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Chapter 3 Test Bank
Intermediate Financial Accounting I (University of Lethbridge)
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3
Student: ___________________________________________________________________________
1.
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 the other answers are correct
2.
Industries most sensitive to inflation-induced profits are those with
A. seasonal products.
B. cyclical products.
C. consumer products.
D. high-profit products.
3.
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
4.
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. two of the answers are correct.
5.
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.
6.
Which of the following is not an asset utilization ratio?
A. Inventory turnover
B. Return on assets
C. Capital asset turnover
D. Average collection period
7.
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 capital assets
8.
Total asset turnover indicates the firm's
A. liquidity.
B. debt position.
C. ability to use its assets to generate sales.
D. profitability.
9.
A short-term creditor would be most interested in
A. profitability ratios.
B. asset utilization ratios.
C. liquidity ratios.
D. debt utilization ratios.
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10. 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.
11. ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,285,000.
What is the balance in accounts receivable at year-end?
A. $54,750
B. $109,500
C. $540,000
D. $547,500
12. 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. 4.00x
C. 3.50x
D. 2.33x
13. A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The
firm's capital asset turnover is
A. 3.0x
B. 12.0x
C. 2.4x
D. 5.0x
14. 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 shareholders.
D. measures the firm's ability to generate a profit on sales.
15. 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 the other answers are correct
16. 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 the other answers are correct
17. Income can be distorted by factors other than inflation. The most important causes of distortion for interindustry 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 the other answers are correct
D. None of the other answers are correct
18. 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 the other answers are correct
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19. A quick ratio 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.
20. 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 the other answers are correct
21. 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 = 1.0
22. The Bubba Corp. had net income 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%
23. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the sales
figure for the year?
A. $60,000
B. $6,000,000
C. $7,200,000
D. None of the other answers are correct
24. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders' equity is
$900,000. What is the total debt to asset ratio?
A. 45%
B. 40%
C. 55%
D. None of the other answers are correct
25. 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
26. 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
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27. If government bonds pay 8.5% interest and CDIC insured savings accounts pay 5.5% interest,
shareholders in a moderately risky firm would expect return-on-equity values of
A. 5.5%.
B. 8.5%.
C. 12%.
D. above 8.5%, but the exact amount is uncertain.
28. 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.
29. 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.
30. 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 the other answers are correct
31. 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.
32. 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)
33. Which industry places the most value on intangible assets?
A. professional services
B. manufacturing
C. production
D. all of the other answers are correct
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34. Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately
A. 19.5%.
B. 25%.
C. 29%.
D. 34%.
35. The firm's average collection period is
A. 31 days.
B. 25 days.
C. 12 days.
D. 20 days.
36. Times interest earned for Megaframe Computer is
A. 2x.
B. 5x.
C. 4x.
D. 10x.
37. Megaframe's quick ratio is
A. 1:1.
B. 1:2.
C. 1.6:1.
D. 3:1.
38. Megaframe's current ratio is
A. 1.9:1.
B. .6:1.
C. 1:1.
D. .86:1.
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39. The firm's debt to asset ratio is
A. 56.1%.
B. 75.61%.
C. 80.49%.
D. None of the other answers are correct
40. What is Megaframe Computer's total asset turnover?
A. 3.680x.
B. 3.18x.
C. 2x.
D. 1.71x.
41. Compute Megaframe's after tax profit margin.
A. 10.0%
B. 14.29%
C. 11.43%
D. 46.34%
42. The firm's return on equity is
A. 44.44%.
B. 80.00%.
C. 50.05%.
D. 100.0%.
43. The firm's receivable turnover is
A. 4.4x.
B. 10x.
C. 11.67x.
D. 14.4x.
44. 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.
45. An increasing average collection period indicates
A. the firm is generating more income.
B. accounts receivable is going down.
C. the company is becoming more efficient in its collection policy.
D. the company is becoming less efficient in its collection policy.
46. A decreasing average collection period could be associated with
A. increasing sales.
B. decreasing sales.
C. decreasing accounts receivable
D. a and c.
47. Disinflation as compared to inflation would normally be good for investments in
A. bonds.
B. gold.
C. collectible antiques.
D. text books.
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48. A company experiencing rapid price increases for its product would take the most conservative approach
by using
A. FIFO accounting.
B. LIFO accounting.
C. average cost accounting.
D. a or c.
49. Historical cost based amortization tends to ________ when there is inflation.
A. lower taxes
B. decrease profits
C. increase profits
D. increase assets.
50. If lease payments are reduced.
A. times interest earned goes up.
B. fixed charge coverage goes up.
C. fixed charge coverage stays the same.
D. fixed charge coverage goes down.
51. A large extraordinary loss has what effect on cost of goods sold?
A. It raises it.
B. It lowers it.
C. It has no effect.
D. Need more information.
52. 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.
