Financial Management, 12e (Titman/Keown/Martin)
Chapter 4 Financial Analysis-Sizing Up Firm Performance
4.1 Why Do We Analyze Financial Statements?
1) Which of the following parties would perform an external inancial analysis?
A) A irm’s compensation committee
B) A inancial analyst forecasting the next period’s borrowing needs
C) A irm’s creditors
D) A CFO comparing the performance of the irm’s various divisions
Question Status: New question
Objective: 4.1 Explain what we can learn by analyzing a irm’s inancial statements.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
2) Which of the following parties would perform an internal inancial analysis?
A) A inancial analyst forecasting the next period’s borrowing needs
B) A irm’s competitors
C) A irm’s creditors
D) Analysts for investment companies
Question Status: New question
Objective: 4.1 Explain what we can learn by analyzing a irm’s inancial statements.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
3) Which of the following parties would be interested in an analysis of the irm’s inancial
statements?
A) Investors
B) Creditors
C) The irm’s managers
D) all of the above
Question Status: New question
Objective: 4.1 Explain what we can learn by analyzing a irm’s inancial statements.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
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4) The analysis of a irm’s inancial statements can be an important factor in the irm’s
ability to borrow money.
Question Status: New question
Objective: 4.1 Explain what we can learn by analyzing a irm’s inancial statements.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
5) The analysis of a irm’s inancial statements is usually of interest only to people who do
not work for the company.
Question Status: New question
Objective: 4.1 Explain what we can learn by analyzing a irm’s inancial statements.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
6) Individuals who do not work for a company rarely have enough information to perform a
detailed inancial analysis of the company.
Question Status: New question
Objective: 4.1 Explain what we can learn by analyzing a irm’s inancial statements.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
2
4.2 Common Size Statements: Standardizing Financial Information
1) The principal reason for preparing common size statements is
A) to make meaningful comparisons between irms that are not the same size.
B) to make meaningful comparisons between diferent iscal years.
C) to eliminate the efects of inlation.
D) to make meaningful comparisons between irms in diferent industries.
Question Status: New question
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
2) Common size inancial statements represent all igures on the inancial statements
A) in inlation adjusted dollars from a base year.
B) as if all companies being compared had the same total revenue.
C) as if all companies being compared had the same total assets.
D) as a percentage of either sales or total assets.
Question Status: New question
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
3) Common size income statements represent all igures on the income statement
A) as a percentage change from the previous year.
B) percentages of the current year’s sales.
C) as a percentage of some benchmark igure.
D) as a percentage of total assets.
Question Status: New question
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
3
4) Common size balance sheets represent all igures on the balance sheet
A) as a percentage change from the previous year.
B) percentages of the current year’s sales.
C) as a percentage of some benchmark igure.
D) as a percentage of total assets.
Question Status: New question
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
5) On a common size balance sheet, total assets are equal to 100%.
Question Status: Previous edition
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
6) On a common size income statement, EBIT is equal to 100%.
Question Status: Previous edition
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
7) By using common size income statements, irms can determine how various expenses as
a percentage of total sales changed from period to period.
Question Status: Previous edition
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
4
8) What is the purpose of using common size balance sheets and common size income
statements?
Question Status: Previous edition
Objective: 4.2 Use common-size inancial statements as a tool of inancial analysis.
Keywords: common size statements
Principles: Principle 4: Market Prices Relect Information
4.3 Using Financial Ratios
1) If you were given the components of current assets and of current liabilities, what
ratio(s) could you compute?
A) Acid test or quick ratio
B) Average collection period
C) Current ratio
D) Both A and C
E) All of the above
Question Status: Revised
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
2) The debt ratio is a measure of a irm’s
A) leverage.
B) proitability.
C) liquidity.
D) eiciency.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
5
3) Which of the following statements is true?
A) Current assets consist of cash, accounts receivable, inventory, and net plant, property,
and equipment.
B) The quick ratio is a more restrictive measure of a irm’s liquidity than the current ratio.
C) For the average irm, inventory is considered to be more “liquid” than accounts
receivable.
D) A successful irm’s current liabilities should always be greater than its current assets.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
4) Which of the following transactions does NOT afect the quick ratio?
A) Land held for investment is sold for cash.
B) Equipment is purchased and is inanced by a long-term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a credit basis.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
5) Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the
average collection period (360-day year) is
A) 90 days.
B) 45 days.
C) 75 days.
D) 60 days.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
6
6) The question “Did the common stockholders receive an adequate return on their
investment?” is answered through the use of
A) liquidity ratios.
B) proitability ratios.
C) coverage ratios.
D) leverage ratios.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
7
Table 1
Smith Company Balance Sheet and selected Income Statement data
Assets:
Cash and marketable securities $300,000
Accounts receivable 2,215,000
Inventories 1,837,500
Prepaid expenses 24,000
Total current assets $3,286,500
Fixed assets 2,700,000
Less: accumulated depreciation 1,087,500
Net ixed assets $1,612,500
Total assets $4,899,000
Liabilities:
Accounts payable $240,000
Notes payable 825,000
Accrued taxes 42,500
Total current liabilities $1,107,000
Long-term debt 975,000
Owner’s equity 2,817,000
Total liabilities and owner’s equity $4,899,000
Net sales (all credit) $6,375,000
Less: Cost of goods sold 4,312,500
Selling and administrative expense 1,387,500
Depreciation expense 135,000
Interest expense 127,000
Earnings before taxes $412,500
Income taxes 225,000
Net income $187,500
Common stock dividends $97,500
Change in retained earnings $90,000
7) Based on the information in Table 1, the current ratio is
A) 2.97.
B) 1.46.
C) 2.11.
D) 2.23.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
8
8) Based on the information in Table 1, the average collection period is
A) 71 days.
B) 84 days.
C) 64 days.
D) 127 days.
Question Status: Revised
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
9) Based on the information in Table 1, the debt ratio is
A) 0.70.
B) 0.20.
C) 0.74.
D) 0.42.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
10) Based on the information in Table 1, the net proit margin is
A) 4.61%.
B) 2.94%.
C) 1.97%.
D) 5.33%.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
11) Based on the information in Table 1, the inventory turnover ratio is
A) 0.29 times.
B) 2.35 times.
C) 0.43 times.
D) 3.47 times.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
12) Marshall Networks, Inc. has a total asset turnover of 2.5 and a net proit margin of
3.5%. The irm has a return on equity of 17.5%. Calculate Marshall’s debt ratio.
A) 30%
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B) 40%
C) 50%
D) 60%
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
13) The DuPont method decomposes return on equity into
A) return on assets and the debt ratio.
B) return on assets and the equity multiplier.
C) operating income and inventory turnover.
D) net proit margin and ixed asset turnover.
Question Status: New question
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
14) A irm’s average collection period has decreased signiicantly from the previous year.
Which of the following could possibly explain the results?
A) Customers are paying of their accounts quicker.
B) Customers are taking longer to pay for purchases.
C) The irm has a stricter collection policy.
D) Both A and C.
Question Status: Previous edition
Objective: 4.3 Calculate and use a comprehensive set of inancial ratios to evaluate a company’s
performance.
Keywords: inancial ratios
Principles: Principle 2: There Is a Risk–Return Tradeof
10