1.Theincomestatementmeasurestheflowoffundsinto(I.E.Revenue)Andoutof(I.E.Expenses)Thefirmovera

Full file at

1.Theincomestatementmeasurestheflowoffundsinto(i.e.revenue)andoutof(i.e.expenses)thefirmovera certaintimeperiod.It is alwaysbasedonaccountingdata.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Incomestatement

2.Thebalancesheetis afinancialstatementmeasuringtheflowoffundsintoandoutofvariousaccountsovertime whiletheincomestatementmeasurestheprogressofthefirmat apointin time.

a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Financialstatements

3.Anincreaseinanassetaccountisasourceofcash,whereasanincreaseinaliabilityaccountisauseofcash. a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Sourcesandusesofcash

4.Depreciation,asshownontheincomestatement,isregardedasauseofcashbecauseitisanexpense. a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Sourcesandusesofcash

Full file at

5.Whenafirmpaysoffaloanusingcash,thesourceoffundsisthedecreaseintheassetaccount,cash,whiletheuse offundsinvolvesa decreaseina liabilityaccount,debt.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Sourcesanduses

6.Non-cashassetsareexpectedtoproducecashovertimebuttheamountofcashtheyeventuallyproducecouldbe higherorlowerthanthevaluesatwhichtheassetsarecarriedonthebooks.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Non-cashassets

7.Taxes,paymentpatterns,andreportingconsiderations,aswellascreditsalesandnon-cashcosts,arereasonswhy operatingcashflowscandifferfromaccountingprofits.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Operatingcashflows

8.Ratioanalysisinvolvesa comparisonof therelationshipsbetweenfinancialstatementaccountsso as toanalyzethe financialpositionand strengthofafirm.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Ratioanalysis

Full file at

9.Thecurrentratioandinventoryturnoverratiomeasuretheliquidityof a firm.Thecurrentratiomeasurestherelation of afirm'scurrentassetstoits currentliabilitiesandtheinventoryturnoverratiomeasureshowrapidlyafirmturnsitsinventorybackintoa"quick"assetor cash.

a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Liquidityratios

10.Ifafirmhashighcurrentandquickratios,thisalwaysisagoodindicationthat afirmis managingitsliquidityposition well.

a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Currentratio

11.A declinein theinventoryturnoverratiosuggeststhat thefirm'sliquiditypositionisimproving. a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Inventoryturnoverratio

12.Thedegreetowhichthemanagersofa firmattempttomagnifythereturnstoowners'capitalthroughtheuseof financialleverageiscapturedindebtmanagementratios.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Debtmanagementratios

Full file at

13.Profitabilityratiosshowthe combinedeffectsofliquidity,assetmanagement,anddebtmanagementonoperations. a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Profitabilityratios

14.Determiningwhethera firm'sfinancialpositionisimprovingordeterioratingrequiresanalysisofmorethanoneset of financialstatements.Trendanalysisis onemethodofmeasuringafirm'sperformanceovertime.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Trendanalysis

15.Theinformationcontainedintheannualreportisusedby investorstoformexpectationsaboutfutureearningsand dividends.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Annualreport

16.Thebalancesheetpresentsasummaryofthefirm'srevenuesandexpensesoveranaccountingperiod. a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Financialstatements

17.On the balancesheet,totalassetsmustequaltotalliabilitiesplusstockholdersequity. a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Balancesheet

18.Oneofthebiggestnoncashitemsontheincomestatementis depreciationwhichneedsto besubtractedfromnet incometo determinecashflowsforthefirm.

a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Cashflows

19.Afirm'snetincomereportedonitsincomestatementmustequaltheoperatingcashflowsonthestatementofcash flows.

a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Accountingprofitandcashflows

20.Astatementreportingtheimpactof afirm'soperating,investing,andfinancingactivitieson cashflowsoveran accountingisthestatementofcashflows.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Statementofcashflows

21.Whena firmconductsa seasonedequityoffering,it increasesanequityaccountwhichisanexampleofa sourceof funds.

a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Sourcesandusesofcash

22.Whena firmconductsa stockrepurchase,it increasesanequityaccountwhichisanexampleofa sourceoffunds. a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Sourcesandusesofcash

23.Aliquidassetisan assetthatcanbe easilyconvertedintocashwithoutasignificantlossof its originalvalue. a.True

b.False

ANSWER:True

DIFFICULTY: Easy

TOPICS:Liquidityratios

24.GenzymeCorporationhasseenitsdayssalesoutstanding(DSO)declinefrom38dayslastyearto 22daysthis implyingthatmoreofthefirm'ssuppliersarebeingpaidontime.

a.True

b.False

ANSWER:False

DIFFICULTY: Easy

TOPICS:Dayssalesoutstanding(DSO)

25.Fundssuppliedbycommonstockholdersmainlyincludescapitalstock,paid-incapital,andretainedearnings,while totalequityiscomprisedofcommonequitypluspreferredstock.

a.True

b.False

ANSWER:True

DIFFICULTY: Medium

TOPICS:Total equity

26.Retainedearningsisthecashthathasbeengeneratedbythefirmthroughitsoperationswhichhasnotbeenpaidout tostockholdersasdividends.Retainedearningsarekeptincashornearcashaccountsandthus,thesecash accounts,whenaddedtogether,willalwaysbeequalto thetotalretainedearningsofthefirm.