53. Which of the following is not a profitability ratio?
A. profit margin
B. return on assets
C. return on equity
D. capital asset turnover
54. Which of the following is not an asset utilization ratio?
A. profit margin
B. inventory turnover
C. total asset turnover
D. capital asset turnover
55. Which of the following is not a debt utilization ratio?
A. debt to total assets
B. times interest earned
C. current ratio
D. fixed charge coverage
56. According the DuPont system, which of the following is not a factor in achieving a satisfactory return on
assets?
A. use of debt
B. low inventory levels
C. rapid turnover of assets
D. high profit margins
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57. A firm has current assets of $150,000 and total assets of $750,000. The firm's sales are $1,800,000. The
firm's capital asset turnover is
A. 3.0x
B. 12.0x
C. 2.4x
D. 5.0x
58. Return on assets (ROA) can be distorted by
A. interest costs.
B. dividends.
C. asset historical valuation.
D. all of the other answers are correct.
59. 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. none of the above.
60. Which of the following is not an asset utilization ratio?
A. Receivable turnover
B. Return on equity
C. Accounts payable turnover
D. Average collection period
61. Flounders Co. has an average collection period of 60 days. Total credit sales for the year were
$9,855,000. What is the balance in accounts receivable at year-end?
A. $164,250
B. $328,500
C. $1,620,000
D. $1,642,500
62. A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is
$60,000. What is the firm's fixed charge coverage?
A. 4.00x
B. 5.00x
C. 3.33x
D. 1.71x
63. A firm's long term assets = $150,000, total assets = $400,000, inventory = $50,000, and current liabilities
= $100,000.
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
64. If the company's accounts receivable turnover is decreasing, the average collection period
A. is going up.
B. is going down.
C. could be moving in either direction.
D. is going down slightly.
65. A decreasing average collection period indicates
A. the firm is generating more income.
B. accounts receivable is going down.
C. the company is becoming more efficient in its collection policy.
D. the company is becoming less efficient in its collection policy.
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66. An increasing average collection period could be associated with
A. Decreasing.
B. Increasing.
C. increasing accounts receivable.
D. a and c.
67. A firm has a Debt-to-Asset ratio of 35% and Total Assets of $350,000. What is the firm's Total Debt?
A. $122,500
B. $650,000
C. $100,000
D. $60,000
68. Juniper, Ltd. report total sales of $10,000,000 in the prior year. If these sales were 15.50X total capital
assets what was the company's capital asset position in the year?
A. $15,000,000
B. $155,000,000
C. $645,161
D. None of the above
69. Jones and Co., reported average receivables of $550,000 in its most recent annual report. If total credit
sales were $3,000,000 what was Jones and Co.'s average collection period?
A. 66 days
B. 29 days
C. 82 days
D. 21 days
70. If a company's profit margin was 32%, what were its reported sales if its reported net income was
$650,000?
A. $10,000,000
B. $9,758,982
C. $1,008,332
D. $2,031,250
71. If a company has a return on investment of 17%, and its equity multiplier is 1.75, it ROE would be
_______?
A. 64.75%
B. 29.75%
C. 18.25%
D. 16.50%
72. Absolute values taken from financial statements are more useful than relative values.
True False
73. Heavy use of long-term debt can be of benefit to a firm.
True False
74. The stock market tends to move up when inflation goes up.
True False
75. Under generally acceptable accounting principles, two companies with identical operating results may not
report identical net incomes.
True False
76. A current ratio of 2 to 1 is always acceptable, for a company in any industry.
True False
77. In analyzing ratios, the age of the firm's assets need not be considered.
True False
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78. As long as prices continue to rise faster than costs in an inflationary environment, reported profits will
generally continue to rise.
True False
79. To compute the quick ratio, accounts receivable are not included in current assets.
True False
80. Ratios are used to compare different firms in the same industry.
True False
81. Liquidity ratios indicate how fast a firm can generate cash to pay bills.
True False
82. Asset utilization ratios describe how capital is being utilized to buy assets.
True False
83. Return on equity will be higher than return on assets if there is debt in the capital structure.
True False
84. The DuPont system of profitability analysis emphasizes that profit generated by assets can be derived by
various combinations of profit margins and asset turnover.
True False
85. Ratios are not distorted by inflation.
True False
86. Profitability ratios are distorted by inflation because profits are stated in current dollars and assets and
equity are stated in historical dollars.
True False
87. Higher debt utilization ratios will always increase a firm's return on equity given a positive return on
assets.
