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BSA 35P > Chapter 3 TB > Flashcards

Chapter 3 TB Flashcards

1
Q

The Financial Accounting Standards Board (FASB) is the federal regulatory body that governs the sale and listing of securities.

T or F?

A

FALSE

The Securities and Exchange Commission (SEC) is the federal regulatory body that governs the sale and listing of securities.

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2
Q

GAAP is the accounting profession’s rule-setting body

T or F?

A

FALSE

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3
Q

Generally accepted accounting principles are authorized by the Financial Accounting Standards Board (FASB).

T or F?

A

TRUE

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4
Q

The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) which is a not-for-profit corporation that oversees auditors of public corporations

T or F?

A

TRUE

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5
Q

The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.

T or F?

A

TRUE

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6
Q

The Sarbanes-Oxley Act of 2002 established the Private Company Accounting Oversight Board (PCAOB) which is a for-profit corporation that oversees CEOs of public corporations.

T or F?

A

FALSE

The Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation created by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.

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7
Q

Publicly owned corporations with more than $5 million assets are required by the Securities and Exchange Commission (SEC) to provide their stockholders with an annual stockholders’ report.

T or F?

A

TRUE

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8
Q

The letter to stockholders is the primary communication from management in an annual report

T or F?

A

TRUE

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9
Q

Common stock dividends paid to stockholders is equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding

T or F?

A

FALSE

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10
Q

The income statement is a financial summary of a firm’s operating results during a specified period while the balance sheet is a summary statement of a firm’s financial position at a given point in time

T or F?

A

TRUE

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11
Q

The common stock entry in balance sheet is the par value of common stock

T or F?

A

TRUE

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12
Q

Paid-in capital in excess of par represents the proceeds in excess of par value received from the original sale of common stock

T or F?

A

TRUE

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13
Q

Earnings per share represents amount earned during the period on each outstanding share of common stock

T or F?

A

TRUE

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14
Q

Net fixed assets represent the difference between gross fixed assets and the amount of depreciation expense from the most recent year.

T or F?

A

FALSE

Net of accumulated depreciation

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15
Q

Earnings per share results from dividing earnings available for common stockholders by the number of shares of common stock authorized.

T or F?

A

FALSE

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16
Q

Retained earnings represent the cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception.

T or F?

A

TRUE

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17
Q

The balance sheet is a statement which balances a firm’s assets (what it owns) against its debt (what it owes) and its equity (what is provided by owners).

T or F?

A

TRUE

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18
Q

The amount paid in by the original purchasers of common stock is shown by two entries in the firm’s balance sheet—common stock and paid-in capital in excess of par on common stock.

T or F?

A

TRUE

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19
Q

The original price per share received by the firm on a single issue of common stock is equal to the sum of the common stock and paid-in capital in excess of par accounts divided by the number of shares

T or F?

A

TRUE

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20
Q

The statement of cash flows reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.

T or F?

A

FALSE

The statement of retained earnings reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.

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21
Q

The statement of cash flows provides insight into a firm’s operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities (cash equivalents) during the period of concern

T or F?

A

TRUE

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22
Q

A U.S. parent company’s foreign equity accounts are translated into dollars using the historical rate or average rate based on the company’s discretion.

T or F?

A

FALSE

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23
Q

A U.S. parent company’s foreign retained earnings are not adjusted for currency movements to reflect each year’s operating profits or losses.

T or F?

A

FALSE

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24
Q

The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that U.S.-based companies translate their foreign-currency-denominated assets and liabilities into dollars using the current rate (translation) method.

T or F?

A

TRUE

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25
Q

A firm’s annual stockholders’ report ________.

A) is only accessible to the shareholders of the firm
B) summarizes and documents the firm’s financial activities during the past year
C) documents the list of all investors who bought the firm’s shares during the past year
D) summarizes and documents the firm’s financial plan and budgets during the past year

A

B

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26
Q

The rule-setting body, which authorizes generally accepted accounting principles is the ________.

A) IFRS
B) FASB
C) SEC
D) Federal Reserve System

A

B

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27
Q

Accounting practices and procedures used to prepare financial statements are called ________.

A) SEC
B) IFRS
C) GAAP
D) IRB

A

C

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28
Q

The federal regulatory body governing the sale and listing of securities is called the ________.

