| 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 |
