1.Theincomestatementmeasurestheflowoffundsinto(i.e.revenue)andoutof(i.e.expenses)thefirmovera certaintimeperiod.It is alwaysbasedonaccountingdata. a.True b.False ANSWER: True DIFFICULTY: Easy TOPICS: Incomestatement 2.Thebalancesheetis afinancialstatementmeasuringtheflowoffundsintoandoutofvariousaccountsovertime whiletheincomestatementmeasurestheprogressofthefirmat apointin time. a.True b.False ANSWER: False DIFFICULTY: Easy TOPICS: Financialstatements 3.Anincreaseinanassetaccountisasourceofcash,whereasanincreaseinaliabilityaccountisauseofcash. a.True b.False ANSWER: False DIFFICULTY: Easy TOPICS: Sourcesandusesofcash 4.Depreciation,asshownontheincomestatement,isregardedasauseofcashbecauseitisanexpense. a.True b.False ANSWER: False DIFFICULTY: Easy TOPICS: Sourcesandusesofcash
5.Whenafirmpaysoffaloanusingcash,thesourceoffundsisthedecreaseintheassetaccount,cash,whiletheuse offundsinvolvesa decreaseina liabilityaccount,debt. a.True ANSWER: True DIFFICULTY: Easy TOPICS: Sourcesanduses 6.Non-cashassetsareexpectedtoproducecashovertimebuttheamountofcashtheyeventuallyproducecouldbe higherorlowerthanthevaluesatwhichtheassetsarecarriedonthebooks. a.True b.False ANSWER: True DIFFICULTY: Easy TOPICS: Non-cashassets 7.Taxes,paymentpatterns,andreportingconsiderations,aswellascreditsalesandnon-cashcosts,arereasonswhy operatingcashflowscandifferfromaccountingprofits. a.True b.False ANSWER: True DIFFICULTY: Easy TOPICS: Operatingcashflows 8.Ratioanalysisinvolvesa comparisonof therelationshipsbetweenfinancialstatementaccountsso as toanalyzethe financialpositionand strengthofafirm. a.True b.False ANSWER: True DIFFICULTY: Easy TOPICS: Ratioanalysis
9.Thecurrentratioandinventoryturnoverratiomeasuretheliquidityof a firm.Thecurrentratiomeasurestherelation of afirm'scurrentassetstoits currentliabilitiesandtheinventoryturnoverratiomeasureshowrapidlyafirmturnsitsinventorybackintoa"quick"assetor cash. a.True b.False ANSWER: False DIFFICULTY: Easy TOPICS: Liquidityratios 10.Ifafirmhashighcurrentandquickratios,thisalwaysisagoodindicationthat afirmis managingitsliquidityposition well. a.True b.False ANSWER: False DIFFICULTY: Easy TOPICS: Currentratio 11.A declinein theinventoryturnoverratiosuggeststhat thefirm'sliquiditypositionisimproving. a.True b.False ANSWER: False DIFFICULTY: Easy TOPICS: Inventoryturnoverratio 12.Thedegreetowhichthemanagersofa firmattempttomagnifythereturnstoowners'capitalthroughtheuseof financialleverageiscapturedindebtmanagementratios. a.True b.False ANSWER: True DIFFICULTY: Easy TOPICS: Debtmanagementratios
TOPICS: Cashflows 19.Afirm'snetincomereportedonitsincomestatementmustequaltheoperatingcashflowsonthestatementofcash flows. a.True b.False ANSWER: False DIFFICULTY: Easy TOPICS: Accountingprofitandcashflows 20.Astatementreportingtheimpactof afirm'soperating,investing,andfinancingactivitieson cashflowsoveran accountingisthestatementofcashflows. a.True b.False ANSWER: True DIFFICULTY: Easy TOPICS: Statementofcashflows 21.Whena firmconductsa seasonedequityoffering,it increasesanequityaccountwhichisanexampleofa sourceof funds. a.True b.False ANSWER: True DIFFICULTY: Easy TOPICS: Sourcesandusesofcash 22.Whena firmconductsa stockrepurchase,it increasesanequityaccountwhichisanexampleofa sourceoffunds. a.True ANSWER: False DIFFICULTY: Easy TOPICS: Sourcesandusesofcash 23.Aliquidassetisan assetthatcanbe easilyconvertedintocashwithoutasignificantlossof its originalvalue. a.True ANSWER: True DIFFICULTY: Easy TOPICS: Liquidityratios 24.GenzymeCorporationhasseenitsdayssalesoutstanding(DSO)declinefrom38dayslastyearto 22daysthis implyingthatmoreofthefirm'ssuppliersarebeingpaidontime. a.True ANSWER: False DIFFICULTY: Easy TOPICS: Dayssalesoutstanding(DSO)
