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Exam 3: Analysis of Financial Statements

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Question 41

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It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

A) True
B) False

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Question 42

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Profitability ratios show the combined effects of liquidity,asset management,and debt management on operating results.

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B) False

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Question 43

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Companies Heidee and Leaudy are virtually identical in that they are both profitable,and they have the same total assets (TA) ,Sales (S) ,return on assets (ROA) ,and profit margin (PM) .However,Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?

Suppose a firm wants to maintain a specific TIE ratio.It knows the amount of its debt,the interest rate on that debt,the applicable tax rate,and its operating costs.With this information,the firm can calculate the amount of sales required to achieve its target TIE ratio.

Stewart Inc.'s latest EPS was $3.50,its book value per share was $22.75,it had 215,000 shares outstanding,and its debt-to-assets ratio was 46%.How much debt was outstanding?

Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than that of B.

Rappaport Corp.'s sales last year were $320,000,and its net income after taxes was $23,000.What was its profit margin on sales?

The inventory turnover ratio and days sales outstanding (DSO)are two ratios that are used to assess how effectively a firm is managing its assets.

Heidee Corp.and Leaudy Corp.have identical assets,sales,interest rates paid on their debt,tax rates,and EBIT.However,Heidee uses more debt than Leaudy.Which of the following statements is CORRECT?

One problem with ratio analysis is that relationships can be manipulated.For example,we know that if our current ratio is less than 1.0,then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Since 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.

The basic earning power ratio (BEP)reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Other things held constant,which of the following alternatives would increase a company's cash flow for the current year?

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically,depending on the time of year when the financial statements are constructed.

Bostian,Inc.has total assets of $625,000.Its total debt outstanding is $185,000.The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%.How much debt must the company add or subtract to achieve the target debt ratio?

A firm's new president wants to strengthen the company's financial position.Which of the following actions would make it financially stronger?

Firms A and B have the same current ratio,0.75,the same amount of sales and cost of goods sold,and the same amount of current liabilities.However,Firm A has a higher inventory turnover ratio than B.Therefore,we can conclude that A's quick ratio must be smaller than B's.

Lindley Corp.'s stock price at the end of last year was $33.50,and its book value per share was $25.00.What was its market/book ratio?

Suppose Firms A and B 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,Firm A has a higher debt ratio.If BEP is greater than the interest rate on debt,Firm A will have a higher ROE as a result of its higher debt ratio.

One problem with ratio analysis is that relationships can be manipulated.For example,if our current ratio is greater than 1.5,then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.