Financial Management: Core Concepts, 4e (Brooks)
Chapter 14 Financial Ratios and Firm Performance
1) In the business world we need to be able to measure ________ performance and predict
________ performance if we want to deliver positive results.
A) past; future
B) past; present
C) present; future
D) present; past
2) The financial statements of a company are the primary sources of information that enable us to
communicate the financial results ________.
A) of the company externally
B) of the company internally
C) to internal managers but not externally to the public
D) of the company, both internally and externally
3) Which of the statements below is FALSE?
A) Financial statements are a collection of historical and current activities of the company.
B) The collection of value over time found in financial statements requires us to pay attention to
how we construct financial ratios so as to glean information for analysis.
C) All financial statements are constructed with the same accounting principles, so you can
always compare different firms based solely on these statements.
D) We want to analyze financial statements so as to compare different companies and their
performance relative to our company.
4) Which of the statements below is FALSE?
A) Financial statements are a collection of historical and current activities of the company.
B) The collection of value over time found in financial statements requires us to pay attention to
how we construct financial ratios so as to glean information for analysis.
C) We want to analyze financial statements so as to compare different companies and their
performance relative to our company.
D) All of the above statements are TRUE.
5) An example of a financial statement is ________.
A) the Income Statement
B) the Sources and Uses of Cash
C) the Statement of Financial Position (Balance Sheet)
D) all of these
6) ________ is the listing of all assets and all claims against the assets of a company.
A) The Balance Sheet or Statement of Financial Position
B) Income Statement
C) The Sources and Uses of Cash
D) All of these
7) The term balance sheet is used because the following accounting identity must always hold
________.
A) Assets ≡ Liabilities – Owners’ Equity
B) Assets ≡ Liabilities + Owners’ Equity
C) Liabilities ≡ Assets + Owners’ Equity
D) Owners’ Equity ≡ Liabilities + Assets
8) Income statements are often prepared ________.
A) monthly for external use and quarterly for internal reporting
B) annually for internal use and quarterly for external reporting
C) monthly for internal use and quarterly for external reporting
D) monthly for internal use and annually for external reporting
9) Total liabilities are $200,000 and total owners’ equity is $100,000. What are total assets?
A) We need to know retained earnings before we can compute total assets.
B) We need more information on current and long-term assets before we can compute total
assets.
C) $200,000
D) $300,000
10) Total current liabilities are $100,000 and total owners’ equity is $2,000,000. What are total
assets?
A) We need to know retained earnings before we can compute total assets.
B) We need more information on long-term liabilities before we can compute total assets.
C) $2,000,000
D) $2,100,000
11) The revenue is $10,000, the cost of goods sold is $2,000, the selling, general and
administrative expenses are $3,000, addition to retained earnings are $2,000, and depreciation is
$1,000. What is the EBIT?
A) -$1,000
B) $2,000
C) $3,000
D) $4,000
12) The revenue is $30,000, the cost of goods sold is $16,000, the selling, general and
administrative expenses are $7,000, interest expense is $2,000,addition to inventory is $1,000,
and depreciation is $3,000. What is the EBIT?
A) $1,000
B) $4,000
C) $7,000
D) $13,000
13) EBIT is $12,000 and interest expense is $3,000. If the tax rate is 20%, what is the net
income?
A) $3,800
B) $4,200
C) $7,200
D) $9,400
14) Which of the following statements is TRUE about benchmarking?
A) It compares a company’s current performance against its own previous performance.
B) It compares a company’s performance against that of its competitors.
C) It provides a standard of comparison for financial measurement.
D) All of the above statements are true about benchmarking.
15) With regard to trend analysis over time, which of the following statements is TRUE?
A) We often look at the past five years of financial statements to establish trends and then predict
future performance based on these trends.
B) To look at trends over time requires that we examine a financial statement at one point in
time.
C) The net income last year was $20,000 and the past five years has shown an increase of 10%
on average for each of these five years. The predicted net income for next year is still $20,000.
D) It is better to predict future performance by basing it solely on net income than on all the
individual accounts.
16) One way to measure a company’s financial performance is to benchmark against that of its
competition. Which of the below is NOT a problem a company faces when benchmarking this
way?
A) A problem arises when we use financial statements of different firms.
