Chapter 003 Financial Analysis

True / False Questions

1. Ratios are used to compare different firms in the same industry.

TRUE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 1

2. Financial ratios are used to weigh and evaluate the operational performance of the firm.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

3. Liquidity ratios indicate how fast a firm can generate cash to pay bills.
TRUE

Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 2

4. Asset utilization ratios describe how capital is being utilized to buy assets.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

5. Profitability ratios allow one to measure the ability of the firm to earn an adequate return on
sales, total assets, and invested capital.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

6. Asset utilization ratios measure the returns on various assets such as return on total assets.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

7. A banker or trade creditor is most concerned about a firm's profitability ratios.

FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

8. Ratios are only useful for those areas of business that involve investment decisions.
FALSE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 2

9. Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset
base and earning power.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

10. The DuPont system of analysis emphasizes that profit generated by assets can be derived
by various combinations of profit margins and asset turnover.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 3

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Chapter 003 Financial Analysis

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 Chapter 003 Financial Analysis

11. Satisfactory return on assets may be achieved through high profit margins or rapid
turnover of assets, but not a combination of both.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 3

12. Heavy use of long-term debt can be of benefit to a firm.

TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

13. Return on equity will be higher than return on assets if there is debt in the capital
structure.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 3

14. Higher debt utilization ratios will always increase a firm's return on equity given a
positive return on assets.
TRUE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 3

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 Chapter 003 Financial Analysis

15. Return on equity will not change if the firm increases its use of debt.
FALSE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 3

16. In analyzing ratios, the age of the firm's assets need not be considered.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2
Learning Objective: 5

17. Asset utilization ratios relate balance sheet assets to income statement sales.
TRUE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 2

18. A current ratio of 2 to 1 is always acceptable, for a company in any industry.

FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 1
Learning Objective: 2

19. To compute the quick ratio, accounts receivable are not included in current assets.
FALSE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 2

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Chapter 003 Financial Analysis

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 Chapter 003 Financial Analysis

20. The current ratio is a more severe test of a firm's liquidity than the quick ratio.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

21. Asset utilization ratios can be used to measure the effectiveness of a firm's managers.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

22. Fiercely competitive industries such as the computer industry have had lower profit
margins and return on equity in recent years even though they are under extreme pressure to
maintain high profitability.
TRUE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 1
Learning Objective: 2

23. Ratios are not distorted by inflation.

FALSE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 5

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 Chapter 003 Financial Analysis

24. Profitability ratios are distorted by inflation because profits are stated in current dollars
and assets and equity are stated in historical dollars.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 5

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 Chapter 003 Financial Analysis

25. FIFO will cause inflated profits during deflation.

FALSE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Hard
Learning Objective: 5

26. As long as prices continue to rise faster than costs in an inflationary environment, reported
profits will generally continue to rise.
TRUE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

27. Industries most sensitive to inflation-induced profits are those with cyclical products such
as lumber, copper, etc.
TRUE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

28. The stock market tends to move up when inflation goes up.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 5

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 Chapter 003 Financial Analysis

29. Under generally acceptable accounting principles, two companies with identical operating
results may not report identical net incomes.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 5

30. During disinflation, stock prices tend to go up because the investor's required rate of
return goes down.
TRUE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

31. LIFO inventory valuation is responsible for much of the inventory profits caused by
inflation.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 5

32. Analysts agree that extraordinary gains/losses should be excluded from ratio analysis
because they are one time events, and do not measure annual operating performance.
TRUE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

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 Chapter 003 Financial Analysis

33. LIFO inventory pricing does a better job than FIFO in equating current costs with current
revenue.
TRUE

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

34. Intangible assets are becoming an important part of the assets in a company's financial
statements because accountants are recognizing the growing impact of brand names.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 5

35. Absolute values taken from financial statements are more useful than relative values.
FALSE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 5

36. Trend analysis is used to project the future performance of an industry.

FALSE

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 4

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 Chapter 003 Financial Analysis