True False
88. The term "inventory profits" refers to profits made in the process of selling finished goods at prices
higher than their cost of goods sold.
True False
89. Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales, total
assets, and invested capital.
True False
90. Asset utilization ratios measure the returns on various assets such as return on total assets.
True False
91. A banker or trade creditor is most concerned about a firm's profitability ratios.
True False
92. Ratios are only useful for those areas of business that involve investment decisions.
True False
93. LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue.
True False
94. Financial ratios are used to weigh and evaluate the operational performance of the firm.
True False
95. FIFO will cause inflated profits during deflation.
True False
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96. 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 False
97. Asset utilization ratios relate balance sheet assets to income statement sales.
True False
98. A firm with heavy long-term debt can benefit during inflationary times, as debt can be repaid
with "cheaper" dollars.
True False
99. During disinflation, stock prices tend to go up because the investor's required rate of return goes
down.
True False
100.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 False
101.Return on equity for a very risky firm should be higher than return on equity for a less risky firm.
True False
102.The current ratio is a more severe test of a firm's liquidity than the quick ratio.
True False
103.Asset utilization ratios can be used to measure the effectiveness of a firm's managers.
True False
104.LIFO inventory valuation is responsible for much of the inventory profits caused by inflation.
True False
105.Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and
earning power.
True False
106.Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets, but
not a combination of both.
True False
107.Intangible assets are becoming an important part of the assets in company financial statements because
accountants are recognizing the growing impact of brand names.
True False
108.Industries most sensitive to inflation-induced profits are those with cyclical products such as lumber,
copper, etc.
True False
109.The use of capital assets will affect the equity multiplier.
True False
110.Receivables turnover is the reciprocal of the collection period times 365.
True False
111.Return on equity (ROE) will not change if the firm increases its use of debt.
True False
112.Big Bath Accounting is the tendency of firms to write off significant portions of assets during "troubled"
times with the effect of allowing management to start over when times get better.
True False
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113."Big baths" are usually taken after a corporate reorganization.
True False
114.Accrual accounting can result in wide variations in operating result within an industry.
True False
115.Match each key term with its most correct definition statement.
1. asset
A system of including inventory into cost of goods sold _
utilization
in which the items purchased last are written off first. __
ratios
_
2. replacement
A phantom source of profit that can mislead even the _
costs
most alert analysts. __
_
3. LIFO
A result of an inflationary economy in which old stocks _
of goods are sold at large profits. __
_
4. liquidity
A method of study that breaks down return on assets _
ratios
between the profit margin and asset turnover. __
_
Ratios that measure the speed at which the firm is _
5. inventory
profits
turning over its assets. __
_
6. inflation
Ratios that measure the firm's ability to pay off short- _
term obligations as they come due. __
_
7. DuPont
A system that includes inventory into cost of goods sold _
System of ratio
in which the items purchased first are written off first. __
analysis
_
8. profitability
A group of ratios that indicates to what extent a firm has _
ratios
borrowed funds and how prudently these funds are being__
managed. _
9. fixed charge
Costs incurred if the present asset base were _
coverage
repurchased at current prices. __
_
10. times
The ratios that measure return on sales, assets and _
interest earned
invested capital of the firm. __
_
11. trend
Analysis of performance over a number of years that is _
analysis
made to ascertain significant patterns. __
_
12. FIFO
Measures the firm's ability to meet all fixed obligations. _
__
_
13. debt
Indicates the strength of the firm regarding its coverage _
utilization
of interest payments. __
ratios
_
116.What are the 3 main uses of financial ratios?
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117.Return on equity (ROE) indicates a return to the owners of the firm and is closely followed by investment
analysts. What 4 deficiencies does this ratio have?
118.As defined by the text, list each of the 3 profitability ratios and explain the information they provide
about a firm.
119.As defined by the text, list each of the 8 asset utilization ratios and explain the information they provide
about a firm.
120.As defined by the text, list each of the 2 liquidity ratios and explain the information they provide about a
firm.
121.As defined by the text, list each of the 3 debt utilization ratios and explain the information they provide
about a firm.
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122.Complete the following balance sheet for the Range Company using the following information:
Debt to Assets = 60%
Quick Ratio = 1.1
Asset Turnover = 5x
Capital Asset Turnover = 12.037x
Current Ratio = 2
Average Collection Period = 17.0708 days
Assume all sales are on credit.
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123.Given the balance sheet and income statement for Simmons Maintenance Company, compute the ratios
below. The "right answer" refers to the question of whether a particular ratio for Simmons is better or
worse than the industry average.
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124.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) Shareholders' equity
F) Return on equity
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3 Key
1.
