Quiz Questions

3-1. Profitability ratios measure:

a. the speed at which the firm is turning over its assets

b. the ability of the firm to earn an adequate return on sales, total assets, and
invested capital
c. the firm's ability to pay off short term obligations as they are due

d. the debt position of the firm in light of its assets and earning power

3-2. Asset utilization ratios measure:

a. the speed at which the firm is turning over its assets

b. the ability of the firm to earn on adequate return on sales, total assets, and
invested capital
c. the firm's ability to pay off short term obligations as they are due

d. the debt position of the firm in light of its assets and earning power

3-3. Liquidity ratios measure:

a. the speed at which the firm is turning over its assets

b. the ability of the firm to earn an adequate return on sales, total assets, and
invested capital
c. the firm's ability to pay off short term obligations as they are due

d. the debt position of the firm in light of its assets and earning power.

3-4. Debt utilization ratios measure:

a. the speed at which the firm is turning over its assets

b. the ability of the firm to earn an adequate return on sales, total assets, and
invested capital
 c. the firm's ability to pay off short term obligations as they are due

d. the debt position of the firm in light of its assets and earning power

3-5. Return on assets is computed:

a. net income/sales

b. net income/total assets

c. net income/current assets

d. income before interest and taxes (EBIT)/total assets

3-6. Under the Du Pont method of analysis, return on total assets is:

a. profit margin times assets turnover

b. net income/total assets

c. income before interest and taxes (EBIT)/total assets

d. net income/sales

3-7. Receivables turnover is:

a. a profitability ratio

b. a debt utilization ratio

c. an asset utilization ratio

d. a liquidity ratio

3-8. Among the liquidity ratios, one would include:

a. receivables turnover and inventory turnover

 b. current ratio and quick ratio

c. capital asset turnover and total asset turnover

d. receivables turnover and total asset turnover

3-9. All of the following are debt utilization ratios except:

a. debt to total assets

b. times interest earned

c. fixed charge coverage

d. debt to sales

3-10. Analyzing the performance of the firm through ratios over a

number of years is referred to as:

a. financial analysis

b. ratio analysis

c. trend analysis

d. operations analysis

3-11. Which of the following does not cause a distortion in the reporting
of income?

a. The reporting of revenue.

b. The treatment of non-recurring items.

c. The tax-write off policy.

d. The firm's dividend policy.

3-12. Financial ratios are used to:

a. weigh and evaluate the operating performance of the firm

b. provide an absolute benchmark of industry performance

c. determine which firm will provide the highest return to investors

d. None of the above are correct

3-13. To the securities analyst, the most important ratio group is:

a. asset utilization

b. profitability

c. liquidity

d. debt utilization

3-14. To the banker/creditor, the most important ratio group is:

a. asset utilization

b. profitability

c. liquidity

d. debt utilization

3-15. To the bondholder, the most important ratio is:

a. profit margin

b. quick ratio

c. times interest earned

 d. debt to total assets

True/False Quiz
20-1. The purpose of financial statement analysis is to help users make
better business decisions, therefore the only parties interested in
financial statement analysis are external to the company.

True

False

20-2. Liquidity and efficiency, solvency, profitability, and market are

called the building blocks of analysis.

True

False

20-3. Financial reporting is not narrow in scope but broadly refers to

useful information for decision makers.

True

False

20-4. Financial statement analysis requires no standards or very loose

standards for comparisons.

True

False

20-5. Should a business have no interest income in one year, and have
$1,000 of interest income the following year, the percentage of change
in the interest income between the two years is 100%.
 True

False

20-6. Generally, trend percentages are not adjusted for the effects of
inflation or deflation.

True

False

20-7. Common-size comparative statements show items appearing on

them in percentage form and in dollar form.

True

False

20-8. If net sales increase by 10%, from $200,000 to $220,000, and the
cost of goods sold increases 10%, from $110,000 to $121,000, the
gross profit from sales will increase by 10%.

True

False

20-9. A ratio expresses a mathematical relation between two quantities.

True

False

20-10. Liquidity and efficiency are used synonymously in ratio analysis.

True
 False

20-11. The excess of current assets over current liabilities is known as

working capital.

True

False

20-12. A high current ratio suggests a strong liquidity position, however

the makeup of the type of business, the composition of the current
assets, and the turnover rate of assets need to be considered before
passing judgment on the current ratio.

True

False

20-13. When a company records a credit sale, the acid-test ratio will
increase.

True

False

20-14. A firm can have a positive current ratio and a negative acid-test
ratio.

