Chapter 3 Working with Financial Statements

True/False

1. If a firm uses part of the cash it received from payment of an account receivable to buy inventory and
leaves the rest in its bank account, its current ratio will remain unchanged.

Ans: True Level: Basic Subject: Current Ratio Type: Concepts

2. If a firm uses cash to purchase inventory, its quick ratio will increase.

Ans: False Level: Basic Subject: Quick Ratio Type: Concepts

3. Another name for return on equity is return on total capitalization.

Ans: False Level: Basic Subject: Return on Equity Type: Concepts

4. If a firm has only current assets and no fixed assets of any kind, its times interest earned ratio must exceed
its cash coverage ratio.

Ans: False Level: Intermediate Subject: Long-term Solvency Type: Concepts

Multiple Choice

5. An increase in a/an _____________ account would be considered a/an __________ of funds.

I. asset; source
II. liability; source
III. expense; source
A) I only
B) II only
C) I and II only
D) I and III only
E) II and III only

Ans: B Level: Basic Subject: Uses Of Cash Type: Definitions

6. Activities of the firm that generate cash are known as:

A) Sources of cash.
B) Uses of cash.
C) Cash payments.
D) Cash receipts.
E) Cash on hand.

Ans: A Level: Basic Subject: Sources Of Cash Type: Definitions

7. Activities of the firm in which cash is spent are known as:

A) Sources of cash.
B) Uses of cash.
C) Cash payments.
D) Cash receipts.
E) Cash on hand.

Ans: B Level: Basic Subject: Uses Of Cash Type: Definitions

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 Chapter 3 Working with Financial Statements

8. The financial statement that summarizes the sources and uses of cash over a specified period is:
A) The income statement.
B) The balance sheet.
C) The tax reconciliation statement.
D) The statement of changes in financial position.
E) The statement of operating position.

Ans: D Level: Basic Subject: Statement Of Changes in Financial... Type: Definitions

9. A _____________ standardizes items on the income statement and balance sheet as a percentage of total
sales and total assets, respectively.
A) tax reconciliation statement
B) statement of standardization
C) statement of changes in financial position
D) common-base year statement
E) common-size statement

Ans: E Level: Basic Subject: Common-Size Statements Type: Definitions

10. A __________ standardizes items on the income statement and balance sheet relative to a point in time.
A) statement of standardization
B) statement of changes in financial position
C) common-base year statement
D) common-size statement
E) tax reconciliation statement

Ans: C Level: Basic Subject: Common-Base Year Statements Type: Definitions

11. Relationships determined from a firm's financial information and used for comparison purposes are known
as:
A) Financial ratios.
B) Comparison statements.
C) Dimensional analysis.
D) Scenario analysis.
E) Solvency analysis.

Ans: A Level: Basic Subject: Financial Ratios Type: Definitions

12. Financial ratios that measure the firm's ability to pay its bills over the short run without undue stress are
known as:
A) Asset management ratios.
B) Long-term solvency ratios.
C) Short-term solvency ratios.
D) Profitability ratios.
E) Market value ratios.

Ans: C Level: Basic Subject: Short-Term Solvency Ratios Type: Definitions

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 Chapter 3 Working with Financial Statements

13. The current ratio is measured as:

A) Current assets minus current liabilities.
B) Current assets divided by current liabilities.
C) Current liabilities minus inventory, divided by current assets.
D) Cash on hand divided by current liabilities.
E) Current liabilities divided by current assets.

Ans: B Level: Basic Subject: Current Ratio Type: Definitions

14. The quick ratio is measured as:

A) Current assets divided by current liabilities.
B) Cash on hand plus current liabilities, divided by current assets.
C) Current liabilities divided by current assets, plus inventory.
D) Current assets minus inventory, divided by current liabilities.
E) Current assets minus inventory minus current liabilities.

Ans: D Level: Basic Subject: Quick Ratio Type: Definitions

15. The cash ratio is measured as:

A) Current assets divided by current liabilities.
B) Current assets minus cash on hand, divided by current liabilities.
C) Current liabilities plus current assets, divided by cash on hand.
D) Cash on hand plus inventory, divided by current liabilities.
E) Cash on hand divided by current liabilities.

Ans: E Level: Basic Subject: Cash Ratio Type: Definitions

16. The financial ratio measured as current assets divided by average daily operating costs is the:
A) Cash ratio.
B) NWC to total assets ratio.
C) Acid-test ratio.
D) Interval measure.
E) Operating measure.

Ans: D Level: Basic Subject: Interval Measure Type: Definitions

17. The interval measure is an example of a ____________ ratio.

A) short-term solvency
B) financial leverage
C) asset management
D) profitability
E) market value

Ans: A Level: Basic Subject: Interval Measure Type: Definitions

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 Chapter 3 Working with Financial Statements

18. Ratios that measure the firm's financial leverage are known as:
A) Asset management ratios.
B) Long-term solvency ratios.
C) Short-term solvency ratios.
D) Profitability ratios.
E) Market value ratios.

Ans: B Level: Basic Subject: Long-Term Solvency Ratios Type: Definitions

19. The financial ratio measured as total assets minus total equity, divided by total assets, is the:
A) Total debt ratio.
B) Equity multiplier.
C) Debt-equity ratio.
D) Current ratio.
E) Times interest earned ratio.

Ans: A Level: Basic Subject: Total Debt Ratio Type: Definitions

20. The debt-equity ratio is measured as:

A) Total equity minus total debt.
B) Total equity divided by total debt.
C) Total debt divided by total equity.
D) Total debt plus total equity.
E) Total debt minus total assets, divided by total equity.

Ans: C Level: Basic Subject: Debt-Equity Ratio Type: Definitions

21. The equity multiplier ratio is measured as:

A) Total equity divided by total assets.
B) Total equity plus total debt.
C) Total assets minus total equity, divided by total assets.
D) Total assets plus total equity, divided by total debt.
E) Total assets divided by total equity.

Ans: E Level: Basic Subject: Equity Multiplier Type: Definitions

22. The total long-term debt and equity of the firm is frequently called:
A) Total assets.
B) Total capitalization.
C) Total financing.
D) Debt-equity consolidation.
E) Debt-equity reconciliation.

Ans: B Level: Basic Subject: Total Capitalization Type: Definitions

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 Chapter 3 Working with Financial Statements

23. The financial ratio measured as the firm's long-term debt divided by its total capitalization is:
A) The interval measure.
B) The equity multiplier.
C) The total debt ratio.
D) The long-term debt ratio.
E) The debt-equity ratio.

Ans: D Level: Basic Subject: Long-Term Debt Ratio Type: Definitions

24. The financial ratio measured as EBIT divided by interest expense is the __________.
A) cash coverage ratio
B) debt-equity ratio
C) times interest earned ratio
D) gross margin
E) total debt ratio

Ans: C Level: Basic Subject: Times Interest Earned Type: Definitions

25. The financial ratio measured as EBIT plus depreciation, divided by interest expense, is the:
A) Cash coverage ratio.
B) Debt-equity ratio.
C) Times interest earned ratio.
D) Gross margin.
E) Total debt ratio.

Ans: A Level: Basic Subject: Cash Coverage Ratio Type: Definitions

26. Ratios that measure how efficiently a firm uses its assets to generate sales are known as:
A) Asset management ratios.
B) Long-term solvency ratios.
C) Short-term solvency ratios.
D) Profitability ratios.
E) Market value ratios.

Ans: A Level: Basic Subject: Asset Management Ratios Type: Definitions

27. The inventory turnover ratio is measured as:

A) Total sales minus inventory.
B) Inventory times total sales.
C) Cost of goods sold divided by inventory.
D) Inventory times cost of goods sold.
E) Inventory plus cost of goods sold.

Ans: C Level: Basic Subject: Inventory Turnover Type: Definitions

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 Chapter 3 Working with Financial Statements

28. The financial ratio days' sales in inventory is measured as:

A) Inventory turnover plus 365 days.
B) Inventory times 365 days.
C) Inventory plus cost of goods sold, divided by 365 days.
D) 365 days divided by inventory.
E) 365 days divided by inventory turnover.

Ans: E Level: Basic Subject: Days' Sales In Inventory Type: Definitions

29. The receivables turnover ratio is measured as:

A) Sales plus accounts receivable.
B) Sales divided by accounts receivable.
C) Sales minus accounts receivable, divided by sales.
D) Accounts receivable times sales.
E) Accounts receivable divided by sales.

Ans: B Level: Basic Subject: Receivables Turnover Type: Definitions

30. The financial ratio days' sales in receivables is measured as:

A) Receivables turnover plus 365 days.
B) Accounts receivable times 365 days.
C) Accounts receivable plus sales, divided by 365 days.
D) 365 days divided by receivables turnover.
E) 365 days divided by accounts receivable.

Ans: D Level: Basic Subject: Days' Sales In Receivables Type: Definitions

31. The net working capital turnover ratio is measured as:

A) Sales divided by net working capital.
B) Sales minus net working capital.
C) Sales times net working capital.
D) Net working capital divided by sales.
E) Net working capital plus sales.

Ans: A Level: Basic Subject: Net Working Capital Turnover Type: Definitions

32. The fixed asset turnover ratio is measured as:

A) Sales minus net fixed assets.
B) Sales times net fixed assets.
C) Sales divided by net fixed assets.
D) Net fixed assets divided by sales.
E) Net fixed assets plus sales.