a.True

b.False

ANSWER:False

DIFFICULTY: Medium

TOPICS:Retainedearnings

27.Thefinancialpositionofcompanieswhosebusinessisseasonalcanbedramaticallydifferentdependinguponthe

timeof yearchosentoconstructfinancialstatements.Thistimesensitivityisespeciallytruewithrespecttothefirm's balancesheet.

a.True

b.False

ANSWER:True

DIFFICULTY: Medium

TOPICS:Balancesheetchanges

28.Inorderto accuratelyestimatecashflowfromoperations,depreciationmustbeaddedbackto netincome.The reasonforthisis thateventhoughdepreciationis deductedfromrevenueitis reallyanon-cashcharge.

a.True

b.False

ANSWER:True

DIFFICULTY: Medium

TOPICS:Cashflows

29.Inaccounting,emphasisisplacedondeterminingnet income.Infinance,the primaryemphasisalsoisonnet income becausethatiswhatinvestorsusetovaluethefirm.However,asecondaryconsiderationiscashflowbecausethat's whatisusedtorunthebusiness.

a.True

b.False

ANSWER:False

DIFFICULTY: Medium

TOPICS:Cashflowandnetincome

30.Currentcashflowfromexistingassetsis highlyrelevantto theinvestor.However,thevalueofthefirmdepends primarilyuponitsgrowthopportunities.Asa result,profitprojectionsfromthoseopportunitiesaretheonlyrelevant futureflowswithwhichinvestorsareconcerned.

a.True

b.False

ANSWER:False

DIFFICULTY: Medium

TOPICS:Futurecashflows

31.IfthecurrentratioofFirmAisgreaterthanthecurrentratioofFirmB,wecannotbesurethatthequickratioof FirmAisgreaterthanthatofFirmB.However,ifthequickratioofFirmAexceedsthatofFirmB,wecanbe assuredthatFirmA'scurrentratioalsoexceedsB'scurrentratio.

a.True

b.False

ANSWER:False

DIFFICULTY: Medium

TOPICS:Liquidityratios

32.Theinventoryturnoverandcurrentratiosarerelated.Thecombinationof ahighcurrentratioandalowinventory turnoverratiorelativeto theindustrynormmightindicatethat thefirmis maintainingtoohighaninventorylevelor thatpartoftheinventoryis obsoleteordamaged.

a.True

b.False

ANSWER:True

DIFFICULTY: Medium

TOPICS:Inventoryturnoverratio

33.Wecanusethefixedassetturnoverratiotolegitimatelycomparefirmsindifferentindustriesas longas all thefirms beingcomparedareusingthesameproportionoffixedassetstototalassets.

a.True

b.False

ANSWER:False

DIFFICULTY: Medium

TOPICS:Fixedassetturnover

34.Supposetwofirmswiththesameamountofassetspaythesameinterestrateontheirdebtandearnthesamerate ofreturnontheirassets,andthatROAispositive.However,onefirmhasa higherdebtratio.Underthese conditions,thefirmwiththehigherdebtratiowillalsohaveahigherrateof returnon commonequity.

a.True

b.False

ANSWER:True

DIFFICULTY: Medium

TOPICS:ROAandROE

35.Supposea firmwantstomaintaina specificTIEratio.Ifthefirmknowsthelevelof its debt,theinterestrateitwill payon thatdebtandtheapplicabletaxrate,thefirmcanthencalculatetheearningslevelrequiredtomaintainits targetTIEratio.

a.True

b.False

ANSWER:True

DIFFICULTY: Medium

TOPICS:TIEratio

36.Thefixedchargecoverageratiorecognizesthatfirmsoftenleaseequipmentundercontractandthus,somefirms mustmeetmorethanjusttheirscheduledinterestpaymentsoutofearnings.Therefore,thefixedchargecoverageis moreinclusivethanthe TIEratio.

a.True

b.False

ANSWER:True

DIFFICULTY: Medium

TOPICS:Fixedchargecoverageratio

37.Ifsalesdecreaseandfinancialleverageincreases,wecansaywithcertaintythattheprofitmarginonsaleswill decrease.

a.True

b.False

ANSWER:False

DIFFICULTY: Medium

TOPICS:Profitmarginandleverage

Full file at

38.Sellingnewstockisan equitytransaction;it doesnotaffectanyassetor liabilityaccountandtherefore,doesnot appearonthestatementofcashflows.

a.True

b.False

ANSWER: False

DIFFICULTY: Medium

TOPICS: Financingactivities

39.Otherthingsheldconstant,whichofthefollowingwillnotaffectthequickratio?(Assumethatcurrentassetsequal currentliabilities.)

a.Fixedassetsaresoldforcash.

b.Cashis usedto purchaseinventories.

c.Cashisusedtopayoffaccountspayable. d.Accountsreceivablearecollected.

e.Long-termdebtis issuedto payoffashort-termbankloan.

ANSWER: d

RATIONALE:Thequickratioiscalculatedasfollows:

The only action that doesn'taffectthequickratioisstatementd.Whilethisactiondecreasesreceivables(acurrent asset),itincreasescash(alsoacurrentasset).Theneteffectisnochangeinthequickratio.

DIFFICULTY: Easy

TYPE:Conceptual

TOPICS: Quickratio

40.Onewouldcalculatechangesinbalancesheetaccountsfor a.A typicalratioanalysis.

b. Proformabalancesheetconstruction. c.Statementof cashflowsconstruction. d.Profitandlossanalysis.

e.Proformaincomestatementconstruction.