True

False

20-15. The accounts receivable turnover for 2001 was 3.56 times. In
2002 it was 3.87 times. This type of change would generally be
considered a positive change.
 True

False

20-16. The write off of an account receivable through an allowance for

doubtful accounts will increase the current ratio.

True

False

20-17. An increase in the accounts receivable turnover is always a

favorable trend.

True

False

20-18. An increase in the merchandise inventory turnover is always a

favourable trend.

True

False

20-19. Merchandise inventory turnover is calculated by dividing the cost

of goods sold by the average of merchandise inventory balances.

True

False

20-20. Day's Sales Uncollected = (Accounts Receivable / Net Sales) x

365.

True
 False

20-21. Day's Sales in Inventory = Ending Inventory / Cost of Goods

Sold.

True

False

20-22. The debt ratio is calculated by dividing total liabilities by total

shareholders' equity.

True

False

20-23. When a company records a credit sale, the debt ratio will
decrease.

True

False

20-24. The times fixed interest charges earned provides a measurement

for evaluating the operating efficiency and profitability of a business.

True

False

20-25. The profit margin indicates the amount of net income each dollar
of sales generates.

True

False
20-26. If a company has a return on total assets of 18.0%, and net
income of $36,000, its average total assets are $180,000.

True

False

20-27. The market price per share of stock decreased 4.0%, or $1.00.
The earnings per share decreased 10%, or $.15. The price earnings
ratio will have increased.

True

False

20-28. The relationship between the market price of a share of stock

and the current earnings of the stock is known as the dividend yield.

True

False

20-29. The dividend yield is determined by dividing the annual dividends

declared per share by the market price per share.

True

False

20-30. An investor need only use the dividend yield as a measure to

evaluate the profitability of alternative share investments.

True

False

Multiple Choice Quiz

20-1.
Assets 2001 2000 1999 1998
Cash $10,000 $15,000 $12,000 $8,000
Other current assets 18,000 15,000 13,000 10,000
Plant and equipment 20,000 23,000 24,000 15,000
Total assets 48,000 53,000 49,000 33,000

Which of the following statements is true?

a. plant and equipment had the largest percentage gain from 1998 to 2000

b. cash had the greatest percentage decrease between 2000 and 2001

c. cash increased at a faster rate than total assets from 1998 to 2001

d. cash was always the same percentage of total assets

20-2.
2001 2000 1999 1998
Sales $160,000 $130,000 $100,000 $ 80,000
Cost of goods sold 96,000 71,500 53,000 41,600
Net income 28,000 26,000 25,000 24,000

Which of the following statements is NOT true?

a. sales have increased 200% since 1998

b. net income has increased 16.67% since 1998

c. gross profit on sales has increased 66.67% since 1998

d. net income as a percentage of sales has decreased

20-3. Which is NOT true of common-size comparative statements?

a. each item is shown as a percentage of some total of which it is a part

b. dollar amounts are generally not shown

 c. the net change in each item, on a year-to-year basis, is not shown

d. total assets are used as a total against which all assets are measured

20-4.
Current assets $120,000
Cash $20,000
Accounts receivable $45,000
Short-term investments $12,000
Merchandise inventory $42,000
Current liabilities $68,000

Which of the following is true?

a. working capital is $52,000, current ratio is 1.17

b. current ratio is 2.0 , acid-test ratio is 1.15

c. working capital is $10,000 , acid-test ratio is 1.15

d. working capital is $52,000, current ratio is 1.76

20-5. Net sales were $450,000, and the accounts receivable turnover
was 5.5 times. What is the average accounts receivable?

a. not determinable from the information provided

b. $24,750

c. $81,818

d. $90,000

20-6. The cost of goods sold was $240,000. Beginning and ending
merchandising inventory balances were $20,000 and $30,000,
respectively. The merchandise inventory turnover was:

a. 8.0 times
 b. 12.0 times

c. 7.0 times

d. 9.6 times

20-7. The days' sales in inventory is 73. The cost of goods sold is
$720,000. The net sales are $1,020,000. The beginning inventory was
$82,000. What is the ending inventory?

a. $98,360

b. $144,000

c. $139,726

d. $82,000

20-8. Total asset turnover is a component of:

a. solvency

b. profitability

c. comparability

d. operating efficiency

20-9. Which change in the following ratios would be regarded as

generally favourable by creditors but generally unfavourable by
shareholders?

a. debt to equity ratio changed from 1:2 to 1:2.5

b. current ratio changed from 2:5 to 3:4

c. debt to equity ratio changed from 2:5 to 1:3

 d. return on total assets changed from 10% to 12.5%

20-10. Which of the following formulas and its results is not correct?

