Chapter 4

1. A benchmark for a financial statement analysis is the performance of a multinational firm in

the same industry from another country.
A) True
B) False
2. The purchase of additional inventory by a firm should decrease a firm's quick ratio.
A) True
B) False
3. Firms with a lower ROA and higher leverage will have a lower ROE than firms with a higher
ROA and lower leverage.
A) True
B) False
4. All but one of the following is true of common-size balance sheets.
A) Each asset and liability item on the balance sheet is standardized by dividing it by total
assets.
B) Balance sheet accounts are represented as percentages of total assets.
C) Each asset and liability item on the balance sheet is standardized by dividing it by sales.
D) Common-size financial statements allow us to make meaningful comparisons between
the financial statements of two firms that are different in size.
5. All but one of the following is true about the inventory turnover ratio.
A) It is calculated by dividing inventory by cost of goods sold.
B) It measures how many times the inventory is turned over into saleable products.
C) The more times a firm can turnover the inventory, the better.
D) Too high a turnover or too low a turnover could be a warning sign.
6. Which one of the following is NOT an advantage of using ROE as a goal?
A) ROE is highly correlated with shareholder wealth maximization.
B) ROE and the DuPont analysis allow management to break down the performance and
identify areas of strengths and weaknesses.
C) ROE does not consider risk.
D) All of the above are advantages of using ROE as a goal.
7. Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the
firm's equity multiplier and debt-to-equity ratio? (Round to nearest whole percent)
A) 2.31; 1.31
B) 1.75; 0.75
C) 0.75; 1.75
D) 1.31; 2.31
8. Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and
its current ratio now is 2.1. The firm plans to acquire additional inventory to meet an unexpected
surge in the demand for its products and will pay for the inventory with short-term debt. How
much inventory can the firm purchase without violating its debt agreement if their total current
assets equal $3.5 million?
A) $0
B) $777,777
C) $1 million
D) None of the above
9. Jason Traders has sales of $833,587, a gross profit margin of 32.4 percent, and inventory of
$178,435. What is the company's inventory turnover ratio?
A) 4.67 times
B) 3.16 times
C) 4.1 times
D) None of the above
10. Deutsche Bearings has total sales of $9,745,923, inventories of $2,237,435, cash and
equivalents of $755,071, and days' sales outstanding of 49 days. If the firm's management
wanted its DSO to be 35 days, by how much will the accounts receivable have to change?
A) $373,816.23
B) -$373,816.23
C) -$379,008.12
D) $379,008.12
11. Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and
an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned
and cash coverage ratios for this company?
A) 19.4 times; 12.7 times
B) 17.3 time; 11.4 times
C) 13.8 times; 19.4 times
D) None of the above
12. GenTech Pharma has reported the following information: Sales/Total assets = 2.89; ROA =

10.74%; ROE = 20.36%. What are the firm's profit margin and equity multiplier?

A) 7.1%; 0.53 ROE = ROA * EM => EM = 1.89

ROE = net profit margin * EM * total assets turnover
B) 7.1%; 1.90 Sales/ total assets = 2.89
=> 20.36% = X * 1.89 * 2.89
C) 3.7%; 0.53 => X = 3.72%
D) 3.7%; 1.90
13. Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53, sales of $2.75
million, and a total assets turnover of 2.7 times. What is the firm's net income?
A) $75,281.80
B) $514,250.00 ROE = net profit margin * EM * total assets turnover

