Stock 200,000
Total Assets 1,275,000 Retained Earnings 50,000
Total Liab. & Earnings 1,275,000
The Zeco Company's industry averages are as follows:

Net Profit Margin = 4.5%; Total Asset Turnover = 0.8; Total Assets/Equity = 1.5
60. Refer to Exhibit 10.8. Calculate Zeco Company's Net Profit Margin.
a. 0.42%
b. 0.97%
c. 1.50%
d. 19.60%
e. 25.00%
ANS: A
NI/Sales = 4,200/1,000,000 = 0.0042 or 0.42%
61. Refer to Exhibit 10.8. Calculate Zeco Company's Total Asset Turnover.
a. 0.59
b. 0.78
c. 1.28
d. 1.70
e. 1.97
ANS: B
Sales/Total Assets = 1,000,000/1,275,000 = 0.7843
62. Refer to Exhibit 10.8. Calculate Zeco Company's Total Assets/Equity ratio.
a. 5.1
b. 6.1
c. 6.4
d. 8.7
e. 25.5
ANS: A
Total Assets/Equity = 1,275,000/(200,000 + 50,000) = 5.1
63. Refer to Exhibit 10.8. Calculate the return on equity (ROE) for Zeco Company and the Industry.
Zeco Industry Average

a. 1.52% 0.55%
b. 1.68% 5.40%
c. 2.10% 1.80%
d. 6.00% 5.40%
e. 8.40% 9.32%
ANS: B
Zeco's ROE = NI/Sales = 4,200/(200,000 + 50,000) = .0168
Or Zeco's ROE = 0.0042 * 0.7843 * 5.1 = 0.0168
Industry Average ROE = 0.045 * 0.8 * 1.5 = 0.054
64. Refer to Exhibit 10.8. Calculate the sustainable growth rate for Zeco Company.
a. 0.4%
b. 0.7%
c. 1.3%
d. 2.1%
e. 4.1%
ANS: A
Sustainable growth = ROE(1 - Div Payout Ratio) = 0.0168(1 - 3,200/4,200) = 0.004
65. Refer to Exhibit 10.8. Based on this information what are the strengths and concerns of Zeco
Company?
a. Zeco needs to lower its leverage and improve profitability and efficiency.
b. Zeco needs to increase its leverage and improve efficiency.
c. Zeco needs to lower its leverage and improve efficiency.
d. Zeco needs to lower its leverage and improve profitability.
e. Zeco needs to increase its leverage and improve profitability.
ANS: D
Comparing the DuPont relationship for Zeco and the industry reveals that Zeco is less profitable,
efficiency is relatively equal to the industry average, and Zeco has much higher leverage.
Zeco's ROE = 0.0042 * 0.7843 * 5.1 = 0.0168

Industry Average ROE = 0.045 * 0.8 * 1.5 = 0.054
Exhibit 10.9
You are provided with the following year end information for All Systems Corporation.
Income Statement Data

Sales 800
Operating Income 280
Depreciation 85
Interest Expense 48
Pretax Income 147
Income Taxes 52
Net Income after tax 95
Balance Sheet Data

Fixed Assets 810
Total Assets 1050
Net Working Capital 85
Total Debt 640
Equity 410
66. Refer to Exhibit 10.9. Calculate the profit margin for the firm.
a. 22.5%
b. 18.4%
c. 17.6%
d. 15.3%
e. 11.9%
ANS: E
Profit margin = NI/Sales = 95/800 = 0.1188 or 11.9%
67. Refer to Exhibit 10.9. Calculate the total asset turnover ratio for the firm.
a. 0.76
b. 1.31
c. 1.64
d. 2.81
e. 3.24
ANS: A
Total asset turnover = Sales/Total Assets = 800/1050 = 0.76
68. Refer to Exhibit 10.9. Calculate the financial leverage ratio used in DuPont analysis.
a. 0.61
b. 1.56
c. 1.77
d. 1.98
e. 2.56
ANS: E
Financial leverage = 1050/410 = 2.56

a. 31.3%
b. 23.2%
c. 18.4%
d. 13.2%
e. 7.5%
ANS: B
ROE = NI/Equity = 95/410 = 0.232 or 23.2%
70. Refer to Exhibit 10.9. The industry norms for profit margin (PM), total asset turnover (TAT), and
financial leverage are 10.9%, 1.2, and 1.0, respectively. Based on this information it appears that All
Systems Corporation is
a. Better than the industry in terms of PM, but worse in terms of TAT
b. Better than the industry for all three ratios
c. Better than the industry for TAT and leverage, but worse for PM
d. Worse than the industry for all three measures
e. None of the above
ANS: A
DuPont ratio comparisons
PM TAT Leverage
Industry 10.9% 1.20 1.00
All Systems 11.9% 0.76 2.56
All Systems Corporation is more highly leveraged than the industry and has a lower TAT indicating
they are less efficient. All Systems Corporation is better than the industry in terms of PM, but worse
than the industry in terms of TAT. Leverage for All Systems Corporation is higher, which increases
ROE, but is much riskier in terms of bankruptcy risk.

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CHAPTER 10—ANALYSIS OF FINANCIAL STATEMENTS

16. Financial ratios can be used to estimate systematic risk.

2. The five major classes of ratios include the following, except

3. Which of the following is not a flow ratio?

4. Which ratio is considered an internal liquidity ratio?

5. Operating performance is divided into which two subcategories of ratios?

6. Which of the following is not a component of return on equity (ROE)?

8. Determinants of market liquidity include all except the

9. Which of the following is not a use of financial ratios?

10. Limitations on the use of ratios include

11. Business risk is a function of

12. A common-size balance sheet expresses all balance sheet items

13. A common-size income statement expresses all income statement items

16. The market liquidity of a security can be measured using

BMC CORPORATION INCOME STATEMENT

Net Sales $1025

BMC CORPORATION BALANCE SHEET

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

32. Refer to Exhibit 10.1. What is BMC'S traditional cash flow?

PTS: 1 OBJ: Multiple Choice Problem

33. Refer to Exhibit 10.1. What is BMC'S operating profit margin?

PTS: 1 OBJ: Multiple Choice Problem

STAR CORPORATION INCOME STATEMENT

Net Sales $1075

STAR CORPORATION BALANCE SHEET

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

42. Refer to Exhibit 10.2. What is Star's traditional cash flow?

PTS: 1 OBJ: Multiple Choice Problem

43. Refer to Exhibit 10.2. What is Star's operating profit margin?

PTS: 1 OBJ: Multiple Choice Problem

You are provided with the following information for a company.

Net Annual Sales 60000

44. Refer to Exhibit 10.3. Calculate the receivables turnover ratio.

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

46. Refer to Exhibit 10.3. Calculate the payables turnover ratio.

PTS: 1 OBJ: Multiple Choice Problem

47. Refer to Exhibit 10.3. Calculate the cash conversion cycle.

PTS: 1 OBJ: Multiple Choice Problem

You are provided with the following information about MaxCorp.

Net sales 5000

48. Refer to Exhibit 10.4. Calculate the return on equity (ROE).

PTS: 1 OBJ: Multiple Choice Problem

49. Refer to Exhibit 10.4. Calculate the sustainable growth rate.

PTS: 1 OBJ: Multiple Choice Problem

Income Statement Data

Balance Sheet Data

50. Refer to Exhibit 10.5. Calculate the operating margin.

PTS: 1 OBJ: Multiple Choice Problem

51. Refer to Exhibit 10.5. Calculate the asset turnover ratio.

PTS: 1 OBJ: Multiple Choice Problem