a. Formula: Net sales/Average total assets

Result: Total asset turnover
b. Formula: (Net income/Net sales) x 100
Result: Profit margin
c. Formula: (Net inc./Average total assets) x 100
Result: Return on total assets employed
d. Formula: (Total liabilities/Total assets) x 100
Result: Equity ratio

20-11. Which of the following ratios would not be considered a

measurement of short-term liquidity?

a. current ratio

b. days' sales uncollected

c. debt ratio

d. acid-test ratio

20-12. Which of the following ratios would be of the least interest to the
short-term creditor of the business?

a. current ratio

b. times interest earned

c. acid-test ratio

d. working capital ratio

20-13. Net income is not used as a numerator or a denominator in

which of the following financial ratios?
 a. return on total assets employed

b. times fixed interest charges earned

c. return on common shareholders' equity

d. profit margin measurement

20-14. Net sales were $360,000. The cost of goods sold was $180,000.
Operating expenses were $120,000. The ending balance of the
Accounts Receivable account was $20,000. The merchandise turnover
ratio was 12.75. The profit margin was:

a. 16.67%

b. 20.0%

c. 40.0%

d. 33.3%

20-15. The denominator in the formula to calculate the return on

common shareholders' equity is:

a. book value of the common shares

b. average total assets

c. total equity

d. total contributed capital

20-16. Which of the following formulas is used to calculate a price-

earnings ratio?

a. dividends per share / earnings per share

b. current market price per share / earnings per share

 c. net income less preferred dividends / number of com. shares outstanding

d. dividends per share / market price per share

20-17. The balance of the Common Shares account was $400,000 for
the entire fiscal year. Net income for the year was $40,000, of which
25% was distributed to shareholders as a cash dividend. The market
price of the shares on the last day of the year was $12 per share. The
price earnings ratio was:

a. 40.0

b. 4.0

c. 12.0

d. 2.5

20-18. The market price per share is $32. The price earnings ratio is
5.0. The earnings per share are:

a. $160

b. 50% of the market price per share

c. 25.60

d. $6.40

20-19.
2001 2000 1999 1998
Total liabilities $100,000 $150,000 $122,000 $80,000
Shareholders' equity 80,000 150,000 130,000 100,000
Net income 20,000 23,000 24,000 15,000

If 50,000 common shares have been outstanding since 1998, then:

a. the 1998 debt-to-equity ratio was 1 to .80

 b. the earnings per share in 2001 were $0.40

c. the book value per share in 1999 was $3.08

d. earnings per share in 1998 were $0.15

20-20. Which line is NOT correct?

a. Ratio: Current ratio; Type of measurement: Short-term liquidity

b. Ratio: Return on total assets; Type of measurement: Operating efficiency

c. Ratio: Dividend yield; Type of measurement: Capital structure

d. Ratio: Equity ratio; Type of measurement: Long-term risk and capital structure

MC III

Which ratio tells the user everything there is to know about a company?

a. Current ratio

b. Earnings per share

c. Price/earnings ratio

d. No ratio tells the user everything about a company.

All of the following affect financial statement analysis except:

a. inflation.
2. b. the independent auditor.

c. alternative accounting principles.

d. industry averages.

An example of horizontal analysis would be:

a. comparing the income of General Motors to that of Ford Motor Company.

comparing the income of companies in the auto industry to those in the
3. b. motorcycle industry.

c. comparing the cash of Wal-Mart for 2005 to the cash of Wal-Mart for 2006.
comparing the net income of Wal-Mart for 2005 to the assets of Wal-Mart
d. for 2006.

4. Tracking items over a series of years is a practice called:

 a. profitability analysis.

b. ratio analysis.

c. trend analysis.

d. financial statement analysis.

Common-size financial statements refer to:

a. comparing different years of the same company's financial statements.

comparing the financial statements for different companies for the same
5. b. year.
putting all the financial statement information in terms of a common
c. currency, the dollar.
putting the financial statements in terms of percentages so comparisons
d. can be made.

When computing asset percentages on the balance sheet, the benchmark should be:

a. total cash.
6. b. total current assets.

c. total assets.

d. total stockholders' equity.

A measure of liquidity would include:

a. the gross profit ratio.

7. b. net income.

c. the price/earnings ratio.

d. the quick ratio.

One of the most widely used of all financial statement ratios is the:

a. quick ratio.
8. b. inventory turnover ratio.

c. current ratio.

d. accounts receivable turnover ratio.