ANSWER: c

DIFFICULTY: Easy

TOPICS: Statementofcashflows

Full file at

41.Allof thefollowingrepresentcashoutflowstothefirmexcept a.Taxes.

b.Interestpayments. c.Dividends.

d.Purchaseofplantandequipment. e.Depreciation.

ANSWER:e

DIFFICULTY:Easy

TOPICS:Cashflows

42.Otherthingsheldconstant,ifafirmholdscashbalancesinexcessof theiroptimallevelinanon-interestbearing account,thiswilltendtolowerthe firm's

a.Profitmargin.

b.Totalassetturnover. c.Returnonequity.

d.Allof theabove.

e.Answersbandcabove.

ANSWER:e

DIFFICULTY:Easy

TOPICS:Excessivecashbalances

43.Otherthingsheldconstant,whichofthefollowingwillnotaffectthecurrentratio,assumingan initialcurrentratio greaterthan1.0?

a.Fixedassetsaresoldforcash.

b.Long-termdebtis issuedto pay offcurrentliabilities. c.Accountsreceivablearecollected.

d.Cashisusedtopayoffaccountspayable.

e.Abankloanisobtained,andtheproceedsarecreditedtothefirm'scheckingaccount.

ANSWER:c

DIFFICULTY:Easy

TOPICS:Currentratio

Full file at

44.Theannualreportcontainsallofthe followingfinancialstatementsexcept a.incomestatement.

b.statementofchangesinlong-termfinancing. c.statementofcashflows.

d.balancesheet.

e.statementofretainedearnings.

ANSWER:b

DIFFICULTY:Easy

TOPICS:Annualreport

45.Whichof thefollowingfinancialstatementsshowsafirm'sfinancingactivities(howfundsweregenerated)and investmentactivities(howfundswereused)overaparticularperiodoftime?

a.balancesheet

b.incomestatement

c.statementofretainedearnings d.statementofcashflows

e.proxystatement

ANSWER:d

DIFFICULTY:Easy

TOPICS:Financialstatements

46.Whichofthefollowingstatementsshowstheportionofthefirm'searningsthathasbeensavedratherthanpaidout asdividends?

a.balancesheet

b.incomestatement

c.statementofretainedearnings d.statementofcashflows

e.proxystatement

ANSWER:c

DIFFICULTY:Easy

TOPICS:Financialstatements

Full file at

47.Whichofthefollowingfinancialstatementsincludesinformationaboutafirm'sassets,equity,andliabilities?

a.Incomestatement

b.Cashflowstatement c.Balancesheet

d.Statementofretainedearnings e.Allofthe above

ANSWER:c

DIFFICULTY:Easy

TOPICS:Financialstatements

48.WhenconstructingaStatementof CashFlows,whichof thefollowingactionswouldbe consideredasourceof funds?

a.increaseinthecashaccount b.decreaseinaccountspayable c.increaseininventory

d.increasein long-termbonds e.increaseinfixedassets

ANSWER:b

DIFFICULTY:Easy

TOPICS:Financialstatements

49.Whichofthefollowinggroupsprobablywouldnotbeinterestedin thefinancialstatementanalysisofafirm?

a.creditors

b.managementof thefirm c.stockholders

d.InternalRevenueService

e.Allof theabovewouldbe interestedinthefinancialstatementanalysis.

ANSWER:d

DIFFICULTY:Easy

TOPICS:Ratioanalysis

Full file at

50.Whichof thefollowingratiosmeasureshoweffectivelyafirmismanagingits assets?

a.quickratio

b.timesinterestearned c.profit margin

d.inventoryturnoverratio e.priceearningsratio

ANSWER:d

DIFFICULTY:Easy

TOPICS:Inventoryturnoverratio

51.Ifyourgoalisdeterminehoweffectivelya firmismanagingitsassets,whichofthe followingsetsofratioswould youexamine?

a.profitmargin,currentratio,fixedchargecoverageratio b.quickratio,debtratio,timeinterestearned

c.inventoryturnoverratio,dayssalesoutstanding,fixedassetturnoverratio d.totalassetsturnoverratio,priceearningsratio,returnontotalassets

e.timeinterestearned,profitmargin,fixedassetturnoverratio

ANSWER:c

DIFFICULTY:Easy

TOPICS:Assetmanagementratios

52.Whichof thefollowingratiosmeasurestheextenttowhichoperatingincomecandeclinebeforethefirmisunableto meetitsannualinterestcosts?

a.fixedchargecoverageratio b.debtratio

c.times-interest-earnedratio d.returnonequity

e.profit margin

ANSWER:c

DIFFICULTY:Easy

TOPICS:TIEratio

Full file at

53.An analysisofa firm'sfinancialratiosovertimethatisusedtodeterminethe improvementordeteriorationinits financialsituationiscalled

a.sensitivityanalysis b.DuPontchart

c.ratioanalysis d.progresschart e.trendanalysis

ANSWER:e

DIFFICULTY:Easy

TOPICS:Trendanalysis

54.Whichof thefollowingstatementsismostcorrect?

a.Anincreasein afirm'sdebtratio,withnochangesin itssalesandoperatingcosts,couldbeexpectedto lower itsprofitmarginonsales.

b.Anincreasein DSO,otherthingsheldconstant,wouldgenerallyleadto anincreasein thetotalassetturnover ratio.

c.AnincreaseontheDSO,otherthingsheldconstant,wouldgenerallyleadto anincreasein theROE.

d.Ina competitiveeconomy,whereallfirmsearnsimilarreturnsonequity,onewouldexpecttofindlowerprofit marginsforairlines,whichrequirealotoffixedassetsrelativeto sales,thanforfreshfishmarkets.

e.It is moreimportantto adjusttheDebt/Assetratiothantheinventoryturnoverratioto accountforseasonal fluctuations.

