Homework answers / question archive / FPT University FIN 202 Chapter 4 1)Financial statements can be analyzed from the following three different perspectives: A)           management, regulator, and bondholder B)            management, shareholder, and creditor C)            regulator, shareholder, and creditor D)           shareholder, creditor, and regulator 2

FPT University FIN 202 Chapter 4 1)Financial statements can be analyzed from the following three different perspectives: A)           management, regulator, and bondholder B)            management, shareholder, and creditor C)            regulator, shareholder, and creditor D)           shareholder, creditor, and regulator 2

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FPT University

FIN 202

Chapter 4

1)Financial statements can be analyzed from the following three different perspectives:

A)           management, regulator, and bondholder

B)            management, shareholder, and creditor

C)            regulator, shareholder, and creditor

D)           shareholder, creditor, and regulator

2.            Shareholders analyze financial statements in order to:

A)           assess the cash flows that the firm will generate from operations/

B)            determine the firm's profitability, their return for that period, and the dividend they are likely to receive.

C)            focus on the value of the stock they hold.

D)           All of the above.

 

3.            The creditors of a firm analyze financial statements so that they can focus on

A)           the firm's amount of debt.

B)            the firm's ability to generate sufficient cash flows to meet all legal obligations first and still have sufficient cash flows to meet debt repayment and interest payments.

C)            the firm's ability to meet its short-term obligations.

D)           All of the above.

4.            A firm's management analyzes financial statement's so that:

A)           they can get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements.

B)            similar to shareholders, they can focus on profitability, dividend,

capital appreciation, and return on investment.

C)            they can get more stock options.

D)           a and b.

5.            Anyone analyzing a firm's financial statements should

A)           use audited financial statements only.

B)            do a trend analysis.

C)            perform a benchmark analysis.

D)           All of the above.

6.            An individual analyzing a firm's financial statements should do all but one

of the following:

A)           Use unaudited financial statements.

B)            Do a trend analysis.

C)            Perform a benchmark analysis.

D)           Compare the firm's performance to that of its direct competitors.

7.            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.

8.            All but one of the following is true of common-size income statements.

A)           Each income statement item is standardized by dividing it by total

 

assets.

B)            Income statement accounts are represented as percentages of sales.

C)            Each income statement item is standardized by dividing it by sales.

D)           Common-size financial statement analysis is a specialized application of ratio analysis.

9.            Common-size financial statements:

A)           are a specialized application of ratio analysis.

B)            allow us to make meaningful comparisons between the financial statements of two firms that are different in size.

C)            are prepared by having each financial statement item expressed as a

percentage of some base number, such as total assets or total revenues.

D)           All of the above are true.

10.          Which of the following is true of ratio analysis?

A)           A ratio is computed by dividing one balance sheet or income statement by another.

B)            The choice of the scale determines the story that can be garnered from

the ratio.

C)            Ratios can be calculated based on the type of firm being analyzed or the kind of analysis being performed.

D)           All of the above are true.

11.          Which of the following is NOT true of liquidity ratios?

A)           They measure the ability of the firm to meet short-term obligations with short-term assets without putting the firm in financial trouble.

B)            There are two commonly used ratios to measure liquidity—current

ratio and quick ratio.

C)            For manufacturing firms, quick ratios will tend to be much larger than current ratios.

D)           The higher the number, the more liquid the firm and the better its

ability to pay its short-term bills.

12.          All but one of the following is true about quick ratios.

A)           The quick ratio is calculated by dividing the most liquid of current assets by current liabilities.

B)            Service firms that tend not to carry too much inventory will see

significantly higher quick ratios than current ratios.

C)            Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets.

 

D)           Quick ratios will tend to be much smaller than current ratio for manufacturing firms or other industries that have a lot of inventory.

13.          Which one of the following does NOT change a firm's current ratio?

A)           The firm collects on its accounts receivables.

B)            The firm purchases inventory by taking a short-term loan.

C)            The firm pays down its accounts payables.

D)           None of the above.

14.          All else being equal, which one of the following will decrease a firm's current ratio?

A)           a decrease in the net fixed assets

B)            a decrease in depreciation

C)            an increase in accounts payable

D)           None of the above

15.          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.

16.          Which one of the following statements is NOT true?

A)           The accounts receivables turnover ratio measures how quickly the firm collects on its credit sales.

B)            One ratio that measures the efficiency of a firm's collection policy is

days' sales outstanding.

C)            The more days that it takes the firm to collect on its receivables, the more efficient the firm is.

D)           DSO measures in days, the time the firm takes to convert its

receivables into cash.

