Chapter 03

Chapter 3 Working with Financial Statements

True/False

1. If a firm uses part part of the cash it received from from payment of an account account receivable to buy inventory and leaves the rest in its bank account its current ratio will remain unchanged. !ns" #rue

$evel" %asic

Sub&ect" Current 'atio

#ype" #ype" Concepts

(. If a firm uses cash to purchase inventory inventory its )uick ratio will increase. !ns" False

$evel" %asic

Sub&ect" *uick 'atio


3. !nother !nother name for return return on e)uity is return on total capitali+atio capitali+ation. n. !ns" False

$evel" %asic

Sub&ect" 'eturn on ,)uity


-. If a firm has only current current assets and no fied fied assets of any kind its times interest interest earned ratio must eceed its cash coverage ratio. !ns" False

$evel" Intermediate

Sub&ect" $ong/term Solvency


Multiple Choice

0. !n increase in aan 2222222222222 account account would be considered considered aan 2222222222 2222222222 of funds. funds. I. asset source II. liability source III. epense source !4 I only %4 II only C4 I and II only 54 I and III only ,4 II and III only !ns" %

$evel" %asic

Sub&ect" 6ses 7f Cash

#ype" #ype" 5efinitions

8. !ctivities !ctivities of the firm that that generate cash cash are known known as" !4 Sources of of ca cash. %4 6ses of cash. C4 Cash payments. 54 Cash receipts. ,4 Cash on hand. !ns" !

$evel" %asic

Sub&ect" Sources 7f Cash


9. !ctivities !ctivities of the firm in which which cash is spent are are known as" !4 Sources of of ca cash. %4 6ses of cash. C4 Cash payments. 54 Cash receipts. ,4 Cash on hand. !ns" %

$evel" %asic



Copyright : (;;0 ill 'yerson $imited.

?age 1


@. #he financial statement that summari+es the sources sources and uses of cash over a specified specified period is" !4 #he in income state tateme men nt. %4 #he balance sheet. C4 #he #he ta ta reco reconc ncil ilia iati tion on stat statem emen ent. t. 54 #he #he stat statem emen entt of cha chang nges es in in fina financ ncia iall posi positio tion. n. ,4 #he #he sta state teme ment nt of of ope opera rati ting ng posi positi tion on.. !ns" 5

$evel" %asic

Sub&ect" Statement 7f Changes in Financial...


A. ! 2222222222222 2222222222222 standardi+es items on the income statement and balance sheet as a percentage of total sales and total assets respectively. !4 ta ta reco reconc ncil ilia iati tion on stat statem emen entt %4 stat statem emen entt of stan standa dard rdi+ i+at atio ion n C4 state stateme ment nt of chan change gess in in fin finan anci cial al posi positio tion n 54 com ommo mon/ n/ba base se yea yearr sta stateme tement nt ,4 comm mmo on/si+e sta state teme men nt !ns" ,

$evel" %asic

Sub&ect" Common/Si+e Statements


1;. ! 2222222222 standardi+es items on the income statement and balance sheet relative to a point in time. !4 stat statem emen entt of stan standa dard rdi+ i+at atio ion n %4 state stateme ment nt of chan change gess in in fin finan anci cial al posi positio tion n C4 com ommo mon/ n/ba base se year ear sta state teme ment nt 54 com ommo mon/ n/si si+e +e state tateme ment nt ,4 ta ta rec reconc oncilia iliati tion on sta state teme ment nt !ns" C

$evel" %asic

Sub&ect" Common/%ase Bear Bear Statements


11. 'elationships determined from a firms financial financial information and used for comparison comparison purposes are known as" !4 Financial ra ratios. %4 Comp Compaariso ison state tateme ment nts. s. C4 5ime imensional an analys lysis. is. 54 Scenario analysi lysiss. ,4 Solvency an anal ys ysis. !ns" !

$evel" %asic

Sub&ect" Financial 'atios


1(. Financial ratios that measure the firms ability to pay its bills over the short run without undue undue stress are known as" !4 !ss !sset man manage agemen ment ra ratios tios.. %4 $ong ong/ter /term m sol solve venc ncy y ra ratios tios.. C4 Shor hort/te t/terrm solv solveency ncy rati ratio os. 54 ?rof ?rofit itaabili bility ty ratio atioss. ,4
$evel" %asic

Sub&ect" Short/#erm Short/#erm Solvency 'atios



?age (


13. #he current current ratio ratio is measured measured as" !4 Curr Curren entt ass asset etss m minu inuss cur curre rent nt liabi liabilit litie ies. s. %4 Curr Curren entt asse assets ts div divid ided ed by by curr curren entt liab liabili ilitie ties. s. C4 Curren Currentt liabil liabilitie itiess minus minus inve invento ntory ry divid divided ed by curren currentt assets assets.. 54 Cash Cash on on hand hand div divide ided d by curr curren entt liabi liabilit litie ies. s. ,4 Curr Curren entt liab liabili ilitie tiess divid divided ed by cur curre rent nt ass asset ets. s. !ns" %

$evel" %asic



1-. #he )uick )uick ratio is is measured measured as" as" !4 Curr Curren entt asse assets ts divid divided ed by cur curre rent nt liab liabili ilitie ties. s. %4 Cash Cash on hand hand plus plus curre current nt liabi liabiliti lities es divide divided d by curren currentt asset assets. s. C4 Curren Currentt liabil liabilitie itiess divide divided d by curre current nt asset assets s plus plus inve invento ntory ry.. 54 Curren Currentt assets assets minus minus invent inventory ory divid divided ed by curre current nt liabil liabilitie ities. s. ,4 Curren Currentt asse assets ts minus minus invent inventory ory minus minus curr current ent liabil liabilitie ities. s. !ns" 5

$evel" %asic



10. #he cash cash ratio is measured measured as" as" !4 Curr Curren entt asse assets ts divid divided ed by cur curre rent nt liab liabili ilitie ties. s. %4 Curren Currentt asset assetss minus minus cash cash on hand hand divide divided d by curre current nt liabi liabiliti lities. es. C4 Curren Currentt liabil liabilitie itiess plus plus curr current ent assets assets divide divided d by cash cash on hand hand.. 54 Cash Cash on hand hand plus plus invent inventory ory divid divided ed by curren currentt liabil liabilitie ities. s. ,4 Cash Cash on hand hand divide divided d by curr curren entt liab liabili ilitie ties. s. !ns" ,

$evel" %asic

Sub&ect" Cash 'atio


18. #he financial ratio measured measured as current current assets divided by average daily daily operating costs is the" !4 Cash ratio. %4 DWC to tota totall as assets sets ratio atio.. C4 !cid/test ratio. 54 Int er erval me measure. ,4 7perating me measure. !ns" 5

$evel" %asic

Sub&ect" Interval

19. #he interval interval measure measure is an eample of a 222222222222 222222222222 ratio. ratio. !4 short/ter term solve lvency %4 financial l ev everage C4 asset managem en ent 54 profitability ,4 market value !ns" !

$evel" %asic

Sub&ect" Interval


?age 3


1@. 'atios that measure measure the firms firms financial leverage leverage are known as" !4 !ss !sset man manage agemen ment ra ratios tios.. %4 $ong ong/ter /term m sol solve venc ncy y ra ratios tios.. C4 Shor hort/te t/terrm solv solveency ncy rati ratio os. 54 ?rof ?rofit itaabili bility ty ratio atioss. ,4
$evel" %asic

Sub&ect" $ong/#erm $ong/#erm Solvency 'atios


1A. #he financial ratio measured measured as total assets minus total e)uity e)uity divided by total assets is the" !4 #otal de debt ra ratio. %4 ,)uit y multiplier. C4 5ebt/e)uit y ratio. 54 Current ratio. ,4 #ime imes inte interrest est ear earned ned ra ratio. tio. !ns" !

$evel" %asic

Sub&ect" #otal #otal 5ebt 'atio


(;. #he debt/e)ui debt/e)uity ty ratio is measur measured ed as" !4 #otal tal e)u e)uit ity y minu minuss tot total al debt debt.. %4 #otal tal e)u e)uit ity y div divid ided ed by tota totall debt debt.. C4 #otal tal deb debtt div divid ided ed by tota totall e)ui e)uity ty.. 54 #otal tal deb debtt plu pluss tot total al e)ui e)uity ty.. ,4 #otal #otal debt debt minus minus total total asset assets s divided divided by total total e)uity e)uity.. !ns" C

$evel" %asic

Sub&ect" 5ebt/,)uity 'atio


(1. #he e)uity e)uity multiplier multiplier ratio ratio is measured measured as" !4 #otal e)ui e)uity ty divi divide ded d by by tota totall ass asset ets. s. %4 #otal tal e)ui e)uity ty plus plus tota totall debt debt.. C4 #otal #otal asse assets ts minu minuss total total e)uity e)uity divi divided ded by tota totall asset assets. s. 54 #otal #otal asse assets ts plus plus total total e)ui e)uity ty divide divided d by total total debt. debt. ,4 #otal asse assets ts divid divided ed by tota totall e)u e)uity ity.. !ns" ,

$evel" %asic

Sub&ect" ,)uity

((. #he total long/term long/term debt and e)uity of the firm is fre)uently fre)uently called" !4 #otal assets. %4 #otal tal capita pitali li+a +ati tion on.. C4 #otal financing. 54 5ebt 5ebt/e /e)u )uit ity y cons consol olid idat atio ion. n. ,4 5ebt 5ebt/e /e)u )uit ity y reco reconc ncil ilia iati tion on.. !ns" %

$evel" %asic

Sub&ect" #otal #otal Capitali+ation



?age -


(3. #he financial ratio measured measured as the firms long/term debt debt divided by its total total capitali+ation is" !4 #he in inter terval me measure. %4 #he e) e)uity multi ltiplie lier. C4 #he total tal debt ratio. io. 54 #he #he lon long/ g/te terrm de debt ratio atio.. ,4 #he de debt/e)uity ity ra ratio tio. !ns" 5

$evel" %asic

Sub&ect" $ong/#erm $ong/#erm 5ebt 'atio


(-. #he financial ratio measured measured as ,%I# ,%I# divided by interest epense is the 2222222222. !4 cash coverage ratio tio %4 debt/e)uit y ratio C4 time timess int inter ereest earne arned d rat ratio io 54 gross margin ,4 total debt ratio !ns" C

$evel" %asic

Sub&ect" #imes Interest ,arned


(0. #he financial ratio measured measured as ,%I# ,%I# plus depreciation depreciation divided by interest epense is the" !4 Cash co coverage ra ratio. io. %4 5ebt/e)uit y ratio. C4 #imes imes inte intere rest st earn earned ed rati ratio. o. 54 =ross ma margin. ,4 #otal debt ratio. !ns" !

