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2. The current ratio and inventory turnover ratios both help us measure the firm's liquidity. The current ratio measures the
relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of
how long it takes the firm to convert its inventory into cash.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.46 - LO: 7-2
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Liquidity ratios
KEYWORDS: Bloom’s: Knowledge
3. Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-
to-use measures of a firm's liquidity position.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
Cengage Learning Testing, Powered by Cognero Page 1
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
LEARNING OBJECTIVES: INTE.GENE.16.46 - LO: 7-2
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Liquidity ratios
KEYWORDS: Bloom’s: Knowledge
4. High current and quick ratios always indicate that a firm is managing its liquidity position well.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.46 - LO: 7-2
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Current ratio
KEYWORDS: Bloom’s: Knowledge
5. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a
firm is managing its assets.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.47 - LO: 7-3
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Asset management ratios
KEYWORDS: Bloom’s: Knowledge
6. A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its
liquidity position is improving, i.e., it is becoming more liquid.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.47 - LO: 7-3
Cengage Learning Testing, Powered by Cognero Page 2
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Inventory turnover ratio
KEYWORDS: Bloom’s: Knowledge
7. Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners'
capital through the use of financial leverage.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.48 - LO: 7-4
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Debt management ratios
KEYWORDS: Bloom’s: Knowledge
8. The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term
debt obligations.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.48 - LO: 7-4
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: TIE ratio
KEYWORDS: Bloom’s: Knowledge
9. Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating
results.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.49 - LO: 7-5
Cengage Learning Testing, Powered by Cognero Page 3
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Profitability ratios
KEYWORDS: Bloom’s: Knowledge
10. Market value ratios provide management with an indication of how investors view the firm's past performance and
especially its future prospects.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.50 - LO: 7-6
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Market value ratios
KEYWORDS: Bloom’s: Knowledge
11. Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios
for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.51 - LO: 7-7
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Trend analysis
KEYWORDS: Bloom’s: Knowledge
12. The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically,
depending on the time of year when the financial statements are constructed.
a. True
b. False
ANSWER: True
RATIONALE: Many of the ratios show sales over some past period such as the last 12 months divided by
an asset such as inventories as of a specific date. Assets like inventories vary at different
times of the year for a seasonal business, thus leading to big changes in the ratio.
POINTS: 1
Cengage Learning Testing, Powered by Cognero Page 4
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.45 - LO: 7-1
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Balance sheet changes
KEYWORDS: Bloom’s: Knowledge
13. Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more
difficult than if all firms used similar accounting methods.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.45 - LO: 7-1
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Limitations of ratio analysis
KEYWORDS: Bloom’s: Knowledge
14. The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial
leverage and tax effects.
a. True
b. False
ANSWER: False
RATIONALE: BEP = EBIT/Assets. This is before the effects of leverage (interest) and taxes, so the
statement is false.
POINTS: 1
DIFFICULTY: Difficulty: Moderate
LEARNING OBJECTIVES: INTE.GENE.16.49 - LO: 7-5
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Basic earning power ratio
KEYWORDS: Bloom’s: Knowledge
15. The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory
turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of
the inventory is obsolete or damaged.
a. True
b. False
Cengage Learning Testing, Powered by Cognero Page 5
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
ANSWER: True
RATIONALE: A high current ratio is consistent with a lot of inventory. A low inventory turnover is also
consistent with a lot of inventory. If the CR exceeds industry norms and the turnover is below
the norms, then the firm has more inventory than most other firms, given its sales. It could
just be carrying a lot of good inventory, but it might also have a normal amount of "good"
inventory plus some "bad" inventory that has not been written off. So the statement is true.
POINTS: 1
DIFFICULTY: Difficulty: Moderate
LEARNING OBJECTIVES: INTE.GENE.16.47 - LO: 7-3
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Inventory turnover ratio
KEYWORDS: Bloom’s: Comprehension
16. It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if
and only if all the firms being compared have the same proportion of fixed assets to total assets.
a. True
b. False
ANSWER: False
RATIONALE: The FA turnover is Sales/FA, and it gives an indication of how effectively the firm utilizes its
FA. The proportion of FA to TA is not relevant to this usage.
