Chapter 14: Financial Analysis and Long-Term Planning
Multiple Choice
1. How can financial statement analysis affect the nonfinancial operations at a firm?
a. They predict the future earnings at the firm so that the financial statement analysis may
indicate that a complete overhaul of the hiring system is necessary.
b. A salesperson could lose a new customer and a sales commission should a check of the
customer’s financial statements lead to the conclusion that the customer is a bad credit risk.
c. They predict the future earnings at the firm so that the internal documents based on this
analysis inform division managers of the status of their divisions and product lines and
determine new policies.
d. They predict the future earnings and dividends at the firm so that the analysis could
influence the company’s choice of target customers changing the sales objective.
Answer: b
Level: medium
Section: Financial Statement Analysis
2. Ratios are constructed by ___________________.
a. sending the data to the manager.
b. sending them to the retail team.
c. dividing various financial statement numbers into one another.
d. evaluating the strengths and weaknesses of the firm.
Answer: c
Level: medium
Section: Ratio Analysis of Balance Sheet and Income Statement
3. Which of the following is not a practical problem that limits the use of industry comparative
analysis?
a. A firm may be involved in more than one type of industry.
b. Accounting standards often differ among firms in an industry.
c. Firms may have operations in different countries using different accounting standards.
d. Some users of financial analysis may focus on short term liquidity while others would
focus on long term profitability.
Answer: d
Level: difficult
Section: Ratio Analysis of Balance Sheet and Income Statement
4. Which of the following is not a type of financial ratio that gathers information from the
income statement and balance sheet?
a. market value ratios
b. liquidity ratios
c. financial leverage ratios
d. profitability management ratios
Answer: a
Level: difficult
Section: Types of Financial Ratios
5. ______________ indicate the ability to meet short term obligations to creditors as they mature
or come due.
a. Profitability management ratios
b. Liquidity ratios
c. Market value ratios
d. Financial leverage ratios
Answer: b
Level: medium
Section: Types of Financial Ratios
6. Part of Walgreens’ successes can be traced to ________________ and until recently superior
asset management.
a. highly populated locations
b. good cost control
c. low overhead
d. balanced liquidity ratios
Answer: b
Level: difficult
Section: Summary of Ratio Analysis for Walgreens
7. ________________ calculates a firm’s past and ongoing financial performance relative to
other firms in the same industry or a firm’s own performance over time.
a. A financial analyst
b. A financial planner
c. A credit analyst
d. A market analyst
Answer: a
Level: easy
Section: Career Opportunities in Finance
8. Which formula indicates the firm’s ability to generate returns on its sales, assets, and equity?
a. profitability management ratios
b. liquidity ratios
c. financial leverage ratios
d. profitability ratios
Answer: d
Level: medium
Section: Profitability Ratios and Analysis
9. _______________ indicate the willingness of investors to value a firm in the marketplace
relative to financial statement values.
a. Liquidity ratios
b. Market value ratios
c. Profitability ratios
d. Financial leverage ratios
Answer: b
Level: difficult
Section: Market Value Ratios and Analysis
10. Approximately _______________ of all firms are dissolved less than two years after starting
operations.
a. one tenth
b. one fourth
c. one third
d. one half
Answer: d
Level: easy
Section: Small Business Practice
11. Supermarkets generate profits in all these ways except ________________.
a. Supermarkets generally have low asset turnover ratios.
b. Many of their goods are sold for pennies above cost.
c. Much of the profit is generated by rapid turnover.
d. The shelves are restocked daily with new items taking the place of items that were
purchased.
Answer: a
Level: medium
Section: Du Pont Method of Ratio Analysis
12. Why does a manager at an established firm conduct financial ratio analysis of past
performances?
a. To analyze the performance characteristics of other firms in the same industry before
making plans
b. To aid in the development of realistic future plans
c. To establish the initial business plan
d. Managers at established firms do not conduct financial ratio analysis because the firm
is already established.
Answer: b
Level: medium
Section: Long Term Financial Planning
13. Sales forecasts are the basis for written financial plans referred to as ______________.
a. good cost control
b. liquidity ratios
c. market analysis
d. budgets
Answer: d
Level: easy
Section: Percentage of Sales Technique
14. The relationship of assets and sales is shown in the _____________________.
a. profitability ratio
b. total assets turnover ratio
c. liquidity ratios
d. market analysis
Answer: b
Level: easy
Section: Asset Investment Requirements
15. ___________________ can be used to estimate how many units of product must be sold to
have zero profits.
a. Cost-volume profit analysis
b. Break-even analysis
c. Market analysis
d. Operating income analysis
Answer: b
Level: medium
Section: Cost Volume Profit Analysis