Fundamentals of Corporate Finance 3e Test Bank
Chapter 4: Analyzing Financial Statements
1.
Financial statement analysis can help us determine why a firm’s cash flows are increasing or
decreasing.
A)
True
B)
False
Ans:
A
2.
Stockholders are primarily concerned on the value of their stock, but not on how much cash
they can expect to receive from dividends and/or capital appreciation over time.
A)
True
B)
False
Ans:
B
3.
Managers’ decisions regarding financing, investment, and working capital are reflected in the
financial statements.
A)
True
B)
False
Ans:
A
Learning Objective: LO 1
Fundamentals of Corporate Finance 3e Test Bank
4.
A financial statement analysis conducted over a period of time is called trend analysis.
A)
True
B)
False
Ans:
A
5.
A typical way in which a common-size income statement is constructed is by dividing all
expense items in an income statement by net income.
A)
True
B)
False
Ans:
B
6.
The most frequent method used for creating a common-size balance sheet is to divide each
of the accounts by total assets, expressing each account as a percentage of total assets.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
7.
Liquidity ratios are concerned with a firm’s ability to pay its current bills without putting the
firm in financial difficulty.
A)
True
B)
False
Ans:
A
8.
A)
True
B)
False
Ans:
A
9.
A company can improve its liquidity by increasing its accounts payable, while maintaining the
other accounts constant.
A)
True
B)
False
Ans:
B
Learning Objective: LO 3
Level of Difficulty: Medium
Fundamentals of Corporate Finance 3e Test Bank
10.
The purchase of additional inventory by a firm should decrease a firm’s quick ratio.
A)
True
B)
False
Ans:
A
11.
Turnover ratios are useful for managers in identifying inefficient use of current and long-term
assets.
A)
True
B)
False
Ans:
A
12.
A firm increased its day’s sales outstanding from 35 days to 43 days. This implies the firm is
more efficient in collecting the debts.
A)
True
B)
False
Ans:
B
13.
Total asset turnover is more relevant for service-industry firms, while the fixed asset turnover
ratio is more relevant for manufacturing industry firms.
A)
True
B)
False
Fundamentals of Corporate Finance 3e Test Bank
14.
Financial leverage refers to the use of preferred stock in a firm’s capital structure.
A)
True
B)
False
Ans:
B
15.
The equity multiplier of a firm is computed by dividing the total equity by its total assets.
A)
True
B)
False
Ans:
B
16.
The higher the times-interest-earned ratio, the more comfortable a firm is in meeting its interest
obligations.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
17.
For a given share price of a firm’s stock, the lower the EPS the lower the price-earnings ratio.
A)
True
B)
False
Ans:
B
18.
A firm that has no debt will have its return on assets (ROA) equal to its return on equity (ROE).
A)
True
B)
False
Ans:
A
19.
For a given level of after-tax income, the lower the level of equity a firm has, the higher the
return on equity its shareholders will earn.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
20.
The DuPont equation relates a firm’s net profit margin, total asset turnover ratio, and equity
multiplier to determine its return on equity.
A)
True
B)
False
Ans:
A
21.
Firms with a lower return on assets (ROA) and higher leverage will have a lower return on
equity (ROE) than firms with a higher return on assets (ROA) and lower leverage.
A)
True
B)
False
Ans:
B
22.
In a peer group analysis, the benchmark for financial statement analysis is the performance of a
competitor that is roughly the same size and that offer a similar range of products.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
23.
While doing an industry group analysis, you form the comparison group by choosing firms that
are larger than the firm being compared.
A)
True
B)
False
Ans:
B
24.
The Standard Industrial Classification (SIC) codes are four-digit numbers in which the last two
digits describe the type of business or industry in which the firm is engaged.
A)
True
B)
False
Ans:
B
25.
The three different perspectives on financial statement analysis are those of the:
A)
manager, regulator, and bondholder.
B)
manager, shareholder, and creditor.
C)
regulator, shareholder, and creditor.
D)
shareholder, creditor, and regulator.
Ans:
B
Learning Objective: LO 1
Level of Difficulty: Easy
Fundamentals of Corporate Finance 3e Test Bank
26.
