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Indicate whether the statement is true or false.
1. Investors are willing to pay a higher P/E ratio for growth stocks than for income stocks.
a.
True
b.
False
2. Quick assets include cash and merchandise inventory.
a.
True
b.
False
3. The ratio that measures the relationship between cash and current assets is the quick ratio.
a.
True
b.
False
4. The dividend ratio is the most widely recognized measure of a corporation’s financial performance.
a.
True
b.
False
5. An accounts receivable ratio above the target range may indicate that ThreeGreen is too liberal in extending credit to its
customers.
a.
True
b.
False
6. A corporation should compare its working capital to industry standards.
a.
True
b.
False
7. Managers who want to control operating expenses will be more interested in the operating margin than the total
operating expense ratio.
a.
True
b.
False
8. The gross profit ratio is also referred to as the gross margin.
a.
True
b.
False
9. A company having earnings per share of $5.67 is more profitable than a company having earnings per share of $4.32.
a.
True
b.
False
10. A company has set its gross margin target range at 40% to 42%. An increase in the ratio from 38% to 39% is a
positive trend.
a.
True
b.
False
11. A business with operating expenses that exceed its target range should always begin by reducing the number of
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employees, the largest operating expense for most businesses.
a.
True
b.
False
12. The gross profit margin gives investors the best indication of how effectively a business is earning a profit from its
normal business operations.
a.
True
b.
False
13. A corporation’s earnings per share can only be compared to its earnings per share during prior fiscal years.
a.
True
b.
False
14. The current ratio assumes a business could sell its merchandise inventory quickly.
a.
True
b.
False
15. Alpha Company’s target range for its total operating expense ratio is between 32.0% and 34.0%. A decline in its
operating expense ratio from thus, from 35.1% to 34.2% is a favorable trend.
a.
True
b.
False
16. Income stocks typically have a higher dividend yield than growth stocks.
a.
True
b.
False
17. A company has done everything possible to control rising merchandise costs. To maintain its gross margin, its only
alternative is to increase sales.
a.
True
b.
False
18. Modifying a benchmark is an option for a business that fails to achieve its benchmark.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
19. Gross margin can be increased by
a.
selling more merchandise.
b.
buying less merchandise.
c.
increasing unit sales prices.
d.
reducing operating expenses.
20. The debt ratio is an example of a
a.
solvency ratio.
b.
profitability ratio.
c.
liquidity ratio.
d.
market ratio.
21. To rate the ability of a business to pay its current and long-term liabilities, investors use
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a.
solvency ratios.
b.
profitability ratios.
c.
liquidity ratios.
d.
market ratios.
22. The least likely factor a business will use to determine a benchmark is
a.
government economic standards.
b.
actual ratios from the prior year.
c.
industry standards.
d.
its business plan.
23. A company’s cost of merchandise sold increased by 6.7% over the prior year. Management
a.
considers this to be an unfavorable trend.
b.
cannot evaluate this change without knowing the change in sales.
c.
should reduce the amount of merchandise purchased during the next year.
d.
should reduce operating costs to maintain a constant operating margin.
24. Vertical analysis ratios are an example of a
a.
solvency ratio.
b.
profitability ratio.
c.
liquidity ratio.
d.
market ratio.
25. The price-earnings ratio is an example of a
a.
solvency ratio.
b.
profitability ratio.
c.
liquidity ratio.
d.
market ratio.
26. The ratio that gives the best indication of how effectively a business is earning a profit from its normal business
operations is the
a.
debt ratio.
b.
rate of return on sales.
c.
gross margin.
d.
operating margin.
27. Gross margin is also referred to as
a.
operating margin.
b.
gross profit margin.
c.
rate of return on sales.
d.
earnings per share.
28. Operating margin is also referred to as
a.
rate of return on sales.
b.
operating income.
c.
gross margin.
d.
earnings per share.
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