ANSWER:a

RATIONALE:Statementaistruebecause,ifafirmtakesonmoredebt,itsinterestexpensewillrise,and thiswillloweritsprofitmargin.Ofcourse,therewillbelessequitythantherewouldhave been,hencetheROEmightriseeventhoughtheprofitmarginfell.

DIFFICULTY:Medium

TOPICS:Financialstatementanalysis

Full file at

55.Whichof thefollowingstatementsiscorrect?

a.Theannualreportcontainsfourbasicfinancialstatements:theincomestatement;balancesheet;statementof cashflows;andstatementof changesinlong-termfinancing.

b.Althoughtheannualreportis gearedtowardtheaveragestockholder,itrepresentsfinancialanalysts'most completesourceoffinancialinformationaboutthefirm.

c.Thekeyimportanceof annualreportinformationisthatitisusedby investorswhentheyformtheir expectationsaboutthefirm'sfutureearningsanddividendsandtheriskinessofthosecashflows.

d.Theannualreportprovidesnorelevantinformationforuse byfinancialanalystsorbytheinvestingpublic. e.Noneoftheabovestatementsiscorrect.

ANSWER:c

DIFFICULTY:Medium

TOPICS:Annualreport

56.Afirm'scurrentratiohassteadilyincreasedoverthepast5 years,from1.9fiveyearsagoto3.8today.Whatwould afinancialanalystbemostjustifiedinconcluding?

a.Thefirm'sfixedassetsturnoverprobablyhasimproved. b.Thefirm'sliquiditypositionprobablyhasimproved.

c.Thefirm'sstockpriceprobablyhasincreased. d.Eachoftheaboveis likelyto haveoccurred.

e.Theanalystwouldbeunabletodrawanyconclusionsfromthisinformation.

ANSWER:b

DIFFICULTY:Medium

TOPICS:Liquidityratios

57.Whichofthe followingactionswillcauseanincreaseinthe quickratiointhe shortrun?

a.$1,000worthofinventoryis sold,andanaccountreceivableis created.Thereceivableexceedstheinventory by theamountof profitof thesale,whichisaddedtoretainedearnings.

b.A smallsubsidiarywhichwasacquiredfor$100,000twoyearsagoandwhichwasgeneratingprofitsat the rateof10percentissoldfor$100,000cash.(Averagecompanyprofitsare15percentofassets.)

c.Marketablesecuritiesaresoldatcost. d.Allof theabove.

e.Answersaandbabove.

ANSWER:e

DIFFICULTY:Medium

TOPICS:Quickratio

Full file at

58.Whichof thefollowingstatementsiscorrect?

a.Inthetext,depreciationisregardedasauseofcashbecauseitreducesfixedassets,whichthenmustbe replaced.

b.If acompanyusessomeofitscashto payoffshort-termdebt,thenitscurrentratiowillalwaysdecline,given thewayratioiscalculated,otherthingsheldconstant.

c.Duringa recession,it isreasonabletothinkthatmostcompaniesinventoryturnoverratioswillchangewhile theirfixedassetturnoverratiowillremainfairlyconstant.

d.Duringa recession,wecanbeconfidentthatmostcompanies'DSOs(orACPs)willdeclinebecausetheir saleswillprobablydecline.

e.Eachoftheabovestatementsisfalse.

ANSWER: e

DIFFICULTY: Medium

TOPICS: Miscellaneousratiobehavior

59.As a short-termcreditorconcernedwitha company'sabilitytomeetitsfinancialobligationtoyou,whichoneofthe followingcombinationsofratioswouldyoumostlikelyprefer?

Current / Debt
ratio / TIE / ratio
a. / 0.50.50.33
b. / 1.01.00.50
c. / 1.51.50.50
d. / 2.01.00.67
e. / 2.50.50.71

ANSWER: c

DIFFICULTY: Medium

TOPICS: Ratioanalysis

Full file at

60.Whichofthe followingstatementsaboutratioanalysisisincorrect?

a.Classifyinga large,well-diversifiedfirmintoa singleindustryoftenisdifficultbecausemanyofthefirm's divisionsareinvolvedwithdifferentproductsfromdifferentindustries.

b.Asaruleofthumb,itis safeto concludethatanyfirmwithacurrentratiogreaterthan1.0shouldbeableto meetits currentobligations,thatis, paybillsthatcomedueinthecurrentperiod.[Currentratio=(Current assets)/(Currentliabilities)]

c.Sometimesfirmsattempttouse"windowdressing"techniquestomaketheirfinancialstatementslookbetter thantheyactuallyarein thecurrentperiod.

d.Computingthe valuesofthe ratiosisfairlysimple;the toughestandmostimportantpartofratioanalysisis interpretationofthe valuesderivedfromthe computations.

e.Generalconclusionsabouta firmshouldnotbemadebyexaminingoneora fewratios,ratioanalysisshould becomprehensive.

