# Finance Practice

 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
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