Ans: C Level: Basic Subject: Fixed Asset Turnover Type: Definitions

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 Chapter 3 Working with Financial Statements

33. The total asset turnover ratio is measured as:

A) Sales minus total assets.
B) Sales divided total assets.
C) Sales times total assets.
D) Total assets divided by sales.
E) Total assets plus sales.

Ans: B Level: Basic Subject: Total Assets Type: Definitions

34. Ratios that measure how efficiently a firm's management uses its assets in operations to generate bottom-
line net income are known as:
A) Asset management ratios.
B) Long-term solvency ratios.
C) Short-term solvency ratios.
D) Profitability ratios.
E) Market value ratios.

Ans: D Level: Basic Subject: Profitability Ratios Type: Definitions

35. The financial ratio measured as net income divided by sales is known as the firm's:
A) Profit margin.
B) Return on assets.
C) Return on equity.
D) Asset turnover.
E) Earnings before interest and taxes (EBIT).

Ans: A Level: Basic Subject: Profit Margin Type: Definitions

36. The financial ratio measured as net income divided by total assets is known as the firm's:
A) Profit margin.
B) Return on assets.
C) Return on equity.
D) Asset turnover.
E) Earnings before interest and taxes (EBIT).

Ans: B Level: Basic Subject: Return On Assets Type: Definitions

37. The financial ratio measured as net income divided by total equity is known as the firm's:
A) Profit margin.
B) Return on assets.
C) Return on equity.
D) Asset turnover.
E) Earnings before interest and taxes (EBIT).

Ans: C Level: Basic Subject: Return on Equity Type: Definitions

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 Chapter 3 Working with Financial Statements

38. The financial ratio measured as the price per share of stock divided by earnings per share is known as the:
A) Return on assets.
B) Return on equity.
C) Debt-equity ratio.
D) Price-earnings ratio.
E) Du Pont identity.

Ans: D Level: Basic Subject: Price-Earnings Ratio Type: Definitions

39. The market-to-book ratio is measured as:

A) Total equity divided by total assets.
B) Net income times market price per share of stock.
C) Net income divided by market price per share of stock.
D) Market price per share of stock divided by earnings per share.
E) Market value of equity per share divided by book value of equity per share.

Ans: E Level: Basic Subject: Market-To-Book Ratio Type: Definitions

40. The ___________ breaks down return on equity into three component parts: operating efficiency of the
firm, its asset use efficiency, and financial leverage.
A) Du Pont identity
B) return on assets
C) statement of cash flows
D) asset turnover ratio
E) equity multiplier

Ans: A Level: Basic Subject: Du Pont Identity Type: Definitions

41. A use of cash can be defined as any activity that:

A) Diminishes the cash balance of a firm.
B) Generates cash for the firm.
C) Affects the cash on hand.
D) Involves a checking account.
E) Affects current assets.

Ans: A Level: Basic Subject: Use Of Cash Type: Definitions

42. A source of cash can be defined as any activity that:

A) Increases the current assets of a firm.
B) Increases the cash reserves of a firm.
C) Involves accounts receivable or inventory.
D) Involves the sale or return of merchandise by a customer.
E) Involves the spending of cash.

Ans: B Level: Basic Subject: Source Of Cash Type: Definitions

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 Chapter 3 Working with Financial Statements

43. A statement that explains the changes in the cash balance of a firm over time is called a(n):
A) Balance sheet.
B) Income statement.
C) Statement of current assets.
D) Statement of analysis.
E) Statement of cash flows.

Ans: E Level: Basic Subject: Statement Of Cash Flows Type: Definitions

44. A statement that expresses each account as a percentage of sales is called a(n):
A) Common-size balance sheet.
B) Common-size income statement.
C) Common-size statement of cash flows.
D) Ratio income statement.
E) Statement of ratio analysis.

Ans: B Level: Basic Subject: Common-Size Income Statement Type: Definitions

45. Current assets expressed as a multiple of current liabilities is called the:

A) Working capital ratio.
B) Quick ratio.
C) Acid-test ratio.
D) Current ratio.
E) Cash ratio.

Ans: D Level: Basic Subject: Current Ratio Type: Definitions

46. Profit margin is defined as:

A) EBIT divided by sales.
B) Cost of goods sold divided by sales.
C) Net income divided by sales.
D) Net income divided by total assets.
E) EBIT divided by total assets.

Ans: C Level: Basic Subject: Profit Margin Type: Definitions

47. The times interest earned ratio is defined as:

A) Net income divided by interest expense.
B) Interest expense divided by net income.
C) EBIT divided by interest expense.
D) Interest expense divided by EBIT.
E) Sales divided by interest expense.

Ans: C Level: Basic Subject: Times Interest Earned Ratio Type: Definitions

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 Chapter 3 Working with Financial Statements

48. The PE ratio is defined as:

A) Dividends per share divided by earnings per share.
B) Earnings per share divided by dividends per share.
C) Price per share divided by earnings per share.
D) Earnings per share divided by price per share.
E) Price per share divided by equity per share.

Ans: C Level: Basic Subject: Pe Ratio Type: Definitions

49. Return on assets is defined as:

A) Sales divided by net fixed assets.
B) EBIT divided by net fixed assets.
C) Net income divided by net fixed assets.
D) EBIT divided by total assets.
E) Net income divided by total assets.

Ans: E Level: Basic Subject: Return On Assets Type: Definitions

50. The Du Pont identity is defined as the:

A) Profit margin times the total asset turnover times the equity multiplier.
B) Profit margin times the inventory turnover times the equity multiplier.
C) Return on equity times the profit margin times the total asset turnover.
D) Return on equity times the total asset turnover times the equity multiplier.
E) Return on assets times the total asset turnover times the profit margin.

Ans: A Level: Basic Subject: Du Pont Identity Type: Definitions

51. Which of the following would be considered a use of cash?

I. Accounts receivable increase.
II. Accounts payable decrease.
III. Common stock and surplus increases.
IV. Net fixed assets decrease by the amount of depreciation.
A) I only
B) II only
C) I and II only
D) I and III only
E) I, III, and IV only

Ans: C Level: Intermediate Subject: Uses Of Cash Type: Concepts

52. Which of the following are considered a source of cash?

I. Common stock and surplus decrease.
II. Accounts payable increase.
III. Accounts receivable decrease.
IV. Inventory increases.
A) I only
B) II and III only
C) III and IV only
D) I, II, and III only
E) I, II, III, and IV

Ans: B Level: Basic Subject: Sources Of Cash Type: Concepts

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 Chapter 3 Working with Financial Statements

53. In the most general sense, which of the following would you expect to be true?
A) If a current asset account and a current liability account both increase by the same amount, there is a
net use of funds.
B) If fixed assets decrease by the amount of depreciation for the year, there is a net use of funds.
C) Changes in income and expense accounts do not affect sources and uses of funds.
D) If a liability account increases and an asset account decreases by the same amount, there is a net
source of funds.
E) If the common stock outstanding increases there is a use of funds.

Ans: D Level: Intermediate Subject: Sources & Uses Of Cash Type: Concepts

54. The net change in cash over a period of time is equal to

A) cash uses plus operating cash flows
B) additions to current assets minus expenditures on fixed assets
C) net income plus depreciation, minus taxes and dividends
D) ending cash minus changes in long-term debt minus additions to fixed assets
E) cash flow from operating activities plus net cash from investment and financing activities

Ans: E Level: Intermediate Subject: Change in Cash Type: Concepts

55. On a typical statement of changes in financial position, fixed asset acquisitions would be classified under
the heading called ____________ activities.
A) recognition
B) operating
C) investment
D) financing
E) income

Ans: C Level: Basic Subject: Statement Of Changes in Financial... Type: Concepts

56. Which of the following is generally considered one of the major categories on a typical statement of
changes in financial position?
A) Subsidiary activities
B) Notes payable activities
C) Operating activities
D) Income statement activities
E) Division activities

Ans: C Level: Basic Subject: Statement Of Changes in Financial... Type: Concepts

57. Which of the following is NOT included in the operating activities portion of a typical statement of changes
in financial position?
A) Changes in notes payable
B) Changes in accounts payable
C) Changes in accounts receivable
D) Depreciation
E) Net income

Ans: A Level: Basic Subject: Statement Of Changes in Financial... Type: Concepts

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 Chapter 3 Working with Financial Statements

58. Which of the following is included in the financing activities portion of a typical statement of changes in
financial position?
A) Changes in notes payable
B) Depreciation
C) Changes in fixed assets
D) Net income
E) Changes in inventory

Ans: A Level: Basic Subject: Statement Of Changes in Financial... Type: Concepts

59. Comparison of the financial statements of two firms in the same general industry may be difficult if:
I. The size of the two firms' operations are different.
II. The firms have identical product lines and operations.
III. The firms' financial statements are prepared using different fiscal year-ends.
A) I only
B) III only
C) I and II only
D) I and III only
E) I, II, and III

Ans: D Level: Intermediate Subject: Financial Statements Type: Concepts

60. You are comparing two companies by looking at financial ratios they publish in their annual reports. You
know that:
I. You must be careful because not all financial statement ratios are calculated the same way.
II. The balance sheet ratios of a large firm and a medium size firm cannot be compared.
III. These financial ratios will capture the relevant differences between the two firms, leaving you with
no need to look at the rest of the reports.
A) I only
B) II only
C) III only
D) I and II only
E) I and III only

Ans: A Level: Basic Subject: Financial Statements Type: Concepts

61. Problems with financial statement analysis include all of the following EXCEPT:
A) Many firms are conglomerates whose combined operations don't fit any neat industry classification.
B) The financial statements of firms outside US and Canada do not necessarily conform to GAAP,
making it difficult to compare them to US and Canadian firms.
C) Firms may use different accounting procedures for inventory, making it difficult to compare them
using standard financial ratios.
D) If two firms with seasonal operations end their fiscal years at different times, their financial
statements may be difficult to compare.
E) Financial statements have little value since they cannot be used to calculate a firm's tax liability.

