Question 2The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders’ claims against the firm’s existing assets. Put another way retained earnings are stockholders’ reinvested earnings.True/False True
Question 3The amount shown on the December 31, 2012, balance sheet as “retained earnings” is equal to the firm’s net income for 2012 minus any dividends it paid.True/False False
Question 7Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.True/False True
Question 10Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.True/False True
Question 12Free cash flow is the amount of cash that if withdrawn would harm the firm’s ability to operate and to produce future cash flows.True/False False
Question 14Two metrics that are used to measure a company’s financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.True/False True
Question 15EBITDA stands for earnings before interest, taxes, debt, and assets. True/False False
Question 17If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.True/False FalseQuestion 18The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories.True/False True
Question 19The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.False/True True
Question 20The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.True/False True
Question 21Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.False/True False
Question 22 The operating margin measures operating income per dollar of assets.False/True False
Question 23The profit margin measures net income per dollar of sales. False/True False
Question 40The more conservative a firm’s management is, the higher its debt ratio is likely to be.False/True False
Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet. True/False True
Question 2Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.False/True True
Question 3On the balance sheet, total assets must always equal the sum of total liabilities plus equity.True/False True
Question 5Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.True/False True
Question 7The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.- False Question 8If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.- False
Question 9The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity.True/False True
Question 11If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.False/True False
Question 13An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows.False/True True
Question 17 If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.False/True False
Question 18Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm’s liquidity position.True/False True
Question 19In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. True/False False
Question 20The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.True/False True
Question 21Other things held constant, the more debt a firm uses, the lower its return on total assets will be. False/True True
Question 23 Other things held constant, the more debt a firm uses, the lower its profit margin will be. False/True True
Question 22Other things held constant, the more debt a firm uses, the lower its operating margin will be.False/True False
Question 40The times-interest-earned ratio is one, but not the only, indication of a firm’s ability to meet its long-term and short-term debt obligations. False/True True

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