ANSWER:b

DIFFICULTY:Medium

TOPICS:Ratioanalysis

61.Yesterday,BickslerCorporationpurchased(andreceived)rawmaterialsoncreditfromitssupplier.Allelse equal,if

Bicksler'scurrentratiowas2.0beforethepurchase,whateffectdidthistransactionhaveonBicksler'scurrent ratio?

a.increased b.decreased

c.stayedthesame

d.Thereisnotenoughinformationtoanswerthisquestion. e.Noneoftheaboveisacorrectanswer.

ANSWER:b

DIFFICULTY:Medium

TOPICS:Currentratio

Full file at

62.BubblesSoapCorporationhasa quickratioof1.0 anda currentratioof2.0 implyingthat a.thevalueofcurrentassetsis equalto thevalueofinventory.

b.thevalueofcurrentassetsis equalto thevalueofcurrentliabilities. c.thevalueofcurrentliabilitiesis equalto thevalueofinventory.

d.Allof theabove.

e.Noneoftheabove.

ANSWER:c

DIFFICULTY:Medium

TOPICS:Currentratioandquickratio

63.Whichof thefollowingstatementsismostcorrect?

a.firmswithrelativelylowdebtratioshavehigherexpectedreturnswhenthebusinessisgood. b.firmswithrelativelylowdebtratiosareexposedtoriskof losswhenthebusinessispoor.

c.firmswithrelativelyhighdebtratioshavehigherexpectedreturnswhenthebusinessisbad. d.firmswithrelativelyhighdebtratioshavehigherexpectedreturnswhenthebusinessisgood. e.noneoftheabove.

ANSWER:d

DIFFICULTY:Medium

TOPICS:Debtmanagementratios

64.Allotherthingsconstant,anincreaseina firm'sprofitmarginwould

a.increasetheadditionalfundsneededforfinancingagrowthinoperations. b.decreasetheadditionalfundsneededforfinancingagrowthinoperations.

c.haveno effecton theadditionalfundsneededforfinancingagrowthinoperations. d.decreaseitstaxes.

e.noneoftheabove.

ANSWER:b

DIFFICULTY:Medium

TOPICS:Profitmargin

Full file at

65.Whichof thefollowingstatementsiscorrect?

a.IfCompanyAhasa higherdebtratiothatCompanyB,thenwecanbesurethatAwillhavea lowertimes- interest-earnedratiothanB.

b.Supposetwocompanieshaveidenticaloperationsintermsof sales,costof goodssold,interestrateon debt, andassets.However,CompanyAusedmoredebtthanCompanyB;thatis,CompanyAhasa higherdebt ratio.Undertheseconditions,wewouldexpectB'sprofitmarginto behigherthanA's.

c.TheROEof anycompanywhichisearningpositiveprofitsandwhichhasapositivenetworth(orcommon equity)mustexceedthecompany'sROA.

d.Statementsa,b,andcarealltrue. e.Statementsa,b,andcareallfalse.

ANSWER:b

DIFFICULTY:Tough

TOPICS:ROEanddebtratios

66.PepsiCorporation'scurrentratiois0.5,whileCokeCompany'scurrentratiois1.5.Bothfirmswantto"window dress"theircomingend-of-yearfinancialstatements.Aspartof theirwindowdressingstrategy,eachfirmwilldoubleitscurrentliabilitiesbyaddingshort-termdebtandplacingthe fundsobtainedinthe cashaccount.Whichof thestatementsbelowbestdescribestheactualresultsofthesetransactions?

a.Thetransactionswillhavenoeffectonthecurrentratios. b.Thecurrentratiosofbothfirmswillbeincreased.

c.Thecurrentratiosofbothfirmswillbedecreased.

d.OnlyPepsiCorporation'scurrentratiowillbe increased. e.OnlyCokeCompany'scurrentratiowillbe increased.

ANSWER:d

RATIONALE:PepsiCorporation:

Before: Current ratio= 50/100= 0.50. After: Current ratio = 150/200 = 0.75.

CokeCompany:

Before: Current ratio= 150/100= 1.50. After: Current ratio = 250/200 = 1.25.

DIFFICULTY:Easy

TOPICS:Currentratio

Full file at

67.TheCharlestonCompanyisarelativelysmall,privatelyownedfirm.Lastyearthecompanyhadafter-taxincomeof

$15,000and10,000shareswereoutstanding.Theownersweretryingto determinethemarketvalueforthestock, priortotakingthecompanypublic.Asimilarfirmwhichispubliclytradedhad a price/earningsratioof5.0.Using onlytheinformationgiven,estimatethemarketvalueof oneshareof Charleston'sstock.

a.$10.00 b.$7.50 c.$5.00 d.$2.50 e.$1.50

ANSWER:b

RATIONALE:EPS = $15,000/10,000 = $1.50. P/E = 5.0 = P/$1.50. P = $7.50

DIFFICULTY:Easy

TOPICS:Marketpricepershare

68.IfBoydCorporationhassalesof $2 millionperyear(allcredit)anddayssalesoutstandingof 35 days,whatisits averageamountofaccountsreceivableoutstanding(assumea 360dayyear)?

a.$194,444 b.$57,143 c.$5,556

d.$97,222 e.$285,714

ANSWER:a

RATIONALE:A/R=(Sales/360)(DSO)=(($2,000,000)/(360))(35)=$194,444.