Shareholders analyze financial statements in order to:
A)
assess the cash flows that the firm will generate from its operations.
B)
determine the firm’s profitability, their return for that period, and the dividend they are
likely to receive.
C)
focus on the value of the stock they hold.
D)
All of the above
Ans:
D
AICPA: Measurement
27.
The creditors of a firm analyze financial statements so that they can focus on:
A)
the firm’s amount of debt.
B)
the firm’s ability to generate sufficient cash flows to meet its legal obligations first and
still have sufficient cash flows to meet debt repayment and interest payments.
C)
the firm’s ability to meet its short-term obligations.
D)
All of the above.
Ans:
D
28.
A firm’s management analyzes financial statements so that:
A)
they can get feedback on their investing, financing, and working capital decisions by
identifying trends in the various accounts that are reported in the financial statements.
B)
similar to shareholders, they can focus on profitability, dividend, capital appreciation,
and return on investment.
C)
they can get more stock options.
D)
Both a and b
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
29.
Anyone analyzing a firm’s financial statements should:
A)
use audited financial statements.
B)
do a trend analysis.
C)
perform a benchmark analysis.
D)
All of the above.
Ans:
D
AICPA: Measurement
30.
An individual analyzing a firm’s financial statements should do all but which one of the
following?
A)
Use unaudited financial statements
B)
Perform a trend analysis
C)
Perform a benchmark analysis
D)
Compare the firm’s performance to that of its direct competitors
Ans:
A
31.
Which of the following is NOT true of common-size balance sheets?
A)
Each asset and liability item on the balance sheet is standardized by dividing it by total
assets.
B)
Balance sheet accounts are represented as percentages of total assets.
C)
Each asset and liability item on the balance sheet is standardized by dividing it by sales.
D)
Common-size balance sheets allow us to make meaningful comparisons between the
balance sheets of two firms that are different in size.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
32.
Which of the following is NOT true of common-size income statements?
A)
Each income statement item is standardized by dividing it by total assets.
B)
Income statement accounts are represented as percentages of net sales.
C)
Each income statement item is standardized by dividing it by net sales.
D)
Common-size income statements analysis is a specialized application of ratio analysis.
Ans:
A
AICPA: Measurement
33.
Common-size financial statements:
A)
are a specialized application of ratio analysis.
B)
allow us to make meaningful comparisons between the financial statements of two firms
that are different in size.
C)
are prepared by having each financial statement item expressed as a percentage of some
base number, such as total assets or total revenues.
D)
All of the above are true.
Ans:
D
34.
Which of the following is a benefit of a common-size income statement?
A)
It is very useful to assess how effectively a firm collected its accounts receivable.
B)
It reveals a great deal of information about the adequacy of a firm’s net working capital.
C)
It can tell the analyst a great deal about a firm’s efficiency and profitability.
D)
It reveals how effectively a firm has increased its assets.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
35.
Which of the following is true of ratio analysis?
A)
A ratio is computed by dividing one balance sheet item or income statement item by
another.
B)
The choice of the scale determines the story that can be garnered from the ratio.
C)
Ratios can be calculated based on the type of firm being analyzed or the kind of analysis
being performed.
D)
All of the above are true.
Ans:
D
36.
Which of the following is NOT true of liquidity ratios?
A)
They measure the ability of a firm to meet short-term obligations with short-term assets
without putting the firm in financial trouble.
B)
There are two commonly used ratios to measure liquidity—current ratio and quick ratio.
C)
For manufacturing firms, quick ratios will tend to be much larger than current ratios.
D)
The higher the liquidity ratios, the more liquid the firm and the better its ability to pay its
short-term bills.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
37.
Which of the following is true about the quick ratio?
A)
The quick ratio is calculated by dividing the least liquid of current assets by current
liabilities.
B)
Service firms that tend not to carry too much inventory will see significantly higher
quick ratios than current ratios.
C)
Inventory, being not very liquid, is subtracted from total current assets to determine the
most liquid assets.
D)
Quick ratios will tend to be much larger than current ratio for manufacturing firms or
other industries that have a lot of inventory.
Ans:
C
AICPA: Measurement
38.
Which of the following does NOT change a firm’s current ratio?
A)
The firm collects its accounts receivables.