Ans: E Level: Intermediate Subject: Problems Analyzing Financial Statements Type: Concepts

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 Chapter 3 Working with Financial Statements

62. In a common size statement, the balance sheet may be expressed as a percentage of ____________ while
the income statement may be expressed as a percentage of ____________.
A) liabilities plus equity; net income
B) assets; net income
C) sales; liabilities plus equity
D) liabilities plus equity; sales
E) liabilities; sales

Ans: D Level: Basic Subject: Common Size Statements Type: Concepts

63. Which of the following statements about the current ratio is accurate?
A) Use of book values in calculation of this ratio is unacceptable because the market values of these
assets and liabilities tend to deviate from book values.
B) This ratio is calculated by dividing current liabilities by current assets.
C) It will always be greater than the quick ratio in companies that carry inventory.
D) This ratio is intended to indicate the long run liquidity position of the firm.
E) The higher the current ratio, the higher the level of cash in a firm.

Ans: C Level: Basic Subject: Current Ratio Type: Concepts

64. The financial manager of Mystery, Inc., tells her banker that Mystery's accounts receivable declined by
$275,000 that day. Based on this, the bank knows that Mystery's current ratio:
A) Must have increased from the day before.
B) Must have decreased from the day before.
C) Did not change from the day before.
D) Declined but the quick ratio was unchanged from the day before.
E) Would possibly be affected, but more information is needed to know in which direction.

Ans: E Level: Challenge Subject: Current Ratio Type: Concepts

65. All else the same, which of the following occurs when a firm buys inventory with cash?
A) The quick ratio goes up if it was greater than one before the change.
B) The current ratio goes down if it was greater than one before the change.
C) The current ratio goes down if it was lower than one before the change.
D) The quick ratio goes up if it was lower than one before the change.
E) The quick ratio declines but the current ratio remains unchanged.

Ans: E Level: Intermediate Subject: Current & Quick Ratios Type: Concepts

66. All else unchanged, which of the following is true when a firm sells a fixed asset on credit (an account
receivable is created) ?
A) The current ratio goes up but the quick ratio is unchanged
B) The current ratio goes up but the quick ratio declines
C) The quick ratio goes up but the current ratio is unchanged
D) The quick ratio goes up but the current ratio declines
E) The quick ratio and the current ratio both go up

Ans: E Level: Intermediate Subject: Current & Quick Ratios Type: Concepts

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 Chapter 3 Working with Financial Statements

67. A very short-term creditor would likely be most interested in a firm's ________________.
A) current ratio
B) quick ratio
C) NWC to total assets ratio
D) cash ratio
E) interval measure

Ans: D Level: Basic Subject: Cash Ratio Type: Concepts

68. Which of the following statements is true?

A) The smaller the current ratio the more liquid the firm.
B) Since inventory is not as liquid as the other current assets it is excluded in calculation of the quick
ratio.
C) A current ratio of greater than one indicates net working capital is negative.
D) In firms with inventory the quick ratio will always exceed the current ratio.
E) A current ratio can be less than zero.

Ans: B Level: Basic Subject: Liquidity Ratios Type: Concepts

69. A financial manager who needs to find out how long it will take before their firm runs out of cash if no
further cash comes in should consider the ________________.
A) current ratio
B) quick ratio
C) cash ratio
D) net working capital to total assets ratio
E) interval measure

Ans: E Level: Basic Subject: Interval Measure Type: Concepts

70. In words, what does an equity multiplier of 2 mean?

A) Each dollar in assets the firm owns is supported by $2 in equity.
B) Each dollar in equity the firm has supports $2 in assets.
C) Each dollar in assets the firm owns is supported by $4 in equity.
D) Each dollar in equity the firm has supports fifty cents in assets.
E) Each dollar in assets the firm owns is supported by $2 in debt.

Ans: B Level: Basic Subject: Equity Multiplier Type: Concepts

71. Which of the following could be calculated with the use of only a balance sheet?
A) Interval measure
B) Equity multiplier
C) Receivables turnover
D) Times interest earned
E) Return on equity

Ans: B Level: Basic Subject: Equity Multiplier Type: Concepts

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 Chapter 3 Working with Financial Statements

72. A firm has a times interest earned ratio of 2.7 times. This means:
A) The firm generated enough cash to cover its interest expense 2.7 times.
B) The firm has sufficient EBIT to cover its interest expense 2.7 times.
C) The interest expense of this firm exceeded earnings before taxes by 2.7 times.
D) The net income of this firm is sufficient to cover its interest expense 2.7 times.
E) The firm earned $1 in EBIT for every $2.70 it paid out in interest.

Ans: B Level: Basic Subject: Times Interest Earned Type: Concepts

73. The sales of Ace Sporting Goods have increased recently and inventory has declined slightly. A financial
analyst would expect to find that the:
A) Inventory turnover has increased and the days' sales in inventory has decreased.
B) Inventory turnover has decreased and the days' sales in inventory has decreased.
C) Inventory turnover has decreased and the days' sales in inventory has increased.
D) Inventory turnover has increased and the days' sales in inventory has increased.
E) Quick ratio has decreased and the current ratio has increased.

Ans: A Level: Basic Subject: Days' Sales In Inventory Type: Concepts

74. Golf Inc. and Golfanatics Corp. are close competitors. Last year, both had the same level of cost of goods
sold, but Golf Inc. turned its inventory over five times during the year while Golfanatics turned its
inventory over every 65 days. If the objective is to keep inventory as low as possible (on average), which
of the following is true?
A) Golf Inc. did a better job since its inventory turnover was lower.
B) Golfanatics did a better job since its days' sales in inventory was lower.
C) Golf Inc. a better job since its days' sales in inventory was lower.
D) Golfanatics did a better job since its inventory turnover was lower.
E) Golf Inc. did a better job since its level of inventory was lower.

Ans: B Level: Intermediate Subject: Inventory Management Ratios Type: Concepts

75. Conceptually, what does the days' sales in receivables ratio measure for a firm?
A) The number of days it takes to generate dollar sales equal to the outstanding accounts receivable
balance.
B) The number of days it takes on average for customers to pay their bills.
C) The number of days it takes for a firm to pay its bills assuming no new payables are created.
D) The number of times during the year a firm collects and reloans its receivables.
E) The number of days it takes before the firm's working capital becomes negative.

Ans: B Level: Basic Subject: Days' Sales In Receivables Type: Concepts

76. In addition to days' sales in receivables and days' sales in inventory we could calculate "days' sales in
payables" by computing the accounts payable turnover and dividing it into 365 days. In words, what do
these ratios tell us?
A) The number of days it takes before the current ratio falls to zero.
B) The number of days of sales needed to make a profit.
C) The time it takes to completely replace total current assets.
D) The rate at which assets are replaced.
E) How long it takes, on average, to entirely deplete these accounts.

Ans: E Level: Intermediate Subject: Days' Sales Ratios Type: Concepts

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 Chapter 3 Working with Financial Statements

77. In words, what does a total asset turnover of 1.5 times mean?
A) For each $1 of sales generated the firm has total assets of $1.50.
B) For each $1 of total assets, the firm generated $1.50 in sales.
C) For each $1 of total assets, the firm generated $1.50 in net income.
D) For each $1 of net income generated, the firm has total assets of $1.50.
E) The firm completely replaces its fixed assets three times each year, on average.

Ans: B Level: Basic Subject: Total Assets Type: Concepts

78. Which of the following is a correct interpretation of a profit margin of 0.20?

A) For each $1 of sales the firm earns twenty cents in net income.
B) For each $1 of sales the firm earns twenty cents before operating expenses.
C) For each $1 of sales, $2 fall to the bottom line.
D) It takes sales of $1 to generate $20 in net profit after taxes.
E) It takes twenty cents in sales to generate $1 in profit.

Ans: A Level: Basic Subject: Profit Margin Type: Concepts

79. Which of the following would result in a lower profit margin, all else the same?
I. A decrease in cost of goods sold.
II. A higher corporate tax rate.
III. Doubling the amount of long-term debt while decreasing common equity by the same amount.
A) I only
B) II only
C) III only
D) I and III only
E) II and III only

Ans: E Level: Intermediate Subject: Net Profit Margin Type: Concepts

80. If the total assets of a firm decrease while all other components of ROE remain unchanged, you would
expect the firm's:
A) ROE to increase.
B) ROA to decrease.
C) Equity multiplier to increase.
D) ROE to remain unchanged.
E) Profit margin to decrease.