9. Solvency refers to:

a. a company's ability to meet its current obligations.

b. how well management is using company resources.

c. a measure of a company's success in earning a return for stockholders.

 d. the ability of a company to remain in business over the long term.

A measure of solvency would include the:

a. accounts receivable turnover ratio.

10. b. cash-to-cash operating cycle.

c. times interest earned ratio.

d. asset turnover ratio.

When there is unfavorable leverage, a company will likely have a high:

a. price/earnings ratio.
11. b. debt-to-equity ratio.

c. return on assets ratio.

d. inventory turnover ratio.

A measure of profitability would include:

a. earnings per share.

12. b. the debt-to-equity ratio.

c. the inventory turnover ratio.

d. All of the answers are correct.

For a gain or loss to be considered extraordinary, it must be:

a. unusual.
13. b. infrequent.

c. unusual and infrequent.

d. either unusual or infrequent.

Which of the following is not true about discontinued operations and extraordinary items?

a. They are all shown net of their tax effects on the income statement.
They are separated from income from continuing operations because they are usually not recurring
14. b. statement items.

c. They do not appear on all income statements.

d. They all appear before income from continuing operations on the income statement.
Q1.
Analysing Financial Statements across the period of time is called ... ... ... ...
 'Horizontal Analysis'

'Vertical Analysis'

Both of the above

None of the above

Q2.
An analysis technique that states each account balance on a financial statement as a
percentage of base amount of the statement is :
A Horizontal Analysis.

A Vertical Analysis.

Both of the above

None of the above

Q3.
Which is the ratio/ratios used for analysing financial statements?
Profitability ratios

Liquidity ratios

Solvency ratios

All the above

Q4.
Which is not a profitability analysis ratio?
Profit margin

Debt to asset ratio

Return on assets

Price to earning ratio

Q5.
Which is not a liquidity analysis ratio?
Current ratio
 Inventory turnover ratio

Earnings per share

Quick ratio

Q6.
Which is not a solvency analysis ratio?
Debt to asset ratio

Debt to equity ratio

Receivable turnover ratio

Times interest earned

Q7.
Which is the component of Dupont Analysis?
Operating Efficiency

Capital Structure

Asset effectiveness

All of the above

What is the first step in an analysis of financial statements?

Check the auditor's report.

Do a common-size analysis.

Specify the objectives of the analysis.

Check references containing financial information.

What is a creditor's objective in performing an analysis of financial

statements?
To determine the company's taxes for the current year.
 To determine if the firm would be a good place to obtain employment.

To decide whether the borrower has the ability to repay interest and principal on
borrowed funds.

To determine whether an investment is warranted by estimating a company's

future earnings stream.

What is an investor's objective in financial statement analysis?

To decide whether the borrower has the ability to repay interest and principal on
borrowed funds.

To determine whether an investment is warranted by estimating a company's

future earnings stream.

To determine if the firm would be a good place to obtain employment.

To determine the company's taxes for the current year.

What information does the auditor's report contain?

An unqualified opinion.

An opinion as to the fairness of the financial statements.

The results of operations.

A detailed coverage of the firm's liquidity, capital resources, and operations.

Which of the following would be helpful to an analyst evaluating the

performance of a firm?
Reviewing the annual reports of a company's suppliers, customers, and
competitors.

Understanding the economic and political environment in which the company

operates.

Preparing common-size financial statements and calculating key financial ratios for
the company being evaluated.
 All of the above.

Which of the following is not required to be discussed in the

Management Discussion and Analysis of the Financial Condition and
Results of Operations?
Earnings projections

Liquidity

Capital resources

Operations

What type of information found in supplementary schedules is required

for inclusion in an annual report?
Management remuneration and segmental data

Inflation data

Segmental data

Material litigation and management photographs

What is a Form 10-K?

A document filed with the SEC containing nonpublic information.

A document filed with the SEC by companies selling securities to the public,
containing much of the same information as the annual report as well as additional
detail.
A document filed with the American Institute of Certified Public Accountants
(AICPA) containing supplementary schedules showing management remuneration
and elaborations of financial statement disclosures.
A document filed with the SEC containing key business ratios and forecasts of
earnings.
What information can be gained from sources such as Industry Norms
and Key Business Ratios, Annual Statement Studies, and Industry
Surveys?
The general economic condition

Forecasts of earnings

Elaborations of financial statement disclosures

A company's relative position within its industry

Which of the following is not a tool or technique used by a financial

statement analyst?
Industry comparisons

Random sampling analysis

Trend analysis

Common-size financial statement

What do liquidity ratios measure?

