The ______________ method of inventory costing is most likely to lead to inflation-induced profits. |
FIFO |
In addition to comparison with industry ratios, it is also helpful to analyze ratios using: |
trend analysis. |
In examining the liquidity ratios, the primary emphasis is the firm’s: |
ability to pay short-term obligations on time |
Which two ratios are used in the DuPont system to create return on assets? |
Profit margin and asset turnover |
If a firm has both interest expense and lease payments: |
times interest earned will be greater than fixed charge coverage. |
ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,285,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.) |
$540,000 |
A firm has operating profit of $120,000 after deducting lease payments of $20,000. Interest expense is $40,000. What is the firm’s fixed charge coverage? |
2.33x |
Asset utilization ratios: |
relate the balance sheet assets to the income statement sales. |
Which of the following is a potential problem of utilizing ratio analysis? |
Trends and industry averages are futuristic in nature |
Income can be distorted by factors other than inflation. The most important causes of distortion for inter-industry comparisons are: |
timing of revenue receipts and nonrecurring gains or losses. |
A quick ratio much smaller than the current ratio reflects: |
a large portion of current assets is in inventory. |
A firm’s long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000. Calculate the current ratio and quick ratio. |
Current ratio = 2.5; Quick ratio = 2.0 |
XYZ’s receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the sales figure for the year? |
$6,000,000 |
A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders’ equity is $900,000. What is the total debt to asset ratio? |
55% |
A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is: |
15% |
What happens if lease payments are reduced? |
Fixed charge coverage goes up. |
Flounders Co. has an average collection period of 60 days. Total credit sales for the year were $9,855,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.) |
$1,620,000 |
An increasing average collection period could be associated with: |
increasing accounts receivable ? |
If a company’s profit margin was 32%, what were its reported sales if its reported net income was $650,000? |
$2,031,250 |
Replacement cost accounting (current cost method) will usually: |
increase assets, decrease net income before taxes, and lower the return on equity. |
Ratios are used to compare different firms in the same industry |
True |
Financial ratios are used to weigh and evaluate the operational performance of the firm |
True |
Liquidity ratios indicate how fast a firm can generate cash to pay bills |
True |
A banker or trade creditor is most concerned about a firm’s profitability ratios |
False |
Ratios are only useful for those areas of business that involve investment decisions |
False |
Debt utilization ratios are used to evaluate the firm’s debt position with regard to its asset base and earning power |
True |
The DuPont system of analysis emphasizes that profit generated by assets can be derived by various combinations of profit margins and asset turnover |
True |
During disinflation, stock prices tend to go up because the investor’s required rate of return goes down |
True |
Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are a one time events, and do not measure annual operating performances |
True |
Intangible assets are becoming an important part of the assets in a company’s financial statements because accountants are recognizing the growing impact of brand names |
False |
Absolute values taken from financial statements are more useful than relative values |
False |
In examining the liquidity ratios, the primary emphasis is the firm’s |
ability to pay short-term obligations on time |
Which of the following is not an asset utilization ratio |
return on asset |
A short-term creditor would be most interested in |
liquidity ratios |
Which of the following is not considered to be a profitability ratio |
times interest earned |
Which two ratios are used in DuPont system to create return on assets |
Profit margin and asset turnover |
The Bubba Corp. had earnings before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket its after-tax profit margin is: |
5% |
A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is |
15% |
A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity |
60% |
For a given level of profitability as measured by profit margin, the firm’s return on equity will |
increase as its debt-to-assets ratio increases |
Asset utilization ratios |
relate balance sheet assets to income statement sales |
A decreasing average collection period could be associated with |
increasing sales and decreasing account receivable |
If accounts receivable stays the same, and credit sales go up |
the average collection period will go down |
Total asset turnover indicates the firm’s |
ability to use its assts to generate sales |
A quick ratio that is much smaller than the current ratio reflects |
a large portion of current assets is in inventory |
Investors and financial analysts wanting to evaluate the operating efficiency of a firm’s managers would probably look primarily at the firm’s |
asset utilization ratios |
An increasing average collection period indicates |
the company is becoming less efficient in its collection policy |
In addition to the comparison with industry ratios, it is also helpful to analyze ratios using |
trend analysis and historical comparisons. |
If lease payments are reduced |
fixed charges coverage goes up |
A large extraordinary loss has what effect on COGS |
has no effect |