Ans: D Level: Intermediate Subject: Return on Equity Type: Concepts

81. When would the return on equity (ROE) definitely equal the return on assets (ROA) ?
A) Whenever a firm has no long-term debt.
B) Whenever a firm's debt-to-equity ratio is equal to one.
C) Whenever a firm's long-term debt ratio is equal to zero.
D) Whenever a firm's return on equity is equal to 100%.
E) Whenever a firm's total debt ratio is equal to zero.

Ans: E Level: Basic Subject: Return On Equity & Return On Assets Type: Concepts

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 Chapter 3 Working with Financial Statements

82. Which of the following is NOT a correct statement about the price/earnings ratio?
A) A high P/E ratio is often taken to mean the firm has significant prospects for future growth.
B) A P/E ratio of 15 means investors are willing to pay $15 for each $1 of current earnings.
C) Care must be taken in interpreting very high P/E ratios since they can result from a firm having very
low earnings.
D) A P/E ratio of 15 means the firm's shares are selling for 15 times current earnings.
E) A firm with high earnings per share will also have a very high P/E ratio.

Ans: E Level: Basic Subject: Price-Earnings Ratio Type: Concepts

83. Which of the following statements is false concerning the use of accounting data versus market value data?
A) The primary reason for using accounting data is the lack of readily available market value
information.
B) Whenever market value information is available, it should be used instead of accounting data.
C) If market value and accounting data conflict, the accounting data should be given precedence.
D) If a firm has only current assets and current liabilities, book values will likely be reasonable
approximations of market values.
E) Little direct market value information exists for privately held and not-for-profit businesses.

Ans: C Level: Basic Subject: Market Values vs. Book Values Type: Concepts

84. Vendors providing trade credit to a firm tend to be most interested in the firm's __________ ratios.
A) liquidity
B) profitability
C) market value
D) asset management
E) financial leverage

Ans: A Level: Basic Subject: Ratio Categories Type: Concepts

85. If a firm is having difficulty controlling its operating expenses, the trouble will be most directly reflected in
the firm's ________________ ratios.
A) liquidity
B) profitability
C) market value
D) asset management
E) long-term solvency

Ans: B Level: Basic Subject: Ratio Categories Type: Concepts

86. Which of the following is NOT incorporated into calculation of the Du Pont identity?
A) Return on assets
B) Equity multiplier
C) Total asset turnover
D) Profit margin
E) Receivables turnover

Ans: E Level: Basic Subject: Du Pont Identity Type: Concepts

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 Chapter 3 Working with Financial Statements

87. Hilton Publishing and Jordan Publishing have identical debt-equity ratios and profit margins. However,
Hilton's ROA is higher than Jordan's. Therefore, it must be true that:
A) Hilton has a lower total asset turnover ratio.
B) Jordan's ROE is higher than Hilton's.
C) Hilton uses its assets more efficiently to generate sales.
D) Hilton's operating efficiency is higher than Jordan's.
E) Hilton has a lower investment in total assets than Jordan does.

Ans: C Level: Basic Subject: Du Pont Identity Type: Concepts

88. Return on equity will increase if the _________________.

A) profit margin decreases
B) return on assets increases
C) debt-equity ratio decreases
D) accounts receivable turnover increases
E) total asset turnover decreases

Ans: B Level: Intermediate Subject: Du Pont Identity Type: Concepts

89. Which of the following is NOT a component of the Du Pont identity?

A) Operating efficiency
B) Asset use efficiency
C) Financial leverage
D) Profit per dollar of assets
E) Net working capital

Ans: E Level: Basic Subject: Du Pont Identity Type: Concepts

90. Which of the following does NOT correctly complete this sentence: The financial statements of a
company ___________________.
A) can be useful to the financial manager of the firm even though they employ accounting figures and
not actual cash flows
B) are useful for analysts outside the firm
C) are generally considered a useful second best source of information for analysts of the firm if only
because this information is often all that is readily available
D) are useful for looking at the trends in financial performance of a firm
E) are rarely comparable from year to year since accountants are constantly changing accounting
methods resulting in very little consistency from year to year

Ans: E Level: Basic Subject: Financial Statements Type: Concepts

91. Which of the following regarding financial statement analysis is NOT correct?
A) According to the Du Pont identity, ROE is affected by operating efficiency, asset use efficiency, and
financial leverage.
B) It is straightforward to calculate the market value based measures of firm performance using
financial statements prepared according to GAAP.
C) Asset management ratios measure the intensity and efficiency of asset use.
D) For common size statements, we divide asset and liability accounts by total assets and income
statement accounts by sales.
E) An increase in a firm's net fixed assets is considered to be a use of cash.

Ans: B Level: Basic Subject: Financial Statements Type: Concepts

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 Chapter 3 Working with Financial Statements

92. Which of the following is NOT a source of industry benchmark information for Canadian companies?
A) Statistics Canada.
B) Dun & Bradstreet Canada.
C) Foster's Statistics.
D) Financial Post Datagroup.
E) All of the above are sources for industry benchmark information.

Ans: C Level: Basic Subject: Industry Benchmarks Type: Concepts

93. Which one of the following is a use of cash?

A) An increase in accounts payable
B) An increase in retained earnings
C) An increase in accounts receivable
D) An increase in paid in surplus
E) A sale of a long-term asset

Ans: C Level: Intermediate Subject: Uses Of Cash Type: Concepts

94. Which of the following is (are) a source of cash?

I An increase in accounts payable
II A reduction in inventory
III An increase in retained earnings
IV An increase in notes payable
A) II and III only
B) I and IV only
C) I, II and IV
D) I, III, and IV only
E) I, II, III, and IV

Ans: E Level: Intermediate Subject: Sources Of Cash Type: Concepts

95. On the statement of cash flows, the change in current assets is listed in the section entitled:
A) Operating activity.
B) Merger activity.
C) Working activity.
D) Investment activity.
E) Financing activity.

Ans: A Level: Intermediate Subject: Statement Of Cash Flows Type: Concepts

96. Common sized statements:

A) Depict the cash flows of a firm.
B) Are useful in making comparisons.
C) Reflect the ratio analysis of a firm.
D) Show the sources and uses of cash.
E) Reflect the market value of a firm.

Ans: B Level: Intermediate Subject: Common Sized Statements Type: Concepts

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 Chapter 3 Working with Financial Statements

97. Which one of the following is a measure of liquidity?

A) Debt-equity ratio
B) Return on assets
C) Inventory turnover
D) Interval measure
E) Times interest earned ratio

Ans: D Level: Intermediate Subject: Financial Ratios Type: Concepts

98. Which of the following is (are) a measure of long-term solvency?

I Total debt ratio
II Cash coverage ratio
III Price-earnings ratio
IV Market-to-book ratio
A) I only
B) I and II only
C) II and IV only
D) III and IV only
E) I, II, and IV only

Ans: B Level: Intermediate Subject: Financial Ratios Type: Concepts

99. The current ratio:

A) Analyzes long-term financial viability.
B) Will normally have a lower value than the quick ratio.
C) Is a measure of short-term liquidity.
D) Considers all debt obligations of a firm.
E) Indicates the turnover rate of a firm's accounts receivable.

Ans: C Level: Basic Subject: Current Ratio Type: Concepts

100. The quick ratio:

A) Indicates the ability of a firm to meet its current obligations without disposing of any inventory.
B) Depicts the ability of a firm to pay off its long-term debts in a timely manner.
C) Compares the current cash holdings of a firm to the current liabilities.
D) Measures a firm's ability to generate cash from its operations.
E) Indicates how quickly a firm can liquidate its inventory.

Ans: A Level: Basic Subject: Quick Ratio Type: Concepts

101. Which one of the following measures indicates how long a firm can continue operating without any
additional cash inflows?
A) Current ratio
B) Cash ratio
C) Quick ratio
D) Interval measure
E) Total debt ratio

Ans: D Level: Intermediate Subject: Interval Measure Type: Concepts

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 Chapter 3 Working with Financial Statements

102. Last year a firm had a total debt ratio of .31. This year the total debt ratio is .33. Which one of the following
statements can be made with certainty based on this information?
A) The firm is bankrupt.
B) The firm increased its equity financing.
C) The firm had to have sold some long-term assets.
D) The firm had to have borrowed more money.
E) The firm changed its capital structure.

Ans: E Level: Challenge Subject: Total Debt Ratio Type: Concepts

103. An equity multiplier of 1.64 means that for every $1 the firm raises in new equity, the firm can:
A) Acquire an additional $1.64 in new assets.
B) Acquire an additional $1.64 in new debt.
C) Earn $1.64 in additional profits.
D) Earn $1.64 in additional profits per share.
E) Pay $1.64 in additional dividends per share.

Ans: A Level: Basic Subject: Equity Multiplier Type: Concepts

104. If a firm acquires more long-term debt while also issuing additional shares of stock, then the:
A) Debt-equity ratio will increase.
B) Debt-equity ratio will decrease.
C) Debt equity ratio will remain constant.
D) Change in the debt-equity ratio cannot be determined from the information provided.
E) Net Income will increase.

Ans: D Level: Intermediate Subject: Debt-Equity Ratio Type: Concepts

105. Creditors are most likely interested in the:

A) Fixed asset turnover.
B) Times interest earned ratio.
C) Earnings per share ratio.
D) Price earnings ratio.
E) Return on assets ratio.

