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86 Cards in this Set

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A firm has a higher quick (or acid test) ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry.B. the firm is more likely to avoid insolvency in the short run than other firms in the industry.C. the firm may be less profitable than other firms in the industry.D. the firm has a higher P/E ratio than other firms in the industry and the firm is more likely to avoid insolvency in the short run than other firms in the industry.E. the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry.

E. the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry.

A firm has a lower quick (or acid test) ratio than the industry average, which implies A. the firm has a lower P/E ratio than other firms in the industry.B. the firm is less likely to avoid insolvency in the short run than other firms in the industry.C. the firm may be more profitable than other firms in the industry.D. the firm has a lower P/E ratio than other firms in the industry and the firm is less likely to avoid insolvency in the short run than other firms in the industry.E. the firm is less likely to avoid insolvency in the short run than other firms in the industry and the firm may be more profitable than other firms in the industry.

E. the firm is less likely to avoid insolvency in the short run than other firms in the industry and the firm may be more profitable than other firms in the industry.

An example of a liquidity ratio is A. fixed asset turnover.B. current ratio.C. acid test or quick ratio.D. fixed asset turnover and acid test or quick ratio.E. current ratio and acid test or quick ratio.

E. current ratio and acid test or quick ratio.

__________ provides a snapshot of the financial condition of the firm at a particular time. A. The balance sheetB. The income statementC. The statement of cash flowsD. All of the optionsE. None of the options

A. The balance sheet

__________ is a report of the cash flow generated by the firm's operations, investments and financial activities. A. The balance sheetB. The income statementC. The statement of cash flowsD. The auditor's statement of financial conditionE. None of the options

C. The statement of cash flows

A firm has a higher asset turnover ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry.B. the firm is more likely to avoid insolvency in the short run than other firms in the industry.C. the firm is more profitable than other firms in the industry.D. the firm is utilizing assets more efficiently than other firms in the industry.E. the firm has higher spending on new fixed assets than other firms in the industry.

D. the firm is utilizing assets more efficiently than other firms in the industry.

A firm has a lower asset turnover ratio than the industry average, which implies A. the firm has a lower P/E ratio than other firms in the industry.B. the firm is less likely to avoid insolvency in the short run than other firms in the industry.C. the firm is less profitable than other firms in the industry.D. the firm is utilizing assets less efficiently than other firms in the industry.E. the firm has lower spending on new fixed assets than other firms in the industry.

D. the firm is utilizing assets less efficiently than other firms in the industry

If you wish to compute economic earnings and are trying to decide how to account for inventory, A. FIFO is better than LIFO.B. LIFO is better than FIFO.C. FIFO and LIFO are equally good.D. FIFO and LIFO are equally bad.E. None of the options

B. LIFO is better than FIFO.

__________ is a summary of the profitability of the firm over a period of time such as a year. A. The balance sheetB. The income statementC. That statement of cash flowsD. The audit reportE. None of the options

B. The income statement

Over a period of 30 years or so, in managing investment funds, Benjamin Graham used the approach of investing in the stocks of companies where the stocks were trading at less than their working capital value. The average return from using this strategy was approximately A. 5%B. 10%.C. 15%.D. 20%.E. None of the options

D. 20%.

A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis, A. the original and restated P/E ratios were quite similar.B. the original and restated P/E ratios varied considerably.C. most variation was explained by tax differences.D. most firms were consistent in their treatment of goodwill.

B. the original and restated P/E ratios varied considerably

If the interest rate on debt is higher than ROA, a firm will __________ by increasing the use of debt in the capital structure. A. increase the ROEB. not change the ROEC. decrease the ROED. change the ROE in an indeterminable manner

C. decrease the ROE

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure. A. increase the ROEB. not change the ROEC. decrease the ROED. change the ROE in an indeterminable manner

A. increase the ROE

A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry.B. the firm is more likely to avoid insolvency in the short run than other firms in the industry.C. the firm is more profitable than other firms in the industry.D. the firm is utilizing its assets more efficiently than other firms in the industry.

