CFIN EVALUATION EXAM UPDATED QUESTIONS AND
SOLUTIONS RATED A+
✔✔Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5.
Both firms want to "window dress" their coming end-of-year financial statements. As
part of their window dressing strategy, each firm will double its current liabilities by
adding short-term debt and placing the funds obtained in the cash account. Which of the
statements below best describes the actual results of these transactions?
The transactions will have no effect on the current ratios.
The current ratios of both firms will be increased.
The current ratios of both firms will be decreased.
Only Pepsi Corporation's current ratio will be increased.
Only Coke Company's current ratio will be increased. - ✔✔only pepsi coropration will
increase
✔✔One would calculate changes in balance sheet accounts for
A typical ratio analysis.
Pro forma balance sheet construction.
Statement of cash flows construction.
Profit and loss analysis.
Pro forma income statement construction. - ✔✔statement of cash flows construction
✔✔Which of the following mechanisms is not used by shareholders to get managers to
act in shareholder's best interests?
Threat of firing
Managerial compensation.
Golden parachute.
Threat of takeover.
Answers b and c above. - ✔✔golden parachute
✔✔The Meryl Corporation's common stock currently is selling at $100 per share, which
represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a
return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total
assets (ROA)?
8.0%
10.0%
12.0%
16.7%
20.0% - ✔✔8
✔✔Which of the following groups probably would not be interested in the financial
statement analysis of a firm?
creditors
management of the firm
stockholders
, Internal Revenue Service
All of the above would be interested in the financial statement analysis. - ✔✔internal
revenue service
✔✔The 11 "titles" in the Sarbanes-Oxley Act of 2002 establish standards for
accountability and responsibility of financial reporting information for major corporations.
Which of the following activities does the act not provide rules that a corporation must
abide by?
The corporation must have a committee that consists of outside directors to oversee
the firm's audits.
The corporation must hire an external auditor that will render an unbiased
(independent) opinion concerning the firm's financial statement.
The corporation must maximize social welfare through funding of environmentally
friendly activities.
The corporation must provide additional information about the procedures used to
construct and report financial statements.
The firm's CEO and CFO must certify financial reports submitted to the Securities
Exchange Commission. - ✔✔The corporation must maximize social welfare through
funding of environmentally friendly activities.
✔✔Which of the following should be the primary goal pursued by the financial manager
of a firm?
Maximize net income (profits).
Maximize the firm's net worth, or book value.
Maximize dividends paid to common stockholders.
Minimize variable operating expenses.
Maximize the market value of the firm's stock. - ✔✔maximize the market value of the
firms stock
✔✔Which of the following statements about ratio analysis is incorrect?
Classifying a large, well-diversified firm into a single industry often is difficult because
many of the firm's divisions are involved with different products from different industries.
As a rule of thumb, it is safe to conclude that any firm with a current ratio greater than
1.0 should be able to meet its current obligations, that is, pay bills that come due in the
current period. [Current ratio = (Current assets) / (Current liabilities)]
Sometimes firms attempt to use "window dressing" techniques to make their financial
statements look better than they actually are in the current period.
Computing the values of the ratios is fairly simple; the toughest and most important part
of ratio analysis is interpretation of the values derived from the computations.
General conclusions about a firm should not be made by examining one or a few ratios,
ra - ✔✔As a rule of thumb, it is safe to conclude that any firm with a current ratio greater
than 1.0 should be able to meet its current obligations, that is, pay bills that come due in
the current period. [Current ratio = (Current assets) / (Current liabilities)]
SOLUTIONS RATED A+
✔✔Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5.
Both firms want to "window dress" their coming end-of-year financial statements. As
part of their window dressing strategy, each firm will double its current liabilities by
adding short-term debt and placing the funds obtained in the cash account. Which of the
statements below best describes the actual results of these transactions?
The transactions will have no effect on the current ratios.
The current ratios of both firms will be increased.
The current ratios of both firms will be decreased.
Only Pepsi Corporation's current ratio will be increased.
Only Coke Company's current ratio will be increased. - ✔✔only pepsi coropration will
increase
✔✔One would calculate changes in balance sheet accounts for
A typical ratio analysis.
Pro forma balance sheet construction.
Statement of cash flows construction.
Profit and loss analysis.
Pro forma income statement construction. - ✔✔statement of cash flows construction
✔✔Which of the following mechanisms is not used by shareholders to get managers to
act in shareholder's best interests?
Threat of firing
Managerial compensation.
Golden parachute.
Threat of takeover.
Answers b and c above. - ✔✔golden parachute
✔✔The Meryl Corporation's common stock currently is selling at $100 per share, which
represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a
return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total
assets (ROA)?
8.0%
10.0%
12.0%
16.7%
20.0% - ✔✔8
✔✔Which of the following groups probably would not be interested in the financial
statement analysis of a firm?
creditors
management of the firm
stockholders
, Internal Revenue Service
All of the above would be interested in the financial statement analysis. - ✔✔internal
revenue service
✔✔The 11 "titles" in the Sarbanes-Oxley Act of 2002 establish standards for
accountability and responsibility of financial reporting information for major corporations.
Which of the following activities does the act not provide rules that a corporation must
abide by?
The corporation must have a committee that consists of outside directors to oversee
the firm's audits.
The corporation must hire an external auditor that will render an unbiased
(independent) opinion concerning the firm's financial statement.
The corporation must maximize social welfare through funding of environmentally
friendly activities.
The corporation must provide additional information about the procedures used to
construct and report financial statements.
The firm's CEO and CFO must certify financial reports submitted to the Securities
Exchange Commission. - ✔✔The corporation must maximize social welfare through
funding of environmentally friendly activities.
✔✔Which of the following should be the primary goal pursued by the financial manager
of a firm?
Maximize net income (profits).
Maximize the firm's net worth, or book value.
Maximize dividends paid to common stockholders.
Minimize variable operating expenses.
Maximize the market value of the firm's stock. - ✔✔maximize the market value of the
firms stock
✔✔Which of the following statements about ratio analysis is incorrect?
Classifying a large, well-diversified firm into a single industry often is difficult because
many of the firm's divisions are involved with different products from different industries.
As a rule of thumb, it is safe to conclude that any firm with a current ratio greater than
1.0 should be able to meet its current obligations, that is, pay bills that come due in the
current period. [Current ratio = (Current assets) / (Current liabilities)]
Sometimes firms attempt to use "window dressing" techniques to make their financial
statements look better than they actually are in the current period.
Computing the values of the ratios is fairly simple; the toughest and most important part
of ratio analysis is interpretation of the values derived from the computations.
General conclusions about a firm should not be made by examining one or a few ratios,
ra - ✔✔As a rule of thumb, it is safe to conclude that any firm with a current ratio greater
than 1.0 should be able to meet its current obligations, that is, pay bills that come due in
the current period. [Current ratio = (Current assets) / (Current liabilities)]