DIFFICULTY:Easy

TOPICS:Accountsreceivable

Full file at

69.Afirmhasaprofitmarginof 15 percenton salesof $20,000,000.Ifthefirmhasdebtof $7,500,000,totalassetsof

$22,500,000,andanafter-taxinterestcostontotaldebtof5percent,whatis thefirm'sROA?

a.8.4% b.10.9% c.12.0% d.13.3% e.15.1%

ANSWER:d

RATIONALE:Netincome=0.15($20,000,000)=$3,000,000.ROA=$3,000,000/$22,500,000=13.3%.

DIFFICULTY:Easy

TOPICS:ROA

Full file at

70.CollinsCompanyhadthe followingpartialbalancesheetandcompleteincomestatementinformationfor lastyear:

BalanceSheet:
Cash / $20
A/R / 1,000
Inventories / 2,000
Totalcurrentassets / $3,020
Netfixedassets / 2,980
Totalassets / $6,000
IncomeStatement: Sales / $10,000
Costofgoodssold / 9,200
EBIT / $800
Interest(10%) / 400
EBT / $400
Taxes(40%) / 160
NetIncome / $240

TheindustryaverageDSOis 30(360-daybasis).Collinsplansto changeitscreditpolicysoasto causeitsDSOto equaltheindustryaverage,andthischangeisexpectedtohavenoeffectoneithersalesorcostofgoodssold.Ifthe cashgeneratedfromreducingreceivablesisusedtoretiredebt(whichwasoutstandingalllastyearandwhichhasa

10%interestrate),whatwillCollins'debtratio(Totaldebt/Totalassets)beafterthechangein DSOis reflectedin thebalancesheet?

a. 33.33% b. 45.28% c. 52.75% d. 60.00% e.65.71%

ANSWER:e

RATIONALE:Current DSO = 36 days. Industry average DSO = 30 days.

Reduce receivables by

Debt = $400/0.10 = $4,000.

Debt to assets =

DIFFICULTY:Medium

TOPICS:Financialstatementanalysis

Full file at

71.A firmhastotalinterestchargesof$10,000peryear,salesof$1million,ataxrateof40percent,andanetprofit marginof6 percent.Whatisthefirm'stimes-interest-earnedratio?

a.16times b.10times c.7times d.11times e.20times

ANSWER:d

RATIONALE:NI=$1,000,000(0.06)=$60,000.

EBT=$60,000/0.6=$100,000.

EBIT=$100,000+$10,000= $110,000.

TIE= EBIT/I= $110,000/$10,000= 11 times.

DIFFICULTY:Medium

TOPICS:TIEratio

72.AlumbatCorporationhas$800,000ofdebtoutstanding,andit paysaninterestrateof10percentannuallyonitsbank loan.Alumbat'sannualsalesare$3,200,000;itsaveragetaxrateis 40percent;anditsnetprofitmarginonsalesis 6 percent.If thecompanydoesnotmaintainaTIEratioofat least4times,itsbankwillrefuseto renewitsloan,and bankruptcywillresult.WhatisAlumbat'scurrentTIEratio?

a. 2.4 b. 3.4 c. 3.6 d. 4.0 e.5.0

ANSWER:e

RATIONALE:TIE=EBIT/I,sofindEBITandI.

Interest=$800,000 ×0.1=$80,000.

Netincome=$3,200,000×0.06=$192,000.

Taxableincome=EBT=$192,000/(1−T)=$192,000/0.6=$320,000.

EBIT=$320,000+$80,000=$400,000.

TIE=$400,000/$80,000=5.0times.

DIFFICULTY:Medium

TOPICS:TIEratio

Full file at

73.Determinetheincreaseor decreaseincashforRinkySupplyCompanyforlastyear,giventhefollowinginformation. (Assumenootherchangesoccurredduringthepastyear.)

Decreaseinmarketablesecurities / = / $25
Increaseinaccountsreceivables / = / $50
Increaseinnotespayable / = / $30
Decreaseinaccountspayable / = / $20
Increaseinaccruedwagesandtaxes / = / $15
Increaseininventories / = / $35
Retainedearnings
a.−$50 / = / $5
b.+$40
c.−$30
d.+$20
e.−$10

ANSWER:c

RATIONALE:Statementofcashflows:

CashFlowsfromOperations

Retainedearnings $5

Additions(sourcesof cash):

Increaseinaccruedwagesandtaxes 15

Subtractions(usesofcash):

Increaseinaccountsreceivable (50) Increasein inventories (35) Decreaseinaccountspayable (20)

NetCashFlowsfromOperations($85)

CashFlowsAssociatedwithFinancingActivities

Decreaseinmarketablesecurities / $25
Increaseinnotespayable / 30
NetCashFlowsfromFinancing / 55
NetreductioninCash / ($30)
DIFFICULTY:
TOPICS: / Medium
Changein cashflows

Full file at

74.CannonCompanyhasenjoyedarapidincreaseinsalesinrecentyears,followingadecisiontosellon credit.

However,thefirmhasnoticeda recentincreaseinits collectionperiod.Lastyear,totalsaleswere$1 million,and

$250,000ofthesesaleswereoncredit.Duringtheyear,theaccountsreceivableaccountaveraged$41,664.Itis expectedthatsaleswillincreaseintheforthcomingyearby 50 percent,and,whilecreditsalesshouldcontinuetobe thesameproportionoftotalsales,itis expectedthatthedayssalesoutstandingwillalsoincreaseby50percent.If the resultingincreaseinaccountsreceivablemustbefinancedbyexternalfunds,howmuchexternalfundingwill Cannonneed?

a.$41,664 b.$52,086 c.$47,359 d.$106,471 e.$93,750

ANSWER:b

RATIONALE:DSO=($41,664/$250,000)/360=60days.