$evel" %asic

Sub&ect" Cash Coverage 'atio


(8. 'atios that measure how efficiently efficiently a firm uses its assets to generate sales are known known as" !4 !ss !sset man manage agemen ment ra ratios tios.. %4 $ong ong/ter /term m sol solve venc ncy y ra ratios tios.. C4 Shor hort/te t/terrm solv solveency ncy rati ratio os. 54 ?rof ?rofit itaabili bility ty ratio atioss. ,4
$evel" %asic

Sub&ect" !sset

(9. #he inventory inventory turnover turnover ratio ratio is measured measured as" !4 #otal tal sal sales es minu minuss inv inven ento tory ry.. %4 Invent ventor ory y tim timees tota totall sal sales es.. C4 Cost Cost of good goodss sol sold d divi divide ded d by by inv inven entor tory y. 54 Inve Invent ntor ory y tim times es cost cost of of goo goods ds sol sold. d. ,4 Inve Invent ntor ory y plu pluss cos costt of of goo goods ds sold sold.. !ns" C

$evel" %asic

Sub&ect" Inventory #urnover



?age 0


(@. #he financial financial ratio days days sales in inventory inventory is measured measured as" !4 Inve Invent ntor ory y tur turno nove verr plu pluss 380 380 days days.. %4 Invent ventor ory y time timess 380 380 day days. C4 Inven Inventory tory plus plus cost cost of goo goods ds sold sold divid divided ed by 380 days. days. 54 380 380 day dayss div divid ided ed by inve invent ntor ory y. ,4 380 380 days days divid divided ed by inven invento tory ry turn turnov over er.. !ns" ,

$evel" %asic

Sub&ect" 5ays Sales In Inventory


(A. #he receivable receivabless turnover turnover ratio is measured measured as" !4 Sale Saless p plu luss acc accou ount ntss rec recei eiva vabl ble. e. %4 Sale Saless divi divide ded d by by acco accoun unts ts rece receiva ivable ble.. C4 Sales Sales minus minus accoun accounts ts receiv receivabl able e divided divided by sales. sales. 54 !cco !ccoun unts ts rec recei eiva vabl blee time timess sal sales es.. ,4 !cco !ccoun unts ts rec recei eiva vabl blee divi divide ded d by sal sales es.. !ns" %

$evel" %asic

Sub&ect" 'eceivables #urnover


3;. #he financial ratio ratio days sales in receivables receivables is measured as" !4 'ece 'eceiv ivab ables les turn turnov over er plus plus 380 380 days days.. %4 !cco !ccoun unts ts rec recei eiva vabl blee time timess 38 380 0 day days. C4 !cco !ccoun unts ts rece receiv ivab able le plu pluss sale sales s div divide ided d by 380 380 days days.. 54 380 380 day dayss divid divided ed by rece receiva ivable bless turn turnov over er.. ,4 380 380 day dayss d div ivide ided d by by acco accoun unts ts rece receiva ivable ble.. !ns" 5

$evel" %asic

Sub&ect" 5ays Sales In 'eceivables


31. #he net working working capital capital turnover turnover ratio is measured measured as" !4 Sale Saless divi divide ded d by by net net wor workin king g capit capital al.. %4 Sale Saless m min inus us net net wor worki king ng capi capita tal. l. C4 Sale Saless tim times es net net wor worki king ng capi capita tal. l. 54 Det Det wor worki king ng capi capita tall div divide ided d by sale sales. s. ,4 Det Det work workin ing g capi capita tall plus plus sale sales. s. !ns" !

$evel" %asic

Sub&ect" Det Working Working Capital #urnover


3(. #he fied asset asset turnover turnover ratio ratio is measured measured as" !4 Sale Saless minu minuss net net fi fied ed asse assets ts.. %4 Sale Saless tim times es net net fi fieed ass asset ets. s. C4 Sale Saless d div ivid ided ed by net net fi fied ed asse assets ts.. 54 Det Det fie fied d ass asset etss div divid ided ed by sale sales. s. ,4 Det Det fi fieed ass asset etss plu pluss sal sales es.. !ns" C

$evel" %asic

Sub&ect" Fied !sset #urnover



?age 8


33. #he total asset asset turnover turnover ratio is measure measured d as" !4 Sale Saless m min inus us tota totall as assets sets.. %4 Sale Saless d div ivid ideed tot total al ass sseets. ts. C4 Sale Saless time timess tota totall as assets sets.. 54 #otal tal ass asset etss div divid ided ed by sale sales. s. ,4 #otal tal ass sset etss plus plus sales ales.. !ns" %

$evel" %asic

Sub&ect" #otal #otal !ssets


3-. 'atios that measure how efficiently a firms management uses its assets in operations operations to generate generate bottom/ line net income are known as" !4 !ss !sset man manage agemen ment ra ratios tios.. %4 $ong ong/ter /term m sol solve venc ncy y ra ratios tios.. C4 Shor hort/te t/terrm solv solveency ncy rati ratio os. 54 ?rof ?rofit itaabili bility ty ratio atioss. ,4
$evel" %asic

Sub&ect" ?rofitability 'atios


30. #he financial ratio measured measured as net net income divided by sales is known as the firms" !4 ?rofit margin. %4 'eturn on assets. C4 'eturn on e)uit y. y. 54 !sset turnover. ,4 ,arn ,arning ingss bef befor oree int inter eres estt and and tae taess E,%I E,%I#4 #4.. !ns" !

$evel" %asic

Sub&ect" ?rofit

38. #he financial ratio measured measured as net net income divided by total assets is known known as the firms" !4 ?rofit margin. %4 'eturn on assets. C4 'eturn on e)uit y. y. 54 !sset turnover. ,4 ,arn ,arning ingss bef befor oree int inter eres estt and and tae taess E,%I E,%I#4 #4.. !ns" %

$evel" %asic

Sub&ect" 'eturn 7n !ssets


39. #he financial ratio measured measured as net net income divided by total e)uity is known as the firms" !4 ?rofit margin. %4 'eturn on assets. C4 'eturn on e)uit y. y. 54 !sset turnover. ,4 ,arn ,arning ingss bef befor oree int inter eres estt and and tae taess E,%I E,%I#4 #4.. !ns" C

$evel" %asic




?age 9


3@. #he financial ratio measured as the price per share of stock divided by earnings per share is known as as the" !4 'eturn on assets. %4 'eturn on e)uit y. y. C4 5ebt/e)uit y ratio. 54 ?ric ?rice/ e/eearni arning ngss rati ratio o. ,4 5u ?o ?ont id identity. !ns" 5

$evel" %asic

Sub&ect" ?rice/,arnings 'atio


3A. #he market/to/ market/to/book book ratio ratio is measured measured as" !4 #otal e)ui e)uity ty divi divide ded d by by tota totall ass asset ets. s. %4 Det Det inco income me time timess mark market et pri price ce per per shar sharee of stoc stock. k. C4 Det Det incom incomee divid divided ed by mark market et price price per per shar sharee of stoc stock. k. 54
$evel" %asic

Sub&ect"

-;. #he 22222222222 breaks breaks down return return on e)uity into three three component parts" operating efficiency efficiency of the firm its asset use efficiency and financial leverage. !4 5u ?ont identity %4 return on assets C4 statem tement of of ca cash fl flows 54 asset tu turnover ratio ,4 e)uity multiplier !ns" !

$evel" %asic

Sub&ect" 5u ?ont Identity


-1. ! use of cash cash can be defined defined as any activity activity that" !4 5imini 5iminish shes es the cash cash bala balanc ncee of of a fir firm. m. %4 =ene =enera rate tess cas cash h for for the the fir firm. m. C4 !ff !ffects cts the the cash cash on hand hand.. 54 Invo Involv lves es a chec checki king ng acco accoun unt. t. ,4 !ff !ffects cts curr curreent ass sseets. ts. !ns" !

