Principles of Finance, 6e
Besley/Brigham
Chapter 07
Cengage Learning Testing, Powered by Cognero
Page 36
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Cash Flow Cycle
78. Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the
financial position and strength of a firm.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Ratio Analysis
79. The current ratio and inventory turnover ratio measure the liquidity of a firm. The current ratio measures the relation
of a firm’s current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its
inventory back into a “quick” asset or cash.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Liquidity Ratios
80. Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-
to-use measures of a firm’s liquidity position.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
Principles of Finance, 6e
Besley/Brigham
Chapter 07
Cengage Learning Testing, Powered by Cognero
Page 41
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Retained Earnings
95. The time dimension is important in financial statement analysis. While the balance sheet and income statements
represent the firm’s financial position at a point in time, the statement of cash flows reports changes that were made to the
firm’s accounts over a period of time.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Time Dimension
96. The financial position of companies whose business is seasonal can be dramatically different depending upon the time
of year chosen to construct financial statements. This time sensitivity is especially true with respect to the firm’s balance
sheet.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Balance Sheet
97. In order to accurately estimate cash flow from operations, depreciation must be added back to net income. The reason
for this is that even though depreciation is deducted from revenue it is really a non-cash charge.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Principles of Finance, 6e
Besley/Brigham
Chapter 07
Cengage Learning Testing, Powered by Cognero
Page 44
turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that
part of the inventory is obsolete or damaged.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Inventory Turnover Ratio
105. We can use the fixed asset turnover ratio to legitimately compare firms in different industries as long as all the firms
being compared are using the same proportion of fixed assets to total assets.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Fixed Asset Turnover Ratio
106. Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of
return on their assets, and that ROA is positive. However, one firm has a higher debt ratio. Under these conditions, the
firm with the higher debt ratio will also have a higher rate of return on common equity.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
ROA
ROE
107. Suppose a firm wants to maintain a specific TIE ratio. If the firm knows the level of its debt, the interest rate it will
pay on that debt and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target
TIE ratio.
Principles of Finance, 6e
Besley/Brigham
Chapter 07
Cengage Learning Testing, Powered by Cognero
Page 45
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
TIE Ratio
108. The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms
must meet more than just their scheduled interest payments out of earnings. Therefore, the fixed charge coverage is more
inclusive than the TIE ratio.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Fixed Charge Coverage Ratio
109. If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will
decrease.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Profit Margin and Leverage
110. If a positive change in gross fixed assets is greater than the change in accumulated depreciation for a particular year,
net fixed assets increase and this constitutes a source of funds.
a.
True
b.
False
ANSWER:
False
POINTS:
1
Cengage Learning Testing, Powered by Cognero
Page 47
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
114. Common stockholders’ equity is the current market value of all common shares of stock outstanding.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Common Stockholders’ Equity
115. During a period of lowering prices, the FIFO accounting method will produce a higher balance sheet inventory but a
lower cost of goods sold than the LIFO accounting method.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Accounting Alternatives
116. A positive number in the retained earnings account indicates that according to GAAP in the past the firm has earned
income excess of all dividends paid.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Retained Earnings
117. Using the direct method to determine cash flows from operations, start with net income, then add back all expenses
not paid in cash and subtract all revenues that do not provide cash.
a.
True
b.
False
ANSWER:
False