Ans: B Level: Basic Subject: Times Interest Earned Ratio Type: Concepts

106. If the level of inventory rises, all else constant, then:

A) The days sales in inventory will also rise.
B) The NWC ratio will also rise.
C) Inventory turnover will also rise.
D) Fixed asset turnover will decline.
E) Current ratio will decline.

Ans: A Level: Intermediate Subject: Days Sales In Inventory Type: Concepts

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 Chapter 3 Working with Financial Statements

107. An increase in the receivables turnover means that:

A) The majority of customers are paying slower.
B) The prices of items purchased are rising.
C) The days sales in receivables is rising.
D) Profit margins are rising.
E) Customers are paying their bills faster.

Ans: E Level: Intermediate Subject: Receivables Turnover Type: Concepts

108. A fixed asset turnover ratio of .72 means that:

A) For every $1 in total assets, a firm can generate $0.72 in net income.
B) For every $1 in net fixed assets, a firm can generate $0.72 in net income.
C) For every $1 in total assets, a firm can generate $0.72 in sales.
D) For every $1 in net fixed assets, a firm can generate $0.72 in sales.
E) For every $1 in net fixed assets, a firm can obtain $0.72 in debt.

Ans: D Level: Intermediate Subject: Fixed Asset Turnover Type: Concepts

109. Which one of the following measures the efficiency with which a firm uses it resources to generate sales?
A) Price earnings ratio
B) Return on equity
C) Total asset turnover
D) Current ratio
E) Return on assets

Ans: C Level: Intermediate Subject: Total Asset Turnover Type: Concepts

110. A reduction in interest expense, all else constant, will cause a(n):
A) Decrease in the times interest earned ratio.
B) Increase in the cash coverage ratio.
C) Decrease in the long-term debt ratio.
D) Decrease in the return on equity.
E) Increase in the price earnings ratio.

Ans: B Level: Challenge Subject: Profit Margin Type: Concepts

111. Last year a firm had a profit margin of 7%. This year the profit margin is 6%. Sales remained constant.
Which one of the following statements is correct based on this information?
A) The return on assets declined.
B) The return on equity increased.
C) The net income increased.
D) The price earnings ratio decreased.
E) The interval measure decreased.

Ans: A Level: Challenge Subject: Return On Assets Type: Concepts

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 Chapter 3 Working with Financial Statements

112. Stockholders are most interested in the:

A) Times interest earned ratio.
B) Current ratio.
C) Return on equity ratio.
D) Total asset turnover rate.
E) Return on assets ratio.

Ans: C Level: Basic Subject: Return On Equity Type: Concepts

113. ABC, Inc. expects sales and net income to remain constant next year. If ABC wishes to increase its
earnings per share figures, then ABC could:
A) Increase the amount of dividend paid per share.
B) Decrease the amount of dividend paid per share.
C) Purchase more assets.
D) Issue additional shares of common stock.
E) Repurchase outstanding shares of common stock.

Ans: E Level: Intermediate Subject: Earnings Per Share Type: Concepts

114. A price earnings ratio of 14 means that:

A) Stockholders are currently paying a price equal to 14 times earnings per share when they buy one
share of stock.
B) The market value of each share of outstanding common stock is currently valued at $14 per share.
C) The market-to-book ratio must be equal to 4.
D) The current selling price of a product is equal to 14 times the net income generated from the sale of
that product.
E) The market value of the common stock is currently equal to 14 times the book value per share.

Ans: A Level: Intermediate Subject: Price Earnings Ratio Type: Concepts

115. Which one of the following is true concerning the market-to-book ratio?
A) Extending the depreciation life of a firm's assets will increase the market-to-book ratio.
B) A decrease in the price of the stock on the stock exchange will increase the market-to-book ratio.
C) An increase in the market value of the common stock will increase the market-to-book ratio.
D) The market-to-book ratio is of most interest to the creditors of a firm.
E) The market-to-book ratio provides the selling price of a firm's inventory.

Ans: C Level: Intermediate Subject: Market-To-Book Ratio Type: Concepts

116. Which one of the following will increase the return on equity as computed using the Du Pont identity given
that all else is held constant?
A) A decrease in total equity
B) A decrease in sales
C) A decrease in net income
D) An increase in total assets
E) An increase in costs

Ans: A Level: Intermediate Subject: Du Pont Identity Type: Concepts

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 Chapter 3 Working with Financial Statements

117. Financial statement analysis provides useful information to which of the following parties?
I. Creditors
II. Investors
III. Internal division managers
IV. Senior corporate officers
A) I and II only
B) II and IV only
C) III and IV only
D) II, III, and IV only
E) I, II, III, and IV

Ans: E Level: Intermediate Subject: Financial Statement Analysis Type: Concepts

118. Computronics, Inc. has a current ratio of 1.5. This implies that if the firm liquidates its current assets in
order to pay off its current liabilities, it can sell the current assets for as little as:
A) 15% of book value.
B) 25% of book value.
C) 33% of book value.
D) 67% of book value.
E) 150% of book value.

Ans: D Level: Basic Subject: Current Ratio Type: Problems

119. Assume a firm's current ratio equals 3.5. Which of the following actions would increase it?
A) Discarding and writing off spoiled inventory.
B) Receiving a full cash payment on an account receivable.
C) Paying off a short-term bank loan with the proceeds from new long-term debt.
D) Purchasing new fixed assets using the proceeds from a new stock issue.
E) Buying inventory on credit, thereby increasing accounts payable.

Ans: C Level: Basic Subject: Current Ratio Type: Problems

120. A firm has current liabilities of $250, a current ratio of 1.2, and a quick ratio of 0.80. Calculate the level of
inventory for this firm.
A) $45
B) $50
C) $100
D) $120
E) $200

Ans: C Level: Intermediate Subject: Current & Quick Ratios Type: Problems

121. Danny D. Inc. had cost of goods sold of $5,200, net working capital of $120, total current assets of $600,
and a quick ratio of 0.8. What is Danny D's days' sales in inventory?
A) 12.7 days
B) 15.2 days
C) 17.1 days
D) 19.8 days
E) 22.7 days

Ans: B Level: Intermediate Subject: Days' Sales In Inventory Type: Problems

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 Chapter 3 Working with Financial Statements

122. Calculate the value of cost of goods sold for Peterson Brewing given the following information: Current
liabilities = $340,000; Quick ratio = 1.8; Inventory turnover = 4.0; Current ratio = 3.3.
A) $2,040,000
B) $3,060,000
C) $3,999,999
D) $4,180,222
E) $5,888,100

Ans: A Level: Intermediate Subject: Cost Of Goods Sold Type: Problems

123. CatchaTan Co. had net sales of $800,000 over the past year. During that time, average receivables were
$200,000. What was the average collection period?
A) 4 days
B) 5 days
C) 36 days
D) 48 days
E) 91 days

Ans: E Level: Intermediate Subject: Average Collection Period Type: Problems

124. Martin's Method Acting School has a current ratio of 2, a quick ratio of 1.8, net income of $180,000, a
profit margin of 10%, and an accounts receivable balance of $150,000. What is the firm's average
collection period?
A) 50 days
B) 43 days
C) 30 days
D) 24 days
E) 16 days

Ans: C Level: Intermediate Subject: Average Collection Period Type: Problems

125. Atlasta Limo Corp. has an average collection period of 36.5 days. Sales are $300,000. What is the
average investment in receivables?
A) $4,441
B) $8,219
C) $10,000
D) $30,000
E) $36,500

Ans: D Level: Intermediate Subject: Receivables Ratios Type: Problems

126. If a firm has a total debt ratio of 1.5, what is its equity multiplier?
A) –2.00 times
B) 0.50 times
C) 0.67 times
D) 1.50 times
E) 3.00 times

Ans: A Level: Intermediate Subject: Debt Ratio & Equity Multiplier Type: Problems

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 Chapter 3 Working with Financial Statements

127. Tron, Inc. has a times interest earned ratio of 4.0. Based on this ratio, a creditor knows that Tron's EBIT
must decline by more than __________ before Tron will be unable to cover its interest expense.
A) 33%
B) 40%
C) 67%
D) 75%
E) 80%

Ans: D Level: Intermediate Subject: Times Interest Earned Type: Problems

128. The BeenThereDoneThat Company has net income of $200, interest expenses of $50, and depreciation of
$50. The corporate tax rate is 50%. What is the cash coverage ratio?
A) 1.2 times
B) 1.8 times
C) 3.0 times
D) 9.0 times
E) 10.0 times

Ans: E Level: Intermediate Subject: Cash Coverage Ratio Type: Problems

129. A firm has an ROA of 8%, sales of $100, and total assets of $75. What is its profit margin?
A) 1.3%
B) 4.3%
C) 6.0%
D) 10.7%
E) 16.7%

Ans: C Level: Intermediate Subject: Return On Assets Type: Problems

130. You have the following data for the Fosberg Winery. What is Fosberg's return on assets (ROA) ? Return on
equity = 15%; Earnings before taxes = $30,000; Total asset turnover = 0.80; Profit margin = 4.5%; Tax rate
= 35%.
A) 3.6%
B) 3.9%
C) 5.7%
D) 6.4%
E) 9.3%

Ans: A Level: Intermediate Subject: Return On Assets Type: Problems

131. A firm has a total book value of equity of $2 million, a market to book ratio of 2, and a book value per
share of $5.00. What is the total market value of the firm's equity?
A) $10
B) $500,000
C) $2 million
D) $4 million
E) $20 million