$evel" %asic

Sub&ect" 6se 7f Cash


-(. ! source source of cash cash can be defined defined as any activity activity that" !4 Incr Increa ease sess the the curr curren entt ass asset etss of of a firm firm.. %4 Incr Increa ease sess the the cash cash rese reserv rves es of a fir firm. m. C4 Invol Involve vess acco accoun unts ts rec recei eiva vable ble or inven invento tory ry.. 54 Involv Involves es the the sale sale or retu return rn of of merch merchand andise ise by a custome customer. r. ,4 Invo Involv lves es the the spen spendi ding ng of cash cash.. !ns" %

$evel" %asic

Sub&ect" Source 7f Cash



?age @


-3. ! statement that eplains eplains the changes in the cash balance of a firm over time is called aEn4" !4 %alance sheet. %4 Income statement. C4 State tateme ment nt of of cur currrent as assets sets.. 54 State tateme ment nt of ana analys lysis. is. ,4 State tateme men nt of of ca cash flo flow ws. !ns" ,

$evel" %asic

Sub&ect" Statement 7f Cash Flows


--. ! statement that epresses epresses each account account as a percentage of sales sales is called aEn4" !4 Comm Common on//si+e si+e bal balan ance ce she sheet et.. %4 Comm Common on/s /si+ i+ee inco income me stat statem emen ent. t. C4 Comm Common on/s /si+ i+ee stat statem emen entt of cas cash h flow flows. s. 54 'ati 'atio o inc incom omee state tateme men nt. ,4 State tateme ment nt of of ra ratio tio ana analy lyssis. is. !ns" %

$evel" %asic

Sub&ect" Common/Si+e Income Statement


-0. Current assets epressed epressed as a multiple of current current liabilities is called the" !4 Working king capi capita tall ratio atio.. %4 *uick ratio. C4 !cid/test ratio. 54 Current ratio. ,4 Cash ratio. !ns" 5

$evel" %asic



-8. ?rofit ?rofit margin margin is define defined d as" !4 ,%I# div diviided by by sa sales. %4 Cost Cost of good goodss ssol old d div divid ided ed by sale sales. s. C4 Det Det inc incom omee div divid ideed by by sa sales. les. 54 Det Det inco income me div divid ided ed by tota totall asse assets ts.. ,4 ,%I ,%I# div divid ideed by by tot totaal as assets sets.. !ns" C

$evel" %asic

Sub&ect" ?rofit

-9. #he times interest interest earned earned ratio is defined defined as" !4 Det Det inc incom omee divi divide ded d by by inte intere rest st epe epens nse. e. %4 Inter Interes estt ep epen ense se divi divide ded d by by net net incom income. e. C4 ,%I# ,%I# divi divide ded d by inte intere rest st epe epens nse. e. 54 Inte Intere rest st ep epen ense se div divid ided ed by by ,%I ,%I#. ,4 Sale Saless d div ivid ided ed by inte intere rest st epe epens nse. e. !ns" C

$evel" %asic

Sub&ect" #imes Interest ,arned 'atio



?age A


-@. #he ?, ratio is is defined defined as" as" !4 5ivide 5ividends nds per share share divide divided d by by earn earning ingss p per er share. share. %4 ,arn ,arning ingss per per shar sharee divide divided d by divi divide dend ndss per per shar share. e. C4 ?ric ?ricee per per shar sharee divi divide ded d by earn earnin ings gs per per sha share re.. 54 ,arn ,arning ingss per per shar sharee divi divide ded d by pri price ce per per sha share re.. ,4 ?ric ?ricee per per shar sharee divi divide ded d by by e)u e)uity ity per per sha share re.. !ns" C

$evel" %asic

Sub&ect" ?e 'atio


-A. 'eturn on assets assets is defined defined as" !4 Sale Saless d div ivid ided ed by net net fi fied ed asse assets ts.. %4 ,%I# ,%I# divi divide ded d by by net net fie fied d ass asset ets. s. C4 Det Det inc incom omee divi divide ded d by by net net fi fied ed asse assets ts.. 54 ,%I# ,%I# divi divide ded d by by tota totall ass asset ets. s. ,4 Det Det inc incom omee div divid ided ed by tota totall ass asset ets. s. !ns" ,

$evel" %asic



0;. #he 5u ?ont ?ont identity identity is defined defined as as the" !4 ?rofit ?rofit marg margin in times times the the total total asset asset turnov turnover er times times the the e)uity e)uity mult multipli iplier er.. %4 ?rofit ?rofit marg margin in times times the the invent inventory ory turn turnove overr times times the the e)uity e)uity multip multiplier lier.. C4 'eturn 'eturn on on e)uity e)uity times times the the profi profitt margin margin times times the total total asset asset turno turnover ver.. 54 'eturn 'eturn on on e)uity e)uity times times the the total total asset asset turno turnover ver times times the the e)uity e)uity multi multiplie plier. r. ,4 'eturn 'eturn on on assets assets times times the tota totall asset asset turno turnover ver times times the the profi profitt margin margin.. !ns" !

$evel" %asic



01. Which of the following following would would be considere considered d a use of cash I. !ccounts !ccounts receivable increase. II. !ccounts payable decrease. decrease. III. Common stock and and surplus increases. IG. Det fied assets decrease by the amount of depreciation. !4 I only %4 II only C4 I and II only 54 I and III only ,4 I III and IG only !ns" C

$evel" Intermediate



0(. Which of the following following are considere considered d a source of cash I. Common stock and surplus decrease. II. !ccounts payable increase. III. !ccounts receivable decrease. IG. Inventory Inventor y increases. increas es. !4 I only %4 II and III only C4 III and IG only 54 I II and III onl y ,4 I II III an and IG !ns" %

$evel" %asic




?age 1;


03. In the most general general sense which of the following would you epect to be true !4 If a current current asset asset account account and and a curren currentt liability liability account account both both increase increase by the same amount amount there is a net use of funds. %4 If fied fied assets assets decrease decrease by the amount amount of depreciatio depreciation n for the year year there is a net net use of funds. funds. C4 Change Changess in income income and and epen epense se accou accounts nts do do not aff affect ect sour source cess and uses uses of fund funds. s. 54 If a liability account account increas increases es and an asset asset account account decreases decreases by the same same amount amount there there is a net source of funds. ,4 If the the commo common n stock stock outsta outstandi nding ng incre increase asess there there is is a use use of funds. funds. !ns" 5

$evel" Intermediate

Sub&ect" Sources H 6ses 7f Cash


0-. #he net change change in cash over over a period of time is e)ual e)ual to !4 cash cash use usess plus plus oper operat atin ing g cas cash h flow flowss %4 additio additions ns to to curre current nt asse assets ts minus minus epend ependitu itures res on fied fied assets assets C4 net income income plus plus d depr eprec eciati iation on minus minus tae taess and and divide dividends nds 54 ending ending cash cash minu minuss change changess in long/t long/ter erm m debt debt minus minus additio additions ns to fied fied asse assets ts ,4 cash flow from operating operating activitie activitiess plus plus net net cash cash from investment investment and financing financing activities activities !ns" ,

$evel" Intermediate

Sub&ect" Change in Cash


00. 7n a typical statement of changes in financial position fied asset ac)uisitions would be classified under the heading called 222222222222 activities. !4 recognition %4 operating C4 investment 54 financing ,4 income !ns" C

$evel" %asic


#ype" #ype" Concepts Concepts

08. Which of the following is generally considered considered one of the ma&or categories categories on a typical statement of changes in financial position !4 Subsidiary iary ac activ tiviti ities %4 Dote Dotess pay payable ble acti activ vitie itiess C4 7perating ing activi ivities ies 54 Inco Income me stat statem emen entt acti activi viti ties es ,4 5ivision a ct ctivities !ns" C

$evel" %asic



09. Which of the following is D7# included included in the operating activities portion of a typical statement of changes changes in financial position !4 Chan Chang ges in note notess pay payable able %4 Chan Chang ges in acc account ountss pay payab able le C4 Chan Change gess in in acc accou ount ntss rec recei eiva vabl blee 54 5epreciation ,4 Det income !ns" !

$evel" %asic




?age 11


0@. Which of the following is included in the financing activities portion portion of a typical typical statement of changes changes in financial position !4 Chan Chang ges in note notess pay payable able %4 5epreciation C4 Changes in fi fied as assets 54 Det income ,4 Changes in inv inventor tory !ns" !

$evel" %asic



0A. Comparison of the financial statements of two firms in the same general industry may be difficult difficult if" I. #he si+e of the two firms operations are different. II. #he firms have have identical product lines and operations. III. #he firms financial statements are prepared using different different fiscal year/ends. !4 I only %4 III only C4 I and II only 54 I and III only ,4 I II and III !ns" 5

$evel" Intermediate

Sub&ect" Financial Statements


8;. Bou Bou are comparing comparing two companies by looking at financial ratios ratios they publish in their annual reports. Bou Bou know that" I. Bou Bou must be careful careful because not all financial statement ratios are calculated the same way. way. II. #he balance sheet ratios of a large firm and a medium si+e firm cannot be compared. III. #hese financial ratios will capture the relevant differences between the two firms leaving you with no need to look at the rest of the reports. !4 I only %4 II only C4 III only 54 I and II only ,4 I and III only !ns" !

$evel" %asic



81. ?roblems with financial financial statement analysis analysis include all of the following following ,C,?#" !4
$evel" Intermediate

Sub&ect" ?roblems !naly+ing Financial Statements


?age 1(



8(. In a common si+e statement the balance sheet may be epressed epressed as a percentage of 222222222222 while the income statement may be epressed as a percentage of 222222222222. !4 liab liabil ilit itie iess plus plus e)u e)uit ity y net net inco income me %4 assets net income C4 sale sales s liab liabil ilit itie iess plus plus e)ui e)uity ty 54 liab liabil ilit itie iess plu pluss e)ui e)uity ty sal sales es ,4 liabilities sa sales !ns" 5

$evel" %asic

Sub&ect" Common Si+e Statements


83. Which of the following statements statements about the current ratio ratio is accurate accurate !4 6se of of book values values in calcula calculation tion of this ratio ratio is unacceptab unacceptable le because because the the market market values values of of these these assets and liabilities tend to deviate from book values. %4 #his #his ratio ratio is calcu calculat lated ed by divid dividing ing curr current ent liabi liabiliti lities es by curr current ent asse assets. ts. C4 It will will always always be grea greater ter than than the the )uick )uick ratio ratio in comp compani anies es that that carry carry inve invento ntory ry.. 54 #his #his ratio ratio is is intend intended ed to indi indicat catee the long long run li)uidi li)uidity ty posit position ion of of the firm. firm. ,4 #he higher higher the curren currentt ratio ratio the high higher er the the level level of of cash cash in in a firm. firm. !ns" C

$evel" %asic



8-. #he financial manager of
$evel" Challenge



80. !ll else the same which of the following following occurs when a firm buys inventory with cash !4 #he )uic )uick k ratio ratio goes goes up up if it was was great greater er than than one one before before the the chan change. ge. %4 #he curr current ent ratio ratio goes goes down down if it was was great greater er than than one one befor beforee the change change.. C4 #he curren currentt ratio ratio goes goes down down if it it was lower lower than than one one befo before re the the chan change. ge. 54 #he )uick )uick rati ratio o goes goes up up if it it was lower lower than than one one befo before re the the chan change. ge. ,4 #he )uick )uick rati ratio o decli declines nes but the curre current nt ratio ratio rema remains ins unchan unchanged ged.. !ns" ,