37. If two companies have the same ROE, they will also have the same ROA.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 3

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 Chapter 003 Financial Analysis

38. A company can improve their ROE by changing their capital structure.
TRUE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 3

39. Because ratios are historic, they have minimal value to an investor.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 1

40. Times interest earned is an example of a profitability ratio.

FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

41. Investors are most concerned with the liquidity ratios of a company.
FALSE

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

Multiple Choice Questions

42. Ratio analysis can be useful for

A. historical trend analysis within a firm.
B. comparison of ratios within a single industry.
C. measuring the effects of financing.
D. All of these are true.

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 1
Learning Objective: 4

43. In examining the liquidity ratios, the primary emphasis is the firm's
A. ability to effectively employ its resources.
B. overall debt position.
C. ability to pay short-term obligations on time.
D. ability to earn an adequate return.

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

44. Which of the following is not an asset utilization ratio?

A. Inventory turnover
B. Return on assets
C. Fixed asset turnover
D. Average collection period

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

45. A short-term creditor would be most interested in

A. profitability ratios.
B. asset utilization ratios.
C. liquidity ratios.
D. debt utilization ratios.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 2

46. Which of the following is not considered to be a profitability ratio?

A. profit margin
B. times interest earned
C. return on equity
D. return on assets (investment)

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

47. Which two ratios are used in the DuPont system to create return on assets?
A. Return on assets and asset turnover
B. Profit margin and asset turnover
C. Return on total capital and the profit margin
D. Inventory turnover and return on fixed assets

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 3

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 Chapter 003 Financial Analysis

48. The Bubba Corp. had earnings before taxes of $200,000 and sales of $2,000,000. If it is in
the 50% tax bracket its after-tax profit margin is:
A. 5%
B. 12%
C. 20%
D. 25%

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

49. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000.
The return on equity is
A. 60%
B. 15%
C. 30%
D. not enough information

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

50. A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000.
Calculate return on equity.
A. 60%
B. 20%
C. 26%
D. not enough information

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

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 Chapter 003 Financial Analysis

51. For a given level of profitability as measured by profit margin, the firm's return on equity
will
A. increase as its debt-to-assets ratio decreases.
B. decrease as its current ratio increases.
C. increase as its debt-to assets ratio increases.
D. decrease as its times-interest-earned ratio decreases.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2
Learning Objective: 3

52. ABC Co. has an average collection period of 60 days. Total credit sales for the year were
$3,000,000. What is the balance in accounts receivable at year-end?
A. $50,000
B. $100,000
C. $500,000
D. $80,000

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

53. Asset utilization ratios

A. relate balance sheet assets to income statement sales.
B. measure how much cash is available for reinvestment into current assets.
C. are most important to stockholders.
D. measures the firm's ability to generate a profit on sales.

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

54. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. The
average collection period is 36 days. What was the sales figure for the year assuming all sales
are on credit?
A. $60,000
B. $6,000,000
C. $24,000,000
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

55. A decreasing average collection period could be associated with (select the one best
answer)
A. increasing sales.
B. decreasing sales.
C. decreasing account receivable.
D. a and c.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

56. If accounts receivable stays the same, and credit sales go up

A. the average collection period will go up.
B. the average collection period will go down.
C. accounts receivable turnover will decrease.
D. B and C.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

3-19
 Chapter 003 Financial Analysis

57. Total asset turnover indicates the firm's

A. liquidity.
B. debt position.
C. ability to use its assets to generate sales.
D. profitability.

Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 2

58. A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are
$900,000. The firm's fixed asset turnover is
A. 3.0x
B. 12.0x
C. 2.4x
D. 5.0x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

59. A quick ratio that is much smaller than the current ratio reflects
A. a small portion of current assets is in inventory.
B. a large portion of current assets is in inventory.
C. that the firm will have a high inventory turnover.
D. that the firm will have a high return on assets.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-20
 Chapter 003 Financial Analysis

