Financing enterprises

Common‐size financial statements represent all figures on the financial statements

• in inflation adjusted dollars from a base year.

• as if all companies being compared had the same total revenue

• as if all companies being compared had the same total assets

• as a percentage of either sales or total assets.

The debt ratio is a measure of a firmʹs

• leverage.

• profitability.

• liquidity.

• efficiency.

Which of the following statements is true?

• Current assets consist of cash, accounts receivable, inventory, and net plant, property and equipment.

• The quick ratio is a more restrictive measure of a firmʹs liquidity than the current ratio.

• For the average firm, inventory is considered to be more ʺliquidʺ than accounts receivable.

• A successful firmʹs current liabilities should always be greater than its current assets.

Which of the following financial ratios is the best measure of the operating effectiveness of a firmʹs management?

• Current ratio

• Gross profit margin

• Quick ratio

• Return on investment

Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smithʹs quick or acid test ratio?

• 1.69

• 0.54

• 0.74

• 1.35

Spinnit Limited has a debt ratio of .57, current liabilities of $14,000, and total assets of $70,000. What is the level of Spinnit Limitedʹs total liabilities?

• $25,900

• $24,600

• $39,900

• $53,900

Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of $275,000, which consist strictly of notes payable. The firmʹs operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable. How much is the firmʹs interest coverage ratio?

• 15.6

• 45.3

• 20.2

• 3.0

Corbin, Inc. had net income of $150,000 on sales of $5,000,000 during 2014. In addition, the firmʹs total assets were $2,500,000, and its capital structure is comprised of 40% debt and 60% equity. Assume the company has no preference shares. What was Corbinʹs return on equity in 2014?

• 15%

• 2.5%

• 10%

• Return on equity cannot be determined with the information provided

Dew Point Demolitions, Inc. generated a 1.23 total asset turnover in its latest fiscal year on assets of $2,112,077. The firm has total liabilities of $950,997. The firmʹs net profit margin was 10.3%. What is Dew Pointʹs return on equity? Assume the company has no preference shares. Round to the nearest 0.1%.

• 23.1%

• 12.6%

• 5.5%

• 18.2%

Which of the following is a limitation related to the usage of ratios when reviewing a firmʹs performance?

• Ratios reveal differences in policy and performance between years

• Ratios can be used to compare firms that are in the same industry if one firmʹs sales are higher than another firm

• Financial ratios are designed for the use of creditors, not for managers.

• Different accounting practices between firms can distort comparisons.