Chapter 3 SmartBook

Question 1

Because we are almost always unable to obtain all of the market information we want, we rely on ________ numbers for much of our financial information.

Answer 1

Accounting

Question 2

At the most fundamental level, firms generate cash and:

Answer 2

Spend it

Question 3

Which of the following are uses of cash?

A: Increases in property, plant and equipment

B: Increases in inventory

C: Decreases in accounts receivable

D: Decreases in property, plant and equipment

E: Decreases in accounts payable

Answer 3

A, B and C

Question 4

True or false: There is only one method for preparing the statement of cash flows.

Answer 4

False

Question 5

________ financial statements provide for comparison of firms that differ in size.

Answer 5

Standardized

Question 6

Although Blank______ are often poor reflections of reality, they are often the best information available.

Answer 6

Accounting numbers

Question 7

Common-size statements are used for comparing firms with differing ____.

Answer 7

Sizes

Question 8

At the most fundamental level, firms generate ______ and spend it.

Answer 8

Cash

Question 9

A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.

Answer 9

base year; base amount

Question 10

Which of the following are sources of cash?

A: A decrease in accounts receivable

B: An increase in notes payable

C: Purchasing an asset

D: A decrease in notes payable

Answer 10

A and B

Question 11

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?

Answer 11

There are different methods of preparing it

Question 12

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:

Answer 12

Common-size statements

Question 13

An important accounting goal is to report financial information to users in a way that is useful for _____.

Answer 13

Decision making

Question 14

The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and _____
value ratios.

Answer 14

Market

Question 15

Which one of the following is one way in which financial managers use a common-size balance sheet?

Answer 15

To track changes in a firm’s capital structure

Question 16

Which of the following items are among the items used to compute the current ratio?

A: Accounts payable

B: Earnings

C: Cash

D: Equipment

Answer 16

A and C

Question 17

A common-base year financial statement presents items relative to a certain base, which is the _____.

Answer 17

Dollar amount of each item during a common base year

Question 18

What does a current ratio of 1.2 mean?

Answer 18

The firm has $1.20 in current assets for every $1 in current liabilites

Question 19

By combining common-size and base year analysis, we eliminate the effect of the _____.

Answer 19

Overall growth

Question 20

If a company has inventory, the quick ratio will always be ______ the current ratio.

Answer 20

Less than

Question 21

Which of the following are traditional financial ratio categories?

Answer 21

Asset management ratios, Market value ratios and Profitability ratios

Question 22

The cash ratio is found by dividing cash by:

Answer 22

Current liabilities

Question 23

The current ratio shows the relationship between ____.

Answer 23

Current asset and current liabilities

Question 24

Which of the following is the correct representation of the total debt ratio?

Answer 24

(Total assets - Total equity)/(Total assets)

Question 25

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

Answer 25

It will increase

Question 26

Both the debt-equity ratio and the equity multiplier are calculated using _____ in the denominator.

Answer 26

Total equity

Question 27

Total capitalization equals total equity plus total:

Answer 27

Long-term debt

Question 28

The quick ratio is computed just like the ______ ratio, except that inventory is omitted.

Answer 28

Current

Question 29

The times interest earned ratio equals EBIT divided by

Answer 29

Interest

Question 30

The cash ratio is found by dividing by current liabilities.

Answer 30

Cash

Question 31

A firm has a total debt ratio of 0.30 times. This means the firm has ___ in total debt for every $1 in total assets.

Answer 31

$0.30

Question 32

The debt-equity ratio expresses the total debt divided by the total equity, while the _______ multiplier expresses the total assets divided by the total equity.

Answer 32

equity

Question 33

The inventory _____ is calculated as the COGS divided by the inventory.

Answer 33

Turnover

Question 34

The long-term debt ratio is equal to long-term debt divided by the sum of long-term debt and total ______.

Answer 34

equity

Question 35

A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense.

Answer 35

earnings before interest and taxes

Question 36

The cash ratio is found by dividing cash by:

Answer 36

Current Liabilities

Question 37

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

Answer 37

Increase

Question 38

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

Answer 38

The total asset turnover ratio will increase

Question 39

How is the inventory turnover ratio computed?

Answer 39

Cost of goods sold/Inventory

Question 40

The profit margin is equal to net income divided by ______.

Answer 40

Sales

Question 41

Total capitalization equals total equity plus total:

Answer 41

Long-term debt

Question 42

How is the price-earnings (PE) ratio computed?

Answer 42

Market price per share/ Earnings per share

Question 43

A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

Answer 43

Higher

Question 44

Which of the following represents the receivables turnover ratio?

Answer 44

Sales/Accounts receivable

Question 45

Which one of the following equations defines the total asset turnover ratio?

Answer 45

Sales/Total assets

Question 46

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____.

Answer 46

less than 1

Question 47

A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.

Answer 47

6.8

Question 48

What is the equation for enterprise value?

Answer 48

Market value of stock + book value of liabilities − cash

Question 49

The price-earnings (PE) ratio is a ______ ratio.

Answer 49

market

Question 50

Which one of the following does not affect ROE according to the DuPont identity?

Answer 50

Investor sentiment

Question 51

When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.

Answer 51

Higher

Question 52

A(n) Blank______ in net profit margin will increase ROE.

Answer 52

Increase

Question 53

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

Answer 53

Increase

Question 54

How is market-to-book ratio measured?

Answer 54

Market value per share/Book value per share

Question 55

_____ are the prime source of information about a firm's financial health.

Answer 55

Financial statements

Question 56

True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.

Answer 56

False

Question 57

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

Answer 57

DuPont

Question 58

True or false: A deteriorating time trend in a financial ratio is always a bad sign.

Answer 58

False

Question 59

The ROE equals the net profit margin multiplied by the total _______ turnover multiplied by the equity multiplier.

Answer 59

Asset

Question 60

True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.

Answer 60

True

Question 61

Which of the following represents the receivables turnover ratio?

Answer 61

Sales/Accounts receivable

Question 62

Whenever Blank______ information is available, it should be used instead of accounting data.

Answer 62

Market

Question 63

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:

Answer 63

further investigation

Question 64

Which three of the following are most apt to create problems when comparing financial statements for multiple firms? A: Differing fiscal years B: Differing accounting methods C: Differing levels of cash D: Seasonality

Answer 64

A, B and D

Question 65

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

Answer 65

Increase