UTD Mace FIN 3320 Ch 2

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

Statement of retained earnings

b. Proxy statement

c. Income statement

d. Balance sheet

e. Statement of cash flows

e. Statement of cash flows

Which of the following is an example of a noncash item reported in the income statement of a firm?

a. Depreciation

b. Taxes

c. Interest

d. Net sales

e. Dividends

a. Depreciation

All firms that are publicly traded in the United States will be required to adopt the _____ in the near future.

International Financial Reporting Standards (IFRS)

Emerald Corporation's current ratio is 0.5, while Ruby (Emerald's competitor) 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?

a. The current ratios of both firms will be increased.

b. Only Emerald Corporation's current ratio will be increased.

c. The transactions will have no effect on the current ratios.

d. Only Ruby Company's current ratio will be increased.

e. The current ratios of both firms will be decreased.

b. Only Emerald Corporation's current ratio will be increased

Ruby Enterprises Ltd. has long-term bonds worth $20 million, retained earnings of $45 million, accounts payable of $10 million, notes payable of $12 million, and inventory worth $18 million. What is the value of total liabilities of Ruby Enterprises?

a. $60 million

b. $85 million

c. $87 million

d. $42 million

e. $105 million

d. $42 million

Long-term bonds (20mil) + AP (12mil) + NP (10mil) = 42mil

Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current times interest earned ratio?

a. 3.4 times

b. 4.0 times

c. 3.6 times

d. 5.0 times

e. 2.4 times

d. 5.0 times

TIE = EBIT/Interest

Which of the following provides information about a firm's performance during the past year and also provides information regarding new developments that will affect the future performance of the firm?

a. A memorandum of understanding

b. Articles of incorporation

c. Proxy statements

d. The annual report

e. A DuPont chart

d. The annual report

Which of the following financial statements is prepared to show the changes in the common equity accounts between balance sheet dates?

a. Income statement

b. Statement of cash flows

c. Statement of retained earnings

d. Pro forma statement

e. Proxy statement

c. Statement of retained earnings

If a firm's existing quick ratio is 1.2, and all other variables remain unchanged, the quick ratio can be increased by _____.

receiving interest income

Market value ratios indicate _____.

what investors think of the company's future prospects based on its past performance

Which of the following is the most appropriate measure to examine whether management of a firm is pursuing the goal of maximizing the firm's stock price?

a. Earnings per share

b. Accounting profits

c. Retained earnings

d. Cash flows

e. Net income

d. Cash flows

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times interest earned ratio?

11 times

Which of the following ratios shows the relationship between a firm's current assets and its current liabilities?

a. Asset management ratios

b. Liquidity ratios

c. Debt management ratios

d. Profitability ratios

e. Market value ratios

b. Liquidity ratios

Which of the following is considered a use of cash in a cash flow statement?

e. Increase in fixed assets

Which of the following is considered by analysts when comparing the operations of two firms that are financed differently?

a. Gross profit

b. Retained earnings

c. Total assets

d. Earnings before interest and taxes

e. Net sales

d. Earnings before interest and taxes

The funds provided by common stockholders that consist of common stock, paid-in capital, and retained earnings are referred to as the firm's ______.

a. net cash flows

b. cash equivalents

c. accruals

d. market value

e. net worth

e. net worth

The proportion of a firm's funds that is provided by shareholders is equal to _____.

1 minus the debt ratio

Which of the following ratios indicate how much investors are willing to pay for a firm's stock for each dollar of reported profits?

a. Price/earnings ratio

b. Market-to-book ratio

c. Earnings per share

d. Net profit margin

e. Return on equity

a. Price/earnings ratio

Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

a. Proxy statement

b. Balance sheet

c. Statement of retained earnings

d. Income statement

e. Statement of cash flows

d. Income statement

Daisy Inc.'s book value per share is $10, and its market-to-book ratio is 1.5. If its earnings per share is $2.5, calculate its price/earnings (P/E) ratio.