A) IRS
B) FASB
C) GAAP
D) SEC

A

D

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29
Q

The stockholders’ annual report must include ________.

A) common-size financial statements
B) an income statement
C) an advance tax statement
D) the margin of safety report

A

B

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30
Q

The 2002 Sarbanes-Oxley Act was designed to ________.

A) limit the compensation that could be paid to corporate CEOs
B) eliminate the many disclosure and conflict-of-interest problems of corporations
C) provide uniform international accounting standards
D) provide the guidelines to minimize the tax

A

B

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31
Q

The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called
________.

A) the McCain-Feingold Act
B) the Harkins-Oxley Act
C) the Sarbanes-Harkins Act
D) the Sarbanes-Oxley Act

A

D

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32
Q

The Public Company Accounting Oversight Board (PCAOB) ________.

A) is a not-for-profit corporation that oversees auditors of public corporations
B) is a not-for-profit corporation that oversees managers of public corporations
C) is a for-profit corporation that oversees auditors of public corporations
D) is a for-profit corporation that oversees managers of public corporations

A

A

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33
Q

The stockholder’s report includes ________.

A) an estimated interest cost report
B) an estimated dividend report
C) a break-even sales report
D) a statement of retained earnings

A

D

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34
Q

Total assets less net fixed assets equals ________.

A) gross assets
B) current assets
C) depreciation
D) liabilities and equity

A

B

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35
Q

A(n) ________ provides a financial summary of a firm’s operating results during a specified period.

A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings

A

A

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36
Q

Gross profit is ________.

A) operating profits minus depreciation
B) operating profits minus cost of goods sold
C) sales revenue minus operating expenses
D) sales revenue minus cost of goods sold

A

D

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37
Q

Operating profit is ________.

A) gross profit minus operating expenses
B) sales revenue minus cost of goods sold
C) earnings before depreciation and taxes
D) sales revenue minus depreciation expense

A

A

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38
Q

Net profit after taxes is ________.

A) gross profits minus operating expenses
B) sales revenue minus cost of goods sold
C) EBITDA minus interest
D) EBIT minus interest and taxes

A

D

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39
Q

Operating profit is known as ________.

A) earnings after interest and taxes
B) earnings before interest and taxes
C) earnings before depreciation and taxes
D) earnings after tax

A

B

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40
Q

Earnings available for common stockholders is calculated as net profits ________.

A) before taxes minus preferred dividends
B) after taxes minus preferred dividends
C) after taxes minus common dividends
D) before taxes minus common dividends

A

B

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41
Q

Which of the following is a current liability?

A) accounts receivable
B) cash
C) notes payable
D) inventory

A

C

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42
Q

Which of the following represents a current asset?

A) automobiles
B) buildings
C) marketable securities
D) equipment

A

C

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43
Q

Which of the following is a fixed asset?

A) land
B) accounts payable
C) accruals
D) notes payable

A

A

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44
Q

Which of the following is a fixed asset?

A) land
B) accounts payable
C) accruals
D) notes payable

A

A

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45
Q

Retained earnings on the balance sheet represents the ________.

A) net profit after taxes
B) amount of proceeds in excess of the par value received from the original sale of common stock
C) net profit after taxes minus preferred dividends
D) cumulative total of all earnings reinvested in the firm

A

D

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46
Q

The ________ represents a summary statement of a firm’s financial position at a given point in time.

A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings

A

B

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47
Q

The statement of cash flows ________.

A) shows the financial position of a firm at a given point of time.
B) summarizes all the purchase and sale of fixed assets and raw materials
C) provides insight into a firm’s operating, investment, and financing cash flows
D) classifies a firm’s cash flows as operating, investing, financing, and other activities

A

C

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48
Q

When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the ending balance of retained earnings.

A) net profits after taxes
B) interest expense
C) depreciation
D) dividends

A

D

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49
Q

On the balance sheet, net fixed assets represent ________.

A) gross fixed assets at cost minus depreciation expense
B) gross fixed assets at market value minus depreciation expense
C) gross fixed assets at cost minus accumulated depreciation
D) gross fixed assets at market value minus accumulated deprecation

A

C

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50
Q

Paid-in capital in excess of par represents the amount of proceeds ________.

A) in deficit of the par value from the original sale of common stock
B) in excess of the par value from the original sale of common stock
C) in excess of the par value from the current value of common stock
D) in excess of the par value from the intrinsic value of common stock

A

B

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51
Q

Information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements can be found on ________.