A firm's ability to meet cash needs as they arise.

The liquidity of fixed assets.

The overall performance of a firm.

The extent of a firm's financing with debt relative to equity.

Which category of ratios is useful in assessing the capital structure and
long-term solvency of a firm?
Leverage ratios

Activity ratios

Liquidity ratios

Profitability ratios

What is a serious limitation of financial ratios?

Ratios are not predictive.

Ratios can be used only by themselves.

Ratios are screening devices.

Ratios indicate weaknesses only.

What is the most widely used liquidity ratio?

Debt ratio

Current ratio

Inventory turnover

Quick ratio

What is a limitation common to both the current and quick ratio?

Prepaid expenses are potential sources of cash.
 Inventories may not be truly liquid.

Marketable securities are not liquid.

Accounts receivable may not be truly liquid.

Why is the quick ratio a more rigorous test of short-run solvency than
the current ratio?
The quick ratio eliminates inventories from the numerator.

The quick ratio eliminates prepaid expenses for the numerator.

The quick ratio eliminates prepaid expenses for the denominator.

The quick ratio considers only cash and marketable securities as current assets.

What does an increasing collection period for accounts receivable

suggest about a firm's credit policy?
The firm is probably losing qualified customers.

The credit policy is too restrictive.

The credit policy may be too lenient.

The collection period has no relationship to a firm's credit policy.

Which of the following statements about inventory turnover is false?

Inventory turnover is calculated with cost of goods sold in the numerator.

A low inventory turnover is generally a sign of efficient inventory management.

 Inventory turnover measures the efficiency of the firm in managing and selling
inventory.

Inventory turnover is a gauge of the liquidity of a firm's inventory.

Which of the following items would cause the cash conversion cycle to
decrease?
Increasing the days inventory held.

Increasing days payable outstanding.

Increasing the average collection period.

None of the above.

What do the asset turnover ratios measure?

The distribution of assets in which funds are invested.

The liquidity of the firm's current assets.

Management's effectiveness in generating sales from investments in assets.

The overall efficiency and profitability of the firm.

Debt ratio

Long-term debt to total capitalization

Times interest earned

Debt to equity
Why is the amount of debt in a company's capital structure important
to the financial analyst?
Equity is riskier than debt.

Debt is less costly than equity.

Debt implies risk.

Debt is equal to total assets.

Why is the fixed charge coverage ratio a broader measure of a firm's

coverage capabilities than the times interest earned ratio?
The fixed charge ratio includes both operating and capital leases whereas the
times interest earned ratio includes only operating leases.

The fixed charge ratio indicates how many times the firm can cover interest
payments.

The fixed charge ratio includes lease payments as well as interest payments.

The times interest earned ratio does not consider the possibility of higher interest
rates.

Which profit margin measures the overall operating efficiency of the

firm?
Return on equity

Net profit margin

Gross profit margin

Operating profit margin

Which ratio or ratios measure the overall efficiency of the firm in
managing its investment in assets and in generating return to
shareholders?
Gross profit margin and net profit margin.

Total asset turnover and operating profit margin.

Return on investment and return on equity.

Return on investment.

What does a financial level index greater than one indicate about a
firm?
The unsuccessful use of financial level.

Operating returns more than sufficient to cover interest payments on borrowed

funds.

An increased level of borrowing.

More debt financing than equity financing.

What does the price to earnings ratio measure?

The "multiple" that the stock market places on a firm's earnings.

The relationship between dividends and market prices.

The earnings for one common share of stock.

The percentage of dividends paid to net earnings of the firm.

JDL's current ratio is:

Refer to the table below for questions 28-31:

1.0 to 1

0.7 to 1

1.5 to 1

2.4 to 1

JDL's quick ratio is:

1.0 to 1

2.4 to 1

0.7 to 1

1.5 to 1

JDL's average collection period is:

16 days.

11 days.

22 days.

6 days.
JDL's inventory turnover is:
37.5 times.

13.5 times.

1.25 times.

3.0 times.

RQM's gross profit margin, operating profit margin, and net profit
margin, respectively, are:

Refer to the table below for questions 32-35:

40.00%, 22.50%, 19.50%.

40.00%, 22.50%, 10.83%.

60.00%, 22.50%, 19.50%.

60.00%, 19.50%, 10.83%.

RQM"s return on equity is:

26%.

54%.
 19%.

42%

RQM's return on investment is:

10.8%.

12.8%.

26.5%

22.5%.

RQM's cash flow margin is:

10.8%

1.4%.

12.8%.

2.5%.