POINTS: 1
DIFFICULTY: Difficulty: Moderate
LEARNING OBJECTIVES: INTE.GENE.16.47 - LO: 7-3
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Fixed assets turnover
KEYWORDS: Bloom’s: Comprehension
17. Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed),
two firms with the same EBIT must have the same ROA.
a. True
b. False
ANSWER: False
RATIONALE: EBIT = Sales revenues − Operating costs Net income = EBIT − Interest − Taxes = (EBIT −
Interest) × (1 − T) ROA = Net income after taxes/Assets Two firms could have identical EBITs
but very different amounts of interest, different tax rates, and different assets, and thus very
different ROAs.
POINTS: 1
DIFFICULTY: Difficulty: Moderate
LEARNING OBJECTIVES: INTE.GENE.16.49 - LO: 7-5
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
18. Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in
competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to
have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
a. True
b. False
ANSWER: False
RATIONALE: Think about the DuPont equation: ROE = PM × TATO × Equity multiplier. Similar financing
policies will lead to similar Equity multipliers. Moreover, competition in the capital markets will
cause ROEs to be similar, because otherwise capital would flow to industries with high ROEs
and drive returns down toward the average, given similar risks. To have similar ROEs, firms
with relatively high PMs must have relatively low TATOs, and vice versa. Therefore, the
statement is false.
POINTS: 1
DIFFICULTY: Difficulty: Moderate
LEARNING OBJECTIVES: INTE.GENE.16.52 - LO: 7-8
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: DuPont equation
KEYWORDS: Bloom’s: Comprehension
19. Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if
A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than that of B.
a. True
b. False
ANSWER: False
RATIONALE: This question can be answered by thinking carefully about the ratios: Demonstration that the
first sentence is true:
CR = A>B QR = B>A
A: 1.67 0.67
QR(B) >
QR(A)
B: 1.50 1.00
Demonstration that second sentence is false:
CR = A>B QR = B>A
A: 1.0 0.67
20. Firms A and B have the same current ratio, 0.75, the same amount of sales and cost of goods sold, and the same
amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude
that A's quick ratio must be smaller than B's.
a. True
b. False
ANSWER: False
RATIONALE: Firm A has the higher inventory turnover, so given the same cost of goods, it must have less
inventory. Thus, since the two firms have the same CR, then A must have the higher QR, not
the lower one. Therefore, the statement is false.
POINTS: 1
DIFFICULTY: Difficulty: Challenging
LEARNING OBJECTIVES: INTE.GENE.16.46 - LO: 7-2
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Liquidity ratios
KEYWORDS: Bloom’s: Comprehension
21. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt,
the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required
to achieve its target TIE ratio.
a. True
b. False
ANSWER: True
RATIONALE: TIE = EBIT/Interest = (Sales − Op cost)/(Debt × Interest rate). If we know the op. costs, the
amount of debt, and the interest rate, then we can solve for the sales level required to
achieve the target TIE.
POINTS: 1
DIFFICULTY: Difficulty: Challenging
LEARNING OBJECTIVES: INTE.GENE.16.48 - LO: 7-4
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
Cengage Learning Testing, Powered by Cognero Page 8
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: TIE ratio
KEYWORDS: Bloom’s: Comprehension
22. Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic
earning power (BEP), and have the same tax rate. However, Firm A has a higher debt ratio. If BEP is greater than the
interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.
a. True
b. False
ANSWER: True
RATIONALE: The easiest way to think about this is to realize that you can borrow at a cost of 10% and
invest the proceeds to earn 11%, you'll earn a surplus. If you were previously earning an
ROE of 10%, then after raising and investing additional funds, your income will be higher,
your equity will be the same, and thus your ROE will increase. Similarly, if a firm earns more
on assets than the interest rate, there will be a surplus after paying interest on the debt that
will go to the equity, thus increasing the ROE. So, if BEP > rd, then the firm can increase its
expected ROE by using more debt leverage. The answer can also be seen by working out an
example. The one below shows that leverage increases ROE if BEP > rd, but it could be
varied to show no difference in ROE if interest rates and BEP are the same, and a reduction
in ROE if the interest rate exceeds the BEP.