A) the notes to the financial statements
B) the statement of retained earnings
C) the proxy statement
D) the management discussion and analysis (MD&A)

A

A

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52
Q

FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign currency denominated assets and liabilities into dollars using the ________.

A) historical rate
B) current rate
C) average rate
D) rate prescribed by the SEC

A

B

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53
Q

The basic inputs to an effective financial analysis are the firm’s income statement and the balance sheet

T or F?

A

TRUE

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54
Q

Both current and prospective shareholders are interested in the firm’s current and future level of risk and return, which directly affect share price.

T or F?

A

TRUE

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55
Q

Creditors are primarily interested in short-term liquidity of the company and its ability to make interest and principal payments.

T or F?

A

TRUE

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56
Q

Time-series analysis is the evaluation of a firm’s financial performance in comparison to other firm(s) at the same point in time.

T or F?

A

FALSE

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57
Q

Cross-sectional analysis involves the comparison of different firms’ financial ratios at the same point in time

T or F?

A

TRUE

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58
Q

Benchmarking is a type of cross-sectional analysis in which a firm’s ratios are compared to a key competitor firm within the same industry, primarily to identify areas for improvement.

T or F?

A

TRUE

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59
Q

Time-series analysis evaluates the performance of various firms at the same point in time using financial ratios.

T or F?

A

FALSE

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60
Q

Ratios merely direct an analyst to potential areas of concern and it does not provide conclusive evidence as to the existence of a problem.

T or F?

A

TRUE

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61
Q

A single key ratio of a firm provides all the information required to judge the overall performance of the firm

T or F?

A

FALSE

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62
Q

Due to inflationary effects, inventory costs and depreciation write-offs can differ from their replacement values, thereby distorting profits.

T or F?

A

TRUE

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63
Q

In ratio analysis, the financial statements being used for comparison should be dated at the same point in time during the year. If not, the effect of seasonality may produce erroneous conclusions and decisions.

T or F?

A

TRUE

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64
Q

The use of the unaudited financial statements for ratio analysis is preferable because it reflects the firm’s true financial condition

T or F?

A

FALSE

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65
Q

The use of differing accounting treatments—especially relative to inventory and depreciation—can distort the results of ratio analysis, regardless of whether cross-sectional or time-series analysis is used.

T or F?

A

TRUE

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66
Q

Ratios provide a ________ measure of a company’s performance and condition.

A) definitive
B) gross
C) relative
D) absolute

A

C

67
Q

Present and prospective shareholders are mainly concerned with a firm’s ________.

A) risk and return
B) profitability
C) leverage
D) liquidity

A

A

68
Q

________ analysis involves the comparison of different firms’ financial ratios at the same point in time.

A) Time-series
B) Cross-sectional
C) Marginal
D) Technical

A

B

69
Q

________ analysis involves comparison of current to past performance and the evaluation of
developing trends.

A) Time-series
B) Cross-sectional
C) Marginal
D) Break-even

A

A

70
Q

Which of the following is used to analyze a firm’s financial performance over different years?

A) time-series analysis
B) break-even analysis
C) gap analysis
D) marginal analysis

A

A

71
Q

Which of the following is true of benchmarking?

A) It is an analysis in which a firm’s ratio values are analyzed to project the fundamental values of the assets for upcoming years or business cycle.
B) It is an analysis in which a firm’s ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate.
C) It is an analysis in which a firm’s financial performance over time is evaluated using financial ratio analysis.
D) It is a financial statement analysis technique which is primarily used for forecasting future performance.

A

B

72
Q

Cross-sectional ratio analysis is used to ________.

A) correct expected problems in operations
B) isolate the causes of problems
C) provide conclusive evidence of the existence of a problem
D) measure relative performance of a firm with its peers

A

D

73
Q

Time-series analysis is often used to ________.

A) assess developing trends
B) correct errors of judgment
C) evaluate the value of a firm or its assets
D) standardize results

A

A

74
Q

Which of the following is a limitation of ratio analysis?

A) Financial ratios cannot be used to assess a firm’s profitability.
B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.
C) It is difficult to access audited financial statements for ratio analysis.
D) Ratio analysis assumes that inflation has no effect on a firm’s business.

