Foundations of Finance Test #3

A business organization that is owned by two or more people who operate it for profit is a partnership
What statement expresses balance sheet numbers as a percentage of total assets and income statement numbers as a percentage of revenue to facilitate comparisons between different sized firms common sized financial statements
Of the following forms of business organization, which have the advantage of limited liability but no stockholders? limited partnerships
All of the following accounts are considered to be current liabilities on the balance sheet except: accounts receivable
The maximum number of shareholders in a S corporation is 100
All of the following accounts are considered to be current assets on the balance sheet except: land
On the income statement, gross profit is defined as: sales revenue minus cost of goods sold
Financial statements that must be included in the annual report include all of the following EXCEPT: the cash budget
Which of the following forms of organization has an unlimited life? subchapter S corporation
Which one of the following financial statements shows a relationship between assets and liabilities plus owners’ equity? balance sheet
Which of the following would not be considered an asset? accounts payable
Net income is: profits remaining after income taxes are paid
A limited liability company (LLC): member has limited liability for debts
A C Corporation can be described as all the following except: Is dissolved if a shareholder owner leaves
Of the following forms of organization, which businesses are the greatest in numbers in the United States? proprietorships
Subchapter S corporation is a legal entity that has the following characteristics except: Must register with the SEC to sell securities to the public
Which financial statement would provide us with the best information of the liabilities of a company? Balance Sheet
What type of businesses are more likely to form limited liability partnerships? Legal and accounting services
Partnership income is taxed at the partnership income tax rate. False
The relationship of assets and sales is shown in the _____________________. total assets turnover ratio
Which financial statement would you refer to get financial data to calculate profit margin? Income Statement
Which of the following forms of organization has an unlimited life? corporation and subchapter S corporation
Which financial statement would you use to get financial data debt to equity ratio? Balance Sheet
All forms of business structure will distribute profits to owners, shareholders and partners. Which of the two forms of ownership requires these distributions to be taxed at the self-employment tax of 15.3%? Limited Liability Company and Proprietorship
A subchapter S Corporation and limited liability company (LLC) has several common characteristics. Which of the following is a difference between the two business structures? Limited to no more than 100 shareholders
A limited partnership is comprised of: both general and limited partners
All business organizations have its advantages and disadvantages. Which of the following business organization has the highest risk for all owners being if an owner dies without any planning: Partnership
An income statement will contain the following financial information: Interest expense
Which financial statement will give you the cash holdings of a corporations: Balance Sheet
Gross profit is the best financial parameter in measuring the profitability of a business: False
The balance sheet equation can be written as: assets equal liabilities minus owners’ equity. False
For a given accounting period, which of the following is MOST likely to represent primarily variable costs? cost of goods sold
The current liabilities of a business may include: notes payable
The accrued liabilities of a firm are: amounts owed but not yet due
The three main sections of the statement of cash flows include all of the following EXCEPT: cash from saving
Net income is: profits remaining after income taxes are paid
A firm’s net income over some period is the same as its cash flow. False
Which of the following would not be considered an asset? accounts payable
Financial statements that must be included in the annual report include the: income statement/balance sheet/statement of cash flows
Financial statements that must be included in the annual report include all of the following EXCEPT: the cash budget
Accounting is primarily concerned with matching revenues and expenses while finance focuses on identifying cash inflows and outflows. True
What type of financial ratio relate stock market information to financial statement items: Price/Earning (P/E)
Potential creditors of a firm might analyze financial statements to gauge the firm’s ability to make timely payments of interest and principal. True
When analyzing a potential investment in a company stock, which market value ratio is less subject to managerial manipulation? Price to Sales ratio
You are a mortgage loan officer at Prosperity Bank. You are reviewing a mortgage loan application for a couple that is looking to purchase a new home. They have provided you income information, creditor information, length of employment and a personal financial statement. Which of the following personal financial ratios for this applicant would be most indicative of their ability to repay the loan? Total Payments Ratio.
_____________indicate the ability to meet short term obligations to creditors as they mature or come due. Liquidity ratios
All the following is why analysts do financial ratio analysis except: Financial ratios are predictive of company earnings
The relationship of assets and sales is shown in the _____________________. total assets turnover ratio
Which financial statement would you refer to get financial data to calculate profit margin? Income Statement
Which financial statement would you use to get financial data debt to equity ratio? Balance Sheet
Financial leverage ratios indicate the extent to which borrowed funds are used to finance assets. True
The price/earnings ratio shows how much investors are willing to pay for each dollar of the firm’s current earnings per share. True
Potential creditors of a firm might analyze financial statements to gauge the firm’s ability to make timely payments of interest and principal. True
Because debt obligations are paid with cash, the firm’s cash flows ultimately determine solvency. True
The net profit margin is calculated as the firms earnings before interest and taxes divided by net sales. False
A current ratio of 2.0 is desirable and it means that a firm has twice as many current liabilities as current assets. False
The extent to which assets are used to support sales is indicated by which of the following ratios: asset utilization ratios
The ability of a firm to meet its short-term debt obligations as they come due is indicated by which of the following ratios: liquidity ratios
Find the net profit margin if earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000. 20%
What would be the return on total assets of a firm if net income is $50,000, total sales are $100,000, and total assets are $175,000? 28.6%
If the total asset turnover of a firm is 1.5, total assets are $500,000, and net income is $50,000, what is the profit margin? 6.7%
Which one of the following financial statements reports a firm’s assets and the claims on assets? balance sheet
The current ratio of a firm with current assets of $300,000, current liabilities of $100,000, and inventory of $100,000 is: 3
If a firm’s sales are $2,000,000, its cost of goods sold is $1,500,000, and its fixed assets are $1,000,000, what is fixed asset turnover? 2.0 times
If a firm’s inventories on hand are $200,000, its cost of goods sold is $600,000, and its sales are $800,000, what is the inventory turnover? 3 times
Given the following financial data: net income/sales = 6%; sales/total assets = 3.5; debt/total assets = 30%. The return on total assets is: 21%
Which group of ratios might be most interesting to potential creditors of a firm? leverage ratios
If a firm has sales of $100, total expenses (including interest and taxes) of $50, has a stock that is selling at $50 per share and has 10 shares of stock outstanding, then the firm has a P/E ratio of: 10.0
The _______________ ratio is computed as earnings before interest and taxes divided by interest expense: interest coverage
Common-size financial statements express balance sheet and income statement numbers as a percent of sales. False
The balance sheet equation or accounting identity can be written as: assets equal liabilities minus owners’ equity. False

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