chapter 3 finance

27) A firm’s annual stockholders’ report ________. B) summarizes and documents the firm’s financial activities during the past year
28) The rule-setting body, which authorizes generally accepted accounting principles is the ________. B) FASB
29) Accounting practices and procedures used to prepare financial statements are called ________. C) GAAP
30) The federal regulatory body governing the sale and listing of securities is called the ________. D) SEC
31) The stockholders’ annual report must include ________. B) an income statement
32) The 2002 Sarbanes-Oxley Act was designed to ________. B) eliminate the many disclosure and conflict-of-interest problems of corporations
33) The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called ________. D) the Sarbanes-Oxley Act
34) The Public Company Accounting Oversight Board (PCAOB) ________. A) is a not-for-profit corporation that oversees auditors of public corporations
35) The stockholder’s report includes ________. D) a statement of retained earnings
36) Total assets less net fixed assets equals ________. B) current assets
37) A(n) ________ provides a financial summary of a firm’s operating results during a specified period. A) income statement
38) Gross profit is ________. D) sales revenue minus cost of goods sold
39) Operating profit is ________. A) gross profit minus operating expenses
40) Net profit after taxes is ________. D) EBIT minus interest and taxes
41) Operating profit is known as ________. B) earnings before interest and taxes
42) Earnings available for common stockholders is calculated as net profits ________. B) after taxes minus preferred dividends
43) Which of the following is a current liability? C) notes payable
44) Which of the following represents a current asset? C) marketable securities
45) Which of the following is a fixed asset? A) land
46) The net value of fixed assets is also called its ________. C) book value
47) Retained earnings on the balance sheet represents the ________. D) cumulative total of all earnings reinvested in the firm
48) The ________ represents a summary statement of a firm’s financial position at a given point in time. B) balance sheet
49) The statement of cash flows ________. C) provides insight into a firm’s operating, investment, and financing cash flows
50) When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the ending balance of retained earnings. D) dividends
54) On the balance sheet, net fixed assets represent ________. C) gross fixed assets at cost minus accumulated depreciation
55) Paid-in capital in excess of par represents the amount of proceeds ________. B) in excess of the par value from the original sale of common stock
56) Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000, and preferred dividends of $5,000. What was the firm’s net profit after taxes? B) $49,000
57) Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense. What was Candy Corporation’s earnings per share? C) $7.42
58) A firm’s year-end retained earnings balances are $670,000 and $560,000, for 2014 and 2015 respectively. The firm paid $10,000 in dividends in 2015. The firm’s net profit after taxes in 2015 was ________. A) -$100,000
59) A firm’s year-end retained earnings balances are $320,000 and $400,000, for 2014 and 2015 respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm’s dividend payment for 2015 is ________. B) $20,000
60) A firm has a year-end retained earnings balance of $220,000 for 2014. The firm reported net profits after taxes of $50,000 and paid dividends of $30,000 in 2015. The firm’s retained earnings balance at 2015 year end is ________. A) $240,000
61) A firm’s year-end retained earnings balance are $670,000 and $560,000 for 2014 and 2015, respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm paid dividends of ________ in 2015. D) $210,000
62) Information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements can be found on ________. A) the notes to the financial statements
63) FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the ________. B) current rate
18) Ratios provide a ________ measure of a company’s performance and condition. C) relative
19) Present and prospective shareholders are mainly concerned with a firm’s ________. A) risk and return
20) The primary concern of creditors when assessing the strength of a firm is its ________. C) short-term liquidity
21) ________ analysis involves the comparison of different firms’ financial ratios at the same point in time. B) Cross-sectional
22) ________ analysis involves comparison of current to past performance and the evaluation of developing trends. A) Time-series
23) Which of the following is used to analyze a firm’s financial performance over different years? A) time-series analysis
24) Which of the following is true of benchmarking? B) It is an analysis in which a firm’s ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate.
25) Cross-sectional ratio analysis is used to ________. D) measure relative performance of a firm with its peers
26) Time-series analysis is often used to ________. A) assess developing trends
27) In ratio analysis, a comparison to a standard industry ratio is made to isolate ________ deviations from the norm. B) negative
28) Which of the following is a limitation of ratio analysis? B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.
29) An analyst should be careful when conducting ratio analysis to ensure that ________. A) the overall performance of a firm is not judged on a single ratio
30) The analyst should be careful when analyzing ratios that ________. B) right interpretation of the ratio value is made
31) Inflation can distort ________. A) book value of inventory costs
32) Without adjustment, inflation may tend to cause ________ firms to appear more efficient and profitable than ________ firms. B) older; newer
33) Which of the following groups of ratios primarily measure risk? C) liquidity, activity, and debt
34) The ________ ratios are primarily used as measures of return. D) profitability
12) The ________ of a business firm is measured by its ability to satisfy its short-term obligations as they come due. B) liquidity
13) The two categories of ratios that should be utilized to assess a firm’s true liquidity are the ________. D) liquidity and activity ratios
14) The two basic measures of liquidity are ________. B) current ratio and quick ratio
15) A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might ________. C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios
16) If the only information you are given about Ryan Corporation, a large public company in business for many years, is that it has a current ratio of 2.9, what could you infer from this? A) It can meet the short-term obligations without any difficulty.