17.          One of the following statements is NOT true of asset turnover ratios.

A)           Asset turnover ratios measure the level of sales per dollar of assets that the firm has.

B)            The fixed assets turnover ratio is less significant for equipment-

intensive manufacturing industry firms than the total assets turnover ratio.

C)            The higher the total asset turnover, the more efficiently management

is using total assets.

D)           All of the above are true.

18.          Which one of the following statements is correct?

 

A)           The lower the level of a firm's debt, the higher the firm's leverage.

B)            The lower the level of a firm's debt, the lower the firm's equity multiplier.

C)            The lower the level of a firm's debt, the higher the firm's equity

multiplier.

D)           The tax benefit from using debt financing reduces a firm's risk.

19.          If firm A has a higher debt-to-equity ratio than firm B, then

A)           firm A has a lower equity multiplier than firm B.

B)            firm B has a lower equity multiplier than firm A.

C)            firm B has lower financial leverage than firm A.

D)           None of the above.

20.          Which one of the following statements is NOT correct?

A)           A leveraged firm is more risky than a firm that is not leveraged.

B)            A leveraged firm is less risky than a firm that is not leveraged.

C)            A firm that uses debt magnifies the return to its shareholders.

D)           All of the above statements are correct.

21.          Coverage ratios, like times interest earned and cash coverage ratio, allow

A)           a firm's management to assess how well they meet short-term liabilities.

B)            a firm's shareholders to assess how well the firm will meet its short-

term liabilities.

C)            a firm's creditors to assess how well the firm will meet its interest obligations.

D)           a firm's creditors to assess how well the firm will meet its short-term

liabilities other than interest expense.

22.          For a firm that has no debt in its capital structure,

A)           ROE > ROA.

B)            ROE < ROA.

C)            ROE = ROA.

D)           None of the above.

23.          For a firm that has both debt and equity,

A)           ROE > ROA.

B)            ROE < ROA.

C)            ROE = ROA

D)           None of the above.

24.          Which one of the following statements is NOT correct?

A)           The DuPont system is based on two equations that relate a firm's ROA and ROE.

B)            The DuPont system is a set of related ratios that links the balance

 

sheet and the income statement.

C)            Both management and shareholders can use this tool to understand the factors that drive a firm's ROE.

D)           All of the above are correct.

25.          The DuPont equation shows that a firm's ROE is determined by three factors:

A)           net profit margin, total asset turnover, and the equity multiplier

B)            operating profit margin, ROA, and the ROE

C)            net profit margin, total asset turnover, the ROA

D)           ROA, total assets turnover, and the equity multiplier

26.          Which one of the following is a criticism of equating the goals of maximizing the ROE of a firm and maximizing the firm's shareholder wealth?

A)           ROE is based on after-tax earnings, not cash flows.

B)            ROE does not consider risk.

C)            ROE ignores the size of the initial investment as well as future cash flows.

D)           All of the above are criticisms of ROE as a goal.

27.          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.

28.          Which one of the following statements about trend analysis is NOT

correct?

A)           This benchmark is based on a firm's historical performance.

B)            It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.

C)            The Standard Industrial Classification (SIC) System is used to

identify benchmark firms.

D)           All of the above are true statements.

29.          Peer group analysis can be performed by

A)           management choosing a set of firms that are similar in size or sales, or who compete in the same market.

B)            using the average ratios of this peer group, which would then be used

as the benchmark.

C)            identifying firms in the same industry that are grouped by size, sales,

 

and product lines in order to establish benchmark ratios.

D)           Only a and b relate to peer group analysis.

30.          Limitations of ratio analysis include all but

A)           Ratios depend on accounting data based on historical costs.

B)            Differences in accounting practices like FIFO versus LIFO make comparison difficult.

C)            Trend analysis could be distorted by financial statements affected by

inflation.

D)           All of the above are limitations of ratio analysis.

31.          Liquidity ratio: Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of 378,454. What is the quick ratio?

A)           1.65

B)            0.64

C)            1.01

D)           None of the above

32.          Liquidity ratio: Bathez Corp. has receivables of $334,227, inventory of

$451,000, cash of $73,913, and accounts payables of $469,553. What is the firm's current ratio?

A)           1.83

B)            0.73

C)            1.67

D)           None of the above

33.          Liquidity ratio: Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of 197,333. What is the firm's quick ratio?