$evel" Intermediate

Sub&ect" Current H *uick 'atios


88. !ll else unchanged which of the following is true when a firm sells a fied fied asset on credit Ean account receivable is created4  !4 #he curren currentt ratio ratio goes goes up but the )uick )uick ratio ratio is is un uncha change nged d %4 #he #he curr curren entt ratio ratio goe goess up but but the the )uic )uick k ratio ratio dec declin lines es C4 #he )uick )uick ratio ratio goes goes up but but the the curren currentt ratio ratio is unch unchang anged ed 54 #he )uick )uick ratio ratio goes goes up but but the the curren currentt ratio ratio decline decliness ,4 #he #he )uic )uick k ratio ratio and and the the curr curren entt ratio ratio both both go up !ns" ,

$evel" Intermediate




?age 13


89. ! very very short/term creditor creditor would likely be most most interested in a firms 2222222222222222. !4 current ratio %4 )uick ratio C4 DWC to tota totall as assets sets ratio atio 54 cash ratio ,4 interval me measure !ns" 5

$evel" %asic

Sub&ect" Cash 'atio


8@. Which of the the following following statements statements is is true !4 #he smaller smaller the curren currentt ratio ratio the more more li)ui li)uid d the the firm firm.. %4 Since inventory inventory is not as li)uid as the other current current assets assets it is ecluded ecluded in calculatio calculation n of the the )uick )uick ratio. C4 ! curr current ent rati ratio o of greate greaterr than than one indic indicate atess net worki working ng capita capitall is negativ negative. e. 54 In firms firms with with inven inventory tory the )uick )uick ratio ratio will will alway alwayss eceed eceed the the curre current nt ratio. ratio. ,4 ! cur curre rent nt rat ratio io can can be less less than than +ero +ero.. !ns" %

$evel" %asic

Sub&ect" $i)uidity 'atios


8A. ! financial financial manager who needs to find out how how long it will take before their firm runs runs out of cash if no further cash comes in should consider the 2222222222222222. !4 current ratio %4 )uick ratio C4 cash ratio 54 net net wor workin king g cap capita itall to to tota totall ass asset etss rat ratio io ,4 interval me measure !ns" ,

$evel" %asic

Sub&ect" Interval

9;. In words words what does an e)uity e)uity multiplier multiplier of ( mean !4 ,ach ,ach dolla dollarr in asse assets ts the the firm firm owns owns is is suppo supporte rted d by J( J( in e)ui e)uity ty.. %4 ,ach ,ach dolla dollarr in e)uity e)uity the firm firm has has supp support ortss J( J( in assets assets.. C4 ,ach ,ach dolla dollarr in asse assets ts the the firm firm owns owns is is suppo supporte rted d by JJ- in e)ui e)uity ty.. 54 ,ach ,ach dolla dollarr in e)ui e)uity ty the the firm firm has has supp support ortss fifty fifty cent centss in asse assets. ts. ,4 ,ach ,ach dolla dollarr in assets assets the firm firm owns owns is is su suppo pporte rted d by J( in in debt. debt. !ns" %

$evel" %asic

Sub&ect" ,)uity

91. Which of the following could be calculated calculated with the use of only a balance sheet !4 Int er erval measure %4 ,)uit y multiplier C4 'eceivables les tu turnover 54 #imes in interest ea earned ned ,4 'eturn on e)uity !ns" %

$evel" %asic

Sub&ect" ,)uity


?age 1-


9(. ! firm firm has a times interes interestt earned earned ratio of (.9 (.9 times. #his means" means" !4 #he firm firm gene generat rated ed enou enough gh cash cash to cove coverr its inte interes restt epens epensee (.9 time times. s. %4 #he firm firm has has suff sufficie icient nt ,%I# ,%I# to cove coverr its inte interes restt epens epensee (.9 times times.. C4 #he inte interes restt epense epense of of this firm firm ece eceede eded d earning earningss before before tae taess by (.9 (.9 times. times. 54 #he net net income income of of this firm firm is suff suffici icient ent to cove coverr its inter interest est epe epense nse (.9 (.9 times. times. ,4 #he firm firm earne earned d J1 in ,%I ,%I# # for for ever every y J(.9; J(.9; it paid paid out in inte intere rest. st. !ns" %

$evel" %asic



93. #he sales of !ce Sporting =oods have increased increased recently and and inventory has declined declined slightly. ! financial analyst would epect to find that the" !4 Inventory Inventory turnover turnover has increased increased and the days days sales in inventor inventory y has has decrea decreased. sed. %4 Inven Inventory tory turn turnove overr has decre decrease ased d and the the days days sales sales in invent inventory ory has has decreas decreased. ed. C4 Inven Inventory tory turn turnove overr has decre decrease ased d and the the days days sales sales in invent inventory ory has has increas increased. ed. 54 Inventory Inventory turnover turnover has increased increased and the days days sales in inventor inventory y has has increa increased. sed. ,4 *uick *uick ratio ratio has decrea decreased sed and the curren currentt ratio ratio has increa increased sed.. !ns" !

$evel" %asic



9-. =olf Inc. and =olfanatics =olfanatics Corp. are close competitors. $ast year both had the same level of cost cost of goods sold but =olf Inc. turned its inventory over five times during the year while =olfanatics turned its inventory over every 80 days. If the ob&ective is to keep inventory as low as possible Eon average4 which of the following is true !4 =olf =olf Inc. Inc. did did a bett better er &ob &ob sinc sincee its its invent inventory ory turnov turnover er was was lowe lower. r. %4 =olfan =olfanatic aticss did a better better &ob &ob since since its its days days sales sales in in invent inventory ory was was lower lower.. C4 =olf =olf Inc. Inc. a bett better er &ob &ob since since its days days sales sales in in inven inventory tory was lower lower.. 54 =olfan =olfanatic aticss did a better better &ob &ob since since its its invent inventory ory turn turnove overr was lower lower.. ,4 =olf =olf Inc. Inc. did a better better &ob since since its its leve levell of invent inventory ory was lower lower.. !ns" %

$evel" Intermediate

Sub&ect" Inventory

90. Conceptually what does the days days sales in receivables receivables ratio measure measure for a firm !4 #he number number of days days it takes takes to generate generate dollar sales e)ual e)ual to the the outstand outstanding ing accoun accounts ts receiva receivable ble balance. %4 #he numbe numberr of days days it it takes takes on averag averagee for custome customers rs to pay pay their their bills bills.. C4 #he number number of days days it takes takes for a firm firm to pay pay its bills assuming assuming no no new payables payables are are created created.. 54 #he numbe numberr of times times durin during g the year year a firm firm colle collects cts and and reloa reloans ns its rece receiva ivable bles. s. ,4 #he numbe numberr of days days it takes takes befor beforee the firm firmss working working capi capital tal becom becomes es nega negative tive.. !ns" %

$evel" %asic

Sub&ect" 5ays Sales In 'eceivables


98. In addition to days sales in receivables receivables and days sales in inventory inventory we could calculate Kdays sales in payablesK by computing the accounts payable turnover and dividing it into 380 days. In words what do these ratios tell us !4 #he num number ber of days days it takes takes before before the curre current nt ratio ratio falls falls to +ero. +ero. %4 #he #he numbe numberr of day dayss of sal sales es nee neede ded d to mak makee a prof profit. it. C4 #he time it take takess to comple completely tely replac replacee total total curr current ent assets assets.. 54 #he #he rat ratee at whic which h ass asset etss are are repla replace ced. d. ,4 >ow long it takes takes on averag average e to entire entirely ly depl deplete ete these these acco account unts. s. !ns" ,

$evel" Intermediate

Sub&ect" 5ays Sales 'atios



?age 10


99. In words words what does a total asset asset turnover turnover of 1.0 times mean mean !4 For each each J1 of of sales sales gene generat rated ed the the firm firm has has total total asse assets ts of of J1.0;. J1.0;. %4 For each each J1 of tota totall asset assets s the the firm firm genera generated ted J1.0; J1.0; in sales. sales. C4 For each each J1 of of total total asse assets ts the the firm firm gene generat rated ed J1.0 J1.0; ; in net net incom income. e. 54 For each each J1 J1 of net net incom incomee genera generated ted the firm firm has has total total asse assets ts of J1.0 J1.0;. ;. ,4 #he firm firm comp complete letely ly replac replaces es its fie fied d assets assets thre threee times times each each year year on on averag average. e. !ns" %

$evel" %asic



9@. Which of the following is a correct correct interpretation of a profit margin margin of ;.(; !4 For each each J1 of of sales sales the the firm firm earn earnss twenty twenty cents cents in net income income.. %4 For each each J1 J1 of sales sales the the firm firm earns earns twenty twenty cents cents befor beforee operat operating ing epe epense nses. s. C4 For For eac each h J1 of sale sales s J( J( fal falll to the the bot botto tom m line line.. 54 It takes takes sales sales of of J1 to gene generat ratee J(; in net net profi profitt after after taes. taes. ,4 It tak takes es twe twenty nty cent centss in sal sales es to to gene genera rate te J1 J1 in pro profi fit. t. !ns" !