60. A firm's long term assets = $75,000, total assets = $200,000, inventory = $25,000 and
current liabilities = $50,000.
A. current ratio = 0.5; quick ratio = 1.5
B. current ratio = 1.0; quick ratio = 2.0
C. current ratio = 1.5; quick ratio = 2.0
D. current ratio = 2.5; quick ratio = 2.0

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

61. Investors and financial analysts wanting to evaluate the operating efficiency of a firm's
managers would probably look primarily at the firm's
A. debt utilization ratios.
B. liquidity ratios.
C. asset utilization ratios.
D. profitability ratios.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 2

62. An increasing average collection period indicates

A. the firm is generating more income.
B. accounts receivable are going down.
C. the company is becoming more efficient in its collection policy.
D. the company is becoming less efficient in its collection policy.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-21
 Chapter 003 Financial Analysis

63. In addition to comparison with industry ratios, it is also helpful to analyze ratios using
A. trend analysis.
B. historical comparisons.
C. neither; only industry ratios provide valid comparisons.
D. both a and b.

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 4

64. If a firm has both interest expense and lease payments,

A. times interest earned will be smaller than fixed charge coverage.
B. times interest earned will be greater than fixed charge coverage.
C. times interest earned will be the same as fixed charge coverage.
D. fixed charge coverage cannot be computed.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

65. A firm has operating profit of $120,000 after deducting lease payments of $20,000.
Interest expense is $40,000. What is the firm's fixed charge coverage?
A. 6.00x
B. 2.33x
C. 2.00x
D. 3.00x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

3-22
 Chapter 003 Financial Analysis

66. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The stockholders
equity is $900,000. What is the total debt to asset ratio?
A. 45%
B. 40%
C. 55%
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

67. The higher a firm's debt utilization ratios, excluding debt-to-total assets, the
A. less risky the firm's financial position.
B. more risky the firm's financial position.
C. more easily the firm will be able to pay dividends.
D. none of these.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

68. If lease payments are reduced:

A. times interest earned goes up.
B. fixed charges coverage goes up.
C. fixed charge coverage stays the same.
D. fixed charge coverage goes down.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-23
 Chapter 003 Financial Analysis

69. Industries most sensitive to inflation-induced profits are those with

A. seasonal products.
B. cyclical products.
C. consumer products.
D. high-profit products.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Easy
Learning Objective: 5

70. Replacement cost accounting (current cost method) will usually

A. increase assets, decrease net income before taxes, and lower the return on equity.
B. increase assets, increase net income before taxes, and increase the return on equity.
C. decrease assets, increase net income before taxes, and increase the return on equity.
D. None of these apply.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

71. During inflation, replacement cost accounting will

A. increase the value of assets.
B. lower the debt to asset ratio.
C. reduce incomes.
D. all of these.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

3-24
 Chapter 003 Financial Analysis

72. Income can be distorted by factors other than inflation. The most important causes of
distortion for inter-industry comparisons are:
A. timing of revenue receipts and nonrecurring gains or losses.
B. tax write-off policy and use of different inventory methods.
C. All of these.
D. None of these.

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 5

73. Disinflation may cause

A. an increase in the value of gold, silver, and gems.
B. a reduced required return demanded by investors on financial assets.
C. additional profits through falling inventory costs.
D. None of these.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

74. Disinflation as compared to inflation would normally be good for investments in

A. bonds.
B. gold.
C. collectible antiques.
D. text books.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Easy
Learning Objective: 5

3-25
 Chapter 003 Financial Analysis

75. A company experiencing rapid price increases for its products would take the most
conservative approach by using
A. FIFO accounting.
B. LIFO accounting.
C. average cost accounting.
D. a or c.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Easy
Learning Objective: 5

76. The ______________ method of inventory costing is least likely to lead to inflation-
induced profits.
A. FIFO
B. LIFO
C. Weighted average
D. Lower of cost or market