A

B

75
Q

An analyst should be careful when conducting ratio analysis to ensure that ________.

A) the overall performance of a firm is not judged on a single ratio
B) the role of inflation is ignored
C) ratios being compared should be calculated using financial statements dated at different points in time
during the year
D) different accounting procedures are used

A

A

76
Q

Without adjustment, inflation may tend to cause ________ firms to appear more efficient and profitable than ________ firms.

A) larger; smaller
B) older; newer
C) smaller; larger
D) newer; older

A

B

77
Q

Which of the following groups of ratios primarily measure risk?

A) liquidity, activity, and profitability
B) liquidity, profitability, and market
C) liquidity, activity, and debt
D) activity, debt, and profitability

A

C

78
Q

The liquidity of a business firm refers to its ability to pay its short-term obligations as they come due

T or F?

A

TRUE

79
Q

The two basic measures of liquidity are the debt-to-equity ratio and the asset turnover ratio.

T or F?

A

FALSE

The two basic measures of liquidity are the quick ratio and the current ratio.

80
Q

The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they come due.

T or F?

A

FALSE

81
Q

The current ratio provides a measure of a firm’s ability to meet its long-term obligations

T or F?

A

FALSE

82
Q

The ________ of a business firm is measured by its ability to satisfy its short-term obligations as they come due.

A) activity
B) liquidity
C) debt
D) profitability

A

B

83
Q

The two basic measures of liquidity are ________.

A) inventory turnover and current ratio
B) current ratio and quick ratio
C) gross profit margin and ROE
D) current ratio and total asset turnover

A

B

84
Q

A firm has a current ratio of 1. To increase that ratio the firm might ________.

A) develop a better inventory management system so the firm doesn’t have to hold as many items in inventory at one time
B) hold lower cash balances at the bank and increase holdings of interest-earning marketable securities
C) take out a long-term bank loan and simultaneously offer customers better credit terms, allowing them to pay their bills more slowly
D) issue bonds and use the proceeds to purchase new equipment

A

C

85
Q

If the only information you are given about Ryan Corporation, a large public company in business for many years, is that it has a current ratio of 2.9, what could you infer from this?

A) It can likely meet its short-term obligations without difficulty.
B) You could determine that Ryan has too much liquidity because the average current ratio among firms in Ryan’s industry is 2.0.
C) Nothing, you would also need the current ratio’s from the last few years of the S&P 500 Index.
D) You could determine that Ryan is running a great risk that it will not be able to pay short-term liabilities when they come due.

A

A

86
Q

Which of the following is true of the current ratio?

A) The more predictable a firm’s cash flows, the higher the acceptable current ratio.
B) A higher current ratio indicates a higher return on equity.
C) The more predictable a firm’s current ratio, the higher the current liabilities.
D) A higher current ratio indicates a greater degree of liquidity.

A

D

87
Q

Which of the following is excluded when calculating the quick ratio?

A) accounts receivable
B) accounts payable
C) cash
D) inventory

A

D

88
Q

________ ratios are a measure of the speed with which various accounts are converted into sales or cash.

A) Activity
B) Liquidity
C) Debt
D) Profitability

A

A

89
Q

The ________ measures the activity, or liquidity, of a firm’s stock of goods.

A) average collection period
B) inventory turnover ratio
C) average payment period
D) total asset turnover ratio

A

B

90
Q

A(n) ________ is useful in evaluating credit policies.

A) average payment period
B) current ratio
C) average collection period
D) inventory turnover ratio

A

C

91
Q

The ________ ratio may indicate poor collections procedures or a relaxed credit policy.

A) average payment period
B) inventory turnover
C) average collection period
D) quick

A

C

92
Q

A firm with a total asset turnover lower than industry standard may have ________.

A) excessive debt
B) excessive interest costs
C) insufficient sales
D) insufficient fixed assets

A

C

93
Q

An unusually high ________ may indicate a firm is experiencing stockouts and lost sales.

A) average payment period
B) inventory turnover ratio
C) average collection period
D) quick

A

B

94
Q

If you divide the inventory turnover ratio into 365, you get a measure of ________.

A) financial efficiency
B) the average age of the inventory
C) sales turnover
D) the average collection period

A

B

95
Q

The ________ is useful in evaluating credit policies that a firm extends to its customers.

A) average payment period
B) current ratio
C) average collection period
D) inventory turnover ratio

A

C

96
Q

Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements?

