Question 1

Considered alone, which of the following would increase a company's current ratio?

Accepted Answer

A)   An increase in net fixed assets.
B)   An increase in accrued liabilities.
C)   An increase in notes payable.
D)   An increase in accounts receivable.
E)   An increase in accounts payable.F) C) and E)
G) A) and B)

Question 2

Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were
$12,500. What was the firm's times-interest-earned (TIE)  ratio?

Accepted Answer

A)   4.72
B)   4.97
C)   5.23
D)   5.51
E)   5.80F) A) and D)
G) A) and C)

Question 3

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Accepted Answer

A) True 
 B)False

Question 4

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   A reduction in inventories would have no effect on the current ratio.
B)   An increase in inventories would have no effect on the current ratio.
C)   If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
D)   A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.
E)   If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.F) A) and D)
G) C) and D)

Question 6

Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.

Accepted Answer

A) True 
 B)False

Question 7

Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (which is equal to its total invested capital)  to be $200,000, and its tax rate to be 35%. Under Plan A it would finance the firm using 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.0. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, total invested capital, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?

Accepted Answer

A)   3.71%
B)   4.08%
C)   4.48%
D)   4.93%
E)   5.18%F) C) and E)
G) A) and E)

Question 8

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Accepted Answer

A)   The TIE declines.
B)   The DSO increases.
C)   The quick ratio increases.
D)   The current ratio declines.
E)   The total assets turnover decreases.F) A) and C)
G) B) and E)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   If a security analyst saw that a firm's days' sales outstanding (DSO)  was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength.
B)   A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms.
C)   There is no relationship between the days' sales outstanding (DSO)  and the average collection period (ACP) . These ratios measure entirely different things.
D)   A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
E)   If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.F) B) and D)
G) None of the above

Question 10

Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

Accepted Answer

A) True 
 B)False

Question 11

Refer to Exhibit 4.1. What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

Accepted Answer

A)   39.07
B)   41.13
C)   43.29
D)   45.57
E)   47.97F) B) and E)
G) None of the above

Question 12

Refer to Exhibit 4.1. What is the firm's BEP?

Accepted Answer

A)   7.50%
B)   7.90%
C)   8.31%
D)   8.73%
E)   9.16%F) A) and D)
G) None of the above

Question 13

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Accepted Answer

A)   Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
B)   Use cash to repurchase some of the company's own stock.
C)   Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
D)   Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E)   Use cash to increase inventory holdings.F) C) and D)
G) A) and B)

Question 14

A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.

Accepted Answer

A) True 
 B)False

Question 15

Safeco's current assets total to $20 million versus $10 million of current liabilities, while Risco's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions?

Accepted Answer

A)   The transactions would improve Safeco's financial strength as measured by its current ratio but lower Risco's current ratio.
B)   The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
C)   The transactions would have no effect on the firm' financial strength as measured by their current ratios.
D)   The transactions would lower both firm' financial strength as measured by their current ratios.
E)   The transactions would improve both firms' financial strength as measured by their current ratios.F) B) and D)
G) D) and E)

Question 16

Refer to Exhibit 4.1. What is the firm's operating margin?

Accepted Answer

A)   3.12%
B)   3.46%
C)   3.85%
D)   4.28%
E)   4.75%F) A) and B)
G) C) and D)

Question 17

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Accepted Answer

A) True 
 B)False

Question 18

The operating margin measures operating income per dollar of assets.

Accepted Answer

A) True 
 B)False

Question 19

Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

Accepted Answer

A) True 
 B)False

Question 20

Refer to Exhibit 4.1. What is the firm's return on invested capital?

Accepted Answer

A)   4.25%
B)   5.67%
C)   7.72%
D)   9.33%
E)   11.87%F) B) and E)
G) A) and D)

Exam 4: Analysis of Financial Statements

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Correct Answer
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Considered alone, which of the following would increase a company's current ratio?

Correct Answer
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Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio?

Correct Answer
verified

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Correct Answer
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Correct Answer
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Refer to Exhibit 4.1. What is the firm's BEP?

Correct Answer
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Refer to Exhibit 4.1. What is the firm's operating margin?

Correct Answer
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Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Correct Answer
verified

A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.

Correct Answer
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Refer to Exhibit 4.1. What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

Correct Answer
verified

Correct Answer
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In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.

Correct Answer
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Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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The operating margin measures operating income per dollar of assets.

Correct Answer
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Refer to Exhibit 4.1. What is the firm's return on invested capital?

Correct Answer
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Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.

Correct Answer
verified

Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

Correct Answer
verified

Exam 4: Analysis of Financial Statements

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Correct AnswerverifiedShow Answer

Considered alone, which of the following would increase a company's current ratio?

Correct AnswerverifiedShow Answer

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio?

Correct AnswerverifiedShow Answer

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's BEP?

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's operating margin?

Correct AnswerverifiedShow Answer

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

Correct AnswerverifiedShow Answer

A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.

Correct AnswerverifiedShow Answer

Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The operating margin measures operating income per dollar of assets.

Correct AnswerverifiedShow Answer

Refer to Exhibit 4.1. What is the firm's return on invested capital?

Correct AnswerverifiedShow Answer

Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.

Correct AnswerverifiedShow Answer

Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

Correct AnswerverifiedShow Answer

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