A. the firm has a higher P/E ratio than other firms in the industry.

In periods of inflation, accounting depreciation is __________ relative to replacement cost and real economic income is________. A. overstated; overstatedB. overstated; understatedC. understated; overstatedD. understated; understatedE. correctly; correctly

C. understated; overstated

If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be A. greater than the ROE.B. equal to the ROE.C. less than the ROE.D. greater than zero, but it is impossible to determine how ROA will compare to ROE.E. negative in all cases.

A. greater than the ROE

A firm has a P/E ratio of 12 and a ROE of 13% and a market-to-book value of A. 0.64.B. 0.92.C. 1.08.D. 1.56.

D. 1.56.

Refer to the financial statements of Black Barn Company. The firm's current ratio for 2009 is A. 2.31.B. 1.87.C. 2.22.D. 2.46.

A. 2.31

Refer to the financial statements of Black Barn Company. The firm's quick ratio for 2009 is A. 1.69.B. 1.52.C. 1.23.D. 1.07.E. 1.00.

E. 1.00.

Refer to the financial statements of Black Barn Company. The firm's leverage ratio for 2009 is A. 1.65.B. 1.89.C. 2.64.D. 1.31.E. 1.56.

E. 1.56.

Refer to the financial statements of Black Barn Company. The firm's times interest earned ratio for 2009 is A. 8.86.B. 7.17.C. 9.66.D. 6.86.E. None of the options

A. 8.86.

Refer to the financial statements of Black Barn Company. The firm's average collection period for 2009 is A. 59.31.B. 55.05.C. 61.31.D. 49.05.E. None of the options

D. 49.05.

Refer to the financial statements of Black Barn Company. The firm's inventory turnover ratio for 2009 is A. 3.15.B. 3.63.C. 3.69.D. 2.58.E. 4.20.

A. 3.15.

Refer to the financial statements of Black Barn Company. The firm's fixed asset turnover ratio for 2009 is A. 2.04.B. 2.58.C. 2.97.D. 1.58.E. None of the options

B. 2.58

Refer to the financial statements of Black Barn Company. The firm's asset turnover ratio for 2009 is A. 1.79.B. 1.63.C. 1.34.D. 2.58.E. None of the options

C. 1.34

Refer to the financial statements of Black Barn Company. The firm's return on sales ratio for 2009 is A. 15.5%.B. 14.6%.C. 14.0%.D. 15.0%.E. 16.5%.

A. 15.5%.

Refer to the financial statements of Black Barn Company. The firm's return on equity ratio for 2009 is A. 16.88%.B. 15.63%.C. 14.00%.D. 15.00%.E. 16.24%.

A. 16.88%

Refer to the financial statements of Black Barn Company. The firm's P/E ratio for 2009 is A. 8.88.B. 7.63.C. 7.88.D. 7.32.

C. 7.88.

Refer to the financial statements of Black Barn Company. The firm's market to book value for 2009 is A. 1.13.B. 1.62.C. 1.00.D. 1.26.

D. 1.26.

A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is A. 0.3.B. 1.3.C. 2.3.D. 3.3.

D. 3.3.

A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%. The firm's ROE is A. 11.18%.B. 8.97%.C. 11.54%.D. 12.62%.

A. 11.18%

A firm has an ROE of -2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is A. 2%.B. 4%.C. 6%.D. 8%.E. None of the options

B. 4%.

A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is A. 4.2%.B. 5.2%.C. 6.2%.D. 7.2%.E. None of the options

D. 7.2%.

A measure of asset utilization is A. sales divided by working capital.B. return on total assets.C. return on equity capital.D. operating profit divided by sales.E. None of the options

B. return on total assets.

During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes A. higher reported sales.B. higher incomes taxes.C. lower ending inventory.D. higher incomes taxes and lower ending inventory.E. None of the options