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 the other answers are correct
Block - Chapter 03 #1
Difficulty: Easy
Gradable: automatic
Learning Objective: 3
Learning Objective: 4
Type: Concept
2.
Industries most sensitive to inflation-induced profits are those with
A. seasonal products.
B. cyclical products.
C. consumer products.
D. high-profit products.
Block - Chapter 03 #2
Difficulty: Easy
Gradable: automatic
Learning Objective: 6
Type: Memory
3.
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
Block - Chapter 03 #3
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
4.
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. two of the answers are correct.
Block - Chapter 03 #4
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
5.
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.
Block - Chapter 03 #5
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
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6.
Which of the following is not an asset utilization ratio?
A. Inventory turnover
B. Return on assets
C. Capital asset turnover
D. Average collection period
Block - Chapter 03 #6
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
7.
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 capital assets
Block - Chapter 03 #7
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
8.
Total asset turnover indicates the firm's
A. liquidity.
B. debt position.
C. ability to use its assets to generate sales.
D. profitability.
Block - Chapter 03 #8
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Memory
9.
A short-term creditor would be most interested in
A. profitability ratios.
B. asset utilization ratios.
C. liquidity ratios.
D. debt utilization ratios.
Block - Chapter 03 #9
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
10.
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.
Block - Chapter 03 #10
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
11.
ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,285,000.
What is the balance in accounts receivable at year-end?
A. $54,750
B. $109,500
C. $540,000
D. $547,500
Block - Chapter 03 #11
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
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12.
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. 4.00x
C. 3.50x
D. 2.33x
Block - Chapter 03 #12
Difficulty: Hard
Gradable: automatic
Learning Objective: 1
Type: Concept
13.
A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The
firm's capital asset turnover is
A. 3.0x
B. 12.0x
C. 2.4x
D. 5.0x
Block - Chapter 03 #13
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
14.
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 shareholders.
D. measures the firm's ability to generate a profit on sales.
Block - Chapter 03 #14
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
15.
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 the other answers are correct
Block - Chapter 03 #15
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
16.
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 the other answers are correct
Block - Chapter 03 #16
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
17.
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 the other answers are correct
D. None of the other answers are correct
Block - Chapter 03 #17
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
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18.
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 the other answers are correct
Block - Chapter 03 #18
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
19.
A quick ratio 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.
Block - Chapter 03 #19
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
20.
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 the other answers are correct
Block - Chapter 03 #20
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
21.
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 = 1.0
Block - Chapter 03 #21
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
22.
The Bubba Corp. had net income 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%
Block - Chapter 03 #22
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
23.
XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the
sales figure for the year?
A. $60,000
B. $6,000,000
C. $7,200,000
D. None of the other answers are correct
Block - Chapter 03 #23
Difficulty: Hard
Gradable: automatic
Learning Objective: 1
Type: Concept
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24.
A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders' equity is
$900,000. What is the total debt to asset ratio?
A. 45%
B. 40%
C. 55%
D. None of the other answers are correct
Block - Chapter 03 #24
Difficulty: Hard
Gradable: automatic
Learning Objective: 1
Type: Concept
25.
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
Block - Chapter 03 #25
Difficulty: Hard
Gradable: automatic
Learning Objective: 1
Type: Concept
26.
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
Block - Chapter 03 #26
Difficulty: Hard
Gradable: automatic
Learning Objective: 1
Type: Concept
27.
If government bonds pay 8.5% interest and CDIC insured savings accounts pay 5.5% interest,
shareholders in a moderately risky firm would expect return-on-equity values of
A. 5.5%.
B. 8.5%.
C. 12%.
D. above 8.5%, but the exact amount is uncertain.
Block - Chapter 03 #27
Difficulty: Medium
Gradable: automatic
Learning Objective: 3
Type: Concept
28.
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.
Block - Chapter 03 #28
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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29.
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.
Block - Chapter 03 #29
Difficulty: Medium
Gradable: automatic
Learning Objective: 3
Type: Concept
30.
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 the other answers are correct
Block - Chapter 03 #30
Difficulty: Medium
Gradable: automatic
Learning Objective: 3
Type: Concept
31.
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.
Block - Chapter 03 #31
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
32.
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)
Block - Chapter 03 #32
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
33.
Which industry places the most value on intangible assets?
A. professional services
B. manufacturing
C. production
D. all of the other answers are correct
Block - Chapter 03 #33
Difficulty: Medium
Gradable: automatic
Learning Objective: 3
Type: Concept
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Block - Chapter 03
34.
Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately
A.
B.
C.
D.
19.5%.
25%.
29%.
34%.
Block - Chapter 03 #34
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
35.
The firm's average collection period is
A. 31 days.
B. 25 days.
C. 12 days.
D. 20 days.
Block - Chapter 03 #35
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
36.