C) $51,425.00
D) $7,528.10
Chapter 3
1. The book value of an asset is the historical cost of the asset less the accumulated
depreciation.
A) True
B) False
2. The key financial statement that ties the other three statements together is the balance sheet,
which summarizes the firm's investment and financing activities at a point in time.
A) True
B) False
3. The going concern assumption implies that
A) a firm will continue to be in business for the foreseeable future.
B) a firm will be going out of business in the near future.
C) a firm will continue to operate in the near future but only after being acquired by another
firm.
D) none of the above
4. On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex
Corporation, with the payment to be made in 90 days on September 20. The goods were
shipped to Rynex on July 2. The firm's accountants should recognize the sale on
A) June 23, 2008.
B) July 2, 2008.
C) September 20, 2008.
D) none of the above.
5. Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million,
and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its
market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its
financial statement for the fiscal year end on December 31, 2008. The asset's book value
should be recognized on the balance sheet at
A) $2.3 million.
B) $1.61 million.
C) $230,000.
D) $1.75 million.
6. When prices are falling, valuing inventory using the LIFO method rather than FIFO gives
A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.
7. The major disadvantages of market-value accounting include
A) the difficulty in estimating the current value for some assets.
B) the difficulty in applying some of the valuation models used to estimate market values.
C) the resulting numbers are potentially open to abuse.
D) All of the above are disadvantages of market-value accounting.
8. Trident Manufacturing Company's treasurer identified the following cash flows during this year
as significant. It had repaid existing debt to the tune of $425,110, while raising additional debt
capital of $750,000. It also repurchased stock in the open markets for a total of $63,250. It paid
$233,144 in dividends to its shareholders. What is the net cash provided (used) by financing
activities?
A) $28,496
B) $91,746
C) –$28,496
D) –$91,746
9. Maddux, Inc., has completed its fiscal year and reported the following information. The
company had current assets of $153,413, net fixed assets of $ 412,331, and other assets of
$7,822. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and
common stock of $162,000. How much retained earnings does the firm have?
A) $ 405,648
B) $243,648
C) $167,918
D) $573,566
10. Galan Associates prepared its financial statement for 2008 based on the information given
here. The company had cash worth $1,234, inventory worth $13,480, and accounts receivables
of $7,789. The company's net fixed assets are $42,331, and other assets are $1,822. It had
accounts payables of $9,558, notes payables of $2,756, common stock of $22,000, and
retained earnings of $14,008. How much long-term debt does the firm have?
A) $54,342
B) $76,342
C) $12,314
D) $18,334
11. Chandler Sporting Goods produces baseball and football equipment and lines of clothing.
This year the company had cash and marketable securities worth $335,485, accounts payables
worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term
notes payable worth $313,663, and other current assets of $121,427. What is the company's
net working capital?
Net working capital = current asset - current liabilities
A) $3,596,632
B) $1,801,784
C) $2,123,612
D) $1,673,421
12. Simplex Healthcare had net income of $5,411,623 after paying taxes at 34 percent. The firm
had revenues of $20,433,770. Their interest expense for the year was $1,122,376, while
depreciation expense was $2,079,112. What was the firm's operating expenses excluding
depreciation?
A) $8,199,429 Operating expense = Revenue - EBITDA
EBT = 8,199,429
B) $9,032,853 EBIT = 9,321,805
EBITDA = 11,400,917
C) $9,321,805
D) none of the above
13. Parrino Corporation has announced that its net income for the year ended June 30, 2008, is
$1,824,214. The company had an EBITDA of $ 5,174,366, and its depreciation and amortization
expense was equal to $1,241,790. The company's average tax rate is 34 percent. What is the
amount of interest expense for the firm?
A) $2,763,961
B) $939,747
C) $1,187,720
D) $1,168,615
14. Super Grocers, Inc., provided the following financial information for the quarter ending
September 30, 2006: Depreciation and amortization $(133,414); Net income $341,463; Change
in receivables +$112,709; Change in inventory +$81,336; Change in accounts payable
+$62,411; Change in marketable securities $(31,225). What is the cash flow from operating
activities generated during this quarter by the firm?
A) $308,458
B) $374,468
C) –$374,468
D) –$308,458
15. Trimeton Corporation announced that in the year ended June 30, 2008, its earnings before
taxes amounted to $2,367,045. Calculate its taxes using the following table.
Tax Rate Taxable Income
15% $0 to $50,000
25 50,001 – 75,000
34 75,001 – 100,000
39 100,001 – 335,000
34 335,001 – 10,000,000
35 10,000,001 – 15,000,000
38 15,000,001 – 18,333,333
35 More than $18,333,333
A) $804,795
B) $690,895
C) $713,145
D) none of the above
16. Arco Steel, Inc. generated total sales of $45,565,200 during fiscal 2010. Depreciation and
amortization for the year totaled $2,278,260, and cost of goods sold was $27,339,120. Interest
expense for the year was $9,641,300 and selling, general, and administrative expenses totaled
$4,556,520 for the year. What is Arco’s EBIT for 2010?
A) $9,641,300
B) $11,391,300
C) $13,275,030
D) $18,490,000
Chapter 1
1. A trademark is an example of
A) a productive asset.
B) an intangible asset.
C) a nebulous asset.
D) none of the above.
2. Which of the following business organizational forms subjects the owner(s) to unlimited
liability?
A) sole proprietorship
B) partnership and corporation
C) corporation
D) sole proprietorship & partnership
3. Which of the following is responsible for seeing that the best possible financial analysis is
presented?
A) CFO
B) CEO
C) board of directors
D) audit committee
4. Which of the following is NOT one of the strategies incorporated in the Sarbanes-Oxley Act of
2002?
A) attain greater board independence
B) establish compliance programs
C) establish ethics programs
D) dictate maximum compensation levels
5. Which of the following powers does the audit committee have the authority to do?
A) audit the personal bank account of the CEO
B) question any person employed by the firm
C) audit the compensation files of firms in the same industry
D) none of the above
6. Working capital management decisions involve
A) how a firm's day-to-day financial matters should be managed.
B) how the firm should finance its assets.
C) which productive assets the firm should employ.
D) all of the above.
7. If a firm establishes maximizing profits at the most important goal of the firm, which of the
following would not be given proper consideration?
A) Sales revenues
B) Expenses
C) Risk
D) Cost of goods sold
8. Cash dividends are paid out of
A) residual cash.
B) liquidated assets.
C) long-term debt.
D) all of the above.