Firm A Firm B
Assets 100%Assets 100%
Debt 60%Debt 0%
Equity 40%Equity 100%
BEP 15%BEP 15%
Interest rate, rd 10%Interest rate, rd 10%
Tax rate 40%Tax rate 40%
EBIT = BEP × Assets 15.0EBIT = BEP × Assets 15.0
Interest 6.0Interest 0
Taxable income 9.0Taxable income 15.0
Taxes 3.6Taxes 6.0
NI 5.4NI 9.0
ROE 13.50%ROE 9.00%
POINTS: 1
DIFFICULTY: Difficulty: Challenging
LEARNING OBJECTIVES: INTE.GENE.16.49 - LO: 7-5
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: BEP and ROE
KEYWORDS: Bloom’s: Comprehension
23. If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be
0.667.
a. True
Cengage Learning Testing, Powered by Cognero Page 9
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
b. False
ANSWER: True
RATIONALE: Equity multiplier = Assets/Equity = 3.0, so Assets/Equity = 1/3.0 = 0.333. By definition,
Equity/Assets + Debt/Assets = 1.00, so 0.333 + Debt/Assets = 1.0. Therefore, Debt/Assets =
1.0 − 0.333 = 0.667. Thus, the statement is true.
POINTS: 1
DIFFICULTY: Difficulty: Challenging
LEARNING OBJECTIVES: INTE.GENE.16.52 - LO: 7-8
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Equity multiplier
KEYWORDS: Bloom’s: Comprehension
24. One problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater
than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current
ratio to increase.
a. True
b. False
ANSWER: False
RATIONALE: The key here is to recognize that if the CR is greater than 1.0, then a given increase in both
current assets and current liabilities would lead to a decrease in the CR. The reverse would
hold if the initial CR were less than 1.0. Here the initial CR is greater than 1.0, so borrowing
on a short-term basis to build the cash account would lower the CR. For example:
Original New Old New
CA/CL Plus $1 CA/CL CR CR
CR falls if initial CR is greater
3/2 1/1 4/3 1.50 1.33
than 1.0
CR rises if initial CR is less than
2/3 1/1 3/4 0.67 0.75
1.0
POINTS: 1
DIFFICULTY: Difficulty: Challenging
LEARNING OBJECTIVES: INTE.GENE.16.45 - LO: 7-1
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Limitations of ratio analysis
KEYWORDS: Bloom’s: Comprehension
25. One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current
ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to
increase and thus make the firm look stronger.
a. True
b. False
ANSWER: False
Cengage Learning Testing, Powered by Cognero Page 10
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
RATIONALE: The key here is to recognize that if the CR is less than 1.0, then a given reduction in both
current assets and current liabilities would lead to a decrease in the CR. The reverse would
hold if the initial CR were greater than 1.0. In the question, the initial CR is less than 1.0, so
using cash to reduce current liabilities would lower the CR. If the CR were greater than 1.0,
the statement would have been true. Here's an illustration:
Original New Old New
CA/CL Less $1 CA/CL CR CR
CR falls if initial CR is less than
2/3 −1/−1 1/2 0.67 0.50
1.0
CR rises if initial CR is greater
3/2 −1/−1 2/1 1.5 2.0
than 1.0
POINTS: 1
DIFFICULTY: Difficulty: Challenging
LEARNING OBJECTIVES: INTE.GENE.16.45 - LO: 7-1
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Limitations of ratio analysis
KEYWORDS: Bloom’s: Comprehension
26. Considered alone, which of the following would increase a company's current ratio?
a. An increase in accounts payable.
b. An increase in net fixed assets.
c. An increase in accrued liabilities.
d. An increase in notes payable.
e. An increase in accounts receivable.
