Test bank corporate finance 8e ros chap003

current liabilities minus inventory, divided by current assets.. cash on hand divided by current liabilities.. cash on hand plus accounts receivable divided by current assets.. current a

Multiple Choice Questions

1 Activities of a firm which require the spending of cash are known as:

c tax reconciliation statement

D statement of cash flows.

e statement of operating position

SECTION: 3.1

TOPIC: STATEMENT OF CASH FLOWS

TYPE: DEFINITIONS

4 A _ standardizes items on the income statement and balance sheet relative to their values as of a common point in time

a statement of standardization

b statement of cash flows

C common-base year statement

7 The current ratio is measured as:

a current assets minus current liabilities

B current assets divided by current liabilities.

c current liabilities minus inventory, divided by current assets

d cash on hand divided by current liabilities

e current liabilities divided by current assets

SECTION: 3.3

TOPIC: CURRENT RATIO

TYPE: DEFINITIONS

8 The quick ratio is measured as:

a current assets divided by current liabilities

b (cash on hand plus accounts receivable) divided by current assets

c current liabilities divided by current assets

d cash on hand divided by current liabilities

E (current assets minus inventory) divided by current liabilities.

SECTION: 3.3

TOPIC: QUICK RATIO

TYPE: DEFINITIONS

9 The cash ratio is measured as:

a current assets divided by current liabilities

b (current assets minus cash on hand) divided by current liabilities

c (current assets minus current liabilities) divided by cash on hand

d (current assets minus inventory) divided by current liabilities

E cash on hand divided by current liabilities.

SECTION: 3.3

TOPIC: CASH RATIO

TYPE: DEFINITIONS

3-4

10 The financial ratio measured as current assets divided by average daily operating costs is the:

13 The debt-equity ratio is measured as total:

a equity minus total debt

b equity divided by total debt

C debt divided by total equity.

d debt minus total equity

e debt plus total equity

SECTION: 3.3

TOPIC: DEBT-EQUITY RATIO

TYPE: DEFINITIONS

14 The equity multiplier ratio is measured as:

a total equity divided by total assets

b (total equity plus total debt) divided by total assets

c (total assets minus total equity) divided by total assets

d (total assets minus total equity) divided by total equity

E total assets divided by total equity.

16 The financial ratio measured as a firm's long-term debt divided by the firm's total capitalization is the:

a interval measure

b equity multiplier

c total debt ratio

D long-term debt ratio.

e debt-equity ratio

SECTION: 3.3

TOPIC: LONG-TERM DEBT RATIO

TYPE: DEFINITIONS

17 When you divide EBIT by the amount of the interest expense you are computing the:

a cash coverage ratio

18 Which one of the following computations is known as the cash coverage ratio?

A (EBIT + Depreciation) / Interest

b EBIT / Interest

c Cash on hand / Current assets

d Cash on hand / Current liabilities

e Cash on hand / Interest

SECTION: 3.3

19 Ratios that measure how efficiently a firm uses its assets to generate sales are known as _ ratios

20 The inventory turnover ratio is measured as:

a total sales divided by inventory

b inventory divided by total sales

C cost of goods sold divided by inventory.

d inventory divided by cost of goods sold

e inventory divided by (sales minus cost of goods sold)

SECTION: 3.3

TOPIC: INVENTORY TURNOVER

TYPE: DEFINITIONS

21 The days' sales in inventory ratio is measured as:

a sales divided by inventory

b cost of goods sold divided by inventory

c 365 days divided by (sales divided by inventory)

d 365 days divided by the inventory amount

E 365 days divided by the inventory turnover.

SECTION: 3.3

TOPIC: DAYS' SALES IN INVENTORY

TYPE: DEFINITIONS

3-8

22 The receivables turnover ratio is measured as:

a cash divided by accounts receivable

B sales divided by accounts receivable.

c cost of goods sold divided by accounts receivable

d accounts receivable divided by cost of goods sold

e accounts receivable divided by sales

SECTION: 3.3

TOPIC: RECEIVABLES TURNOVER

TYPE: DEFINITIONS

23 Days' sales in receivables is equal to:

a receivables turnover plus 365 days

b accounts receivable times 365 days

c accounts receivable plus sales, divided by 365 days

D 365 days divided by the receivables turnover.

e 365 days divided by the accounts receivable

SECTION: 3.3

TOPIC: DAYS' SALES IN RECEIVABLES

TYPE: DEFINITIONS

24 The net working capital turnover ratio is measured as:

A sales divided by net working capital.

b sales minus net working capital

c sales times net working capital

d net working capital divided by sales

e net working capital plus sales

SECTION: 3.3

TOPIC: NET WORKING CAPITAL TURNOVER

TYPE: DEFINITIONS

25 The fixed asset turnover ratio is measured as:

a cost of goods sold divided by net fixed assets

b total assets divided by net fixed assets

C sales divided by net fixed assets.

d net fixed assets divided by sales

e net fixed assets divided by total assets

SECTION: 3.3

TOPIC: FIXED ASSET TURNOVER

TYPE: DEFINITIONS

26 The total asset turnover ratio is equal to:

a total equity divided by total assets

B sales divided by total assets.

c total assets divided by cost of goods sold

d total assets divided by sales

e total assets divided by total equity

28 Net income divided by sales is known as a firm's:

29 Return on assets is equal to:

a sales divided by current assets

b sales divided by total assets

c net income divided by current assets

d net income divided by net fixed assets

E net income divided by total assets.