17) Which of the following is true of current ratio? D) A higher current ratio indicates a greater degree of liquidity.
18) Which of the following is excluded when calculating quick ratio? D) inventory
19) ________ ratios are a measure of the speed with which various accounts are converted into sales or cash. A) Activity
20) Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory turnover is ________ and the average age of inventory is ________. B) 10; 36.5
21) ________ may indicate a firm is experiencing stockouts and lost sales. B) Inventory turnover ratio
22) If an inventory turnover is divided into 365, it becomes a measure of ________. B) the average age of the inventory
23) The ________ measures the activity, or liquidity, of a firm’s stock of goods. B) inventory turnover ratio
24) A(n) ________ is useful in evaluating credit policies. C) average collection period
25) The ________ ratio may indicate poor collections procedures or a relaxed credit policy. C) average collection period
26) ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would likely be considered poor if its average collection period was ________. D) 57 days
27) Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements? B) average payment period
28) Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then average purchases per day are ________ and the average payment period is ________. C) 821.9; 36.5
29) ________ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm. C) Lenders and suppliers
30) The ________ ratio indicates the efficiency with which a firm uses its assets to generate sales. B) total asset turnover
32) A firm with a total asset turnover that is lower than industry standard but with a current ratio that meets industry standard must have excessive ________. A) fixed assets
33) A firm with a total asset turnover lower than industry standard may have ________. C) insufficient sales
8) ________ is a term used to describe the magnification of risk and return introduced through the use of fixed-cost financing, such as preferred stock and debt. A) Financial leverage
9) ________ ratio measures the proportion of total assets financed by the firm’s creditors. D) Debt
10) ________ ratio measures a firm’s ability to pay contractual interest payments. A) Times interest earned
11) ________ ratio indicates that a firm will be able to meet interest obligations due on outstanding debt. D) Times interest earned
12) The higher, the value of ________ ratio, the better able a firm is to fulfill its interest obligations. C) times interest earned
13) When assessing the fixed-payment coverage ratio, ________. A) the lower its value the more risky is the firm
6) Two frequently cited ratios of profitability that can be read directly from the common-size income statement are ________. D) the gross profit margin and the net profit margin
7) The ________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales. C) common-size income statement
8) ________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods. C) Gross profit margin
9) ________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses. B) Operating profit margin
10) A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive ________. A) general and administrative expenses
11) ________ measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted. A) Net profit margin
12) ________ measures the overall effectiveness of management in generating profits with its available assets. D) Return on total assets
13) ________ measures the return earned on the common stockholders’ investment in the firm. C) Return on equity
14) A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and common stockholders’ investment of $750,000 has a return on equity of ________. D) 4 percent
15) A ________ ratio is commonly used to assess owners’ appraisal of the share value. B) price/earnings
16) P/E ratio measures the ________. A) market value of the stock to earnings per share
17) Book value per share is the ratio of ________. A) common stock equity to number of outstanding common shares
4) The DuPont system merges the income statement and balance sheet into two summary measures of profitability, ________. C) return on total assets, and return on common equity
5) The ________ is used by financial managers as a structure for dissecting a firm’s financial statements to assess its financial condition. B) DuPont system of analysis
6) In the DuPont system of analysis, the return on total assets (asset) is equal to ________. D) (net profit margin) × (total asset turnover)
7) The modified DuPont formula relates the firm’s return on total assets (ROA) to its ________. A) return on equity (ROE)
8) In the DuPont system of analysis, the return on equity is equal to ________. C) (return on total assets) × (financial leverage multiplier)
9) A firm with a low net profit margin can improve its return on total assets by ________. B) increasing its total asset turnover
10) Other things being equal, a decrease in total asset turnover will result in ________ in the return on total assets. B) a decrease
11) A firm with a low return on total assets can improve its return on equity, all else remaining the same, by ________. A) increasing its debt ratio
12) The three basic ratios used in the DuPont system of analysis are ________. C) net profit margin, total asset turnover, and equity multiplier
13) The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing. C) total debt
14) Financial leverage multiplier is the ratio of ________. B) total assets to common stockholders’ equity
15) Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage will result in ________. A) an increase in the return on equity
30) As the financial leverage multiplier increases, this may result in ________. C) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases

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