Ans: D Level: Intermediate Subject: Market To Book Ratios Type: Problems

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 Chapter 3 Working with Financial Statements

132. Jorge Corp. has 100,000 shares outstanding. EBIT is $1 million and interest paid is $200,000. If the
corporate tax rate is 34%, what is Jorge's earnings per share?
A) $2.72
B) $3.40
C) $5.28
D) $6.60
E) $10.00

Ans: C Level: Intermediate Subject: Earnings Per Share Type: Problems

133. Etling Eccentricities has 400,000 shares of common stock outstanding, net income after tax of $1.2 million,
retained earnings of $17 million, and total equity of $35 million. What is EE's earnings per share?
A) $3.00
B) $4.00
C) $4.25
D) $8.75
E) $13.50

Ans: A Level: Basic Subject: Earnings Per Share Type: Problems

134. A firm with net income of $500,000 pays 48% of net income out in dividends. If the firm has 150,000
shares of common stock outstanding, what is the dividend paid per share of stock?
A) $0.30
B) $1.44
C) $1.60
D) $1.73
E) $3.33

Ans: C Level: Basic Subject: Dividends Per Share Type: Problems

135. Given a profit margin = 10%, ROE = 20%, D/E = 1.5, and assets = $200, calculate sales.
A) $10
B) $160
C) $250
D) $640
E) $1,000

Ans: B Level: Intermediate Subject: Du Pont Identity Type: Problems

136. A firm has sales of $500, total assets of $300, and a debt/equity ratio of 2. If its return on equity is 15%,
what is its net income?
A) $7.50
B) $15.00
C) $22.50
D) $32.50
E) $50.00

Ans: B Level: Intermediate Subject: Du Pont Identity Type: Problems

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 Chapter 3 Working with Financial Statements

Use the following to answer questions 137-148:

Young, Inc.
2003 Income Statement
($ in millions)
Net sales $1,384
Less: Cost of goods sold 605
Less: Depreciation 180
Earnings before interest and taxes 599
Less: Interest paid 80
Taxable income 519
Less: Taxes 156
Net income $363
Addition to retained earnings $254
Dividends paid 109

Young, Inc.
2002 and 2003 Balance Sheet
($ in millions)
2002 2003 2002 2003
Cash $100 $121 Accounts payable $400 $350
Accounts rec. 350 425 Notes payable 390 370
Inventory 440 410 Total $790 $720
Total $890 $956 Long-term debt 500 550
Net fixed assets 1,556 1,704 Common stock 600 580
Retained earnings 556 810
Total assets $2,446 $2,660 Total liabilities $2,446 $2,660

137. What is the current ratio for Young in 2003?

A) 1.13
B) 1.21
C) 1.23
D) 1.33
E) 1.47

Ans: D Level: Basic Subject: Current Ratio Type: Problems

138. What is the quick ratio for Young for 2002?

A) 0.57
B) 0.63
C) 0.76
D) 1.13
E) 1.33

Ans: A Level: Basic Subject: Quick Ratio Type: Problems

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 Chapter 3 Working with Financial Statements

139. What is the total debt ratio for Young for 2003?
A) 0.27
B) 0.48
C) 0.53
D) 0.70
E) 0.82

Ans: B Level: Basic Subject: Total Debt Ratio Type: Problems

140. What is the debt-equity ratio for 2002?

A) 0.48
B) 0.91
C) 1.12
D) 2.15
E) 2.32

Ans: C Level: Basic Subject: Debt-Equity Ratio Type: Problems

141. What is the times interest earned ratio for 2003?

A) 1.5 times
B) 3.5 times
C) 4.5 times
D) 6.5 times
E) 7.5 times

Ans: E Level: Basic Subject: Times Interest Earned Type: Problems

142. What is the cash coverage ratio for 2003?

A) 5.2
B) 6.8
C) 8.7
D) 9.7
E) 9.2

Ans: D Level: Basic Subject: Cash Coverage Ratio Type: Problems

143. What was inventory turnover for 2003?

A) 1.38
B) 1.42
C) 1.48
D) 3.15
E) 3.38

Ans: C Level: Basic Subject: Inventory Turnover Type: Problems

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 Chapter 3 Working with Financial Statements

144. What was the average collection period for 2003?

A) 92 days
B) 112 days
C) 151 days
D) 211 days
E) 256 days

Ans: B Level: Basic Subject: Average Collection Period Type: Problems

145. What was the total asset turnover in 2003?

A) 0.23
B) 0.25
C) 0.52
D) 0.57
E) 1.92

Ans: C Level: Basic Subject: Total Assets Type: Problems

146. What was the profit margin in 2003?

A) 7.9%
B) 18.4%
C) 22.7%
D) 26.2%
E) 60.0%

Ans: D Level: Basic Subject: Profit Margin Type: Problems

147. What was the return on equity for 2003?

A) 18.3%
B) 26.1%
C) 31.4%
D) 44.8%
E) 62.6%

Ans: B Level: Basic Subject: Return on Equity Type: Problems

148. If Young stock sells for $40 and there are 100 million shares outstanding, what is the P/E ratio?
A) 5.68
B) 10.26
C) 11.02
D) 25.64
E) 32.49

Ans: C Level: Basic Subject: Price To Earnings Ratio Type: Problems

Use the following to answer questions 149-158:

Bo Knows Profit Corporation

Income Statement for Year Ending 2003
Sales $ 8,800
Less: Costs 5,600
Depreciation 900
EBIT 2,300

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 Chapter 3 Working with Financial Statements

Less: Interest 350

EBT 1,950
Less: Taxes 550
Net Income $1,400
Dividends $900
Addition to ret. earnings $500

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 Chapter 3 Working with Financial Statements

Bo Knows Profit Corp.

Balance Sheet for End of Year 2002, 2003

2002 2003 2002 2003

Cash $ 170 $ 110 Accounts payable $ 135 $ 120
Accounts rec. 500 700 Notes payable 1,200 1,400
Inventory 1,240 1,000 Current liabilities 1,335 1,520
Current assets 1,910 1,810 Long-term debt 2,005 2,620
Fixed assets 2,000 3,500 Common stock 100 200
(50 shares)
Retained earnings 470 970
Total assets $3,910 $5,310 Total liab. & equity $3,910 $5,310

149. What was the greatest source of funds for Bo Knows Profit Corp.?
A) Sale of inventory
B) Increase in long-term debt
C) Acquisition of more fixed assets
D) Increase in notes payable
E) Increase in common stock

Ans: B Level: Intermediate Subject: Sources Of Cash Type: Problems

150. What was the greatest use of funds for Bo Knows Profit Corp.?
A) Increase in accounts receivable
B) Decrease in accounts payable
C) Acquisition of more fixed assets
D) Dividends
E) Sale of inventory

Ans: C Level: Intermediate Subject: Uses Of Cash Type: Problems

151. If you prepare a statement of cash flows, what is the positive flow to cash from operating activities?
(Consider only inflows)
A) $1,270
B) $1,588
C) $2,150
D) $2,300
E) $2,540

Ans: E Level: Intermediate Subject: Operating Activities Type: Problems

152. If you were to prepare a statement of cash flows, what is the negative flow from cash due to operating
activities? (Consider only outflows)
A) –$105
B) –$175
C) –$215
D) –$351
E) –$457

Ans: C Level: Intermediate Subject: Operating Activities Type: Problems

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 Chapter 3 Working with Financial Statements

153. If you were to prepare a statement of cash flows, what is the cash flow from investment activities?
A) –$1,500
B) –$2,400
C) –$3,400
D) $4,500
E) $4,600

Ans: B Level: Intermediate Subject: Investment Activities Type: Problems

154. If you were to prepare a statement of cash flows, what is the net cash flow from financing activities?
A) –$ 678
B) –$ 108
C) $ 15
D) $1,325
E) $3,003

Ans: C Level: Intermediate Subject: Financing Activities Type: Problems

155. What was the quick ratio for Bo Knows Profit Corp. for 2003?
A) 0.21
B) 0.47
C) 0.50
D) 0.53
E) 1.40

Ans: D Level: Basic Subject: Quick Ratio Type: Problems

156. If cash inflows for the company cease, the firm will be able to stay in business for about:
A) 111 days.
B) 118 days.
C) 146 days.
D) 1,872 days.
E) 2,139 days.