$evel" %asic

Sub&ect" ?rofit

9A. Which of the following would result in a lower profit profit margin all else the same I. ! decrease in cost of goods sold. II. ! higher corporate ta rate. III. 5oubling the amount of long/term debt while decreasing decreasing common e)uity by the same amount. amount. !4 I only %4 II only C4 III only 54 I and III only ,4 II and III only !ns" ,

$evel" Intermediate

Sub&ect" Det ?rofit

@;. If the total assets of a firm decrease while all other components components of '7, remain unchanged you would epect the firms" !4 '7, to to in increase. %4 '7! to de decrease. C4 ,)ui ,)uity ty mu mult ltip ipli lier er to incr increa ease se.. 54 '7, '7, to to rema remain in unc unchang hangeed. ,4 ?rof ?rofit it mar margin to dec decreas rease. e. !ns" 5

$evel" Intermediate



@1. When would the return on e)uity E'7,4 definitely e)ual the return on assets E'7!4  !4 When Whenev ever er a fir firm m has has no long long/t /ter erm m deb debt. t. %4 Whenev Whenever er a firm firmss debt debt/to /to/e) /e)uity uity ratio ratio is is e)ua e)uall to one. one. C4 Whenev Whenever er a firm firmss long long/te /term rm debt debt ratio ratio is e)ua e)uall to +ero. +ero. 54 When Whenev ever er a fir firms ms retur return n on e)u e)uity ity is e)u e)ual al to to 1;;L 1;;L.. ,4 When Whenev ever er a firm firms s tota totall debt debt rat ratio io is is e)ua e)uall to +er +ero. o. !ns" ,

$evel" %asic

Sub&ect" 'eturn 7n ,)uity H 'eturn 7n !ssets



?age 18


@(. Which of the following is D7# a correct statement about about the priceearnings ratio ratio !4 ! high ?, ratio ratio is is often often taken taken to to mean mean the firm has signifi significant cant prosp prospects ects for for future future growth. growth. %4 ! ?, ratio ratio of 10 means investors investors are willing to pay J10 for for each each J1 of curren currentt earnings. earnings. C4 Care must be taken in in interpretin interpreting g very high ?, ?, ratios ratios since since they they can result result from a firm firm having having very very low earnings. 54 ! ?, ratio ratio of 10 means the firms firms shares shares are selling for 10 times times curren currentt earnings. earnings. ,4 ! firm firm with with high high earn earning ingss per per share share will will also also have have a very very high high ?, ratio. ratio. !ns" ,

$evel" %asic



@3. Which of the following statements is false false concerning the use of accounting data versus market market value data !4 #he primary primary reason reason for for using using account accounting ing data data is the lack lack of of readily readily availab available le market market value information. %4 Whenever Whenever market market value information information is availab available le it should be used used instea instead d of accounting accounting data. C4 If market market value and accoun accounting ting data data conflic conflict t the accounting accounting data should be given given prece precedence dence.. 54 If a firm has only only curre current nt assets assets and and curren currentt liabilities liabilities book values values will likely be reasona reasonable ble approimations of market values. ,4 $ittle direct direct market market value value information information eists for privately privately held and not/for/p not/for/profit rofit businesses businesses.. !ns" C

$evel" %asic

Sub&ect"

@-. Gendors Gendors providing trade credit to a firm firm tend to be most interested in the firms 2222222222 ratios. !4 li)uidity %4 profitability C4 market value 54 asset managem en ent ,4 financial le leverage !ns" !

$evel" %asic

Sub&ect" 'atio Categories


@0. If a firm is having difficulty difficulty controlling its operating epenses epenses the trouble will be most directly reflected reflected in the firms 2222222222222222 ratios. !4 li)uidity %4 profitability C4 market value 54 asset managem en ent ,4 long/term so solvency !ns" %

$evel" %asic

Sub&ect" 'atio Categories


@8. Which of the following is D7# incorporated incorporated into calculation of the 5u ?ont identity identity !4 'eturn on on as assets %4 ,)uit y multiplier C4 #otal tal as asset tu turnover 54 ?rofit ma margin ,4 'eceivables les tur turnover !ns" ,

$evel" %asic




?age 19


@9. >ilton ?ublishing and and Mordan Mordan ?ublishing have identical debt/e)uity ratios and profit margins. >owever >iltons '7! is higher than than Mordans. #herefore it must be true that" that" !4 >ilton >ilton has has a lowe lowerr tota totall asse assett turn turnov over er rat ratio. io. %4 Mord Mordan ans s '7, '7, is hig highe herr than than >il >ilto ton ns. s. C4 >ilton >ilton uses uses its its asset assetss mo more re effici efficient ently ly to to gener generate ate sales. sales. 54 >ilton >iltonss oper operatin ating g eff efficie iciency ncy is high higher er than than Morda Mordans ns.. ,4 >ilton >ilton has a lower lower investm investment ent in tota totall asset assetss than than Mordan Mordan does. does. !ns" C

$evel" %asic



@@. 'eturn on e)uity e)uity will increase increase if the 22222222222222 22222222222222222. 222. !4 prof profit it mar margin decr decrea ease sess %4 retur eturn n on on ass asset etss inc incrrease easess C4 debt debt//e)uit )uity y rati ratio o dec decreas reases es 54 acco accoun unts ts rece receiva ivable ble turn turnov over er incre increas ases es ,4 tota totall asse assett turn turnov over er decr decrea ease sess !ns" %

$evel" Intermediate



@A. Which of the following following is D7# D7# a component component of the 5u ?ont identity identity !4 7perating ing ef efficie icien ncy %4 !sset use efficie icienc ncy y C4 Financial l ev everage 54 ?rof ?rofit it per per dol dolla larr of of as assets sets ,4 Det wo working capital !ns" ,

$evel" %asic



A;. Which of the following does D7# correctly complete this sentence" #he financial statements of a company 2222222222222222222. !4 can be useful useful to the financial financial manager manager of the firm even even though though they they employ employ accountin accounting g figures figures and and not actual cash flows %4 are are use usefu full for for analy analyst stss o outs utside ide the firm firm C4 are genera generally lly consider considered ed a usefu usefull second second best best source source of information information for for analyst analystss of the the firm firm if only only because this information is often all that is readily available 54 are useful useful for for lookin looking g at the the trends trends in finan financia ciall perfor performan mance ce of a firm firm ,4 are rarely rarely comparab comparable le from from year year to year since accountants accountants are constantly constantly changin changing g accountin accounting g methods resulting in very little littl e consistency from year to year !ns" ,

$evel" %asic



A1. Which of the following regarding regarding financial statement analysis is is D7# correct !4 !ccording !ccording to the the 5u ?ont ?ont identity identity '7, is affected affected by operating operating efficie efficiency ncy asset asset use effic efficiency iency and financial leverage. %4 It is straightfor straightforward ward to calculate calculate the market market value based based measures measures of firm firm perfor performance mance using financial statements prepared according to =!!?. C4 !sset !ss et manage managemen mentt ratios ratios measu measure re the the intensit intensity y and eff efficie iciency ncy of of asset asset use. use. 54 For common common si+e statements statements we divide divide asset asset and liability liability accounts accounts by total assets and income statement accounts by sales. ,4 !n incr increas easee in a firm firms s net net fied fied asse assets ts is cons conside idered red to to be a use use of cash. cash. !ns" %

$evel" %asic




?age 1@


A(. Which of the following is D7# a source of industry benchmark information information for Canadian companies !4 Stati tatisstics ics Canada. %4 5un 5un H %ra %radstr dstree eett Can Canada ada. C4 Foster ters St Statist istics ics. 54 Fina inancia nciall ?os ?ostt 5at 5atag agro roup up.. ,4 !ll of the above above are sou source rcess for for indust industry ry benchm benchmark ark inform informatio ation. n. !ns" C

$evel" %asic

Sub&ect" Industry %enchmarks


A3. Which one one of the following following is a use use of cash cash !4 !n incr increa ease se in acco accoun unts ts pay payable able %4 !n incr increa ease se in reta retain ined ed earn earnin ings gs C4 !n incr increa ease se in acco accoun unts ts rece receiv ivab able le 54 !n incr increa ease se in paid paid in surp surplu luss ,4 ! sale ale of of a long long/t /ter erm m ass asseet !ns" C

$evel" Intermediate



A-. Which of the following following is Eare4 Eare4 a source source of cash cash I !n increase in accounts payable II ! reduction in inventory III !n increase in retained earnings IG !n increase in notes payable !4 II and III only %4 I and IG only C4 I II and IG 54 I III and IG onl y ,4 I II III an and IG !ns" ,

$evel" Intermediate



A0. 7n the statement of cash flows the change in current current assets is listed in the section entitled" !4 7perating ing ac activi ivity. ty. %4
$evel" Intermediate

Sub&ect" Statement 7f Cash Flows


A8. Common si+ed statements" statements" !4 5epi 5epict ct the the cas cash h flo flows ws of a fir firm. m. %4 !re !re use usefu full in in mak makin ing g com compa pari riso sons ns.. C4 'efl 'eflec ectt the the rat ratio io anal analys ysis is of of a fir firm. m. 54 Show Show the the sou sourc rces es and and use usess o off cas cash. h. ,4 'efl 'eflec ectt the the mark market et valu valuee of of a firm firm.. !ns" %

$evel" Intermediate

Sub&ect" Common Si+ed Statements



?age 1A


A9. Which one of of the following following is a measure of li)uidity li)uidity !4 5ebt/e)uit y ratio %4 'eturn on assets C4 Inven ventor tory turnover 54 Int er erval measure ,4 #ime imes int inter eres estt ear earne ned d ra ratio tio !ns" 5

$evel" Intermediate



A@. Which of the following is Eare4 a measure of long/term solvency solvency I #otal #otal debt ratio II Cash coverage ratio III ?rice/earnings ratio IG
$evel" Intermediate



AA. #he curr current ent rati ratio" o" !4 !naly !naly+e +ess long long/t /ter erm m fin finan anci cial al via viabi bili lity ty.. %4 Will Will norm normal ally ly have have a lowe lowerr valu valuee than than the the )uic )uick k ratio ratio.. C4 Is a measu measure re of shor short/ t/te term rm li)ui li)uidi dity ty.. 54 Cons Consid ider erss all all deb debtt obl oblig igat atio ions ns of a fir firm. m. ,4 Indica Indicates tes the turnov turnover er rate rate of a firms firms accoun accounts ts rece receiva ivable ble.. !ns" C