31 The ratio computed by dividing the price per share of stock by the earnings per share is known as the:

32 The market-to-book ratio is measured as:

a the market value of total assets divided by the book value of total assets

b the market value of inventory divided by the book value of inventory

c net income divided by the market value per share

d market value per share of stock divided by earnings per share

E market value per share divided by book value per share.

SECTION: 3.3

TOPIC: MARKET-TO-BOOK RATIO

TYPE: DEFINITIONS

33 The PEG ratio is equal to the price per share divided by the:

A expected future earnings growth rate.

b profit margin

c sales growth rate

d growth rate of inflation

e earnings per share

SECTION: 3.3

TOPIC: PEG RATIO

TYPE: DEFINITIONS

3-12

34 The market value of a firm's assets divided by the replacement cost of those assets is referred to as:

A Tobin's Q.

b the market-to-book value

c the PEG ratio

d the asset growth rate

e the asset turnover

SECTION: 3.3

TOPIC: TOBIN'S Q

TYPE: DEFINITIONS

35 The price-sales ratio is equal to the:

a average price of a product divided by the annual sales of a firm

b average price of a product divided by the number of products sold in one year

c current price of a product divided by the number of products in inventory that are ready for sale

d price per share divided by sales growth rate

E price per share divided by the sales per share.

b Standard & Poor's 500

C Standard Industrial Classification code.

d Governmental ID code

e Government Engineered Coding System

3-14

37 Which one of the following is a source of cash?

A an increase in accounts payable

b an increase in cash

c a purchase of inventory

d the payoff of a loan

e a credit sale to a customer

SECTION: 3.1

TOPIC: SOURCES OF CASH

TYPE: CONCEPTS

38 Which one of the following is a source of cash?

a an increase in accounts receivable

b a decrease in common stock

C an increase in long-term debt

d a decrease in accounts payable

e a dividend distribution

SECTION: 3.1

TOPIC: SOURCES OF CASH

TYPE: CONCEPTS

39 Which one of the following is a use of cash?

a payment received from a customer on his or her account

b sale of inventory to a cash customer

c decrease in the cash balance

d sale of common stock

E payment to a supplier

SECTION: 3.1

TOPIC: USES OF CASH

TYPE: CONCEPTS

40 Which one of the following is found in the financing activity section of a statement of cash flows?

a fixed asset acquisition

42 Which of the following appear in the operating activity section of a statement of cash flows?

I decrease in long-term debt

II fixed asset acquisition

III increase in accounts receivable

IV net income

a II only

b III only

c I and II only

d II and III only

E III and IV only

SECTION: 3.1

TOPIC: STATEMENT OF CASH FLOWS

TYPE: CONCEPTS

43 On a common-size balance sheet all accounts are expressed as:

a a percentage of sales

b whole dollars

c the number of dollars in thousands

D a percentage of total assets.

e a percentage of total equity

45 Which of the following are liquidity ratios?

I interval measure

II current ratio

III quick ratio

IV net working capital to total assets

a II and III only

b I and II only

c II, III, and IV only

d I, III, and IV only

E I, II, III, and IV

SECTION: 3.3

TOPIC: LIQUIDITY RATIOS

TYPE: CONCEPTS

46 A decrease in which one of the following will decrease a firm's current ratio without affecting its quick ratio?

48 A firm has an interval measure of 59 This means that the firm must:

a pay its suppliers in full within the next 59 hours or lose the accounts payable discounts

B obtain additional liquid assets within the next 59 days or possibly be forced to cease

operations

c repay its long-term debt within the next 59 days or face possible bankruptcy proceedings bythe firm's creditors

d pay interest on its long-term debt every 59 days

e sell its entire inventory every 59 days to remain profitable

SECTION: 3.3

TOPIC: LIQUIDITY RATIOS

TYPE: CONCEPTS

49 A firm has a total debt ratio of 63 This means that that firm has $0.63 in debt for every:

52 From a cash flow point of view, which one of the following ratios best measures a firm's ability to pay the interest on its debts?