ANSWER: e
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.46 - LO: 7-2
NATIONAL STANDARDS: United States - BUSPROG: Analytic
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Current ratio
KEYWORDS: Bloom’s: Comprehension
OTHER: TYPE: Multiple Choice: Conceptual
27. Which of the following would, generally, indicate an improvement in a company's financial position, holding other
things constant?
a. The total assets turnover decreases.
b. The TIE declines.
c. The DSO increases.
d. The EBITDA coverage ratio increases.
e. The current and quick ratios both decline.
Cengage Learning Testing, Powered by Cognero Page 11
CHAPTER 7—ANALYSIS OF FINANCIAL STATEMENTS
ANSWER: d
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.46 - LO: 7-2
NATIONAL STANDARDS: United States - BUSPROG: Analytic
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Current ratio
KEYWORDS: Bloom’s: Comprehension
OTHER: TYPE: Multiple Choice: Conceptual
28. A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
a. Use cash to increase inventory holdings.
b. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to
purchase plant and equipment.
c. Use cash to repurchase some of the company's own stock.
d. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
e. Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as
cash.
ANSWER: e
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.46 - LO: 7-2
NATIONAL STANDARDS: United States - BUSPROG: Analytic
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Current ratio
KEYWORDS: Bloom’s: Comprehension
OTHER: TYPE: Multiple Choice: Conceptual
30. Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price.
Which of the following statements is CORRECT?
a. Company A trades at a higher P/E ratio.
b. Company A probably has fewer growth opportunities.
c. Company A is probably judged by investors to be riskier.
d. Company A must have a higher market-to-book ratio.
e. Company A must pay a lower dividend.
ANSWER: a
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.50 - LO: 7-6
NATIONAL STANDARDS: United States - BUSPROG: Analytic
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Financial statement analysis
KEYWORDS: Bloom’s: Comprehension
OTHER: TYPE: Multiple Choice: Conceptual
33. The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term
notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects
would occur as a result of this action?
a. The company's debt ratio increased.
b. The company's current ratio increased.
c. The company's times interest earned ratio decreased.
d. The company's basic earning power ratio increased.
e. The company's equity multiplier increased.
ANSWER: b
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.50 - LO: 7-6
NATIONAL STANDARDS: United States - BUSPROG: Analytic
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Miscellaneous ratios
34. A firm's new president wants to strengthen the company's financial position. Which of the following actions would
make it financially stronger?
a. Increase inventories while holding sales and cost of goods sold constant.
b. Increase accounts receivable while holding sales constant.
c. Increase EBIT while holding sales constant.
d. Increase accounts payable while holding sales constant.
e. Increase notes payable while holding sales constant.
ANSWER: c
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.49 - LO: 7-5
NATIONAL STANDARDS: United States - BUSPROG: Analytic
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Miscellaneous ratios
KEYWORDS: Bloom’s: Comprehension
OTHER: TYPE: Multiple Choice: Conceptual
35. If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the
manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases,
assume that other things are held constant.
a. The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.
b. The division's basic earning power ratio is above the average of other firms in its industry.
c. The division's total assets turnover ratio is below the average for other firms in its industry.
d. The division's debt ratio is above the average for other firms in the industry.
e. The division's inventory turnover is 6, whereas the average for its competitors is 8.
ANSWER: b
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: INTE.GENE.16.49 - LO: 7-5
NATIONAL STANDARDS: United States - BUSPROG: Analytic
STATE STANDARDS: United States - AK - DISC: Financial statements, anal - DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS: United States - OH - Default City - TBA
TOPICS: Miscellaneous ratios
KEYWORDS: Bloom’s: Comprehension
OTHER: TYPE: Multiple Choice: Conceptual
36. Which of the following would indicate an improvement in a company's financial position, holding other things
constant?
a. The current and quick ratios both increase.
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