totalequityiscomprisedofcommonequitypluspreferredstock. a.True b.False ANSWER: True DIFFICULTY: Medium TOPICS: Total equity 26.Retainedearningsisthecashthathasbeengeneratedbythefirmthroughitsoperationswhichhasnotbeenpaidout tostockholdersasdividends.Retainedearningsarekeptincashornearcashaccountsandthus,thesecash accounts,whenaddedtogether,willalwaysbeequalto thetotalretainedearningsofthefirm. a.True b.False ANSWER: False DIFFICULTY: Medium TOPICS: Retainedearnings 27.Thefinancialpositionofcompanieswhosebusinessisseasonalcanbedramaticallydifferentdependinguponthe timeof yearchosentoconstructfinancialstatements.Thistimesensitivityisespeciallytruewithrespecttothefirm's balancesheet. a.True b.False ANSWER: True DIFFICULTY: Medium TOPICS: Balancesheetchanges 28.Inorderto accuratelyestimatecashflowfromoperations,depreciationmustbeaddedbackto netincome.The reasonforthisis thateventhoughdepreciationis deductedfromrevenueitis reallyanon-cashcharge. a.True b.False ANSWER: True DIFFICULTY: Medium TOPICS: Cashflows 29.Inaccounting,emphasisisplacedondeterminingnet income.Infinance,the primaryemphasisalsoisonnet income becausethatiswhatinvestorsusetovaluethefirm.However,asecondaryconsiderationiscashflowbecausethat's whatisusedtorunthebusiness. a.True b.False ANSWER: False DIFFICULTY: Medium TOPICS: Cashflowandnetincome
41.Allof thefollowingrepresentcashoutflowstothefirmexcept a.Taxes. b.Interestpayments. c.Dividends. d.Purchaseofplantandequipment. e.Depreciation. ANSWER: e DIFFICULTY: Easy TOPICS: Cashflows 42.Otherthingsheldconstant,ifafirmholdscashbalancesinexcessof theiroptimallevelinanon-interestbearing account,thiswilltendtolowerthe firm's a.Profitmargin. b.Totalassetturnover. c.Returnonequity. d.Allof theabove. e.Answersbandcabove. ANSWER: e DIFFICULTY: Easy TOPICS: Excessivecashbalances 43.Otherthingsheldconstant,whichofthefollowingwillnotaffectthecurrentratio,assumingan initialcurrentratio greaterthan1.0? a.Fixedassetsaresoldforcash. b.Long-termdebtis issuedto pay offcurrentliabilities. c.Accountsreceivablearecollected. d.Cashisusedtopayoffaccountspayable. e.Abankloanisobtained,andtheproceedsarecreditedtothefirm'scheckingaccount. ANSWER: c DIFFICULTY: Easy TOPICS: Currentratio
44.Theannualreportcontainsallofthe followingfinancialstatementsexcept a.incomestatement. b.statementofchangesinlong-termfinancing. c.statementofcashflows. d.balancesheet. e.statementofretainedearnings. ANSWER: b DIFFICULTY: Easy TOPICS: Annualreport 45.Whichof thefollowingfinancialstatementsshowsafirm'sfinancingactivities(howfundsweregenerated)and investmentactivities(howfundswereused)overaparticularperiodoftime? a.balancesheet b.incomestatement c.statementofretainedearnings d.statementofcashflows e.proxystatement ANSWER: d DIFFICULTY: Easy TOPICS: Financialstatements 46.Whichofthefollowingstatementsshowstheportionofthefirm'searningsthathasbeensavedratherthanpaidout asdividends? a.balancesheet b.incomestatement c.statementofretainedearnings d.statementofcashflows e.proxystatement ANSWER: c DIFFICULTY: Easy TOPICS: Financialstatements
47.Whichofthefollowingfinancialstatementsincludesinformationaboutafirm'sassets,equity,andliabilities? a.Incomestatement b.Cashflowstatement c.Balancesheet d.Statementofretainedearnings e.Allofthe above ANSWER: c DIFFICULTY: Easy TOPICS: Financialstatements 48.WhenconstructingaStatementof CashFlows,whichof thefollowingactionswouldbe consideredasourceof funds? a.increaseinthecashaccount b.decreaseinaccountspayable c.increaseininventory d.increasein long-termbonds e.increaseinfixedassets ANSWER: b DIFFICULTY: Easy TOPICS: Financialstatements 49.Whichofthefollowinggroupsprobablywouldnotbeinterestedin thefinancialstatementanalysisofafirm? a.creditors b.managementof thefirm c.stockholders d.InternalRevenueService e.Allof theabovewouldbe interestedinthefinancialstatementanalysis. ANSWER: d DIFFICULTY: Easy TOPICS: Ratioanalysis