A) debt equity ratio
B) average payment period
C) quick ratio
D) total asset turnover

A

B

97
Q

The ________ ratio indicates the efficiency with which a firm uses its assets to generate sales.

A) inventory turnover
B) total asset turnover
C) quick
D) current asset turnover

A

B

98
Q

A firm’s total asset turnover increased from 0.75 to 0.90. Which of the following is true about the given data?

A) The firm is generating more dollars of sales per dollar of assets now than it was before.
B) The firm is generating fewer dollars of sales per dollar of assets now than it was before.
C) By cutting back on assets, the firm runs the risk of creating problems like inventory stockouts and production delays.
D) The firm’s stock price will go up because it is using asset more efficiently.

A

A

99
Q

The average age of inventory is viewed as the average length of time inventory is held by a firm or as the average number of days’ sales in inventory.

T or F?

A

TRUE

100
Q

The average age of inventory can be calculated as inventory divided by 365.

T or F?

A

FALSE

101
Q

The average age of inventory can be calculated as inventory turnover divided by 365

T or F?

A

FALSE

102
Q

The average age of inventory can be calculated as 365 divided by inventory turnover.

T or F?

A

TRUE

103
Q

The average payment period can be calculated as accounts payable divided by average sales per day.

T or F?

A

FALSE

104
Q

The average payment period can be calculated as accounts payable divided by average purchases per day.

T or F?

A

TRUE

105
Q

The total asset turnover ratio measures the liquidity of a firm’s assets.

T or F?

A

FALSE

Liquidity ratio measures the liquidity of a firm’s assets.

106
Q

The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk and return.

T or F?

A

FALSE

107
Q

The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk and return.

T or F?

A

FALSE

108
Q

In general, the more debt a firm uses, the smaller its financial leverage.

T or F?

A

FALSE

109
Q

The lower the fixed-payment coverage ratio, the lower is the firm’s financial leverage.

T or F?

A

FALSE

Leverage ratios focus on the balance sheet and measure the extent to which liabilities, instead of equity, are used to finance a company’s assets. Coverage ratios focus, instead, on the income statement and cash flows and measure a company’s ability to cover its debt-related payments.

110
Q

The higher the debt ratio, the more the financial leverage a firm has and thus, the greater will be its risk and return

T or F?

A

TRUE

111
Q

Typically, higher coverage ratios are preferred, but a very high ratio may indicate under-utilization of fixed-payment obligations, which may result in unnecessarily low risk and return.

T or F?

A

TRUE

112
Q

The higher the value of the times interest earned ratio, the higher is the proportion of the firm’s interest income compared to its contractual interest payments.

T or F?

A

FALSE

113
Q

________ is a term used to describe the magnification of risk and return introduced through the use of fixed-cost financing, such as preferred stock and debt.

A) Financial leverage
B) Operating leverage
C) Fixed-payment coverage
D) Benchmarking

A

A

114
Q

The ________ ratio measures the proportion of total assets financed by the firm’s creditors.

A) total asset turnover
B) inventory turnover
C) current
D) debt

A

D

115
Q

The ________ ratio measures a firm’s ability to pay contractual interest payments.

A) times interest earned
B) fixed-payment coverage
C) debt
D) average payment period

A

A

116
Q

The ________ ratio indicates whether a firm will be able to meet interest obligations due on outstanding debt.

A) debt-to-equity
B) interest turnover
C) total assets turnover
D) times interest earned

A

D

117
Q

The higher, the value of the ________ ratio, the better able a firm is to fulfill its interest obligations.

A) dividend payout
B) average collection period
C) times interest earned
D) average payment period

A

C

118
Q

When assessing the fixed-payment coverage ratio, ________.

A) the lower its value the more risky is the firm
B) the lower its value, the higher is the firm’s financial leverage
C) preferred stock dividend payments can be disregarded
D) the higher its value, the more difficult it is for a firm to pay its debts

A

A

119
Q

The magnification of risk and return introduced through the use of fixed-cost financing, such as debt and preferred stock is called financial leverage.

T or F?

A

TRUE

120
Q

The financial leverage multiplier is the ratio of a firm’s total assets to common stock equity.

T or F?

A

TRUE

121
Q

The gross profit margin measures the percentage of each sales dollar left after a firm has paid for its goods and operating expenses.