Ans: B Level: Intermediate Subject: Interval Measure Type: Problems

157. If the firm is currently carrying a price/earnings ratio of 2, what is the firm's approximate market price per
share?
A) $8
B) $11
C) $56
D) $78
E) $129

Ans: C Level: Challenge Subject: Price-Earnings Ratio Type: Problems

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 Chapter 3 Working with Financial Statements

158. Which of the following contains the components of the Du Pont identity for the company? Use year-end
2003 values where appropriate.
A) 0.159; 1.77; 4.26
B) 0.169; 1.56; 4.54
C) 0.159; 1.66; 4.54
D) 0.132; 1.66; 5.46
E) 0.427; 1.40; 2.00

Ans: C Level: Challenge Subject: Du Pont Identity Type: Problems

Use the following to answer questions 159-165:

Marble Comics Group

Balance Sheets
Years ended 2002 and 2003
($ in millions)

2002 2003 2002 2003

Cash $75 $135 Accounts payable $89 $110
Accounts rec. 230 214 Notes payable 227 442
Inventory 240 188 Current liabilities 316 552
Current assets 545 537 Long-term debt 615 440
Fixed assets 788 890 Common stock 55 55
Retained earnings 347 380
Total assets $1,333 $1,427 Total liab. & equity $1,333 $1,427

Marble Comics Group

2003 Income Statement
($ in millions)
Net sales $905
Less: Cost of goods sold 522
Less: General & adm. expenses 93
Less: Depreciation 110
EBIT 180
Less: Interest paid 61
Earnings before taxes 119
Less: Taxes 30
Net income $89

159. How did Marble Comics' net working capital to total assets ratio change from 2002 to 2003?
A) Decreased from 0.66 to 0.43
B) Increased from 0.54 to 0.60
C) Decreased from 0.17 to -0.01
D) Increased from 0.21 to 0.67
E) Increased from 0.17 to 0.89

Ans: C Level: Intermediate Subject: Net Working Capital Type: Problems

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 Chapter 3 Working with Financial Statements

160. Which of Marble Comics' liquidity measures increased from 2002 to 2003?
A) Current ratio
B) Quick ratio
C) Cash ratio
D) NWC to total assets
E) Net working capital

Ans: C Level: Intermediate Subject: Liquidity Type: Problems

161. What was Marble Comics' total debt ratio in 2003?

A) 0.46
B) 0.70
C) 0.74
D) 0.89
E) 2.32

Ans: B Level: Basic Subject: Total Debt Ratio Type: Problems

162. Marble Comics' times interest earned ratio is:

A) 0.34
B) 1.46
C) 1.95
D) 2.95
E) 4.80

Ans: D Level: Basic Subject: Times Interest Earned Type: Problems

163. Assume Marble Comics' days' sales in inventory ratio was 120 days in 2002. By how much did it change
in 2003?
A) Increased by 11 days
B) Increased by 32 days
C) Increased by 48 days
D) Decreased by 22 days
E) Decreased by 44 days

Ans: A Level: Intermediate Subject: Days' Sales In Inventory Type: Problems

164. The profit margin of Marble Comics Group is:

A) 3.6%
B) 9.8%
C) 13.1%
D) 19.9%
E) 22.3%

Ans: B Level: Basic Subject: Profit Margin Type: Problems

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 Chapter 3 Working with Financial Statements

165. Calculate Marble Comics' ROE for 2003.

A) 20.5%
B) 22.1%
C) 23.4%
D) 25.6%
E) 161.8%

Ans: A Level: Basic Subject: ROE & ROA Type: Problems

166. Sales are $75,000, cost of goods sold is $35,000 and inventory is $5,000. What is the number of days sales
in inventory?
A) 7
B) 15
C) 24
D) 52
E) 59

Ans: D Level: Intermediate Subject: Days Sales In Inventory Type: Problems

167. Cash is $500, inventory is $4,800, accounts receivable is $3,200 and accounts payable is $2,400. What is
the quick ratio?
A) 0.77
B) 1.54
C) 1.67
D) 3.33
E) 3.54

Ans: B Level: Intermediate Subject: Quick Ratio Type: Problems

168. Earnings before interest and taxes is $74,300. Interest is $8,300 and depreciation is $9,700. What is the
cash coverage ratio?
A) 7.78
B) 8.52
C) 8.95
D) 9.95
E) 10.12

Ans: E Level: Intermediate Subject: Cash Coverage Ratio Type: Problems

169. Current assets are $94,700. Accounts payable is $36,200, net income is $12,400 and sales are $110,800.
What is the net working capital turnover rate?
A) 0.21
B) 0.85
C) 1.17
D) 1.68
E) 1.89

Ans: E Level: Intermediate Subject: Net Working Capital Turnover Type: Problems

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 Chapter 3 Working with Financial Statements

170. A firm has a profit margin of 9% on sales of $400,000. There are 10,000 shares of common stock
outstanding. What is the earnings per share?
A) $1.80
B) $3.60
C) $4.00
D) $36.00
E) $40.00

Ans: B Level: Intermediate Subject: Earnings Per Share Type: Problems

171. A firm has a net income of $32,000 which provides a 12% return on assets. The firm has a debt-equity ratio
of .40. What is the return on equity?
A) 7.20%
B) 8.57%
C) 11.67%
D) 12.00%
E) 16.80%

Ans: E Level: Challenge Subject: Return On Equity Type: Problems

172. Little's Inc. provides a 10% return on equity. Sales are $100,000 on total assets of $140,000 and total equity
of $85,000. What is the profit margin?
A) 6.07%
B) 8.50%
C) 10.00%
D) 11.77%
E) 14.00%

Ans: B Level: Intermediate Subject: Dupont Identity Type: Problems

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 Chapter 3 Working with Financial Statements

Use the following to answer questions 173-180:

Smith Co.
2003 Income Statement

Net sales $8,324

Cost of goods sold $4,988
Depreciation $1,190
Earnings Before interest and taxes $2,146
Interest paid $320
Taxable income $1,826
Taxes $621
Net income $1,205
Dividends paid $400
Addition to retained earnings $805

Smith Co.
Balance Sheets as of December 31, 2002 and 2003

2002 2003 2002 2003

Cash $5,415 $3,341 Accounts payable $1,110 $1,650
Accounts rec. $2,460 $979 Notes payable $2,500 $1,900
Inventory $2,405 $2,885 Total $3,610 $3,550
Total $10,280 $7,205 Long-term debt $4,800 $4,600
Net fixed assets $12,300 $16,720 Common stock $5,100 $5,900
Retained earnings $9,070 $9,875
Total assets $22,580 $23,925 Total liabilities $22,580 $23,925
and Owner's equity

173. What is the current ratio for 2003?

A) 1.49
B) 2.03
C) 2.18
D) 2.85
E) 4.37

Ans: B Level: Basic Subject: Current Ratio Type: Problems

174. What is the equity multiplier for 2003?

A) 0.29
B) 0.66
C) 1.17
D) 1.52
E) 2.42

Ans: D Level: Intermediate Subject: Equity Multiplier Type: Problems

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 Chapter 3 Working with Financial Statements

175. What is the days sales in receivables for 2003?

A) 34
B) 43
C) 48
D) 53
E) 59

Ans: B Level: Intermediate Subject: Days Sales In Receivables Type: Problems

176. What is the change in net working capital?

A) -$3,655
B) -$3,015
C) $3,655
D) $6,670
E) $10,755

Ans: B Level: Intermediate Subject: Change In Net Working Capital Type: Problems

177. What is the net working capital turnover rate for 2003?
A) 1.16
B) 1.25
C) 2.28
D) 2.34
E) 2.87

Ans: C Level: Intermediate Subject: NWC Turnover Type: Problems

178. What is the cash coverage ratio?

A) 2.99
B) 3.77
C) 6.71
D) 10.43
E) 13.77

Ans: D Level: Intermediate Subject: Cash Coverage Ratio Type: Problems

179. What is the market-to-book ratio if the Smith Co. has 2,603 shares of common stock outstanding with a
current market price of $22 per share?
A) 2.67
B) 3.33
C) 3.63
D) 4.37
E) 6.06

Ans: C Level: Intermediate Subject: Market-To-Book Ratio Type: Problems

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 Chapter 3 Working with Financial Statements

180. On a common size income statement for 2003, earnings before interest and taxes would be assigned a
common value of:
A) 9%
B) 15%
C) 20%
D) 22%
E) 26%

Ans: E Level: Intermediate Subject: Common Size Income Statement Type: Problems

Use the following to answer questions 181-185:

RTF, Inc.
Income Statement for Year Ending 2003
Sales $10,850
Costs of goods sold $8,410
Depreciation $190
EBIT $2,250
Interest $165
EBT $2,085
Taxes $710
Net Income $1,375
Dividends paid $300
Addition to retained earnings $1,075

RTF, Inc.
Balance Sheets as of December 31, 2002 and 2003

2002 2003 2002 2003

Cash $980 $960 Accounts payable $950 $730
Accounts rec. $950 $880 Notes payable $40 $150
Inventory $2,120 $1,750 Total $990 $880
Total $4,050 $3,590 Long-term debt $2,225 $100
Fixed assets $1,700 $2,540 Common stock $2,030 $3,570
Retained earnings $505 $1,580
Total assets $5,750 $6,130 Total liabilities $5,750 $6,130
and Owner's equity

181. The industry in which RTF, Inc. operates has an industry average of 21% for earnings before taxes. Is RTF
outperforming or underperforming the industry and why?
A) Outperforming because RTF has an EBT of 19%
B) Outperforming because RTF has an EBT of 21%
C) Underperforming because RTF has an EBT of 19%
D) Underperforming because RTF has an EBT of 20%
E) Performing in line with the industry at 21%.

Ans: C Level: Intermediate Subject: Earnings Before Taxes Type: Problems

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 Chapter 3 Working with Financial Statements

182. The component values used in the Du Pont analysis for 2003 are:
A) 12.7%, 0.37, and 1.19.
B) 12.7%, 1.77, and 1.19.
C) 19.2%, 1.77, and 1.19.
D) 19.2%, 0.37, and 2.11.
E) 12.7%, 1.77, and 2.11.

Ans: B Level: Intermediate Subject: Du Pont Analysis Type: Problems

183. During 2003, the quick ratio:

A) increased.
B) decreased.
C) remained constant.
D) changed, but the direction of the change can not be determined.