P/E = 6.0

A limitation of ratio analysis is that _____.

firms can employ window-dressing techniques to make their financial statements look better

Which of the following transactions will not affect the quick ratio of a company?

a. Inventory sold on credit

b. Accounts receivable collected

c. Payment for accounts payable

d. Bank loan repaid

e. Cash purchase of equipment

b. Accounts receivable collected

An analysis of a firm's financial ratios over time used to determine the improvement or deterioration in its financial situation is called _____.

trend analysis

Which of the following mathematical expressions calculates the debt ratio?

a. Debt ratio = Long-term liabilities ÷ Current liabilities

b. Debt ratio = Interest charges ÷ Total liabilities

c. Debt ratio = Total liabilities ÷ Total assets

d. Debt ratio = Net operating income ÷ Total debt

e. Debt ratio = Sales ÷ Total liabilities

Debt ratio = Total liabilities ÷ Total assets

Which of the following statements is true regarding debt ratios?

a. Firms with relatively low debt ratios have higher expected returns when business is good.

b. Firms with relatively low debt ratios are exposed to more risk compared to firms with relatively high debt ratios.

c. Firms with relatively high debt ratios have higher expected returns when business is good.

d. Firms with relatively high debt ratios have higher expected returns when business is bad.

e. Firms with relatively low debt ratios have higher expected returns when business is poor.

c. Firms with relatively high debt ratios have higher expected returns when business is good.

Which of the following is an example of a current asset?

a. Plant and equipment

b. Common stock

c. Accounts payable

d. Retained earnings

e. Inventory

e. Inventory

Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?

$275 million

_____ is an example of cash flow from an investing activity in a cash flow statement.

a. Repayment of debt

b. Repurchase of stock

c. Purchase of equipment

d. Purchase of inventory

e. Payment of dividends

c. Purchase of equipment

Retained earnings is the total amount of _____.

income that has been saved and reinvested in assets since the firm started business

Which of the following items appears at the top of an income statement when determining the net income of a firm?

a. Earnings before tax

b. Gross profit

c. Retained earnings

d. Net sales

e. Operating costs

d. Net sales

Which of the following statements is true about net worth?

a. A firm's net worth is the amount to be paid by the shareholders to the firm on liquidation of the firm.

b. A firm's net worth should be higher than the stockholders' equity.

c. A firm's net worth should be equal to 50 percent of the value of the total assets of the firm.

d. A firm's net worth is the amount that the firm's assets can generate on their liquidation.

e. A firm's net worth is equal to total assets minus total liabilities.

e. A firm's net worth is equal to total assets minus total liabilities.

Techniques employed by firms to make their financial statements look better than they actually are, are called _____.

window-dressing techniques

Which of the following ratios measures how effectively a firm is managing its assets?

a. Times interest earned ratio

b. Inventory turnover ratio

c. Profit margin ratio

d. Price earnings ratio

e. Quick ratio

b. Inventory turnover ratio

Which of the following statements is true about net worth?

a. A firm's net worth should be equal to 50 percent of the value of the total assets of the firm.

b. A firm's net worth should be higher than the stockholders' equity.

c. A firm's net worth is the amount that the firm's assets can generate on their liquidation.

d. A firm's net worth is the amount to be paid by the shareholders to the firm on liquidation of the firm.

e. A firm's net worth is equal to total assets minus total liabilities.

e. A firm's net worth is equal to total assets minus total liabilities.

Which of the following accounts contains the actual money that can be spent by a firm?

a. Net worth

b. Cash and equivalents

c. Accounts receivable

d. Inventories

e. Notes payable

b. Cash and equivalents

If an analyst's goal is to determine how effectively a firm is managing its assets, which of the following would he or she examine?

a. Quick ratio, debt ratio, and times interest earned

b. Time interest earned, profit margin, and fixed asset turnover ratio

c. Inventory turnover ratio, days sales outstanding ratio, and fixed asset turnover ratio

d. Total assets turnover ratio, price earnings ratio, and return on total assets

e. Profit margin, current ratio, and fixed charge coverage ratio

c. Inventory turnover ratio, days sales outstanding ratio, and fixed asset turnover ratio

Which of the following is the formula to calculate a firm's inventory turnover ratio?

a. Inventory turnover = Inventory ÷ Current assets

b. Inventory turnover = Sales ÷ Inventory

c. Inventory turnover = (Sales - Cost of goods sold) ÷ Inventory

d. Inventory turnover = Cost of goods sold ÷ Inventory

e. Inventory turnover = Inventory ÷ Accounts receivables

d. Inventory turnover = Cost of goods sold ÷ Inventory

The statement of retained earnings for Redwood Systems Ltd. shows a retained earnings balance of $300 million on December 31. During the year, Redwood generated net income of $60 million and paid dividends of $20 million to its stockholders. What was the beginning balance of retained earnings at the start of this year?

a. $220 million

b. $340 million

c. $380 million

d. $260 million

e. $300 million

d. $260 million

60-20 = 40

300-40 = 260

If a firm earns a net profit of $100,000 on sales of $2,000,000, what is its net profit margin?