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

77. A large extraordinary loss has what effect on cost of goods sold?
A. raises it
B. lowers it
C. has no effect
D. need more information

Bloom's: Understanding
Difficulty: Easy
Learning Objective: 5

3-26
 Chapter 003 Financial Analysis

78. Which of the following is a potential problem of utilizing ratio analysis?

A. trends and industry averages are historical in nature.
B. financial data may be distorted due to price-level changes.
C. firms within an industry may not use similar accounting methods.
D. all of these.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 5

79. If government bonds pay 8.5% interest and insured savings accounts pay 5.5% interest,
stockholders in a moderately risky firm would expect return-on-equity values of
A. 5.5%
B. 6.5%
C. 12%
D. above 8.5%, but the exact amount is uncertain.

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Medium
Learning Objective: 2

80. The most rigorous test of a firm's ability to pay its short-term obligations is its
A. current ratio.
B. quick ratio.
C. debt-to-assets ratio.
D. times-interest-earned ratio.

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 2

3-27
 Chapter 003 Financial Analysis

81. If the company's accounts receivable turnover is increasing, the average collection period:
A. is going up slightly
B. is going down
C. could be moving in either direction
D. is going up by a significant amount

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Hard
Learning Objective: 2

82. Historical cost based depreciation tends to _________ when there is inflation.
A. lower taxes
B. decrease profits
C. increase profits
D. increase assets

AACSB: Analytical Skills

Bloom's: Evaluation
Difficulty: Hard
Learning Objective: 5

3-28
Chapter 003 Financial Analysis

3-29
 Chapter 003 Financial Analysis

83. Refer to the figure above. Using the DuPont method, return on assets (investment) for
Megaframe Computer is approximately
A. 15%
B. 25%
C. 29%
D. 35%

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 3

84. Refer to the figure above. Compute Megaframe's after tax profit margin.
A. 10.0%
B. 14.0%
C. 15.4%
D. 20.0%

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

85. Refer to the figure above. The firm's return on equity is

A. 52.8%
B. 55.6%
C. 56.0%
D. 100.0%

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

86. Refer to the figure above. The firm's average collection period is
A. 30 days.
B. 25 days.
C. 14.4 days.
D. 20 days.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

87. Refer to the figure above. The firm's receivable turnover is

A. 4.4x
B. 10x
C. 12x
D. 14.4x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

88. Refer to the figure above. Megaframe's quick ratio is

A. 2:1
B. 1:1
C. 1.6:1
D. 10:1

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-31
 Chapter 003 Financial Analysis

89. Refer to the figure above. Megaframe's current ratio is

A. 1.9:1
B. 1.625:1
C. 1.5:1
D. 3.2:1

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

90. Refer to the figure above. What is Megaframe Computer's total asset turnover?
A. 4.50x
B. 3.6x
C. 2x
D. 1.76x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

91. Refer to the figure above. The firm's debt to asset ratio is
A. 56.1%
B. 47.22%
C. 33.33%
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-32
 Chapter 003 Financial Analysis

92. Refer to the figure above. Times interest earned for Megaframe Computer is
A. 4.5x
B. 9x
C. 11x
D. 10x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-33
Chapter 003 Financial Analysis

3-34
 Chapter 003 Financial Analysis

93. Refer to the figure above. Compute Tew's after tax profit margin.
A. 65.0%
B. 27.3%
C. 59.4%
D. None of these.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

94. Refer to the figure above. Using the DuPont method, return on assets (investment) for Tew
is approximately
A. 125%
B. 34.1%
C. 293.0%
D. None of these.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 3

95. Refer to the figure above. The firm's return on equity is

A. 136.5%
B. 135.29%
C. 80.29%
D. 57.5%

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-35
 Chapter 003 Financial Analysis

96. Refer to the figure above. The firm's receivable turnover is

A. 5.0x
B. 1.7x
C. 6.25x
D. 0.2x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

97. Refer to the figure above. The firm's average collection period is
A. 57.6 days.
B. 222 days.
C. 55.6 days.
D. 6.3 days.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