NewA/R=(($250,000)(1.5)/(360))(60)(1.5)=$93,750.

Hence,increaseinreceivables=$93,750−$41,664=$52,086.

DIFFICULTY:Medium

TOPICS:Receivablesincrease

75.TheMerylCorporation'scommonstockcurrentlyis sellingat $100pershare,whichrepresentsaP/Eratioof10.If thefirmhas100sharesofcommonstockoutstanding,areturnonequityof20percent,andadebtratioof60 percent,whatisitsreturnontotalassets(ROA)?

a.8.0% b.10.0% c.12.0% d.16.7% e.20.0%

ANSWER:a

RATIONALE:P/E=10=$100/EPS

EPS=$100/10=$10.

Earnings=NI=$10(100shares)=$1,000.

ROE= NI/Equity = $1,000/Equity = 20%

Equity = $1,000/0.20 = $5,000.

Debt ratio = 60%, so Equity ratio=40%=Equity/TA

TA=Equity/0.40=$5,000/0.40=$12,500.

ROA=NI/TA=$1,000/$12,500=0.08=8%.

DIFFICULTY:Medium

TOPICS:ROA

Full file at

76.SelzerInc.sellsall its merchandiseon credit.Ithasa profitmarginof 4 percent,dayssalesoutstandingequalto60 days,receivablesof$150,000,totalassetsof$3million,anda debtratioof0.64.Whatisthe firm'sreturnonequity (ROE)?

a.7.1% b.33.3% c.3.3% d.71.0% e.8.1%

ANSWER:c

RATIONALE:(Salesperday)(DSO)=A/R

(Sales/360)(60)=$150,000

Sales=$900,000.

Profitmargin=Net profitaftertax/Sales.

Netprofit=0.4($900,000)=$36,000.

Debtratio=0.64=Total debt/$3,000,000.

Totaldebt=$1,920,000.

Totalequity=$3,000,000−$1,920,000=$1,080,000.

ROE=$36,000/$1,080,000=3.3%.

DIFFICULTY:Medium

TOPICS:ROE

77.Youaregiventhefollowinginformationaboutafirm:Thegrowthrateequals8percent;returnonassets(ROA)is

10percent;thedebtratiois 20percent;andthestockis sellingat $36.Whatis thereturnonequity(ROE)?

a.14.0% b.12.5% c.15.0% d.2.5% e.13.5%

ANSWER:b

RATIONALE:Debt ratio= TL/TA= 20%, so Equity= (1−0.20)TA=0.80(TA).

ROA=NI/TA=10%.NI=10%(TA)=0.10(TA).

ROE=NI/Equity=[0.10(TA)]/[0.80(TA)]=0.10/0.80=0.125=12.5%.

DIFFICULTY:Medium

TOPICS:ROE

Full file at

78.AssumeMeyerCorporationis100percentequityfinanced.Calculatethe returnonequity,giventhe following information:

(1)Earningsbeforetaxes=$1,500; (2)Sales=$5,000;

(3)Dividendpayoutratio=60%; (4)Totalassetsturnover= 2.0; (5)Applicabletaxrate= 30%.

a. 25% b. 30% c. 35% d. 42% e.50%

ANSWER:d

RATIONALE:NI= $1,500(1−0.3) = $1,050.

Total assets turnover = Sales/TA = 2.0.

TA = Sales/2.0 =$5,000/2.0 = $2,500 = Equity.

ROE = NI/Equity = $1,050/$2,500 = 42%.

DIFFICULTY:Medium

TOPICS:ROE

Full file at

79.TheAmerCompanyhasthefollowingcharacteristics:

Sales: $1,000

TotalAssets: $1,000

TotalDebt/TotalAssets:35% EBIT:$200

Taxrate:40% Interestrateontotaldebt:4.57%

WhatisAmer'sROE?

a. 11.04% b. 12.31% c. 16.99% d. 28.31% e.30.77%

ANSWER: c

RATIONALE: Calculatedebtandequity:

Debt=D/A×TA=0.35($1,000)=$350.

Equity=TA−Debt=$1,000−$350=$650.

CalculatenetincomeandROE:

Net income= (EBIT−I)(1−T)=[$200−0.0457($350)](0.6)=$110.4.

ROE=$110.4/$650=16.99%.

DIFFICULTY: Medium

TOPICS: ROE

Full file at

80.AurilloEquipmentCompany(AEC)projectedthatits ROEfornextyearwouldbe just6%.However,thefinancial staffhasdeterminedthatthefirmcanincreaseitsROEbyrefinancingsomehighinterestbondscurrently outstanding.Thefirm'stotaldebtwillremainat$200,000andthe debtratiowillholdconstantat80%,butthe interest rateontherefinanceddebtwillbe10%.Therateontheolddebtis 14%.Refinancingwillnotaffectsaleswhichare projectedto be$300,000.EBITwillbe11%ofsales,andthefirm'staxrateis 40%.If AECrefinancesitshigh interestbonds,whatwillbe its projectednewROE?

a.3.0% b.8.2% c.10.0% d.15.6% e.18.7%

ANSWER:d

RATIONALE:Relevantinformation:

OldROE= NI/Equity= 0.06= 6%.

Sales= $300,000;EBIT=0.11(Sales)=0.11($300,000)=$33,000.

Debt=$200,000;D/A=0.80=80%.