Times interest earned for Megaframe Computer is
A. 2x.
B. 5x.
C. 4x.
D. 10x.
Block - Chapter 03 #36
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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37.
Megaframe's quick ratio is
A. 1:1.
B. 1:2.
C. 1.6:1.
D. 3:1.
Block - Chapter 03 #37
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
38.
Megaframe's current ratio is
A. 1.9:1.
B. .6:1.
C. 1:1.
D. .86:1.
Block - Chapter 03 #38
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
39.
The firm's debt to asset ratio is
A. 56.1%.
B. 75.61%.
C. 80.49%.
D. None of the other answers are correct
Block - Chapter 03 #39
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
40.
What is Megaframe Computer's total asset turnover?
A. 3.680x.
B. 3.18x.
C. 2x.
D. 1.71x.
Block - Chapter 03 #40
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
41.
Compute Megaframe's after tax profit margin.
A. 10.0%
B. 14.29%
C. 11.43%
D. 46.34%
Block - Chapter 03 #41
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
42.
The firm's return on equity is
A. 44.44%.
B. 80.00%.
C. 50.05%.
D. 100.0%.
Block - Chapter 03 #42
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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43.
The firm's receivable turnover is
A. 4.4x.
B. 10x.
C. 11.67x.
D. 14.4x.
Block - Chapter 03 #43
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
44.
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.
Block - Chapter 03 #44
Difficulty: Easy
Gradable: automatic
Learning Objective: 4
Type: Concept
45.
An increasing average collection period indicates
A. the firm is generating more income.
B. accounts receivable is going down.
C. the company is becoming more efficient in its collection policy.
D. the company is becoming less efficient in its collection policy.
Block - Chapter 03 #45
Difficulty: Easy
Gradable: automatic
Learning Objective: 4
Type: Concept
46.
A decreasing average collection period could be associated with
A. increasing sales.
B. decreasing sales.
C. decreasing accounts receivable
D. a and c.
Block - Chapter 03 #46
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
47.
Disinflation as compared to inflation would normally be good for investments in
A. bonds.
B. gold.
C. collectible antiques.
D. text books.
Block - Chapter 03 #47
Difficulty: Easy
Gradable: automatic
Learning Objective: 4
Type: Concept
48.
A company experiencing rapid price increases for its product would take the most conservative
approach by using
A. FIFO accounting.
B. LIFO accounting.
C. average cost accounting.
D. a or c.
Block - Chapter 03 #48
Difficulty: Easy
Gradable: automatic
Learning Objective: 6
Type: Concept
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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49.
Historical cost based amortization tends to ________ when there is inflation.
A. lower taxes
B. decrease profits
C. increase profits
D. increase assets.
Block - Chapter 03 #49
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
50.
If lease payments are reduced.
A. times interest earned goes up.
B. fixed charge coverage goes up.
C. fixed charge coverage stays the same.
D. fixed charge coverage goes down.
Block - Chapter 03 #50
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
51.
A large extraordinary loss has what effect on cost of goods sold?
A. It raises it.
B. It lowers it.
C. It has no effect.
D. Need more information.
Block - Chapter 03 #51
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
52.
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.
Block - Chapter 03 #52
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
53.
Which of the following is not a profitability ratio?
A. profit margin
B. return on assets
C. return on equity
D. capital asset turnover
Block - Chapter 03 #53
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Memory
54.
Which of the following is not an asset utilization ratio?
A. profit margin
B. inventory turnover
C. total asset turnover
D. capital asset turnover
Block - Chapter 03 #54
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Memory
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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55.
Which of the following is not a debt utilization ratio?
A. debt to total assets
B. times interest earned
C. current ratio
D. fixed charge coverage
Block - Chapter 03 #55
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Memory
56.
According the DuPont system, which of the following is not a factor in achieving a satisfactory return
on assets?
A. use of debt
B. low inventory levels
C. rapid turnover of assets
D. high profit margins
Block - Chapter 03 #56
Difficulty: Easy
Gradable: automatic
Learning Objective: 2
Type: Memory
57.
A firm has current assets of $150,000 and total assets of $750,000. The firm's sales are $1,800,000.
The firm's capital asset turnover is
A. 3.0x
B. 12.0x
C. 2.4x
D. 5.0x
Block - Chapter 03 #57
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
58.
Return on assets (ROA) can be distorted by
A. interest costs.
B. dividends.
C. asset historical valuation.
D. all of the other answers are correct.
Block - Chapter 03 #58
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
59.
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. none of the above.
Block - Chapter 03 #59
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
60.
Which of the following is not an asset utilization ratio?