98. Refer to the figure above. The firm's inventory turnover ratio is
A. 10x.
B. 8x.
C. 2.7x.
D. 0.1x.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-36
 Chapter 003 Financial Analysis

99. Refer to the figure above. The firm's fixed asset turnover ratio is
A. 2.0x.
B. 1.6x.
C. 0.5x.
D. 1.3x.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

100. Refer to the figure above. What is Tew's total asset turnover?
A. 2.9x
B. 1.3x
C. 1.0x
D. 1.25x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

101. Refer to the figure above. Tew's quick ratio is

A. 1.5:1
B. 1:1
C. 2:1
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-37
 Chapter 003 Financial Analysis

102. Refer to the figure above. Tew's current ratio is

A. 1.5:1
B. 1:1
C. 2:1
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

103. Refer to the figure above. The firm's debt to asset ratio is
A. 58%.
B. 33%.
C. 25%.
D. 48%.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

104. Refer to the figure above. Times interest earned for Tew Company is
A. 6.8x
B. 10.5x
C. 25x
D. 11.5x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

3-38
 Chapter 003 Financial Analysis

105. Refer to the figure above. Fixed Charge coverage for Tew Company is
A. 23x
B. 13.6x
C. 1.3x
D. 8.0x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

3-39
Chapter 003 Financial Analysis

3-40
 Chapter 003 Financial Analysis

106. Refer to the figure above. Compute Marni's after tax profit margin.
A. 7.5%
B. 3.75%
C. 50%
D. None of these.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

107. Refer to the figure above. Using the DuPont method, return on assets (investment) for
Marni is approximately
A. 200%
B. 7.5%
C. 3.75%
D. None of these.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 3

108. Refer to the figure above. The firm's return on equity is

A. 75%
B. 26.8%
C. 13.4%
D. 15%

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

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109. Refer to the figure above. The firm's receivable turnover is

A. 10x
B. 8x
C. 20x
D. 12x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

110. Refer to the figure above. The firm's average collection period is
A. 18 days.
B. 277 days.
C. 139 days.
D. 20 days.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

111. Refer to the figure above. The firm's inventory turnover ratio is
A. 10x.
B. 5x.
C. 0.4x.
D. 0.1x.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

112. Refer to the figure above. The firm's fixed asset turnover ratio is
A. 3.1x.
B. 1.5x.
C. 2x.
D. 0.1x.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

113. Refer to the figure above. What is Marni's total asset turnover?
A. 13.3x
B. 4x
C. 1x
D. 2x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

114. Refer to the figure above. Marni's quick ratio is

A. 0.79:1
B. 0.50:1
C. 1.84:1
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

115. Refer to the figure above. Marni's current ratio is

A. 0.79:1
B. 0.5:1
C. 1.84:1
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

116. Refer to the figure above. The firm's debt to asset ratio is
A. 44%.
B. 33%.
C. 19%.
D. 34%.

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

117. Refer to the figure above. Times interest earned for Marni Company is
A. 3x
B. 5x
C. 80x
D. 6x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

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 Chapter 003 Financial Analysis

118. Refer to the figure above. Fixed Charge coverage for Marni Company is
A. 15x
B. 7.5x
C. 0.9x
D. 4.6x

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

119. If Randolph Co. has sales of $2,000,000, net income of $120,000, and total asset
turnover of 2x, what is their ROA?
A. 33%
B. 17%
C. 12%
D. 6%

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 3

120. If Baxter Unlimited has annual sales of $5,000,000 (80% on credit), and receivables
equal to 35% of credit sales, what is their receivables turnover?
A. 3.6 times
B. 2.9 times
C. 2.3 times
D. 4.2 times

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

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 Chapter 003 Financial Analysis

121. If Crossroads International has $3,000,000 in total sales (75% on credit) and receivables
of $500,000, what is their average collection period?
A. 80 days
B. 60 days
C. 61 days
D. 81 days

