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Exercise_Lecture_3__FSA_SV

Chapter 3 focuses on financial statement analysis, including multiple-choice questions on key financial ratios and concepts such as gross margin, equity multiplier, and return on equity. It also includes concept questions that explore the implications of current ratios and inventory turnover, as well as practical problems related to calculating financial metrics for specific companies. The chapter emphasizes the importance of understanding financial ratios in assessing a firm's performance and operational efficiency.

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Bui Bich Hanh
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5 views

Exercise_Lecture_3__FSA_SV

Chapter 3 focuses on financial statement analysis, including multiple-choice questions on key financial ratios and concepts such as gross margin, equity multiplier, and return on equity. It also includes concept questions that explore the implications of current ratios and inventory turnover, as well as practical problems related to calculating financial metrics for specific companies. The chapter emphasizes the importance of understanding financial ratios in assessing a firm's performance and operational efficiency.

Uploaded by

Bui Bich Hanh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CHAPTER 3: FINANCIAL STATEMENT ANALYSIS

I. MCQ
1. If company M.N’s gross margin declined, which of the following is true?
A. Its cost of goods sold increased.
B. Its cost of goods sold as a percent of sales increased.
C. Its sales increased.
D. Its net profit margin was unaffected by the decline.

2. The firm's equity multiplier measures ……..


A. the portion of the firm’s assets that is financed by equity.
B. the return the firm has earned on its investments.
C how well a firm uses its equity to generate sales
D. how efficiently the firm is utilizing its assets to generate sales.

3. The three factors DuPont Identity expresses the firm's return on equity (ROE) in terms of ……
A. profitability, asset efficiency, and leverage.
B. valuation, leverage, and interest coverage.
C. profitability, margins, and valuation.
D. equity, assets, and liabilities.

4. If Firm A and Firm B are in the same industry and use the same production method, and Firm A's
asset turnover (ATO) is higher than that of Firm B. Assuming all else equal, which statement below
is correct?
A. Firm A uses asset more efficiently than Firm B.
B. Firm A has a lower amount of assets than Firm B.
C. Firm A generates higher sales than Firm B.
D. Firm A has a lower return on equity (ROE) than Firm B.

5. Which of the following statements is correct?


A. The use of debt financing will tend to lower the basic earning power (BEP) ratio, other things
held constant.
B. All else equal, increasing the debt ratio will increase the return on asset (ROA).
C. A firm that employs financial leverage will have a higher equity multiplier (EM) than an identical
firm that has no debt in its capital structure.
D. If two firms have identical sales, costs, and assets, but differ in the way they are financed, the firm
with less debt will have the higher expected return on equity (ROE).

6. Which of the following statements is correct?


A. If one firm has a higher debt ratio than another, it will have a lower times interest earned (TIE)
ratio.
B. A firm’s use of debt will have no effect on its return on equity (ROE).
C. If two firms differ only in their use of debt, the firm that uses more debt will have a lower profit
margin (PM) on sales.
D. All else equal, increasing the debt ratio will increase the return on asset (ROA).
7. An Thinh Communications recently issued new common stock and used the proceeds to pay off
some of its short-term notes payable. This action had no effect on the company’s total assets or
operating income. Which of the following effects would occur as a result of this action?
A. The company’s current ratio increased.
B. The company’s times interest earned ratio decreased.
C. The company’s basic earning power ratio increased.
D. The company’s equity multiplier increased.

II. CONCEPT QUESTIONS


1. Explain what it means for a firm to have a current ratio equal to 0.5. Would the firm be better off
if the current ratio were 1.5? What if it were 15.0 ? Explain your answers.
2. Why would the inventory turnover ratio be more important when analyzing a grocery store than
an insurance company?
3. You are provided with the following data for ABC Inc (specialized in providing fresh farm
products) and their industry.

2021-
Ratio 2019 2020 2021 Industry
Average
Inventory Turnover 32.25 42.42 62.65 53.25
Total Asset Turnover 0.70 0.65 0.54 0.40
What can you say about the firm's asset management?
4. Let’s analyze the return on equity of Companies A and B. Both the companies are into the
electronics industry and have the same ROE of 45%. The ratios of the two companies are as
follows:
Ratio Company A Company B

Profit margin (1) 30% 15%

Asset turnover (2) 0.5 6

Equity multiplier (3) 3 0.5

ROE = (1) * (2) * (3) 45% 45%

Based on the information provided, give comments on the two companies operation.

III. QUESTIONS AND PROBLEMS


1. The Hien Company has a ratio of long-term debt to long-term debt and equity of .29 and a
current ratio of 1.20. Current liabilities are $1,280, sales are $6,140, profit margin is 8.9 percent,
and ROE is 17.6 percent. What is the amount of the firm’s net fixed assets?
2. Phuong Dung Inc.’s net income for the most recent year was $9,620. The tax rate was 34 percent.
The firm paid $2,380 in total interest expense and deducted $3,170 in depreciation expense.
What was the company’s cash coverage ratio for the year?
3. Lien Huong Inc. has two divisions. Division A has a profit of $156,000 on sales of $2,010,000.
Division B is able to make only $28,800 on sales of $329,000. Based on the profit margins
returns on sales), which division is superior?
4. Using the Du Pont method, evaluate the effects of the following relationships for the Binh Duong
Corporation:
a. Binh Duong Corporation has a profit margin of 7 percent and its return on assets (investment)
is 25.2 percent. What is its assets turnover?
b. If the Binh Duong Corporation has a debt-to-total-assets ratio of 50 percent, what would the
firm’s return on equity be?
c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 35
percent?

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