Ans: A Level: Intermediate Subject: Current And Quick Ratios Type: Problems

184. What was the change in the debt-equity ratio from 2002 to 2003?
A) The debt-equity ratio declined from 1.27 in 2002 to .19 in 2003.
B) The debt-equity ratio increased from .19 in 2002 to 1.27 in 2003.
C) The debt-equity ratio declined from .05 in 2002 to .02 in 2003.
D) The debt-equity ratio declined from .22 in 2002 to .17 in 2003.
E) The debt-equity ratio increased from .17 in 2002 to .22 in 2003.

Ans: A Level: Intermediate Subject: Debt-Equity Ratio Type: Problems

185. How many days does it take for inventory to sell?

A) 4
B) 6
C) 59
D) 76
E) 99

Ans: D Level: Intermediate Subject: Days' In Inventory Type: Problems

186. How many additional assets can RTF, Inc. acquire if the company issues an additional $1,000 in common
stock?
A) $1,000
B) $1,190
C) $1,500
D) $1,780
E) Can not be determined from the information given.

Ans: B Level: Intermediate Subject: Equity Multiplier Type: Problems

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 Chapter 3 Working with Financial Statements

Use the following to answer questions 187-190:

RTF, Inc.
Income Statement for Year Ending 2003

Sales $10,850
Costs of goods sold $8,410
Depreciation $190
EBIT $2,250
Interest $165
EBT $2,085
Taxes $710
Net Income $1,375
Dividends paid $300
Addition to retained earnings $1,075

RTF, Inc.
Balance Sheets as of December 31, 2002 and 2003

2002 2003 2002 2003

Cash $980 $960 Accounts payable $950 $730
Accounts rec. $950 $880 Notes payable $40 $150
Inventory $2,120 $1,750 Total $990 $880
Total $4,050 $3,590 Long-term debt $2,225 $100
Fixed assets $1,700 $2,540 Common stock $2,030 $3,570
Retained earnings $505 $1,580
Total assets $5,750 $6,130 Total liabilities and Owner's equity $5,750 $6,130

187. The sources of cash include:

A) $220 from accounts payable and $840 from fixed assets.
B) $840 from fixed assets and $70 from accounts receivable.
C) $70 from accounts receivable and $1,540 from common stock.
D) $1,540 from common stock and $220 from accounts payable.
E) $2,125 from long term debt and $1,540 from common stock.

Ans: C Level: Intermediate Subject: Sources Of Cash Type: Problems

188. The uses of cash include:

A) $110 from notes payable.
B) $1,075 from retained earnings.
C) $840 from fixed assets.
D) $370 from inventory
E) $70 from accounts receivable.

Ans: C Level: Intermediate Subject: Uses Of Cash Type: Problems

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 Chapter 3 Working with Financial Statements

189. The net cash from financing activity for 2003 is:
A) -$975
B) -$775
C) -$475
D) $475
E) $775

Ans: B Level: Intermediate Subject: Financing Activity Type: Problems

190. The net cash from investment activity for 2003 is:
A) -$1,030
B) -$840
C) -$650
D) $840
E) $1,030

Ans: A Level: Intermediate Subject: Investment Activity Type: Problems

Essay

191. Dun & Bradstreet Canada publishes peer group financial information for a host of industries, yet the
numbers typically only appear in common-size form. Why not report average dollar amounts instead?
Ans: The common-size numbers are inherently more useful since they can be directly compared to the
financial statements of any firm. If average dollar figures were presented, these numbers would have
to be converted to common-size numbers to facilitate comparisons. Plus, since D&B Canada also
publishes average sales and average total assets, the user can always work backwards to figure out
the dollar amounts represented by each category.

Level: Challenge Subject: Common Size Statements Type: Essays

192. Prepare common-size balance sheets for Marble Comics using the data below. Comment on the firm's
liquidity.

Marble Comics Group

Balance Sheets
Years ended 2002 and 2003
($ in millions)
Assets Liab. and Equity
2002 2003 2002 2003
Current Assets Current Liabilities
Cash $ 105 $ 110 Accounts Payable $ 64 $ 66
Accounts Receivable 106 137 Notes Payable 50 35
Inventory 140 122 Total 114 101
Total 351 369 Long-Term Debt 87 86
Fixed Assets 89 78 Common Stock 55 55
Retained Earnings 184 205
Total Assets $ 440 $ 447 Total Liab. and OE $ 440 $ 447

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 Chapter 3 Working with Financial Statements

Ans: This is a relatively straightforward exercise to test the students' ability to construct a common-size
balance sheet. In terms of liquidity, both cash and AR increased as a percent of total assets, while
inventory decreased, indicating the firm's liquidity is on the increasE) In addition, total CA
increased and total CL decreased as a percent of total assets, again increasing the firm's liquidity.

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 Chapter 3 Working with Financial Statements

Marble Comics Group

Common-Size Balance Sheets
Years ended 2002 and 2003

Assets Liab. and Equity

2002 2003 2002 2003
Current Assets Current Liabilities
Cash 23.9% 24.6% Accounts Payable 14.5% 14.8%
Accounts Receivable 24.1 30.6 Notes Payable 11.4 7.8
Inventory 31.8 27.3 Total 25.9 22.6
Total 79.8% 82.5 Long-Term Debt 19.8 19.2
Fixed Assets 20.2 17.5 Common Stock 12.5 12.3
Retained Earnings 41.8 45.9
Total Assets 100.0% 100.0% Total Liab. and OE 100.0% 100.0%

Level: Intermediate Subject: Common-Size Statements Type: Essays

193. List and interpret three liquidity ratios.

Ans: Choose any three of:
1) Current ratio: the firm's ability to meet its financial obligations as they come due over the
coming year,
2) Quick ratio:the firm's ability to meet its near-term financial obligations,
3) Cash ratio: the firm's ability to meet its near-term financial obligations without depending on the
liquidation of inventory or accounts receivable,
4) Net working capital to total assets: The firm's investment in NWC for each dollar of assets, and
5) Interval measure: The amount of time a firm can operate if no further sales are made.

Level: Basic Subject: Liquidity Ratios Type: Essays

194. A firm has days' sales in inventory of 105 days, an average collection period of 35 days, and takes 42 days,
on average, to pay its accounts payable. Taken together, what do these three figures imply about the firm's
operations and its cash flows?
Ans: It takes, on average, 105 days to sell inventory once it is purchased by the firm, then it takes another
35 days to collect on the receivables. Thus, the firm must finance the inventory and receivables for
140 days. The first 42 days are financed with payables, on average, leaving 98 days worth of
inventory and receivables that it must finance using other sources. In terms of cash flow, the average
cash outflow occurs 42 days after inventory is purchased while the average cash inflow occurs 98
days later, 140 days after the inventory is purchased.

Level: Intermediate Subject: Days Ratios Type: Essays

195. Which is a more meaningful measure of profitability for a firm, return on assets or return on equity? Why?
Ans: Most would argue ROE since it measures returns relative to the amount of money shareholders have
invested in the firm. In addition, since shareholder wealth maximization is a firm's primary goal, it
makes more sense to look at this measure.

Level: Basic Subject: ROE vs. ROA Type: Essays

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 Chapter 3 Working with Financial Statements

196. Suppose you calculated the following ratio for a firm: The sum of the compensation paid to owners,
directors, and managers, divided by total sales. Which class of financial ratios should this be included in
and why? Who might be interested in such a ratio?
Ans: This doesn't fit well into any of the five categories presented in the book although it would most
likely be included as a profitability ratio because it is a measure of how much of each dollar in sales
is used to pay these salaries. The ratio would likely be important to all of the three groups (owners,
directors, managers) included in the ratio, plus it would likely be important to lenders as a measure
of how much of the firm's income these groups draw out of the business.

Level: Challenge Subject: Other Ratios Type: Essays

197. It is often said that anyone with a pencil can calculate financial ratios, but it takes a brain to interpret them.
What kinds of things should the analyst keep in mind when evaluating the financial statements of a given
firm?
Ans: This question is totally open-ended, and allows students to call into play knowledge gleaned from
other courses, this course, and personal experience.

Level: Challenge Subject: Evaluating Financial Statements Type: Essays

198. The Vice President of Finance of Alpha, Inc. wants to improve the current ratio on the company's next
financial statement. Explain what he/she can legitimately do now to help accomplish this goal. Provide
specific examples in your answer.
Ans: Some examples of actions that could be taken to improve the current ratio include:
a. Selling long-term assets either for cash or on account.
b. Using cash to reduce current liabilities.
c. Acquiring long-term financing for current assets.
d. Selling inventory at a profit.
e. Converting short-term debt to long-term debt.

Level: Intermediate Subject: Current Ratio Type: Essays

199. The financial manager of ABC, Inc. would like to somehow do a comparison of financial statements to
determine how ABC, Inc. is performing both historically and competitively. Develop and explain a plan for
performing these comparisons.
Ans: The simplest way to do comparison analysis is to use common-size statements. For a historical
comparison, common size statements for several of the past months, quarters and/or years can be
compared to ascertain what trends are developing. For a competitive analysis, the common-size
statement for the firm can be compared to industry averages or other comparable firms.

Level: Intermediate Subject: Common Size Statement Analysis Type: Essays

Copyright © 2005 McGraw-Hill Ryerson Limited. Page 46