FIN Chapter 3 and 10 Review

Which one of the following statements is NOT correct?

• Common-size financial statements present all balance sheet account values as a percentage total assets

• Cash payment of an account payable will increase the current ratio, all else constant

• Cash ratio a measure of long-term solvency

• The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase Profit margin.

• None of the above

Which one of the following statement is NOT correct?

• Liquidity ratios measures a firm’s short-term solvency, or a firm’s ability to pay bills over the
  short run.

• Ratio analysis allows for better comparison through time or between companies.

• To a firm’s short term creditors, the higher the liquidity ratio the better.

• To a firm’s shareholders, the higher the liquidity ratio the better.
  

• None of the above.

Which one of the following statement is NOT correct?

• Times Interest Earned ratio measures a firm’s ability to pay interest.

• Inventory Turnover indicates how fast we sell off products.

• If a firm’s Receivables Turnover is 15 times, that indicates the firm collects its
  outstanding credit and reloans the money 15 times.

• Receivables Turnover ratio indicates how fast does a firm collect on the sale

• None of the above.

Which one of the following statement is NOT correct?

• High profit margin is desirable, everything else constant.

• Return for shareholder’s equity is the bottom line measure of performance in accounting
  sense.

• Market to book value ratio indicates how aggressively the market valuates the firm.

• High P/E ratio indicates low growth potential for the firm.

Which one of the following statement is NOT correct?

• Return on assets is typically higher than return on equity if the firm uses debt.

• The higher the P/E, the better.

• The higher the profit margin, the better.

• All the above.

Which one of the following statement is correct?

• A high P/E ratio indicates a brighter future for the firm anticipated by the market.

• A M/B ratio lower than 1 could mean that the firm is not creating value for its stockholders.

• A high EPS is typically desirable for stockholders.

• All of the above.

The ratio related to the amount of profit a firm earns for every $1 in sales is called the:

• net income.

• profit margin.

• return on equity.

• return on assets.

• price-earnings ratio.

Which one of the following statement is correct?

• The higher the liquidity ratio, the better.

• The higher the profit margin, the better.

• Internal growth rate indicates how much the firm can grow assets using equity as the only
  source of financing.

• The sustainable growth rate tells us how much the firm can grow by using internally
  generated funds and issuing the same amount of debt.

• None of the above

Russell's Hardware has inventory of $218,000, equity of $421,800, total assets of $647,700, and
sales of $587,200. What is the common-size percentage for the inventory account?

• 26.81 percent

• 33.66 percent

• 37.12 percent

• 49.09 percent

• 51.68 percent

Answer explanation

Inventory common-size percent = $218,000/$647,700 = 33.66 percent

Foreign Travel Services has net income of $48,400, total assets of $219,000, total equity of
$154,800, and total sales of $311,700. What is the common-size percentage for the net income?

• 9.00 percent

• 13.90 percent

• 15.53 percent

• 22.10 percent

• 31.27 percent

Answer explanation

Net income common-size percent = $48,400/$311,700 = 15.53 percent