5%

Sapphire Industries Ltd. has a net income of $60 million and the total depreciation on its assets is $20 million. What is the net cash flow of Sapphire Industries?

$80 million.

$60+$20 = 80

The book value per share of Topaz General Ltd. is $10 per share and the company has a total of 4 million shares. Calculate the total book value of common equity of the company.

$40 million

4 million x $10/sh = $40 million

Selzer Inc. sells all of its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)?

3.3%

The equity section of a firm's balance sheet contains _____.

retained earnings

Which of the following is true about a common size balance sheet?

a. The assets, liabilities, and equities are reported as percentages of total assets.

b. The assets, liabilities, and equities are arranged in the alphabetical order.

c. The assets, liabilities, and equities are reported as percentages of common stock.

d. The assets, liabilities, and equities are reported as percentages of the assets, liabilities, and equities of a competing firm.

e. The assets, liabilities, and equities are reported at their market values.

a. The assets, liabilities, and equities are reported as percentages of total assets.

A firm has total assets of $500 million, including its accounts receivable, which is worth $120 million. The annual sales of the firm is $650 million. What is the firm's days sales outstanding (DSO) ratio?

66.5 days

DSO = AR/Daily Sales

Daily Sales = 650mil/365 = 1.7 mil

120 mil/1.8mil = 66.6 d

_____ is an example of a long-term investment of a firm.

Equipment

Assuming that other things are constant, the price earnings (P/E) ratio is _____.

higher for firms with high growth prospects and lower for riskier firms

Which of the following financial statements is included in the annual reports of a company?

a. Proxy statement

b. Statement of cash flows

c. Statement of changes in long-term financing

d. Fund flow statement

e. Statement of principles

b. Statement of cash flows

Which of the following statements is true about the annual report of a company?

a. The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of changes in long-term financing.

b. The annual report provides no relevant information for use by financial analysts or by the investing public.

c. The annual report is a report issued by each of the shareholders to the corporation and it contains information about the performance of the shares of the firm held by the shareholders.

d. The annual report does not provide any information about a firm's future prospects.

e. The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends.

e. The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends.

Amber Devices Ltd. has total assets worth $900 million and total liabilities worth $475 million at the end of December 31. What is the amount of money received by the stockholders, if Amber liquidates all of its assets for $850 and pays off all of its outstanding debt at book value?

$375 million

Liq: $850 - $475 = $375

Greenwood Builders Ltd. has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of the firm's total liabilities?

$262,500

Which of the following mathematical expressions is used to compute the net working capital of a firm?

a. Net working capital = Total assets − Current assets

b. Net working capital = Total liabilities − Current liabilities

c. Net working capital = Total equity − Retained earnings

d. Net working capital = Current assets − Current liabilities

e. Net working capital = Total liabilities − Retained earnings

Net working capital = Current assets − Current liabilities

The extent to which the operating income can decline before a firm is unable to meet its annual interest costs can be found in the _____.

times interest earned ratio

Using the information below for WAM Inc., what is the market value per share?

Earnings after interest and taxes = $200,000

Earnings per share = $2.00

Stockholders' equity = $2,000,000

Market/Book ratio = 0.20

$4.00

$200,000(EBIT) / $2(EPS) = 100,000 shares

2mil/100,000 = 20

.2 = m/20

=4.00

Assume that Meyer Corporation is 100 percent equity financed, and has the following information:

(1) Earnings before taxes = $1,500;

(2) Sales = $5,000;

(3) Dividend payout ratio = 60%;

(4) Total assets turnover = 2.0;

(5) Applicable tax rate = 30%

What is the firm's return on equity?

42%

Find ROA: (NPM * TAT)

NPM = NI/S = 1050/5000 = .21

.21 TAT = .21 2 = .42%

no equity multiplier.

The book value of the common stock of Zircon Global Ltd. is $34 million. If Zircon has four million shares of common stock outstanding, what is its book value per share?

$8.50 per share

bv/sh = 34mil/4mil = 8.50

The funds provided by common stockholders that consist of common stock, paid-in capital, and retained earnings are referred to as the firm's ______.

net worth

The net fixed assets of Auburn Media Ltd. is $850 million. The sales of the firm is $1,420 million. What is the firm's fixed assets turnover ratio?

1.67 times

FAT = S/FA

FAT =1420/850 = 1.67

Which of the following is considered a part of cash flow from a financing activity in a statement of cash flows?

a. Decrease in accounts payable

b. Decrease in accrued wages

c. Increase in fixed assets

d. Increase in inventories

e. Increase in corporate bonds

e. Increase in corporate bonds

Which of the following mathematical expressions calculates a firm's retained earnings at the end of a year?