$evel" %asic



1;;.. #he )uic 1;; )uick k ratio" ratio" !4 Indicates Indicates the ability ability of a firm to meet meet its current current obligation obligationss without without dispos disposing ing of of any inventory inventory.. %4 5epicts 5epicts the abili ability ty of a firm firm to pay pay off off its long/t long/ter erm m debts debts in a time timely ly manne manner. r. C4 Compar Compares es the the curren currentt cash cash holding holdingss of a firm firm to to the curr current ent liab liabiliti ilities. es. 54
$evel" %asic



1;1. Which one of the following measures indicates how long a firm can continue operating without any additional cash inflows !4 Current ratio %4 Cash ratio C4 *uick ratio 54 Int er erval measure ,4 #otal debt ratio !ns" 5

$evel" Intermediate

Sub&ect" Interval


?age (;


1;(. $ast year a firm had a total debt ratio of .31. #his year year the total debt ratio is .33. Which one of the following statements can be made with certainty based on this information !4 #he firm is is bankrupt. %4 #he #he fir firm m inc incre reas ased ed its e)ui e)uity ty fina financ ncing ing.. C4 #he #he fir firm m had had to hav havee sold sold some some lon long/ g/te term rm ass asset ets. s. 54 #he #he fir firm m had had to to hav havee bor borro rowe wed d more more mon money ey.. ,4 #he #he firm firm chan change ged d its its capit capital al stru struct ctur ure. e. !ns" ,

$evel" Challenge



1;3. !n e)uity multiplier of 1.8- means that for every every J1 the firm raises in new e)uity the firm can" !4 !c)u !c)uir iree an an add additi ition onal al J1.8 J1.8- in new new asse assets ts.. %4 !c)u !c)uir iree an an add additi ition onal al J1.8 J1.8- in in new new debt debt.. C4 ,arn ,arn J1.8 J1.8- in in add addit itio iona nall pro profi fits ts.. 54 ,arn ,arn J1.8 J1.8- in in add additi ition onal al pro profi fits ts per per sha share re.. ,4 ?ay ?ay J1. J1.88- in addi additio tiona nall div divide idend ndss per per shar share. e. !ns" !

$evel" %asic

Sub&ect" ,)uity

1;-. If a firm ac)uires more long/term long/term debt while also issuing additional shares of stock then the" !4 5ebt 5ebt/e /e)u )uit ity y rat ratio io will will incr increa ease se.. %4 5ebt 5ebt/e /e)u )uit ity y rat ratio io will will decr decrea ease se.. C4 5ebt 5ebt e)ui e)uity ty ratio ratio will will rema remain in cons consta tant nt.. 54 Change Change in the the debt/e debt/e)ui )uity ty ratio ratio canno cannott be determin determined ed from from the infor informati mation on provid provided. ed. ,4 Det Det Incom ncomee will will incr increease. ase. !ns" 5

$evel" Intermediate



1;0. Creditors Creditors are most most likely interested interested in the" the" !4 Fied ed as asset tu turnover. %4 #imes imes inte intere rest st earn earned ed rati ratio. o. C4 ,arn ,arnin ing gs p per er sha share rati ratio. o. 54 ?rice ea earnings ra ratio tio. ,4 'eturn on on as assets ratio tio. !ns" %

$evel" %asic

Sub&ect" #imes Interest ,arned 'atio


1;8. If the level level of inventory rises rises all else else constant constant then" !4 #he #he day dayss ssal ales es in inven invento tory ry will will also also rise rise.. %4 #he #he DWC DWC rati ratio o wil willl als also o ris rise. e. C4 Inve Invent ntor ory y tur turno nove verr will will als also o ris rise. e. 54 Fie Fied d asse assett turn turnov over er will will dec decli line ne.. ,4 Curr Curreent rati ratio o wil willl dec decli line ne.. !ns" !

$evel" Intermediate

Sub&ect" 5ays Sales In Inventory



?age (1


1;9. !n increase increase in the receivables receivables turnover turnover means that" !4 #he #he ma&or ma&ority ity of cus custo tomer merss are are pay paying ing slow slower er.. %4 #he #he pri price cess of of ite items ms purc purcha hase sed d are are risi rising ng.. C4 #he #he day dayss ssal ales es in rece receiv ivab able less is is risi rising ng.. 54 ?rof ?rofit it mar margins ins are are risi risin ng. ,4 Custo Custome mers rs are are pay paying ing their their bill billss fas faste terr. !ns" ,

$evel" Intermediate

Sub&ect" 'eceivables #urnover


1;@. ! fied fied asset turnover turnover ratio ratio of .9( means that" that" !4 For every every J1 in total total asse assets ts a firm firm can gener generate ate J;.9 J;.9( ( in net net incom income. e. %4 For ever every y J1 in in net fie fied d assets assets a firm firm can gene generat ratee J;.9( J;.9( in net net incom income. e. C4 For every every J1 in total total asse assets ts a firm firm can gener generate ate J;.9 J;.9( ( in sale sales. s. 54 For every every J1 in net net fie fied d assets assets a firm firm can can gene generat ratee J;.9( J;.9( in sales. sales. ,4 For every every J1 J1 in net fied fied assets assets a firm firm can obtain obtain J;.9( J;.9( in debt. debt. !ns" 5

$evel" Intermediate

Sub&ect" Fied !sset #urnover


1;A. Which one of the following measures measures the efficiency with which a firm uses it resources to generate sales !4 ?rice earnings ratio tio %4 'eturn on e)uity C4 #otal tal as asset tu turnover 54 Current ratio ,4 'eturn on assets !ns" C

$evel" Intermediate

Sub&ect" #otal !sset #urnover


11;. ! reduction reduction in interest epense epense all else constant constant will cause aEn4" aEn4" !4 5ecr 5ecrea ease se in in the the time timess inte intere rest st ear earne ned d ratio ratio.. %4 Incr Increa ease se in in the the cas cash h cove covera rage ge rat ratio io.. C4 5ecr 5ecrea ease se in in the the long long/t /ter erm m debt debt rat ratio io.. 54 5ecr 5ecrea ease se in the the ret retur urn n on on e)u e)uit ity y. ,4 Incr Increa ease se in in the the pri price ce ear earni ning ngss rati ratio. o. !ns" %

$evel" Challenge

Sub&ect" ?rofit

111.. $ast year a firm had a profit margin of 9L. 111 9L. #his year the profit profit margin is 8L. Sales remained constant. Which one of the following statements is correct based on this information !4 #he #he ret retur urn n on on ass asset etss d dec ecli line ned. d. %4 #he #he ret retur urn n on on e)u e)uity ity incr increa ease sed. d. C4 #he #he net inco income me inc increa reased. sed. 54 #he #he pric pricee earn earnin ings gs ratio ratio decr decrea ease sed. d. ,4 #he #he int inter erva vall mea measu sure re decr decrea ease sed. d. !ns" !

$evel" Challenge




?age ((


11(.. Stockholder 11( Stockholderss are most intereste interested d in the" !4 #imes imes inte intere rest st earn earned ed rati ratio. o. %4 Current ra ratio. C4 'eturn on on e) e)uity ratio tio. 54 #otal tal asse assett turn turnov over er rate rate.. ,4 'eturn on on as assets ratio tio. !ns" C

$evel" %asic

Sub&ect" 'eturn 7n ,)uity


113. !%C Inc. epects sales and net net income to remain constant net year. year. If !%C wishes to increase its earnings per share figures then !%C could" !4 Incr Increa ease se the the amo amoun untt of div divid iden end d paid paid per per shar share. e. %4 5ecr 5ecrea ease se the the amo amoun untt of div divide idend nd pai paid d per per shar share. e. C4 ?urchase mo more as assets. 54 Issu Issuee add additi ition onal al shar shares es of comm common on stock stock.. ,4 'epu 'epurc rcha hase se outs outsta tand nding ing shar shares es of of commo common n stoc stock. k. !ns" ,

$evel" Intermediate

Sub&ect" ,arnings ?er Share


11-.. ! price 11price earnings earnings ratio of 1- means means that" !4 Stockholder Stockholderss are currently currently paying paying a price price e)ual e)ual to to 1- times times earning earningss per share when they they buy one share of stock. %4 #he market market value of each each share share of outstand outstanding ing common common stock is current currently ly valued valued at at J1- per share. share. C4 #he #he mar marke ket/ t/to to/b /boo ook k rat ratio io mus mustt be e)ua e)uall to -. 54 #he curren currentt selling price of a produc productt is e)ual e)ual to 1- times times the net net income income generate generated d from from the sale sale of that product. ,4 #he market market value of the the common common stock stock is curren currently tly e)ual e)ual to 1- times times the book value per share. share. !ns" !

$evel" Intermediate

Sub&ect" ?rice ,arnings 'atio


110. Which one of the following is true concerning the market/to/book market/to/book ratio !4 ,tending ,tending the the deprecia depreciation tion life life of a firms firms assets assets will increas increasee the market/to/b market/to/book ook ratio. ratio. %4 ! decre decrease ase in the price price of the stock stock on the stock stock echang echangee will increa increase se the market/to/b market/to/book ook ratio. ratio. C4 !n increase increase in the market market value value of the common common stock will increa increase se the the market/to market/to/book /book ratio. 54 #he mark market/ et/to/ to/boo book k ratio ratio is of most most inter interest est to to the credito creditors rs of of a firm. firm. ,4 #he mark market/ et/to/ to/boo book k ratio ratio provi provides des the the sellin selling g price price of a firm firmss invent inventory ory.. !ns" C

$evel" Intermediate

Sub&ect"

118. Which one of the following will increase the return on e)uity as computed computed using the 5u ?ont identity given that all else is held constant !4 ! dec decrea rease in tota totall e)u e)uit ity y %4 ! decrease in in sa sales C4 ! decrease in in ne net in income 54 !n inc increase ease in tota totall ass asset etss ,4 !n increase in costs !ns" !

