FIN3701
TESTBANK
, LECTURE 3
ANALYSIS OF FINANCIAL STATEMENTS
(Difficulty: E = Easy, M = Medium, and T = Tough)
True-False
Easy:
Ratio analysis Answer: a Diff: E
1. Ratio analysis involves a comparison of the relationships between
financial statement accounts so as to analyze the financial position and
strength of a firm.
a. True
b. False
Liquidity ratios Answer: b Diff: E
2. The current ratio and inventory turnover ratio measure the liquidity of
a firm. The current ratio measures the relationship of a firm's current
assets to its current liabilities and the inventory turnover ratio
measures how rapidly a firm turns its inventory back into a "quick" asset
or cash.
a. True
b. False
Current ratio Answer: b Diff: E
3. If a firm has high current and quick ratios, this is always a good
indication that a firm is managing its liquidity position well.
a. True
b. False
Asset management ratios Answer: a Diff: E
4. The inventory turnover ratio and days sales outstanding (DSO) are two
ratios that can be used to assess how effectively the firm is managing
its assets in consideration of current and projected operating levels.
a. True
b. False
Inventory turnover ratio Answer: b Diff: E
5. A decline in the inventory turnover ratio suggests that the firm's
liquidity position is improving.
a. True
, b. False
Debt management ratios Answer: a Diff: E
6. The degree to which the managers of a firm attempt to magnify the returns
to owners' capital through the use of financial leverage is captured in
debt management ratios.
a. True
b. False
TIE ratio Answer: a Diff: E
7. The times-interest-earned ratio is one indication of a firm's ability to
meet both long-term and short-term obligations.
a. True
b. False
Profitability ratios Answer: a Diff: E
8. Profitability ratios show the combined effects of liquidity, asset
management, and debt management on operations.
a. True
b. False
ROA Answer: b Diff: E
9. Since 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.
a. True
b. False
Market value ratios Answer: a Diff: E
10. Market value ratios provide management with a current assessment of how
investors in the market view the firm's past performance and future
prospects.
a. True
b. False
Trend analysis Answer: a Diff: E
11. Determining whether a firm's financial position is improving or
deteriorating requires analysis of more than one set of financial
statements. Trend analysis is one method of measuring a firm's
performance over time.
a. True
b. False
, Medium:
Liquidity ratios Answer: b Diff: M
12. If the current ratio of Firm A is greater than the current ratio of Firm
B, we cannot be sure that the quick ratio of Firm A is greater than that
of Firm B. However, if the quick ratio of Firm A exceeds that of Firm B,
we can be assured that Firm A's current ratio also exceeds B's current
ratio.
a. True
b. False
Inventory turnover ratio Answer: a Diff: M
13. The inventory turnover and current ratios are related. The combination
of a high current ratio and a low inventory turnover ratio relative to
the industry norm might indicate that the firm is maintaining too high an
inventory level or that part of the inventory is obsolete or damaged.
a. True
b. False
Fixed assets turnover Answer: b Diff: M
14. We can use the fixed assets turnover ratio to legitimately compare firms
in different industries as long as all the firms being compared are using
the same proportion of fixed assets to total assets.
a. True
b. False
BEP and ROE Answer: a Diff: M
15. Suppose two firms have the same amount of assets, pay the same interest
rate on their debt, have the same basic earning power (BEP), and have the
same tax rate. However, one firm has a higher debt ratio. If BEP is
greater than the interest rate on debt, the firm with the higher debt
ratio will also have a higher rate of return on common equity.
a. True
b. False
Equity multiplier Answer: a Diff: M
16. If the equity multiplier is 2.0, the debt ratio must be 0.5.
a. True
b. False
TESTBANK
, LECTURE 3
ANALYSIS OF FINANCIAL STATEMENTS
(Difficulty: E = Easy, M = Medium, and T = Tough)
True-False
Easy:
Ratio analysis Answer: a Diff: E
1. Ratio analysis involves a comparison of the relationships between
financial statement accounts so as to analyze the financial position and
strength of a firm.
a. True
b. False
Liquidity ratios Answer: b Diff: E
2. The current ratio and inventory turnover ratio measure the liquidity of
a firm. The current ratio measures the relationship of a firm's current
assets to its current liabilities and the inventory turnover ratio
measures how rapidly a firm turns its inventory back into a "quick" asset
or cash.
a. True
b. False
Current ratio Answer: b Diff: E
3. If a firm has high current and quick ratios, this is always a good
indication that a firm is managing its liquidity position well.
a. True
b. False
Asset management ratios Answer: a Diff: E
4. The inventory turnover ratio and days sales outstanding (DSO) are two
ratios that can be used to assess how effectively the firm is managing
its assets in consideration of current and projected operating levels.
a. True
b. False
Inventory turnover ratio Answer: b Diff: E
5. A decline in the inventory turnover ratio suggests that the firm's
liquidity position is improving.
a. True
, b. False
Debt management ratios Answer: a Diff: E
6. The degree to which the managers of a firm attempt to magnify the returns
to owners' capital through the use of financial leverage is captured in
debt management ratios.
a. True
b. False
TIE ratio Answer: a Diff: E
7. The times-interest-earned ratio is one indication of a firm's ability to
meet both long-term and short-term obligations.
a. True
b. False
Profitability ratios Answer: a Diff: E
8. Profitability ratios show the combined effects of liquidity, asset
management, and debt management on operations.
a. True
b. False
ROA Answer: b Diff: E
9. Since 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.
a. True
b. False
Market value ratios Answer: a Diff: E
10. Market value ratios provide management with a current assessment of how
investors in the market view the firm's past performance and future
prospects.
a. True
b. False
Trend analysis Answer: a Diff: E
11. Determining whether a firm's financial position is improving or
deteriorating requires analysis of more than one set of financial
statements. Trend analysis is one method of measuring a firm's
performance over time.
a. True
b. False
, Medium:
Liquidity ratios Answer: b Diff: M
12. If the current ratio of Firm A is greater than the current ratio of Firm
B, we cannot be sure that the quick ratio of Firm A is greater than that
of Firm B. However, if the quick ratio of Firm A exceeds that of Firm B,
we can be assured that Firm A's current ratio also exceeds B's current
ratio.
a. True
b. False
Inventory turnover ratio Answer: a Diff: M
13. The inventory turnover and current ratios are related. The combination
of a high current ratio and a low inventory turnover ratio relative to
the industry norm might indicate that the firm is maintaining too high an
inventory level or that part of the inventory is obsolete or damaged.
a. True
b. False
Fixed assets turnover Answer: b Diff: M
14. We can use the fixed assets turnover ratio to legitimately compare firms
in different industries as long as all the firms being compared are using
the same proportion of fixed assets to total assets.
a. True
b. False
BEP and ROE Answer: a Diff: M
15. Suppose two firms have the same amount of assets, pay the same interest
rate on their debt, have the same basic earning power (BEP), and have the
same tax rate. However, one firm has a higher debt ratio. If BEP is
greater than the interest rate on debt, the firm with the higher debt
ratio will also have a higher rate of return on common equity.
a. True
b. False
Equity multiplier Answer: a Diff: M
16. If the equity multiplier is 2.0, the debt ratio must be 0.5.
a. True
b. False