a times interest earned ratio

B cash coverage ratio

53 The lower the inventory turnover, the:

a faster a firm sells its inventory

B longer it takes a firm to sell its inventory.

c greater the profit margin

d longer the receivables period

e lower the days' sales in inventory

a decrease in sales and increase in current assets

b decrease in sales and increase in total assets

C increase in sales and decrease in total assets

d increase in both sales and net fixed assets

e decrease in both sales and total assets

3-24

55 Which one of the following must increase the net working capital turnover?

a increase in current assets

b increase in total assets

c decrease in current liabilities

d decrease in total liabilities

E increase in sales

SECTION: 3.3

TOPIC: AACSB UTILIZATION RATIOS

TYPE: CONCEPTS

56 Delfino's has a fixed asset turnover rate of 1.3 and a total asset turnover rate of 92

Frederick's has a fixed asset turnover rate of 1.2 and a total asset turnover rate of 1.03 Both companies have similar operations Delfino's is:

A utilizing its fixed assets more efficiently than Frederick's.

b utilizing its total assets more efficiently than Frederick's

c generating $1 in sales for every $1.30 in net fixed assets

d generating $1.30 in net income for every $1 in net fixed assets

e more profitable than Frederick's

3-26

58 If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm:

a may have short-term, but not long-term debt

b is using its assets as efficiently as possible

c has no net working capital

d has a debt-equity ratio of 1.0

E has an equity multiplier of 1.0.

SECTION: 3.3

TOPIC: PROFITABILITY RATIOS

TYPE: CONCEPTS

59 An increase in the profit margin, all else constant, will:

a lower the return on assets

b increase the equity multiplier

C increase the return on equity.

d increase the PEG ratio

e decrease Tobin's Q

SECTION: 3.3

TOPIC: PROFITABILITY RATIOS

TYPE: CONCEPTS

60 If a firm can decrease its costs while maintaining the current level of sales, its:

A return on equity will increase.

b return on assets will decrease

c profit margin will decline

d equity multiplier will decrease

e price-earnings ratio will increase

SECTION: 3.3

TOPIC: PROFITABILITY RATIOS

61 The only difference between Larry's and Lana's stores is that Larry's store has been in existence longer Thus, the assets in Larry's store are almost fully depreciated Lana's store opened recently so her store's assets have barely been depreciated Which one of the

following statements must be true?

a Larry's store will have a lower profit margin

b Larry's store will have a lower return on equity

c Lana's store will have a higher net income

D Lana's store will have a lower profit margin.

e Lana's store will have a higher return on assets

price-a Uptown Express has more net income than Downtown Express

B Downtown Express is increasing its earnings at a faster rate than the Uptown Express.

c Uptown Express has a higher market value per share than does Downtown Express

d Downtown Express has a lower market-to-book ratio than Uptown Express

e Uptown Express has a higher net income than Downtown Express

SECTION: 3.3

TOPIC: MARKET VALUE RATIOS

TYPE: CONCEPTS

3-28

63 Tobin's Q relates the market value of a firm today to:

a the initial cost of creating the firm

b the current book value of the firm

c the average cost of similar firms

d the average market value of similar firms

E today's cost to duplicate the firm.

SECTION: 3.3

TOPIC: MARKET VALUE RATIOS

TYPE: CONCEPTS

64 The price-sales ratio is especially useful when analyzing firms that have:

a volatile market prices

65 Which one of the following sets of ratios applies most directly to shareholders?

a return on assets and profit margin

b long-term debt and times interest earned ratios

c price-earnings and debt-equity ratios

d market-to-book and times interest earned ratios

E Tobin's Q and price-earnings ratio

SECTION: 3.3

TOPIC: MARKET VALUE RATIOS

TYPE: CONCEPTS

66 The three parts of the Du Pont identity can be described as:

a operating efficiency, asset use efficiency, and profitability

b financial leverage, operating efficiency, and profitability

C the equity multiplier, the profit margin, and the total asset turnover.

d the debt-equity ratio, the capital intensity ratio, and the profit margin

e the return on assets, the profit margin, and the equity multiplier

SECTION: 3.4

TOPIC: DU PONT IDENTITY

TYPE: CONCEPTS

3-30

67 An increase in which of the following will increase the return on equity, all else constant?

I sales

II net income

III total assets

IV total equity

a I only

B II only

c II and IV only

d II and III only

e I, II, and III only

SECTION: 3.4

TOPIC: DU PONT IDENTITY

TYPE: CONCEPTS

68 Which one of the following statements is correct?

a Book values should always be given precedence over market values

B Financial statements are frequently the basis used for performance evaluations.

c Historical information has no value when predicting the future

d Potential lenders place little value on financial statement information

e Reviewing financial information over time has very limited value

SECTION: 3.5

TOPIC: EVALUATING FINANCIAL STATEMENTS

TYPE: CONCEPTS