A. Receivable turnover
B. Return on equity
C. Accounts payable turnover
D. Average collection period
Block - Chapter 03 #60
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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61.
Flounders Co. has an average collection period of 60 days. Total credit sales for the year were
$9,855,000. What is the balance in accounts receivable at year-end?
A. $164,250
B. $328,500
C. $1,620,000
D. $1,642,500
Block - Chapter 03 #61
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
62.
A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is
$60,000. What is the firm's fixed charge coverage?
A. 4.00x
B. 5.00x
C. 3.33x
D. 1.71x
Block - Chapter 03 #62
Difficulty: Hard
Gradable: automatic
Learning Objective: 1
Type: Concept
63.
A firm's long term assets = $150,000, total assets = $400,000, inventory = $50,000, and current
liabilities = $100,000.
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
Block - Chapter 03 #63
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
64.
If the company's accounts receivable turnover is decreasing, the average collection period
A. is going up.
B. is going down.
C. could be moving in either direction.
D. is going down slightly.
Block - Chapter 03 #64
Difficulty: Easy
Gradable: automatic
Learning Objective: 4
Type: Concept
65.
A decreasing average collection period indicates
A. the firm is generating more income.
B. accounts receivable is going down.
C. the company is becoming more efficient in its collection policy.
D. the company is becoming less efficient in its collection policy.
Block - Chapter 03 #65
Difficulty: Easy
Gradable: automatic
Learning Objective: 4
Type: Concept
66.
An increasing average collection period could be associated with
A. Decreasing.
B. Increasing.
C. increasing accounts receivable.
D. a and c.
Block - Chapter 03 #66
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
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67.
A firm has a Debt-to-Asset ratio of 35% and Total Assets of $350,000. What is the firm's Total Debt?
A.
B.
C.
D.
$122,500
$650,000
$100,000
$60,000
Block - Chapter 03 #67
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
68.
Juniper, Ltd. report total sales of $10,000,000 in the prior year. If these sales were 15.50X total capital
assets what was the company's capital asset position in the year?
A. $15,000,000
B. $155,000,000
C. $645,161
D. None of the above
Block - Chapter 03 #68
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
69.
Jones and Co., reported average receivables of $550,000 in its most recent annual report. If total credit
sales were $3,000,000 what was Jones and Co.'s average collection period?
A. 66 days
B. 29 days
C. 82 days
D. 21 days
Block - Chapter 03 #69
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
70.
If a company's profit margin was 32%, what were its reported sales if its reported net income was
$650,000?
A. $10,000,000
B. $9,758,982
C. $1,008,332
D. $2,031,250
Block - Chapter 03 #70
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
71.
If a company has a return on investment of 17%, and its equity multiplier is 1.75, it ROE would be
_______?
A. 64.75%
B. 29.75%
C. 18.25%
D. 16.50%
Block - Chapter 03 #71
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
72.
Absolute values taken from financial statements are more useful than relative values.
FALSE
Block - Chapter 03 #72
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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73.
Heavy use of long-term debt can be of benefit to a firm.
TRUE
Block - Chapter 03 #73
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
74.
The stock market tends to move up when inflation goes up.
FALSE
Block - Chapter 03 #74
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
75.
Under generally acceptable accounting principles, two companies with identical operating results may
not report identical net incomes.
TRUE
Block - Chapter 03 #75
Difficulty: Medium
Gradable: automatic
Learning Objective: 3
Type: Concept
76.
A current ratio of 2 to 1 is always acceptable, for a company in any industry.
FALSE
Block - Chapter 03 #76
Difficulty: Medium
Gradable: automatic
Learning Objective: 3
Type: Concept
77.
In analyzing ratios, the age of the firm's assets need not be considered.
FALSE
Block - Chapter 03 #77
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
78.
As long as prices continue to rise faster than costs in an inflationary environment, reported profits will
generally continue to rise.
TRUE
Block - Chapter 03 #78
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
79.
To compute the quick ratio, accounts receivable are not included in current assets.
FALSE
Block - Chapter 03 #79
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
80.
Ratios are used to compare different firms in the same industry.
TRUE
Block - Chapter 03 #80
Difficulty: Easy
Gradable: automatic
Learning Objective: 3
Type: Concept
81.
Liquidity ratios indicate how fast a firm can generate cash to pay bills.
TRUE
Block - Chapter 03 #81
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Memory
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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82.
Asset utilization ratios describe how capital is being utilized to buy assets.
FALSE
Block - Chapter 03 #82
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
83.
Return on equity will be higher than return on assets if there is debt in the capital structure.
TRUE
Block - Chapter 03 #83
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
84.
The DuPont system of profitability analysis emphasizes that profit generated by assets can be derived
by various combinations of profit margins and asset turnover.