B. higher incomes taxes.

Return on total assets is the product of A. interest rates and pre-tax profits.B. the debt-equity ratio and P/E ratio.C. the after-tax profit margin and the asset turnover ratio.D. sales and fixed assets.E. None of the options

C. the after-tax profit margin and the asset turnover ratio.

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm A. utilizes assets effectively.B. has too much equity in the capital structure.C. has relatively high current liabilities.D. has a relatively low dividend payout ratio.E. None of the options

C. has relatively high current liabilities.

A firm's current ratio is above the industry average; however, the firm's quick ratio is below the industry average. These ratios suggest that the firm A. has relatively more total current assets and even more inventory than other firms in the industry.B. is very efficient at managing inventories.C. has liquidity that is superior to the average firm in the industry.D. is near technical insolvency.

A. has relatively more total current assets and even more inventory than other firms in the industry.

Which of the following ratios gives information on the amount of profits reinvested in the firm over the years? A. Sales/total assetsB. Debt/total assetsC. Debt/equityD. Retained earnings/total assets

D. Retained earnings/total assets

Ferris Corp. wants to increase its current ratio from the present level of 1.5 when it closes the books next week. The action of __________ will have the desired effect. A. payment of current payables from cashB. sales of current marketable securities for cashC. write-down of impaired assetsD. delay of next payrollE. None of the options

A. payment of current payables from cash

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) ________current ratio than a firm using FIFO, and the difference will tend to __________ as time passes. A. higher; increaseB. higher; decreaseC. lower; decreaseD. lower; increaseE. identical; remain the same

D. lower; increase

Fundamental analysis uses A. earnings and dividends prospects.B. relative strength.C. price momentum.D. earnings and dividends prospects and relative strength.E. earnings and dividends prospects and price momentum.

A. earnings and dividends prospects.

__________ is a true statement. A. During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were usedB. During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were usedC. After inflation ends, distortion due to LIFO will disappear as inventory is soldD. During periods of inflation, LIFO overstates earnings relative to FIFO

A. During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were used

__________ is a false statement. A. During periods of inflation, LIFO makes the balance sheet less representative of the actual inventory values than if FIFO were usedB. During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were usedC. During periods of inflation, LIFO overstates earnings relative to FIFOD. During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used and LIFO overstates earnings relative to FIFOE. None of the options

D. During periods of inflation, FIFO makes the balance sheet less representative of actual inventory values than if LIFO were used and LIFO overstates earnings relative to FIFO

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income. A. understate; overstateB. understate; understateC. overstate; understateD. overstate; overstateE. There is no discernable pattern.

C. overstate; understate

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average? A. The firm's net profit margin is higher than the industry average.B. The firm's asset turnover is higher than the industry average.C. The firm's equity multiplier must be lower than the industry average.D. The firm's debt ratio is higher than the industry average.E. None of the options

D. The firm's debt ratio is higher than the industry average.

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is lower than the industry average? A. The firm pays lower interest on long-term debt than the average firm.B. The firm has more short-term debt than average.C. The firm has a high ratio of current assets/current liabilities.D. The firm has a high ratio of total cash flow/long term debt.E. None of the options

B. The firm has more short-term debt than average.

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average. A. The firm expanded plant and equipment in the past few yearsB. The firm makes less efficient use of assets than competing firmsC. The firm has a substantial amount of old plant and equipmentD. The firm uses straight-line depreciation

C. The firm has a substantial amount of old plant and equipment

Comparability problems arise because A. firms may use different generally accepted accounting principles.B. inflation may affect firms differently due to accounting conventions used.C. financial analysts do not know how to compare financial statements.D. firms may use different generally accepted accounting principles and inflation may affect firms differently due to accounting conventions used.E. firms may use different generally accepted accounting principles and financial analysts do not know how to compare financial statements.

D. firms may use different generally accepted accounting principles and inflation may affect firms differently due to accounting conventions used.