T or F?

A

FALSE

The operating profit margin measures the percentage of each sales dollar left after a firm has paid for its goods and operating expenses.

122
Q

Two frequently cited ratios of profitability that can be read directly from the common-size income statement are ________.

A) the earnings per share and the return on total assets
B) the gross profit margin and the earnings per share
C) the gross profit margin and the return on total assets
D) the gross profit margin and the net profit margin

A

D

123
Q

The ________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales.

A) retained earnings statement
B) common-size balance sheet
C) common-size income statement
D) profit and loss statement

A

C

124
Q

The ________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods.

A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders

A

C

125
Q

The ________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses.

A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders

A

B

126
Q

A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard may have excessive ________.

A) general and administrative expenses
B) cost of goods sold
C) dividend payments
D) principal payments

A

A

127
Q

The ________ measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted.

A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders

A

A

128
Q

The ________ measures the overall effectiveness of management in generating profits with its available assets.

A) total asset turnover
B) price/earnings ratio
C) return on equity
D) return on total assets

A

D

129
Q

The ________ ratio measures the return earned on the common stockholders’ investment in the firm.

A) net profit margin
B) price/earnings
C) return on equity
D) return on total assets

A

C

130
Q

The net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and common stock dividends, have been deducted.

T or F?

A

TRUE

131
Q

If a firm has no liabilities or debt of any kind on its balance sheet, then which of the following is true?

A) ROE > ROA
B) ROE < ROA
C) ROE = ROA
D) ROA = net profit margin

A

C

132
Q

If a firm uses any debt at all and if the firm generates positive earnings for common stockholders, then which of the following below is true?

A) ROE > ROA
B) ROE < ROA
C) ROE = ROA
D) Gross profit margin < net profit margin

A

A

133
Q

Return on total assets (ROA) measures the overall effectiveness of management in generating profits with its available assets.

T or F?

A

TRUE

134
Q

The more money a firm borrows ________.

A) the lower is its ROE because more interest expense reduces earnings
B) the larger is the gap between its ROA and its ROE
C) the lower is its operating profit margin
D) the higher is its gross profit margin

A

B

135
Q

The ________ ratios are primarily used as measures of return.

A) liquidity
B) activity
C) debt
D) profitability

A

D

136
Q

A firm’s P/E ratio tends to be higher if ________.

A) its risk and its growth prospects are lower
B) its risk is higher and its growth prospects are lower
C) its risk and its growth prospects are higher
D) its risk is lower and its growth prospects are higher

A

D

137
Q

All other things being equal, a firm’s P/E ratio will be lower if investors think the firm’s growth prospects are very good.

T or F?

A

FALSE

138
Q

Earnings per share represents the dollar amount earned and distributed to shareholders.

T or F?

A

FALSE

139
Q

The ________ ratio reflects how much investors are willing to pay for a company’s stock per dollar of earnings that the company generates.

A) debt
B) price/earnings
C) return on equity
D) return on total assets

A

B

140
Q

Holding all other factors constant, a higher price/earnings (P/E) ratio indicates that investors have more confidence in a firm’s future performance.

T or F?

A

TRUE

141
Q

Suppose a firm that is normally very profitable barely does better than breaking even this year, i.e., it earns a very small profit. That firm’s P/E ratio is likely to be ________.

A) very high
B) zero
C) negative
D) the lowest among all firms in its industry

A

A

142
Q

The P/E ratio measures the ________.

A) market value of the stock relative to earnings per share
B) intrinsic value of the stock relative to earnings per share
C) book value of the stock relative to earnings per share
D) market price of the stock relative to retained earnings

A

A

143
Q

Book value per share is the ratio of ________.

A) common stock equity to number of outstanding common shares
B) retained earnings to number of outstanding common shares
C) fixed assets to number of outstanding common shares
D) total liabilities to number of outstanding common shares

A

A

144
Q

During the 2008-2009 recession, the average P/E ratio of firms in the U.S. stock market reached an extraordinarily high level because ________.

A) investors believed short-term growth prospects for U.S. firms were extraordinarily good at that time
B) stock prices generally boomed during the recession
C) earnings per share were unusually low during the recession
D) investors believed long-term growth prospects coming out of the recession were not very good

A

C

145
Q

Which of the following is true?