$evel" Intermediate




?age (3


119. Financial statement analysis provides provides useful information information to which of the following parties I. Creditors II. Investors III. Internal division managers IG. Senior corporate corporat e officers !4 I and II only %4 II and IG only C4 III and IG only 54 II II III an and IG IG onl y ,4 I II III an and IG !ns" ,

$evel" Intermediate

Sub&ect" Financial Statement !nalysis


11@. Computronics Inc. has a current ratio of 1.0. #his implies that if the firm li)uidates its current assets assets in order to pay off its current liabilities it can sell the current assets for as little as" !4 10L of book value. %4 (0L of book value. C4 33L of book value. 54 89L of book value. ,4 10;L of book value. !ns" 5

$evel" %asic


#ype" #ype" ?roblems

11A. !ssume a firms current ratio e)uals 3.0. Which of the following actions actions would increase increase it !4 5isca 5iscard rding ing and and wri writin ting g off off spoi spoile led d inve invent ntory ory.. %4 'eceiv 'eceiving ing a full full cash cash paym payment ent on an accoun accountt rece receiva ivable. ble. C4 ?aying ?aying off off a short/ short/ter term m bank bank loan with with the the procee proceeds ds from from new new long/te long/term rm debt. debt. 54 ?urcha ?urchasing sing new fie fied d assets assets using using the the proce proceeds eds from from a new stoc stock k issue. issue. ,4 %uying %uying inve invento ntory ry on on credi credit t there thereby by incre increasi asing ng accou accounts nts paya payable ble.. !ns" C

$evel" %asic



1(;. ! firm firm has current liabilities of J(0; a current ratio of 1.( and a )uick ratio of ;.@;. Calculate the level of inventory for this firm. !4 J-0 %4 J0; C4 J1;; 54 J1(; ,4 J(;; !ns" C

$evel" Intermediate



1(1. 5anny 5. Inc. had cost of goods sold of J0(;; net working working capital of J1(; total current current assets of J8;; and a )uick ratio of ;.@. What is 5anny 5s days sales sales in inventory !4 1(.9 days %4 10.( days C4 19.1 days 54 1A.@ days ,4 ((.9 days !ns" %

$evel" Intermediate




?age (-


1((. Calculate the value of cost of goods sold for ?eterson ?eterson %rewing given the the following information" Current Current liabilities N J3-;;;; *uick ratio N 1.@ Inventory turnover N -.; Current ratio N 3.3. !4 J(;-;;;; %4 J3;8;;;; C4 J3AAAAAA 54 J-1@;((( ,4 J0@@@1;; !ns" !

$evel" Intermediate

Sub&ect" Cost 7f =oods Sold


1(3. Catcha#an Catcha#an Co. had net sales of J@;;;;; over the past year. 5uring that time average receivables receivables were J(;;;;;. What was the average collection period period !4 - days %4 0 days C4 38 days 54 -@ days ,4 A1 days !ns" ,

$evel" Intermediate

Sub&ect" !verage !verage Collection ?eriod


1(-.
$evel" Intermediate



1(0. !tlasta $imo Corp. has an an average average collection period of 38.0 days. days. Sales are are J3;;;;;. What is the average investment in receivables !4 J---1 %4 J@(1A C4 J1;;;; 54 J3;;;; ,4 J380;; !ns" 5

$evel" Intermediate

Sub&ect" 'eceivables 'atios


1(8. If a firm has a total debt debt ratio of 1.0 what what is its e)uity multiplier multiplier !4 O(.;; times %4 ;.0; times C4 ;.89 times 54 1.0; times ,4 3.;; times !ns" !

$evel" Intermediate

Sub&ect" 5ebt 'atio H ,)uity


?age (0


1(9. #ron Inc. Inc. has a times interest earned earned ratio of -.;. %ased on this ratio a creditor knows that #rons #rons ,%I# must decline by more than 2222222222 before #ron #ron will be unable to cover its interest epense. !4 33L %4 -;L C4 89L 54 90L ,4 @;L !ns" 5

$evel" Intermediate



1(@. #he %een#here5one#hat Company has net income of J(;; interest interest epenses of J0; and depreciation of J0;. #he corporate ta ta rate is 0;L. 0;L. What is the cash coverage ratio !4 1.( times %4 1.@ times C4 3.; times 54 A.; times ,4 1;.; times !ns" ,

$evel" Intermediate



1(A. ! firm firm has an '7! of @L sales sales of J1;; and and total assets of J90. What is its profit profit margin !4 1.3L %4 -.3L C4 8.;L 54 1;.9L ,4 18.9L !ns" C

$evel" Intermediate



13;. Bou Bou have the following data for the the Fosberg Winery Winery.. What is Fosbergs Fosbergs return on assets E'7!4 E'7!4  'eturn on e)uity N 10L ,arnings before taes N J3;;;; #otal #otal asset turnover N ;.@; ?rofit margin N -.0L #a #a rate N 30L. !4 3.8L %4 3.AL C4 0.9L 54 8.-L ,4 A.3L !ns" !

$evel" Intermediate



131. ! firm has has a total book value of e)uity of J( million a market to book ratio of ( and and a book value per share of J0.;;. What is the total market value of the firms e)uity !4 J1; %4 J0;;;;; C4 J( million 54 J- million ,4 J(; million !ns" 5

$evel" Intermediate

Sub&ect"


?age (8


13(. Morge Corp. has 1;;;;; 1;;;;; shares shares outstanding. ,%I# is J1 million and interest paid is J(;;;;;. J(;;;;;. If the corporate ta rate is 3-L what is Morges earnings per share !4 J(.9( %4 J3.-; C4 J0.(@ 54 J8.8; ,4 J1;.;; !ns" C

$evel" Intermediate



133. ,tling ,ccentricities has -;;;;; shares of common stock outstanding net net income after ta ta of J1.( million retained earnings of J19 million and total e)uity e)uity of J30 million. What is ,,s earnings per per share !4 J3.;; %4 J-.;; C4 J-.(0 54 [email protected] ,4 J13.0; !ns" !

$evel" %asic



13-. ! firm firm with net income of of J0;;;;; pays -@L of net income out in dividends. dividends. If the firm has 10;;;; shares of common stock outstanding what is the dividend paid per share of stock !4 J;.3; %4 J1.-C4 J1.8; 54 J1.93 ,4 J3.33 !ns" C

$evel" %asic

Sub&ect" 5ividends ?er Share


130. =iven a profit margin N 1;L '7, N (;L 5, N 1.0 and assets assets N J(;; calculate sales. !4 J1; %4 J18; C4 J(0; 54 J8-; ,4 J1;;; !ns" %

$evel" Intermediate



138. ! firm firm has sales of J0;; total assets assets of J3;; and and a debte)uity ratio ratio of (. If its return on e)uity is 10L 10L what is its net income !4 J9.0; %4 J10.;; C4 J((.0; 54 J3(.0; ,4 J0;.;; !ns" %

$evel" Intermediate




?age (9


6se the following to answer )uestions 139/1-@" Boung Inc. (;;3 Income Statement EJ in millions4 Det sales J13@$ess" Cost of goods sold 8;0 $ess" 5epreciation 1@; ,arnings before interest and taes 0AA $ess" Interest paid @; #aable income 01A $ess" #aes 108 Det income J383 !ddition to retained earnings J(05ividends paid 1;A

Cash !ccounts rec. Inventory #otal Det fied assets #otal assets

Boung Inc. (;;( and (;;3 %alance Sheet EJ in millions4 20 2002 2003 J1;; J1(1 !ccounts payable 30; -(0 Dotes payable --; -1; #otal J@A; JA08 $ong/term debt 1008 19;Common stock 'etained earnings J(--8 J(88; #otal liabilities

2002 J-;; 3A; J9A; 0;; 8;; 008 J(--8

2003 J30; 3 9; J9(; 00; 0@; @1; J(88;

139. What is the current current ratio for Bou Boung ng in (;;3 !4 1.13 %4 1.(1 C4 1.(3 54 1.33 ,4 1.-9 !ns" 5

$evel" %asic



13@. What is the )uick )uick ratio for Bou Boung ng for (;;( (;;( !4 ;.09 %4 ;.83 C4 ;.98 54 1.13 ,4 1.33 !ns" !

$evel" %asic




?age (@


13A. What is the total debt ratio for Boung Boung for (;;3 (;;3 !4 ;.(9 %4 ;.-@ C4 ;.03 54 ;.9; ,4 ;.@( !ns" %

$evel" %asic



1-;. What is the debt/e debt/e)uity )uity ratio ratio for (;;( (;;( !4 ;.-@ %4 ;.A1 C4 1.1( 54 (.10 ,4 (.3( !ns" C

$evel" %asic



1-1. What is the times interes interestt earned ratio ratio for (;;3 (;;3 !4 1.0 times %4 3.0 times C4 -.0 times 54 8.0 times ,4 9.0 times !ns" ,

$evel" %asic



1-(. What is the cash cash coverag coveragee ratio for for (;;3 !4 0.( %4 8.@ C4 @.9 54 A.9 ,4 A.( !ns" 5

$evel" %asic



1-3. What was invento inventory ry turnover turnover for (;;3 (;;3 !4 1.3@ %4 1.-( C4 1.-@ 54 3.10 ,4 3.3@ !ns" C

$evel" %asic

Sub&ect" Inventory #urnover



?age (A


1--. What was the average average collectio collection n period for (;;3 (;;3 !4 A( days %4 11( days C4 101 days 54 (11 days ,4 (08 days !ns" %

$evel" %asic



1-0. What was the the total asset asset turnover turnover in (;;3 (;;3 !4 ;.(3 %4 ;.(0 C4 ;.0( 54 ;.09 ,4 1.A( !ns" C

$evel" %asic



1-8. What was was the profit profit margin margin in (;;3 (;;3 !4 9.AL %4 [email protected] C4 ((.9L 54 (8.(L ,4 8;.;L !ns" 5

$evel" %asic

Sub&ect" ?rofit

1-9. What was the the return return on e)uity for for (;;3 (;;3 !4 [email protected] %4 (8.1L C4 31.-L 54 --.@L ,4 8(.8L !ns" %

