Chapter 3 "Recharge" Flashcards
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates that the firm has increased its:
A) Liquidity
B) Size
C) Earnings Outlook
D) Production Efficiency
Liquidity
In a common-size income statement, each item is expressed as a percentage of total ____
Sales (or revenue)
A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ____ available to pay interest.
Cash
Why is TIE not really a measure of cash available to pay interest?
It can’t measure the cash available because depreciation, a noncash expense, has been deducted out.
Which of the following does not affect ROE according to the DuPont identity?
A) Asset use efficiency.
B) Investor sentiment.
C) Operating efficiency.
D) Financial leverage.
Investor sentiment.
What are the three aspects/components that affect ROE according to the DuPont identity?
Operating efficiency, asset use efficiency, and financial leverage.
Select all that apply. Which of the following items are used to compute the current ratio?
A) Accounts payable
B) Equipment
C) Cash
D) Earnings
Accounts Payable and Cash
What is the equation for the current ratio?
Current Assets/Current Liabilities
Why is equipment not included in the current assets of the current ratio calculation?
This is not included because it is a fixed, not current, asset.
Why are earnings not included in the current ratio calcualtion?
This is not included because it appears on the income statement, not the balance sheet.
True or False: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
False
A firm may use a price-sales ratio when it has had ____ earnings over the past year.
Negative
True or False: Market-to-Book Ratio equals book value per share divided by market value per share.
False.
What is the equation for the Market-to-Book Ratio?
Market Value per Share/Book Value per Share.
Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has ____ its liquidity over the past year.
Decreased
True or False: In a common-size income statement, each item is expressed as a percentage of total sales.
True
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?
A) Accrued interest expense.
B) Cash equivalents
C) Noncash expenses
D) Cash expenses.
Noncash expenses.
The ____ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
The current ratio computes the relationship between ______.
A) Current assets and long-term liabilities.
B) Current and long-term assets.
C) Current assets and current liabilities.
D) Current and liquid assets.
Current assets and current liabilities.
Select all that apply. Which of the following create problems with financial statement analysis?
A) The firm and its competitors are approximately the same size.
B) The firm and its competitors operate under different regulatory environments.
C) The firm or its competitors are conglomerates.
D) The firm or its competitors are global companies.
B, C, and D.
The company has had negative earnings for several periods, they might choose to use a _____.
A) Price-Cash Flow Ratio.
B) Price-Sales Ratio
C) Price-Earnings Ratio
Price-Sales Ratio
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be _____.
A) Greater than 1
B) Zero
C) Less than 1
D) Very high.
Less than 1.