50.Whichof thefollowingratiosmeasureshoweffectivelyafirmismanagingits assets? a.quickratio b.timesinterestearned c.profit margin d.inventoryturnoverratio e.priceearningsratio ANSWER: d DIFFICULTY: Easy TOPICS: Inventoryturnoverratio 51.Ifyourgoalisdeterminehoweffectivelya firmismanagingitsassets,whichofthe followingsetsofratioswould youexamine? a.profitmargin,currentratio,fixedchargecoverageratio b.quickratio,debtratio,timeinterestearned c.inventoryturnoverratio,dayssalesoutstanding,fixedassetturnoverratio d.totalassetsturnoverratio,priceearningsratio,returnontotalassets e.timeinterestearned,profitmargin,fixedassetturnoverratio ANSWER: c DIFFICULTY: Easy TOPICS: Assetmanagementratios 52.Whichof thefollowingratiosmeasurestheextenttowhichoperatingincomecandeclinebeforethefirmisunableto meetitsannualinterestcosts? a.fixedchargecoverageratio b.debtratio c.times-interest-earnedratio d.returnonequity e.profit margin ANSWER: c DIFFICULTY: Easy TOPICS: TIEratio
60.Whichofthe followingstatementsaboutratioanalysisisincorrect? a.Classifyinga large,well-diversifiedfirmintoa singleindustryoftenisdifficultbecausemanyofthefirm's divisionsareinvolvedwithdifferentproductsfromdifferentindustries. b.Asaruleofthumb,itis safeto concludethatanyfirmwithacurrentratiogreaterthan1.0shouldbeableto meetits currentobligations,thatis, paybillsthatcomedueinthecurrentperiod.[Currentratio=(Current assets)/(Currentliabilities)] c.Sometimesfirmsattempttouse"windowdressing"techniquestomaketheirfinancialstatementslookbetter thantheyactuallyarein thecurrentperiod. d.Computingthe valuesofthe ratiosisfairlysimple;the toughestandmostimportantpartofratioanalysisis interpretationofthe valuesderivedfromthe computations. e.Generalconclusionsabouta firmshouldnotbemadebyexaminingoneora fewratios,ratioanalysisshould becomprehensive. ANSWER: b DIFFICULTY: Medium TOPICS: Ratioanalysis 61.Yesterday,BickslerCorporationpurchased(andreceived)rawmaterialsoncreditfromitssupplier.Allelse equal,if Bicksler'scurrentratiowas2.0beforethepurchase,whateffectdidthistransactionhaveonBicksler'scurrent ratio? a.increased b.decreased c.stayedthesame d.Thereisnotenoughinformationtoanswerthisquestion. e.Noneoftheaboveisacorrectanswer. ANSWER: b DIFFICULTY: Medium TOPICS: Currentratio
62.BubblesSoapCorporationhasa quickratioof1.0 anda currentratioof2.0 implyingthat a.thevalueofcurrentassetsis equalto thevalueofinventory. b.thevalueofcurrentassetsis equalto thevalueofcurrentliabilities. c.thevalueofcurrentliabilitiesis equalto thevalueofinventory. d.Allof theabove. e.Noneoftheabove. ANSWER: c DIFFICULTY: Medium TOPICS: Currentratioandquickratio 63.Whichof thefollowingstatementsismostcorrect? a.firmswithrelativelylowdebtratioshavehigherexpectedreturnswhenthebusinessisgood. b.firmswithrelativelylowdebtratiosareexposedtoriskof losswhenthebusinessispoor. c.firmswithrelativelyhighdebtratioshavehigherexpectedreturnswhenthebusinessisbad. d.firmswithrelativelyhighdebtratioshavehigherexpectedreturnswhenthebusinessisgood. e.noneoftheabove. ANSWER: d DIFFICULTY: Medium TOPICS: Debtmanagementratios 64.Allotherthingsconstant,anincreaseina firm'sprofitmarginwould a.increasetheadditionalfundsneededforfinancingagrowthinoperations. b.decreasetheadditionalfundsneededforfinancingagrowthinoperations. c.haveno effecton theadditionalfundsneededforfinancingagrowthinoperations. d.decreaseitstaxes. e.noneoftheabove. ANSWER: b DIFFICULTY: Medium TOPICS: Profitmargin
69.Afirmhasaprofitmarginof 15 percenton salesof $20,000,000.Ifthefirmhasdebtof $7,500,000,totalassetsof $22,500,000,andanafter-taxinterestcostontotaldebtof5percent,whatis thefirm'sROA? a.8.4% b.10.9% c.12.0% d.13.3% e.15.1% ANSWER: d RATIONALE: Netincome=0.15($20,000,000)=$3,000,000.ROA=$3,000,000/$22,500,000=13.3%. DIFFICULTY: Easy TOPICS: ROA
85.LombardiTruckingCompanyhasthefollowingdata: Assets: $10,000 Profitmargin: 3.0% Debtratio: 60.0% Interestrate: 10.0% Taxrate: 40% Totalassetturnover: 2.0 WhatisLombardi'sTIEratio? a. 0.95 b. 1.75 c. 2.10 d. 2.67 e.3.45 ANSWER: d RATIONALE: TATurnover= S/A=2 S/$10,000=2S=$20,000 Debt= $6,000INT= $6,000(0.1)=$600 NI=$600 EBIT $1,600 Int. 600 EBT $1,000 Taxes(40%) 400 NI $600 TIE= $1,600/$600=2.67 DIFFICULTY: Tough TOPICS: TIEratio