TRUE
Block - Chapter 03 #84
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
85.
Ratios are not distorted by inflation.
FALSE
Block - Chapter 03 #85
Difficulty: Easy
Gradable: automatic
Learning Objective: 6
Type: Concept
86.
Profitability ratios are distorted by inflation because profits are stated in current dollars and assets and
equity are stated in historical dollars.
TRUE
Block - Chapter 03 #86
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
87.
Higher debt utilization ratios will always increase a firm's return on equity given a positive return on
assets.
TRUE
Block - Chapter 03 #87
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
88.
The term "inventory profits" refers to profits made in the process of selling finished goods at prices
higher than their cost of goods sold.
TRUE
Block - Chapter 03 #88
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
89.
Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales,
total assets, and invested capital.
TRUE
Block - Chapter 03 #89
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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90.
Asset utilization ratios measure the returns on various assets such as return on total assets.
FALSE
Block - Chapter 03 #90
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
91.
A banker or trade creditor is most concerned about a firm's profitability ratios.
FALSE
Block - Chapter 03 #91
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
92.
Ratios are only useful for those areas of business that involve investment decisions.
TRUE
Block - Chapter 03 #92
Difficulty: Easy
Gradable: automatic
Learning Objective: 4
Type: Concept
93.
LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue.
TRUE
Block - Chapter 03 #93
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
94.
Financial ratios are used to weigh and evaluate the operational performance of the firm.
TRUE
Block - Chapter 03 #94
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
95.
FIFO will cause inflated profits during deflation.
FALSE
Block - Chapter 03 #95
Difficulty: Hard
Gradable: automatic
Learning Objective: 6
Type: Concept
96.
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
Block - Chapter 03 #96
Difficulty: Easy
Gradable: automatic
Learning Objective: 3
Type: Concept
97.
Asset utilization ratios relate balance sheet assets to income statement sales.
TRUE
Block - Chapter 03 #97
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
98.
A firm with heavy long-term debt can benefit during inflationary times, as debt can be repaid
with "cheaper" dollars.
TRUE
Block - Chapter 03 #98
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
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99.
During disinflation, stock prices tend to go up because the investor's required rate of return goes
down.
TRUE
Block - Chapter 03 #99
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
100.
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
Block - Chapter 03 #100
Difficulty: Medium
Gradable: automatic
Learning Objective: 6
Type: Concept
101.
Return on equity for a very risky firm should be higher than return on equity for a less risky firm.
FALSE
Block - Chapter 03 #101
Difficulty: Medium
Gradable: automatic
Learning Objective: 3
Type: Concept
102.
The current ratio is a more severe test of a firm's liquidity than the quick ratio.
FALSE
Block - Chapter 03 #102
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
103.
Asset utilization ratios can be used to measure the effectiveness of a firm's managers.
TRUE
Block - Chapter 03 #103
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
104.
LIFO inventory valuation is responsible for much of the inventory profits caused by inflation.
FALSE
Block - Chapter 03 #104
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
105.
Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and
earning power.
TRUE
Block - Chapter 03 #105
Difficulty: Medium
Gradable: automatic
Learning Objective: 4
Type: Concept
106.
Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets,
but not a combination of both.
FALSE
Block - Chapter 03 #106
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
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107.
Intangible assets are becoming an important part of the assets in company financial statements
because accountants are recognizing the growing impact of brand names.
FALSE
Block - Chapter 03 #107
Difficulty: Medium
Gradable: automatic
Learning Objective: 2
Type: Concept
108.
Industries most sensitive to inflation-induced profits are those with cyclical products such as lumber,
copper, etc.
TRUE
Block - Chapter 03 #108
Difficulty: Easy
Gradable: automatic
Learning Objective: 3
Type: Concept
109.
The use of capital assets will affect the equity multiplier.
FALSE
Block - Chapter 03 #109
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Concept
110.
Receivables turnover is the reciprocal of the collection period times 365.
TRUE
Block - Chapter 03 #110
Difficulty: Easy
Gradable: automatic
Learning Objective: 1
Type: Memory
111.
Return on equity (ROE) will not change if the firm increases its use of debt.
FALSE
Block - Chapter 03 #111
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Type: Concept
112.
Big Bath Accounting is the tendency of firms to write off significant portions of assets
during "troubled" times with the effect of allowing management to start over when times get
better.
TRUE
Block - Chapter 03 #112
Difficulty: Easy
Gradable: automatic
Learning Objective: 5
Type: Concept
113.
"Big baths" are usually taken after a corporate reorganization.
FALSE
Block - Chapter 03 #113
Difficulty: Easy
Gradable: automatic
Learning Objective: 5
Type: Concept
114.
