Multiple Choice Questions

Test #9If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
  • True
  • False
_____ ratios help measure a company's ability to generate income and profits based on its invested capital.
  • Market-value or Market-based
  • Plant and Equipment
  • Liquidity
  • Profitablitiy
Which of the following asset classes is generally considered to be the least liquid?
  • A company that uses debt to finance some of its assets.
  • Plant and Equipment
  • Accounts ReceivableInventories
  • Blank Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Blank Company.A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities.An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing it's short-term assets well.
Test #24Which of the following statements is CORRECT?
  • The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.
  • The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed
  • The quick ratio increases
  • The current and quick ratios both increase.
Test #13The basic power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.
  • True
  • False
Test #20Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT?
  • Company E trades at a higher P/E ratio
  • An increase in accounts receivable.
  • The current and quick ratios both increase.
  • The quick ratio increases
Test #3Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.
  • True
  • False
Test #23If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?
  • The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.
  • Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge
  • The quick ratio increases
  • The current and quick ratios both increase.
Which of the following statements represent a WEAKNESS or LIMITATION of ratio analysis?Seasonal factors can distort data.Market data is not sufficiently considered.Window dressing might be in effect.
  • A company that uses debt to finance some of its assets.
  • Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.
  • Seasonal factors can distort data.Window dressing might be in effect.
  • Accounts ReceivableInventories
_____ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market.
  • Seasonal factors can distort data.Window dressing might be in effect.
  • Debt or Financial Leverage Management
  • Profitablitiy
  • Market-value or Market-based
Ratios that help determine whether a company can access its cash and pay its short-term obligations are called _____ ratios.
  • Asset Management or Activity
  • Liquidity
  • Profitablitiy
  • Debt or Financial Leverage Management
Which of the following is TRUE about the leveraging effect?
  • Blank Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Blank Company.A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities.An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing it's short-term assets well.
  • Plant and Equipment
  • Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.
  • Accounts ReceivableInventories
Test #19Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?
  • The quick ratio increases
  • Company E trades at a higher P/E ratio
  • Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge
  • The current and quick ratios both increase.
Test #21If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.
  • Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge
  • InputOutzone Inc. is holding less inventory per dollar of sales compared to the industry average.
  • The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed
  • The division's basic earning power ratio is above the average of other firms in its industry
Test #2The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short- term obligations without relying on the sale of inventories.
  • True
  • False
Test #8A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.
  • True
  • False
Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called _____ ratios.
  • Plant and Equipment
  • Liquidity
  • Asset Management or Activity
  • Market-value or Market-based
Test #6If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.
  • True
  • False
Test #14The profit margin measures net income per dollar of sales.
  • True
  • False
Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called ____ ratios.
  • Seasonal factors can distort data.Window dressing might be in effect.
  • Liquidity
  • Asset Management or Activity
  • Debt or Financial Leverage Management
Test #25Which of the following statements is CORRECT?
  • The quick ratio increases
  • The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.
  • The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed
  • The current and quick ratios both increase.
Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with _____ times-interest earned ratios (TIE).
  • True
  • False
  • Liquidity
  • high
Test #10Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
  • True
  • False
Test #4High current and quick ratios always indicate that the firm is managing its liquidity position well.
  • True
  • False
Which of the following is considered a financially leveraged firm?
  • A company that uses debt to finance some of its assets.
  • Accounts ReceivableInventories
  • Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.
  • Plant and Equipment
Test #1Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.
  • True
  • False
Test #18Considered alone, which of the following would increase a company's current ratio?
  • Company E trades at a higher P/E ratio
  • An increase in accounts receivable.
  • The current and quick ratios both increase.
  • Accounts ReceivableInventories
Which of the following statements are TRUE:
  • Blank Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Blank Company.A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities.An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing it's short-term assets well.
  • Plant and Equipment
  • Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.
  • A company that uses debt to finance some of its assets.
Test #12Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.
  • True
  • False
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Multiple Choice Questions
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