A)           0.72

B)            1.20

C)            1.92

D)           None of the above

34.          Liquidity ratio: 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

35.          Efficiency ratio: If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its accounts receivable turnover?

A)           0.34 times

B)            1.78 times

C)            2.95 times

D)           None of the above

36.          Efficiency ratio: If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables?

A)           $881,234

B)            $13,403,567

C)            $1,340,357

D)           $81,234

37.          Efficiency ratio: 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

38.          Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm's days' sales in inventory?

A)           65.2 days

B)            64.3 days

C)            61.7 days

D)           57.9 days

39.          Efficiency ratio: Jet, Inc., has net sales of $712,478 and accounts receivables of $167,435. What are the firm's accounts receivables turnover and days' sales outstanding?

A)           0.24 times;          78.5 days

B)            4.26 times;          85.7 days

C)            5.2 times;            61.3 days

D)           None of the above

40.          Efficiency ratio: Ellicott City Manufacturers, Inc., has sales of

$6,344,210, and a gross profit margin of 67.3 percent. What is the firm's cost of goods sold?

A)           $2,074,557

 

B)            $2,745,640

C)            $274,560

D)           None of the above

41.          Efficiency ratio: 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

42.          Coverage ratio: Trident Corp. has debt of $3.35 million with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times interest earned?

A)           13 times

B)            12 times

C)            11 times

D)           None of the above

43.          Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio?

A)           15.42 times

B)            18.34 times

C)            14.15 times

D)           None of the above

44.          Coverage ratios: 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

45.          Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

A)           0.60

B)            1.47

C)            1.74

 

D)           0

46.          Leverage ratio: What will be a firm's equity multiplier given a debt ratio of 0.45?

A)           1.82

B)            1.28

C)            2.22

D)           None of the above

47.          Leverage ratio: 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

48.          Market-value ratio: RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio.

A)           4.87 times

B)            8.12 times

C)            5.17 times

D)           None of the above

49.          Market-value ratios: Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a P-E ratio of 11.2 times. What is the firm's share price?

A)           $34.05

B)            $3.68

C)            $11.20

D)           $36.80

50.          Profitability ratio: Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's ROA?

A)           25.6%

B)            18%

C)            27.4%

D)           None of the above

51.          DuPont equation: 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

B)            7.1%;     1.90

C)            3.7%;     0.53

D)           3.7%;     1.90

52.          Profitability ratios: Tigger Corp. has reported the financial results for year-end 2006. Based on the information given, calculate the firm's gross profit margin and operating profit margin.

 

Net sales = $4,156,700   Net income = $778,321 Cost of goods sold = $2,715,334  EBIT = $1,356,098

A)           34.7%;   32.6%

B)            32.6%;   18.72%

C)            34.7%;   18.72%

D)           None of the above

53.          DuPont equation: Andrade Corp has debt of $2,834,950, total assets of

$5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity?

A)           7.1%t

B)            34.7%

C)            28.1%

D)           43.2%

54.          DuPont equation: 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

C)            $51,425.00

D)           $7,528.10

55.          DuPont equation: Sorenstam Corp has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA.

A)           6.23%

B)            4.53%

C)            7.48%

D)           5.79%

56.          Which of the following is a benefit of a common-size income statement?

A)           It is very useful to assess how effectively a firm collected its accounts

 

receivable.

B)            It reveals a great deal of information about the adequacy of a firm’s net working capital.

C)            It can tell the analyst a great deal about the firm’s efficiency and

profitability.

D)           It reveals how effectively a firm has increased its sales.

57.          Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

A)           The quick ratio more accurately reflects a firm's profitability.

B)            It omits the least liquid current asset from the numerator of the ratio.

C)            The current ratio does not include accounts receivable.

D)           It measures how "quickly" cash flows through the firm.

58.          Return on Equity: In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of

$3,000,000. What is Photon's return on equity? (Round off to the nearest 0.1%)

A)           13.1%

B)            14.6%

C)            22.5%

D)           18.7%

59.          Which of the following is not a method of “benchmarking”?

A)           Conduct an industry group analysis.

B)            Utilize the DuPont system to analyze a firm’s performance.

C)            Evaluating a single firm’s performance over time.

D)           Identify a group of firms that compete with the company being analyzed.

60.          There are those that believe that the analysis of financial statements has

limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

A)           Ratio analysis requires the analyst to evaluate a firm’s performance

over too many years to be of any value.

B)            Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.

C)            Thorough ratio analysis requires the analyst to refer to benchmarking,

which is very easy to misinterpret.

D)           Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

61.          Compare how a firm's creditor would analyze a firm's financial statements

 

relative to those of a firm's shareholders.

 

 

 

 

62.          Explain the different ways that a firm's ratios can be benchmarked.

 

 

 

63.          What are some of the main limitations of ratio analysis?