B) Firms are of different sizes, and thus comparisons may be troubling.
C) We cannot restate common-size financial statements for different firms.
D) All of these are problems.
17) Comparing two companies using ________ may point out differences in management styles.
A) common-size financial statements
B) sales growth
C) historical share prices
D) earnings per share
18) To convert a balance sheet into a common-size balance sheet statement, we restate all the
numbers as percentages of ________.
A) revenue
B) total assets
C) total owners’ equity
D) total liabilities
19) To convert an income statement into a common-size income statement, we restate all the
numbers as percentages of ________.
A) total revenues
B) cost of goods sold
C) net income
D) total assets
20) The Balance Sheet, or Statement of Financial Position, is the listing of all assets and all
claims against the assets of a company.
21) The Balance Sheet is the recording of the business activities over the past business cycle.
22) Benchmarking compares a company’s current performance against its own previous
performance or against that of its competitors.
23) Benchmarking is often just a starting point for analysis and directs the management team or
potential investors to areas of the company that may be performing well or poorly.
24) Benchmarking compares a company’s current performance against its own previous
performance whereas bookmarking compares a company’s current performance against that of its
competitors.
25) Common size statements are a particularly ineffective method to compare firms of different
size.
26) Name and describe two primary financial statements produced by a company.
27) Briefly describe what benchmarking does.
28) Briefly describe the major problem that arises when benchmarking against your competitors.
Describe how we can overcome this problem.
1) From the financial statements, we can look at specific performance areas of a company by
selecting key pieces of information and analyzing this information ________.
A) at a point in time
B) over a specific time horizon
C) at a point in time or over a specific time horizon
D) All of these
2) ________ can be helpful for managers to understand short-term cash obligations.
A) Profitability ratios
B) Asset management ratios
C) Solvency ratios
D) Liquidity ratios
3) Which of the following statements is TRUE?
A) The current ratio is current assets divided by current liabilities.
B) Total asset turnover is net income divided by total assets.
C) The cash coverage ratio equals cash divided by current liabilities.
D) The quick ratio equals current assets – current liabilities divided by current liabilities.
4) Which of the statements below is FALSE?
A) The acid ratio test equals current assets minus inventories divided by current liabilities.
B) Examples of liquidity ratios include the current ratio, the cash coverage ratio, and the quick
ratio.
C) The current ratio is current assets divided by current liabilities.
D) Inventory turnover equals cost of goods sold divided by inventory.
5) Computing liquidity ratios is ________ but interpreting them is ________.
A) complex; even more complex
B) complex; more straightforward
C) straightforward; more complex
D) None of these
6) A current ratio greater than 1 can tell us that the company ________.
A) should be able to cover the current liabilities
B) should be able to keep away from short-term cash problems
C) may have too much capital tied up in current assets
D) All of these
7) Which of the statements below is FALSE?
A) When the current ratio is greater than 1, we are also saying that net working capital is positive
as current assets are greater than current liabilities.
B) Financial leverage ratios deal with long-term solvency and the use of debt as a financing tool.
C) The debt ratio is total assets minus total equity divided by equity.
D) Times interest earned equals EBIT divided by interest expense.
8) Which of the statements below is FALSE?
A) The cash coverage ratio is EBIT plus depreciation divided by interest expense.
B) Times interest earned equals EBIT divided by interest expense.
C) The times interest earned ratio tells us the number of times a company has resorted to debt
financing over the year.
D) The debt ratio basically tells us the amount in debt for every dollar of assets.
9) ________ help us analyze whether a company is moving toward financial stress or is using
debt to benefit the company and ultimately, the owners of the company.
A) Financial leverage ratios
B) Asset management ratios
C) Days’ sales in inventory
D) Total asset turnover
10) Debt is a good when ________.
A) we pay for everything later, allowing more positive cash flow today
B) we enjoy the benefits of acquiring an asset early but can still pay for it over time
C) we borrow at low rates, even if you already have a lot of debt
D) we use it very sparingly, because debt is rarely useful
11) Which of the statements below is TRUE?
A) Inventory turnover is cost of goods sold divided by accounts receivables.
B) Receivables turnover is accounts receivable divided by sales.
C) Total asset turnover is profits divided by total assets.
D) A higher inventory turnover ratio signifies that inventory is moving faster.