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 2

122. All of the following are common examples of possible distortion in reported income
except
A. inflation
B. treatment of nonrecurring items
C. cash flow statements
D. reporting of revenue

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 5

123. Trend and industry analysis provide all of the following information except
A. benchmarking
B. the progress of the company
C. basis for decision-making about capital structure
D. future information about the company

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 1
Learning Objective: 4

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 Chapter 003 Financial Analysis

124. If Turnpoint Inc. has net income of $300,000, assets of $3,000,000, sales of $2,000,000,
and debt of 1,300,000, what is their ROE?
A. between 17-18%
B. between 19-20%
C. between 21-22%
D. none of these

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Medium
Learning Objective: 3

Essay Questions

125. Match the following with the items below:

a. asset utilization ratios
b. debt utilization ratios
c. inflation
d. DuPont System of ratio analysis
e. FIFO
f. inventory profits
g. LIFO
h. liquidity ratios
i. profitability ratios
j. replacement costs
k. trend analysis
l. times interest earned
m. fixed charge coverage
1. _____ A system of including inventory into cost of goods sold in which the items
purchased last are written off first.
2. _____ A phantom source of profit that can mislead even the most alert analysts.
3. _____ A result of an inflationary economy in which old stocks of goods are sold at large
profits.
4. _____ A method of study that breaks down return on assets between the profit margin and
asset turnover.
5. _____ Ratios that measure the speed at which the firm is turning over its assets.
6. _____ Ratios that measure the firm's ability to pay off short-term obligations as they come
due.
7. _____ A system that includes inventory into cost of goods sold in which the items
purchased first are written off first.
8. _____ A group of ratios that indicate to what extent a firm has borrowed funds and how
prudently these funds are being managed.
9. _____ Costs incurred if the present asset base were repurchased at current prices.

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 Chapter 003 Financial Analysis

10. _____ The ratios that measure return on sales, assets and invested capital of the firm.
11. _____ analysis of performance over a number of years that is made to ascertain
significant
patterns.
12. _____ Measures the firm's ability to meet all fixed obligations.
13. _____ Indicates the strength of the firm regarding its coverage of interest payments.

(1.) g (2.) c (3.) f (4.) d (5.) a (6.) h (7.) e (8.) b (9.) j (10.) i (11.) k (12.) m (13.) l

Bloom's: Understanding
Difficulty: Medium
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3
Learning Objective: 4
Learning Objective: 5

126. Complete the following balance sheet for the Range Company using the following
information:
Debt to Assets = 60 percent
Quick Ratio = 1.1
Asset Turnover = 5x
Fixed Asset Turnover = 12.037x
Current Ratio = 2
Average Collection Period = 16.837 days

Assume all sales are on credit and a 360-day year.

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 Chapter 003 Financial Analysis

AACSB: Analytical Skills

Bloom's: Application
Difficulty: Hard
Learning Objective: 2

3-49
 Chapter 003 Financial Analysis

127. Given the balance sheet and income state for Simmons Maintenance Company, compute
the ratios that are also shown for the industry average. For each ratio, indicate whether
Simmons is better or worse than the industry average.

3-50
 Chapter 003 Financial Analysis

AACSB: Analytical Skills

Bloom's: Application and Evaluation
Difficulty: Hard
Learning Objective: 1
Learning Objective: 2

3-51
 Chapter 003 Financial Analysis

128. Follies Bookstore, the only bookstore close to campus, had net income in 2005 of
$90,000. Here are some of the financial ratios from the annual report.

Using these ratios, calculate the following for Follies Bookstore:

a) Sales
b) Total assets
c) Total asset turnover
d) Total debt
e) Stockholders' equity
f) Return on equity

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Chapter 003 Financial Analysis

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 Chapter 003 Financial Analysis

AACSB: Analytical Skills

Bloom's: Application and Synthesis
Difficulty: Hard
Learning Objective: 2
Learning Objective: 3

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