Taxrate=40%.

Interestratechange:Oldbonds14%;newbonds10%.

Calculatetotalassets andequityamounts:

Sincedebt= $200,000,totalassets= $200,000/0.80=$250,000.

E/TA=1−D/A=1−0.80=0.20.

Equity=E/TA×TA=0.20×$250,000=$50,000.

ConstructcomparativeIncomeStatementsfromEBIT,andcalculatenewROE:

Old / New
EBIT / $33,000 / $33,000
Less:Interest / 28,000 / 20,000
EBT / 5,000 / 13,000
Less:Taxes(40%) / 2,000 / 5,200
Netincome / $3,000 / $7,800
NewROE= NI/Equity= $7,800/$50,000= 0.1560=15.6%.
DIFFICULTY:
TOPICS: / Medium
ROEandrefinancing

81.SavelotsStores'currentfinancialstatementsareshownbelow:

Inventories / $500 / Accountspayable / $100
Othercurrentassets / 400 / Short-termnotespayable / 370
Fixedassets / 370 / Commonequity / 800
Totalassets / $1,270 / Totalliab. andequity / $1,270
Sales / $2,000
Operatingcosts / 1,843
EBIT / 157
Less:Interest / 37
EBT / 120
Less:Taxes(40%) / 48
Netincome / 72

A recentlyreleasedreportindicatesthatSavelots'currentratioof1.9is in linewiththeindustryaverage.However, itsaccountspayable,whichhavenointerestcostandwhicharedueentirelyto purchasesofinventories,amountto only20%ofinventoryversusanindustryaverageof60%.SupposeSavelotstookactionsto increaseitsaccounts payableto inventoriesratioto the60%industryaverage,butit(1)keptallofitsassetsat theirpresentlevels(thatis, theassetsideofthebalancesheetremainsconstant)and(2)alsohelditscurrentratioconstantat1.9.Assumethat Savelots'taxrateis40%,thatitscostofshort-termdebtis10%,andthatthechangeinpaymentswillnotaffect operations.In addition,commonequitywouldnotchange.Withthechanges,whatwouldbe Savelots'newROE?

a.10.5% b.7.8% c.9.0% d.13.2% e.12.0%

ANSWER:a

RATIONALE:Thefirmis notusingits"free"tradecredit(thatis,accountspayable(A/P))to the same extentasothercompanies.Sinceit isfinancingpartofitsassetswith10%notes payable,itsinterestexpenseishigherthannecessary.

Calculatetheincreasein payables:

Current(A/P)/Inventoriesratio= 100/500= 0.20.

TargetA/P=0.60(Inventories)= 0.60(500)= 300.

Increasein A/P= 300−100=200.

Becausethe currentratioandtotalassetsremainconstant,totalliabilitiesandequitymustbe unchanged.Theincreaseinaccountspayablemustbematchedbyanequaldecrease in interestbearingnotespayable.Notespayabledeclineby200.Interestexpense decreasesby200×0.10= 20.

ConstructcomparativeIncomeStatements:

OldNew

Sales$2,000$2,000

Operatingcosts1,8431,843

EBIT157157

Less:Interest3717

EBT120140

Less:Taxes4856

Netincome(NI)$72$84

ROE= NI/Equity= $72/$800= 9%.$84/$800= 10.5%.

NewROE= 10.5%.

DIFFICULTY:Medium

TYPE:Problem

TOPICS:ROEand financing

82.HarveySuppliesInc.hasacurrentratioof3.0,aquickratioof2.4,andaninventoryturnoverratioof6. Harvey's totalassetsare$1 millionandits debtratiois0.20.Thefirmhasno long-termdebt.WhatisHarvey'ssalesfigureif thetotalcostofgoodssoldis 75%ofsales?

a.$960,000 b.$720,000

c.$1,620,000 d.$120,000

e.$540,000

ANSWER: a

RATIONALE: Currentliabilities:(0.2)($1,000,000)=$200,000.

Currentassets:CA/$200,000=3.0;CA=$600,000.

Inventory:($600,000 −I)/$200,000=2.4;I=$120,000.

Sales:(0.75)S/$120,000=6; S=$720,000/0.75=$960,000.

DIFFICULTY: Medium

TOPICS: Salesvolume

83.Giventhefollowinginformation,calculatethemarketpricepershareof WAMInc.

Earningsafterinterestandtaxes= $200,000

Earningspershare= $2.00

Stockholders'equity=$2,000,000

Market/Bookratio=0.20 a.$20.00

b. $8.00 c. $4.00 d. $2.00 e.$1.00

ANSWER: c

RATIONALE: Numberofshares=$200,000/$2.00=100,000.

Bookvaluepershare=$2,000,000/100,000

=$20.Marketvalue=0.2(Bookvalue)=0.2($20)=$4.00pershare.

DIFFICULTY: Medium

TOPICS: Marketpricepershare

Full file at

84.OnitsDecember31stbalancesheet,LCGCompanyreportedgrossfixedassetsof$6,500,000andnetfixedassets of$5,000,000.Depreciationfortheyearwas$500,000.Netfixedassetsa yearearlieronDecember31st,hadbeen

$4,700,000.Whatfigurefor "CashFlowsAssociatedwithLong-TermInvestments(FixedAssets)"shouldLCG

reportonitsStatementofCashFlowsforthecurrentyear?

a. $500,000 b. $600,000 c. $700,000 d. $800,000 e.$900,000