One problem with comparing financial ratios prepared by different reporting agencies is A. some agencies receive financial information later than others.B. agencies vary in their policies as to what is included in specific calculations.C. some agencies are careless in their reporting.D. some firms are more conservative in their accounting practices.E. None of the options

B. agencies vary in their policies as to what is included in specific calculations.

Refer to the financial statements of Midwest Tours. The firm's current ratio for 2009 is A. 1.82.B. 1.03.C. 1.30.D. 1.65.E. None of the options

C. 1.30.

Refer to the financial statements of Midwest Tours. The firm's quick ratio for 2009 is A. 1.71.B. 0.78.C. 0.85.D. 1.56.

C. 0.85.

Refer to the financial statements of Midwest Tours. The firm's leverage ratio for 2009 is A. 1.62.B. 1.56.C. 2.00.D. 2.42.E. 2.17.

C. 2.00.

Refer to the financial statements of Midwest Tours. The firm's times interest earned ratio for 2009 is A. 2.897.B. 2.719.C. 3.375.D. 3.462.

C. 3.375

Refer to the financial statements of Midwest Tours. The firm's average collection period for 2009 is A. 69.35.B. 69.73.C. 68.53.D. 67.77.E. 68.52.

A. 69.35.

Refer to the financial statements of Midwest Tours. The firm's inventory turnover ratio for 2009 is A. 2.86.B. 1.23.C. 5.96.D. 4.42.E. 4.86.

D. 4.42

Refer to the financial statements of Midwest Tours. The firm'sfixed asset turnover ratio for 2009 is A. 1.45. B. 1.63. C. 1.20. D. 1.58.

C. 1.20

Refer to the financial statements of Midwest Tours. The firm's asset turnover ratio for 2009 is A. 1.86.B. 0.63.C. 0.86.D. 1.63.

C. 0.86

Refer to the financial statements of Midwest Tours. The firm's return on sales ratio for 2009 is A. 20.2%.B. 21.6%.C. 22.4%.D. 18.0%.

B. 21.6%.

Refer to the financial statements of Midwest Tours. The firm's return on equity ratio for 2009 is A. 12.24%.B. 14.63%.C. 15.50%.D. 14.50%.E. 16.9%.

C. 15.50%.

Refer to the financial statements of Midwest Tours. The firm's P/E ratio for 2009 is A. 4.74.B. 6.63.C. 5.21.D. 5.00.

A. 4.74.

Refer to the financial statements of Midwest Tours. The firm's market to book value for 2009 is A. 0.24.B. 0.95.C. 0.71.D. 1.12.

C. 0.71

Refer to the financial statements for Snapit Company. The firm'scurrent ratio for 2009 is A. 1.98. B. 2.47. C. 0.65. D. 1.53. E. None of the options

D. 1.53.

Refer to the financial statements of Snapit Company. The firm's quick ratio for 2009 is A. 1.68.B. 1.12.C. 0.72.D. 1.92.E. None of the options

C. 0.72.

Refer to the financial statements of Snapit Company. The firm's leverage ratio for 2009 is A. 2.25.B. 3.53.C. 2.61.D. 3.06.E. None of the options

D. 3.06.

Refer to the financial statements of Snapit Company. The firm's times interest earned ratio for 2009 is A. 2.26.B. 3.16.C. 3.84.D. 3.31.E. None of the options

D. 3.31.

Refer to the financial statements of Snapit Company. The firm's average collection period for 2009 is _______ days. A. 47.91B. 48.53C. 46.06D. 47.65E. None of the options

A. 47.91

Refer to the financial statements of Snapit Company. The firm's inventory turnover ratio for 2009 is A. 4.64.B. 4.16.C. 4.41.D. 4.87.E. None of the options

A. 4.64.

Refer to the financial statements of Snapit Company. The firm's fixed asset turnover ratio for 2009 is A. 4.60.B. 3.61.C. 3.16.D. 5.46.

