Financial Managment MTQ

With regard to trend analysis over time, which of the following statements is TRUE?

• We often look at the past five years of financial statements to establish trends and then predict future performance based on these trends.

• To look at trends over time requires that we examine a financial statement at one point in time.

• The net income last year was $20,000 and the past five years has shown an increase of 10% on average for each of these five years. The predicted net income for next year is still $20,000.

• It is better to predict future performance by basing it solely on net income than on all the individual accounts

Comparing two companies using ________ may point out differences in management styles.

• common-size financial statements

• sales growth

• historical share prices

• earnings per share

To convert an income statement into a common-size income statement, we restate all the numbers as percentages of ________.

• total revenues

• cost of goods sold

• net income

• total assets

________ can be helpful for managers to understand short-term cash obligations.

• Profitability ratios

• Asset management ratios

• Debt ratios

• Liquidity ratios

________ help us analyze whether a company is moving toward financial stress or is using debt to benefit the company and ultimately, the owners of the company.

• Financial leverage ratios

• Asset management ratios

• Days' sales in inventory

• Total asset turnover

Which of the following identities is TRUE?

• Operating Cash Flow = EBIT - Depreciation + Taxes

• Net Capital Spending = Ending Net Fixed Assets - Depreciation

• Net Working Capital (NWC) = Current Assets - Current Liabilities

• Cash Flow from Assets = Operating Cash Flow - Net Capital Spending

One of the key components to making financial decisions is to ________.

• understand the timing and amount of dividends

• understand the timing and amount of cash flow

• understand the timing of EBIT

• understand the amount of net income

Because financial ratios can vary across industries, it is ________ these ratios by industry.

• not necessary to study

• unimportant to benchmark

• important to benchmark

• futile to examine

The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.25, 0.35, 0.35, and 0.45, respectively. The earnings per share for Firm 1, Firm 2, Firm 3, and Firm 4 are $4.5, $3.5, $3, and $2.5, respectively. Which firm is placing fewer burdens on its borrowing?

• Firm 1

• Firm 2

• Firm 3

• Firm 4

Which of the following is NOT an example of an agency cost?

• Paying an accounting firm to audit your financial statements

• Paying an insurance company to assure that building codes have been met for new construction

• Paying a landscaping firm to maintain your firm's grounds

• All of the above are agency costs.