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Site Title: Fundamentals of Financial Summary of Results

Management, twelfth edition
43% Correct of 21 Scored items:
Book Title: Fundamentals of Financial 43%
9 Correct:
Management, twelfth edition
12 Incorrect: 57%
Book Van Horne/Wachowicz
Author: More information about scoring
Location on Student Resources > Chapter 6
Site: > Multiple choice questions
Date/Time July 27, 2010 at 1:41 AM (EDT)
Submitted:

1. Determine a firm's total asset turnover (TAT) if its net profit margin is
5 percent, assets are $8 million, and ROI is 8 percent.

1.60
Your
Answer:

2. Felton Farm Supplies, Inc., has an 8 percent return on total assets of

$300,000 and a net profit margin of 5 percent. What are its sales?

$300,000
Your Answer:
Correct $480,000
Answer:

Since ROI=8% on $300,000 of assets, then net profit is $24,000 (8%

× $300,000). Using the net profit and given that the NPM=5%, sales
equals $480,000 ($24,000 / 5%).

3. Which of the following would not improve the current ratio?

 Borrow short term to finance additional fixed assets.
Your
Answer:

4. The gross profit margin is unchanged, but the net profit margin
declined over the same period. This could have happened if
__________.

cost of goods sold increased relative to sales

Your Answer:
Correct the U.S. Congress increased the tax rate
Answer:

This transaction would decrease the gross profit margin as gross profit
is sales less cost of goods sold.

5. A company can improve (lower) its debt-to-total asset ratio by doing

which of the following?

Shift long-term to short-term debt.

Your Answer:
Correct Sell common stock.
Answer:

The firm is simply shifting one type of debt for another. Since the ratio
includes total debt this activity will make no impact on the ratio.

6. Which of the following statements (in general) is correct?

The higher the tax rate for a firm, the lower the
Your Answer: interest coverage ratio.
Correct The lower the total debt-to-equity ratio, the lower
Answer: the financial risk for a firm.

The interest coverage ratio equals EBIT / Interest expense. EBIT will
not be influenced by a change in the tax rate and interest expense is a
function of the amount and rate of debt already on the books. Thus, no
impact on the interest coverage ratio.
7. Sales for 1991 (base year) were $800,000 and the year-end total
asset turnover ratio was 1.6. With which of the following statements
would you agree?

Index analysis supplements the common-size

Your Answer: analysis by comparing key industry ratios.
Correct The total assets index analysis value, assuming
Answer: $1.05 million of assets at the end of 2000, would
be 210.

Index analysis compares the relative size of each balance sheet or

income statement to a base year (indexed at 100). Therefore it does
not compare key ratios.

8. Krisle and Kringle's debt-to-total assets ratio is.4. What is its debt-to-
equity ratio?

.667
Your
Answer:

9. Which of the following statements is the least likely to be correct?

It is important to make external comparisons or

Your Answer: financial ratios.
Correct There exists little or no negotiation with suppliers of
Answer: capital regarding the financing needs of the firm.

This is indeed a useful technique to determine how your firm or

division is performing against other publicly traded firms for example.

10 Which of the following statements is most accurate?

.
Receivable- and inventory-based activity ratios also
Your shed light on the "liquidity" of these current assets.
Answer:

11 The authors place financial ratios into __________.

.
 two broad categories: (1) balance sheet and
Your Answer: income statement/balance sheet ratios; and (2)
income statement ratios
Correct two broad categories: (1) balance sheet ratios; (2)
Answer: income statement and income statement/balance
sheet ratios

12 Benchmarking can be applied to ratio analysis. How is this different

from comparing a firm's ratios to industry averages over time?
.
It creates a benchmark that compares your firm to the
Your best world-class competitors rather than an entire
Answer: industry.

13 Which of the following statements is most correct regarding the

current ratio for a firm that uses industry averages and a peer
. benchmark as their comparison?

Firms should strive to maintain a current ratio that

Your seems reasonable when compared to an industry
Answer: average and a peer benchmark.

14 The DuPont Approach breaks down the earning power on shareholders'

book value (ROE) as follows: ROE = __________.
.
Total asset turnover × Gross profit margin × Equity
Your Answer: multiplier
Correct Net profit margin × Total asset turnover × Equity
Answer: multiplier

An analyst should never use "rules-of-thumb" due to the dramatic

differences between firms and industries.

15 In conducting a common-size analysis every balance sheet item is

divided by __________ and every income statement is divided by
. __________.

total assets; net sales or revenues

Your
Answer:
16 In conducting an index analysis every balance sheet item is divided by
__________ and every income statement is divided by __________.
.
total assets; net sales or revenues
Your Answer:
Correct its corresponding base year balance sheet item; its
Answer: corresponding base year income statement item

We would actually divide by its corresponding base year balance sheet

item and its corresponding base year income statement item
respectively.

17 Which group of ratios measure a firm's ability to meet short-term

obligations?
.
Coverage ratios.
Your Answer:
Correct Liquidity ratios.
Answer:

Coverage ratios relate the financial charges of a firm to its ability to

service, or cover, them.

18 Which group of ratios relate the financial charges of a firm to its ability
to service them?
.
Profitability ratios.
Your Answer:
Correct Coverage ratios.
Answer:

Profitability ratios relate profits to sales and investment.

19 Which group of ratios measure how effectively the firm is using its
assets?
.
Activity ratios.
Your
Answer:
20 Which group of ratios relate profits to sales and investment?
.
Coverage ratios.
Your Answer:
Correct Profitability ratios.
Answer:

Coverage ratios relate the financial charges of a firm to its ability to

service, or cover, them.

21 Which group of ratios shows the extent to which the firm is financed
with debt?
.
Debt ratios.
Your
Answer: Type equation here .