A) For most companies the market/book ratio is less than 1.0 because book value is a conservative estimate of what a firm’s equity is really worth.
B) For most companies the market/book ratio is greater than 1.0 because the stock market tends to overvalue things.
C) For most companies the market/book ratio is greater than 1.0 because book value is a backward-looking measure based largely on historical costs, whereas market value is forward looking and depends on how investors believe the company will perform in the future.
D) For most companies the market/book ratio is very close to 1.0 because on average, book value provides a good estimate of the market value of a firm’s equity.

A

C

146
Q

In early 2018, Facebook’s market/book ratio was close to 7.0. A market/book ratio that much greater
than 1.0 for Facebook means that ________.

A) Facebook has a huge number of common shares outstanding
B) the book value of Facebook’s equity is far less than the total market value of the company’s stock
C) Facebook’s stock is overvalued
D) Facebook’s book value is inflated because so many of its assets are intangible

A

B

147
Q

For most companies we would expect the market/book ratio to be greater than 1.0.

T or F?

A

TRUE

148
Q

Market ratios only measure a firm’s risk.

T or F?

A

FALSE

149
Q

Earnings per share represents the dollar amount earned and distributed to shareholders.

T or F?

A

FALSE

150
Q

The DuPont formula allows a firm to break down its return into the net profit margin, which measures the firm’s profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales.

T or F?

A

TRUE

151
Q

The DuPont system allows a firm to break its return on equity into a profit-on-sales component, an efficiency-of-asset-use component, and a liquidity component.

T or F?

A

FALSE

The DuPont formula allows a firm to break down its return into the net profit margin, which measures the firm’s profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales.

152
Q

According to the basic DuPont equation, a firm’s ROA is the product of what other two ratios?

A) net profit margin and return on equity
B) net profit margin and total asset turnover
C) net profit margin and the financial leverage multiplier
D) ROE and the financial leverage multiplier

A

B

153
Q

The ________ is used by financial managers as a structure for dissecting a firm’s financial statements to assess its financial condition.

A) statement of cash flows
B) DuPont system of analysis
C) break-even analysis
D) technical analysis

A

B

154
Q

The modified DuPont formula relates the firm’s return on total assets (ROA) to its ________.

A) return on equity (ROE)
B) operating leverage multiplier
C) net profit margin
D) total asset turnover

A

A

155
Q

In the DuPont system of analysis, the return on equity is equal to ________.

A) (net profit margin) × (total asset turnover)
B) (stockholders’ equity) × (financial leverage multiplier)
C) (return on total assets) × (financial leverage multiplier)
D) (return on total assets) × (total asset turnover)

A

C

156
Q

A firm with a low net profit margin can improve its return on total assets by ________.
A) increasing its debt ratio
B) increasing its total asset turnover
C) decreasing its fixed asset turnover
D) decreasing its total asset turnover

A

B

157
Q

Other things being equal, a decrease in total asset turnover will result in ________ in the return on total
assets.

A) an increase
B) a decrease
C) no change
D) an undetermined change

A

B

158
Q

The modified DuPont equation says that a firm with a low return on total assets can improve its return on equity, all else remaining the same, by ________.

A) financing more of its assets with debt.
B) increasing its total asset turnover
C) using less debt
D) decreasing its total asset turnover

A

A

159
Q

The three basic ratios used in the DuPont system of analysis are ________.

A) net profit margin, total asset turnover, and return on investment
B) net profit margin, total asset turnover, and return on equity
C) net profit margin, total asset turnover, and financial leverage multiplier
D) net profit margin, financial leverage multiplier, and return on equity

A

C

160
Q

The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing.

A) operating leverage
B) long-term debt
C) total debt
D) total assets

A

C

161
Q

The financial leverage multiplier is the ratio of ________.

A) current assets to common stockholders’ equity
B) total assets to common stockholders’ equity
C) total assets to total debt
D) current assets to current liabilities

A

B

162
Q

Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage
will result in ________.

A) an increase in the return on equity
B) a decrease in the gross profit margin
C) an increase in the gross profit margin
D) an increase in retained earnings

A

A

163
Q

As the financial leverage multiplier increases, this may result in ________.

A) an increase in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases
B) an increase in the net profit margin and return on investment, due to the increase in interest expense as debt increases
C) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases
D) a decrease in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases

A

C

BSA 35P (9 decks)

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