Retained earnings = Beginning balance of retained earnings + Net income in the current year − Dividends paid in the current year

Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information. (Assume no other changes occurred during the past year.)

​

Dividend payment $25

Increase in accounts receivables $50

Increase in notes payable $30

Decrease in accounts payable $20

Increase in accrued wages and taxes $15

Increase in inventories $35

Addition to retained earnings $5

-$80

Bicksler Corporation has a current ratio of 2.0 on July 21 of the current year. On July 22, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?

The value of the current ratio will decrease.

Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. What is the ending balance of retained earnings?

$218 million

The firm's statement of retained earnings reports changes in the _____.

common equity accounts between balance sheet dates

Which of the following statements is true about the values recorded in the balance sheet of a firm?

a. The book value of a firm's debt generally is equal to or very close to the market value of the firm's liabilities.

b. The equity section of a firm's balance sheet represents the difference between the market value of the firm's assets and the book value of the firm's liabilities.

c. The book value of a firm's assets will be higher than the market value of the firm's assets.

d. The equity section of a firm's balance sheet represents the difference between the market value of the firm's assets and the market value of the firm's liabilities.

e. The book value of a firm's assets will be equal to the market value of the firm's assets.

a. The book value of a firm's debt generally is equal to or very close to the market value of the firm's liabilities.

Which of the following mathematical expressions is used to compute the book value per share?

Book value per share = Common equity ÷ Total number of shares outstanding

The Charleston Company is a relatively small, privately owned firm. Last year, the company had an after-tax income of $15,000 and 10,000 shares were outstanding. The owners were trying to determine the market value for the stock prior to taking the company public. A similar firm, which is publicly traded, had a price/earnings ratio of 5.0. Using only the information given, what is the estimated market value of one share of Charleston's stock?

$7.50

15000/10000=1.5(EPS)

P/E = mv/EPS

5 = mv/1.5

mv = 7.50

Which of the following mathematical expressions calculates the net cash flow if depreciation is the only noncash item in a firm's income statement?

Net cash flow = Net income + Depreciation

Which of the following actions can be considered a source of cash when constructing a statement of cash flows?

Increase in long-term bonds

If a company has a quick ratio of 1.0 and a current ratio of 2.0, then the value of _____.

current liabilities is equal to the value of inventory

Which of the following is true about the book value and market value of a firm's debt?

a. The market value of a firm's debt must equal the market value of a firm's assets.

b. The book value of a firm's debt generally is either equal to or very close to the market value of the firm's debt.

c. The book value of a firm's debt generally is either equal to or very close to the market value of firm's assets.

d. The market value of a firm's debt generally is higher than the book value of firm's assets.

e. The book value of a firm's debt generally is higher than the market value of the firm's debt.

b. The book value of a firm's debt generally is either equal to or very close to the market value of the firm's debt.

Which of the following changes is considered a source of cash when preparing a statement of cash flow?

a. An increase in property, plant, and equipment

b. A decrease in inventories

c. An increase in accounts receivable

d. A decrease in accrued wages

e. A decrease in accounts payable

b. a decrease in inventories

Which of the following was originally created to develop and approve a set of common International Financial Reporting Standards (IFRS)?

International Accounting Standards Board (IASB)

The balance sheet of Crimpson Solutions Ltd. has cash of $125 million, accounts receivable of $245 million, inventory of $160 million, and equipment worth $450 million. The company also has accounts payable of $120 million, notes payable of $280 million, and corporate bonds of $365 million. What is Crimpson's current ratio?

1.325 times

Sum of Assets = 980

Sum of Liabilities = 765

CR = TA/TL

980/765 = 1.325

Suppose a firm has a growth rate equal to 8 percent, return on assets (ROA) of 10 percent, a debt ratio of 20 percent, and a current stock price of $36. What is the firm's return on equity (ROE)?

12.5%

Equity = 1-DR

1-.2=.8

.10/.8 = .125

12.5%

A comparison of a firm's ratios with those of other firms in the same industry at the same point in time is called _____.

comparative ratio analysis (benchmarking)

A firm's total equity is $10 million and total liabilities is $5 million. During the year, its sales equaled $75 million. Based on the given information, what is the firm's total assets turnover ratio?

5 times

The days sales outstanding (DSO) ratio of a firm identifies _____.

the average length of time a firm must wait after making a credit sale before receiving cash

Which of the following ratios is calculated to help determine the liquidity of a firm?

Current Ratio