Accrual accounting can result in wide variations in operating result within an industry.
TRUE
Block - Chapter 03 #114
Difficulty: Easy
Gradable: automatic
Learning Objective: 5
Type: Concept
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115.
Match each key term with its most correct definition statement.
A system of including inventory into cost of goods sold
1. asset
in which the items purchased last are written off first. 3
utilization
ratios
2. replacement
A phantom source of profit that can mislead even the
costs
most alert analysts. 6
3. LIFO
A result of an inflationary economy in which old
stocks of goods are sold at large profits. 5
4. liquidity
A method of study that breaks down return on assets
ratios
between the profit margin and asset turnover. 7
5. inventory
Ratios that measure the speed at which the firm is
profits
turning over its assets. 1
6. inflation
Ratios that measure the firm's ability to pay off shortterm obligations as they come due. 4
7. DuPont
A system that includes inventory into cost of goods
System of ratio
sold in which the items purchased first are written off1
analysis
first. 2
8. profitability
A group of ratios that indicates to what extent a firm
ratios
has borrowed funds and how prudently these funds are1
being managed. 3
9. fixed charge
Costs incurred if the present asset base were
coverage
repurchased at current prices. 2
10. times
The ratios that measure return on sales, assets and
interest earned
invested capital of the firm. 8
11. trend
Analysis of performance over a number of years that is
analysis
made to ascertain significant patterns. 1
1
12. FIFO
Measures the firm's ability to meet all fixed
obligations. 9
13. debt
Indicates the strength of the firm regarding its coverage
utilization
of interest payments. 1
ratios
0
Block - Chapter 03 #115
Difficulty: Medium
Gradable: automatic
Learning Objective: 1
Learning Objective: 2
Type: Memory
116.
What are the 3 main uses of financial ratios?
Financial ratios are used to
• Weigh and evaluate the operating performance of the firm now and for its past
• Judge comparative performance between firms
• Determine relative as opposed to absolute performance
Block - Chapter 03 #116
Difficulty: Easy
Gradable: manual
Learning Objective: 1
Type: Memory
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
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117.
Return on equity (ROE) indicates a return to the owners of the firm and is closely followed by
investment analysts. What 4 deficiencies does this ratio have?
Focuses on past results not future expected results
• Does not focus on share price, the goal of the firm
• Relies on book value and not the actual market value of the investment
• Doesn't capture the firm's assumed risk to generate earnings
Block - Chapter 03 #117
Difficulty: Medium
Gradable: manual
Learning Objective: 3
Type: Memory
118.
As defined by the text, list each of the 3 profitability ratios and explain the information they provide
about a firm.
Profitability ratios:
Profit margin, return on assets (investment), return on equity (common shareholders)
Profitability ratios measure return (profit) on sales, total assets, and shareholders' capital
• Examine the effective employment of resources
• Are usually dependent on an adequate sales level
• Influence share price performance, and thus are important to equity investors and security analysts
Block - Chapter 03 #118
Difficulty: Hard
Gradable: manual
Learning Objective: 6
Type: Memory
119.
As defined by the text, list each of the 8 asset utilization ratios and explain the information they
provide about a firm.
Asset utilization ratios:
Receivable turnover, average collection period (days sales outstanding), inventory turnover, inventory
holding period, accounts payable turnover, accounts payable period, capital asset turnover, total asset
turnover
• Measure the speed or efficiency of turning over assets constructing the cash conversion cycle
• Identify the times per year inventory is sold, the accounts receivable collected, or the productivity of
capital assets in generating sales
• Are a primary responsibility of management
Block - Chapter 03 #119
Difficulty: Hard
Gradable: manual
Learning Objective: 6
Type: Memory
Downloaded by Richard Lemoi (abhgdnj45@gmail.com)
lOMoARcPSD|6567680
120.
As defined by the text, list each of the 2 liquidity ratios and explain the information they provide about
a firm.
Current ratio, quick ratio
• Emphasize the ability to pay off short-term obligations as they fall due
• Quickly impact day-to-day operations
• Focus bankers and creditors on the ability to generate timely cash flows
Block - Chapter 03 #120
Difficulty: Hard
Gradable: manual
Learning Objective: 6
Type: Memory
121.
As defined by the text, list each of the 3 debt utilization ratios and explain the information they
provide about a firm.
Debt utilization ratios.
Debt to total assets, times interest earned, fixed charge coverage
• Evaluate the overall debt position of the firm in light of the asset base and earning power
• Are examined by debt holders in light of security behind debt obligations
Block - Chapter 03 #121
Difficulty: Hard
Gradable: manual
Learning Objective: 6
Type: Memory
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