B)
The firm purchases inventory by taking a short-term loan.
C)
The firm pays down its accounts payables.
D)
None of the above.
Ans:
A
AICPA: Measurement
39.
All else being equal, which of the following will decrease a firm’s current ratio?
A)
A decrease in the net fixed assets
B)
A decrease in depreciation expense
C)
An increase in accounts payable
D)
None of the above
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
40.
Which of the following is NOT true about the inventory turnover ratio?
A)
It is calculated by dividing inventory by cost of goods sold.
B)
It measures how many times the inventory is turned over into saleable products.
C)
The more times a firm can turnover its inventory, the better.
D)
Too high a turnover or too low a turnover could be a warning sign.
Ans:
A
41.
Which one of the following statements is NOT true?
A)
The accounts receivables turnover ratio measures how quickly the firm collects its credit
sales.
B)
One ratio that measures the efficiency of a firm’s collection policy is day’s sales
outstanding.
C)
The more days that it takes a firm to collect on its receivables, the more efficient the firm
is.
D)
Day’s sales outstanding measures in days, the time a firm takes to convert its receivables
into cash.
Ans:
C
AICPA: Measurement
42.
Which of the following statements is NOT true of the asset turnover ratio?
A)
Asset turnover ratio measures the dollar amount of sales per dollar of assets that the firm
has.
B)
The fixed assets turnover ratio is less significant for equipment-intensive manufacturing
industry firms than the total assets turnover ratio.
C)
The higher the total asset turnover, the more efficiently management is using total assets.
D)
The ratio is quite useful in identifying the inefficient use of current and long-term assets.
Fundamentals of Corporate Finance 3e Test Bank
43.
Which of the following statements is correct?
A)
The lower the level of a firm’s debt, the higher the firm’s leverage.
B)
The lower the level of a firm’s debt, the lower the firm’s equity multiplier.
C)
The lower the level of a firm’s debt, the higher the firm’s equity multiplier.
D)
The tax benefit from using debt financing reduces a firm’s risk.
Ans:
B
44.
If firm A has a higher debt-to–equity ratio than firm B, then:
A)
firm A has a lower equity multiplier than firm B.
B)
firm B has a lower equity multiplier than firm A.
C)
firm B has higher financial leverage than firm A.
D)
None of the above.
Ans:
B
45.
Which one of the following statements is NOT correct?
A)
A leveraged firm is riskier than a firm that is not leveraged.
B)
A leveraged firm is less risky than a firm that is not leveraged.
C)
A firm that uses debt magnifies the return to its shareholders.
D)
A firm that does not use debt incurs opportunity cost of increasing value of shares.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
46.
Coverage ratios, like times interest earned and cash coverage ratio, allow:
A)
a firm’s management to assess how well they meet short-term liabilities.
B)
a firm’s shareholders to assess how well the firm will meet its short-term liabilities.
C)
a firm’s creditors to assess how well the firm will meet its interest obligations.
D)
a firm’s creditors to assess how well the firm will meet its short-term liabilities other than
interest expense.
Ans:
C
AICPA: Measurement
47.
Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current
liabilities of $378,454. What is the quick ratio? Round your final answer to two decimal places.
A)
1.65
B)
0.64
C)
1.01
D)
None of the above
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
48.
Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and
accounts payables of $469,553. What is the firm’s current ratio? Round your final answer to
two decimal places.
A)
1.83
B)
0.73
C)
1.67
D)
None of the above
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
49.
Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of
$197,333. What is the firm’s quick ratio? Round your final answer to two decimal places.
A)
0.72
B)
1.20
C)
1.92
D)
None of the above
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
50.
Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and
its current ratio now is 2.1. The firm plans to acquire additional inventory to meet an
unexpected surge in the demand for its products and will pay for the inventory with short-term
debt. How much inventory can the firm purchase without violating its debt agreement, if their
total current assets equal $3.5 million? Round your final answer to the nearest dollar.
A)
$0
B)
$777,777
C)
$1 million
D)
None of the above
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
51.
If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its
accounts receivable turnover? Round your final answer to two decimal places.
A)
0.34 times
B)
1.78 times
C)
2.95 times
D)
None of the above
Ans:
C