C. 3.16.

Refer to the financial statements of Snapit Company. The firm's asset turnover ratio for 2009 is. A 1.60.B. 3.16.C. 3.31.D. 4.64.

A 1.60

Refer to the financial statements of Snapit Company. The firm's return on sales ratio for 2009 is A. 0.0133.B. 0.1325.C. 1.325.D. 1.260.

B. 0.1325

Refer to the financial statements of Snapit Company. The firm's return on equity ratio for 2009 is A. 0.1235. B. 0.0296. C. 0.2960. D. 2.2960.

C. 0.2960.

Refer to the financial statements of Snapit Company. The firm's market to book value for 2009 is A. 0.7256.B. 1.5294.C. 2.9400.D. 3.6142.

C. 2.9400.

______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities. A. Net SalesB. Operating IncomeC. Net IncomeD. Non-operating IncomeE. Earnings before interest and taxes

E. Earnings before interest and taxes

Proceeds from a company's sale of stock to the public are included in A. par value.B. additional paid-in capital.C. retained earnings.D. par value and additional paid-in capital.E. All of the options

D. par value and additional paid-in capital.

Which of the financial statements recognizes only transactions in which cash changes hands? A. Balance sheetB. Income statementC. Statement of cash flowsD. Balance sheet and income statementE. All of the options

C. Statement of cash flows

Suppose that Chicken Express, Inc. has a ROA of 7% and pays a 6% coupon on its debt. Chicken Express has a capital structure that is 70% equity and 30% debt. Relative to a firm that is 100% equity-financed, Chicken Express's net profit will be ________ and its ROE will be ________. A. lower; lowerB. higher; higherC. higher; lowerD. lower; higherE. It is impossible to predict.

D. lower; higher

The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM) because A. the DDM uses a different price in the numerator.B. the DDM uses different earnings measures in the denominator.C. the prices reported are not accurate.D. the people who construct the ratio from financial statements have inside information.E. They are not different—this is a "trick" question.

B. the DDM uses different earnings measures in the denominator.

The dollar value of a firm's return in excess of its opportunity costs is called its A. profitability measure.B. excess return.C. economic value added.D. prospective capacity.E. return margin.

C. economic value added.

Economic value added (EVA) is also known as A. excess capacity.B. excess income.C. value of assets.D. accounting value added.E. residual income.

E. residual income.

Which of the following are issues when dealing with the financial statements of international firms?I) Many countries allow firms to set aside larger contingency reserves than the amounts allowed for U.S. firms.II) Many firms outside the U.S. use accelerated depreciation methods for reporting purposes, whereas most U.S. firms use straight-line depreciation for reporting purposes.III) Intangibles such as goodwill may be amortized over different periods or may be expensed rather than capitalized.IV) There is no way to reconcile the financial statements of non-U.S. firms to GAAP. A. I and IIB. II and IVC. I, II, and IIID. I, III, and IVE. I, II, III, and IV

C. I, II, and III

To create a common size income statement ____________ all items on the income statement by ____________. A. multiply; net incomeB. multiply; total revenueC. divide; net incomeD. divide; total revenueE. multiply; COGS

D. divide; total revenue

To create a common size balance sheet ____________ all items on the balance sheet by ____________. A. multiply; owners' equityB. multiply; total assetsC. divide; owners' equityD. divide; total assetsE. multiply; debt

D. divide; total assets

Common size financial statements make it easier to compare firms A. of different sizes.B. in different industries.C. with different degree of leverage.D. that use different inventory valuation methods (FIFO vs. LIFO).

A. of different sizes.

Common size income statements make it easier to compare firms A. that use different inventory valuation methods (FIFO vs. LIFO).B. in different industries.C. with different degree of leverage.D. of different sizes.

D. of different sizes.

Common size balance sheets make it easier to compare firms A. with different degree of leverage.B. of different sizes.C. in different industries.D. that use different inventory valuation methods (FIFO vs. LIFO).

B. of different sizes