$evel" %asic



1-@. If Boung Boung stock sells for J-; and there are 1;; million shares outstanding what is the ?, ratio !4 0.8@ %4 1;.(8 C4 11.;( 54 (0.8,4 3(.-A !ns" C

$evel" %asic

Sub&ect" ?rice #o ,arnings 'atio


6se the following to answer )uestions 1-A/10@" %o Pnows ?rofit Corporation Income Statement for Bear Bear ,nding (;;3 Sales J @@;; $ess" Costs 08;; 5epreciation A;; , ,% %I# (3;;


?age 3;


$ess" Interest ,% , %# $ess" #aes Det Income 5i 5 ividends !ddition to ret. e ar arnings

30; 1A0; 00; J1-;; JA;; J0;;


?age 31


%o Pnows ?rofit Corp. %alance Sheet for ,nd of Bear Bear (;;( (;;3

Cash !ccounts rec. Inventory Current assets Fied assets

#otal assets

2002 J 19; 0;; 1(-; 1A1; (;;;

J3A1;

2003 J 11; 9;; 1;;; 1@1; 30;;

J031;

!ccounts payable Dotes payable Current liabilities $ong/term debt Common stock E0; shares4 'etained earnings #otal liab. H e)uity

2002 J 130 1(;; 1330 (;;0 1 ;;

2003 J 1(; 1-;; 10(; (8(; (;;

-9; J3A1;

A9 ; J031;

1-A. What was the greatest greatest source of funds for %o %o Pnows ?rofit Corp. Corp. !4 Sale of inventory %4 Incre ncreaase in long long/t /ter erm m de debt C4 !c)u !c)uis isit itio ion n of of mor moree fi fied ed asse assets ts 54 Incre ncreaase in note notess pay payab able le ,4 Incre ncreaase in comm common on stoc tock !ns" %

$evel" Intermediate



10;. What was the greatest greatest use of funds for %o %o Pnows ?rofit Corp. Corp. !4 Incr Increa ease se in in acc accou ount ntss rec recei eiva vabl blee %4 5ecr 5ecrea ease se in acco accoun unts ts paya payabl blee C4 !c)u !c)uis isit itio ion n of of mor moree fi fied ed asse assets ts 54 5ividends ,4 Sale of inventory !ns" C

$evel" Intermediate



101. If you prepare a statement of cash flows what is the positive flow to cash from operating activities activities EConsider only inflows4 !4 J1(9; %4 J10@@ C4 J(10; 54 J(3;; ,4 J(0-; !ns" ,

$evel" Intermediate

Sub&ect" 7perating !ctivities


10(. If you were to prepare prepare a statement of cash flows flows what is the negative flow from cash cash due to operating activities EConsider only outflows4 !4 OJ1;0 %4 OJ190 C4 OJ(10 54 OJ301 ,4 OJ-09 !ns" C

$evel" Intermediate

Sub&ect" 7perating !ctivities



?age 3(


103. If you were to prepare prepare a statement of cash flows flows what is the cash flow from investment investment activities !4 OJ10;; %4 OJ(-;; C4 OJ3-;; 54 J-0;; ,4 J-8;; !ns" %

$evel" Intermediate

Sub&ect" Investment !ctivities


10-. If you were to prepare prepare a statement of cash flows flows what is the net cash flow from financing financing activities !4 OJ 89@ %4 OJ 1;@ C4 J 10 54 J13(0 ,4 J3;;3 !ns" C

$evel" Intermediate

Sub&ect" Financing !ctivities


100. What was the )uick )uick ratio for for %o Pnows ?rofit ?rofit Corp. for (;;3 (;;3 !4 ;.(1 %4 ;.-9 C4 ;.0; 54 ;.03 ,4 1.-; !ns" 5

$evel" %asic



108. If cash inflows for the company cease the firm will be able able to stay in business for about" about" !4 111 days. %4 11@ days. C4 1-8 days. 54 1@9( days. ,4 (13A days. !ns" %

$evel" Intermediate

Sub&ect" Interval

109. If the firm is currently carrying carrying a priceearnings ratio of ( what is the firms approimate market market price per share !4 J@ %4 J11 C4 J08 54 J9@ ,4 J1(A !ns" C

$evel" Challenge




?age 33


10@. Which of the following contains the components components of the 5u ?ont identity for the company 6se year/end year/end (;;3 values where appropriate. !4 ;.10A 1.99 -.(8 %4 ;.18A 1. 1.08 -. -.0C4 ;.10A 1. 1.88 -. -.054 ;.13( 1.88 0.-8 ,4 ;.-(9 1. 1.-; (. (.;; !ns" C

$evel" Challenge



6se the following to answer )uestions 10A/180"
(;;3 J130 (11@ @ 03 9 @ A; 3@; 3@; J1-(9

!ccounts payable Dotes payable Current liabilities $ong/term debt Common stock #otal liab. H e)uity

(;;( J @A ((9 31 8 810 00

(;;3 J11; --( 00( -- ; 00

J1333

J1-(9

JA;0 0 (( A3 11; 1@; 81 11A 3; J@A

10A. >ow did
$evel" Intermediate

Sub&ect" Det Working Working Capital



?age 3-


18;. Which of
$evel" Intermediate

Sub&ect" $i)uidity


181. What was
$evel" %asic



18(.
$evel" %asic



183. !ssume
$evel" Intermediate



18-. #he profit profit margin margin of
$evel" %asic

Sub&ect" ?rofit


?age 30


180. Calculate Calculate
$evel" %asic

Sub&ect" '7, H '7!


188. Sales are J90;;; cost of goods goods sold is J30;;; and inventory inventory is J0;;;. What is the number of days sales in inventory !4 9 %4 10 C4 (54 0( ,4 0A !ns" 5

$evel" Intermediate

Sub&ect" 5ays Sales In Inventory


189. Cash is J0;; inventory is J-@;; accounts accounts receivable is J3(;; and accounts accounts payable is J(-;;. What What is the )uick ratio !4 ;.99 %4 1.0C4 1.89 54 3.33 ,4 3.0!ns" %

$evel" Intermediate



18@. ,arnings before interest and taes is J9-3;;. Interest is J@3;; and depreciation is JA9;;. What What is the cash coverage ratio !4 9.9@ %4 @.0( C4 @.A0 54 A.A0 ,4 1;.1( !ns" ,

$evel" Intermediate



18A. Current assets are JA-9;;. JA-9;;. !ccounts payable payable is J38(;; net income is J1(-;; and sales are J11;@;;. J11;@;;. What is the net working capital turnover rate !4 ;.(1 %4 ;.@0 C4 1.19 54 1.8@ ,4 1.@A !ns" ,

$evel" Intermediate

Sub&ect" Det Working Working Capital #urnover



?age 38


19;. ! firm has has a profit margin of AL on sales of J-;;;;;. #here are 1;;;; shares shares of common stock outstanding. What is the earnings per share !4 J1.@; %4 J3.8; C4 J-.;; 54 J38.;; ,4 J-;.;; !ns" %

$evel" Intermediate



191. ! firm has has a net income of J3(;;; which provides a 1(L return on assets. #he firm has has a debt/e)uity ratio of .-;. What is the return on e)uity !4 9.(;L %4 @.09L C4 11.89L 54 1(.;;L ,4 18.@;L !ns" ,

$evel" Challenge

Sub&ect" 'eturn 7n ,)uity


19(. $ittles Inc. provides a 1;L return return on e)uity. Sales are J1;;;;; on total assets assets of J1-;;;; and total e)uity of J@0;;;. What is the profit margin !4 8.;9L %4 @.0;L C4 1;.;;L 54 11.99L ,4 1-.;;L !ns" %

$evel" $evel" Intermediate Intermediate

Sub&ect" Sub&ect" 5upont 5upont Identity Identity

#ype" #ype" ?roblems ?roblems


?age 39


6se the following to answer )uestions 193/1@;" Smith Co. (;;3 Income Statement Det sales Cost of goods sold 5epreciation ,arnings %efore interest and taes Interest paid #aable income #aes Det income 5ividends paid !ddition to retained earnings

J@3(J-A@@ J11A; J(1-8 J3(; J1@(8 J8(1 J1(;0 J-;; J@;0

Smith Co. %alance Sheets as of 5ecember 31 (;;( and (;;3

Cash !ccounts rec. Inventory #otal Det fied assets

(;;( J0-10 J(-8; J(-;0 J1;(@; J1(3;;

(;;3 J33-1 JA9A J(@@0 J9(;0 J189(;

#otal assets

J((0@;

J(3A(0

(;;( !ccounts payable Dotes payable #otal $ong/term debt Common stock 'etained earnings #otal liabilities and 7wners e)uity

(;;3 J111; J(0;; J381; J-@;; J01;; JA;9; J((0@;

193. What is the curre current nt ratio for for (;;3 (;;3 !4 1.-A %4 (.;3 C4 (.1@ 54 (.@0 ,4 -.39 !ns" %

$evel" %asic



19-. What is the e)uity e)uity multiplier multiplier for for (;;3 (;;3 !4 ;.(A %4 ;.88 C4 1.19 54 1.0( ,4 (.-( !ns" 5

$evel" Intermediate

Sub&ect" ,)uity


?age 3@

J180; J1A;; J300; J-8;; J0A;; JA@90 J(3A(0


190. What is the days days sales in receivable receivabless for (;;3 (;;3 !4 3%4 -3 C4 -@ 54 03 ,4 0A !ns" %

$evel" Intermediate

Sub&ect" 5ays Sales In 'eceivables


198. What is the change change in net net working working capital capital !4 /J3800 %4 /J3;10 C4 J3800 54 J889; ,4 J1;900 !ns" %

$evel" Intermediate

Sub&ect" Change In Det Working Working Capital

#ype" #ype" ?roblems ?roblems

199. What is the net working working capital capital turnover turnover rate for for (;;3 !4 1.18 %4 1.(0 C4 (.(@ 54 (.3,4 (.@9 !ns" C

$evel" Intermediate

Sub&ect" DWC #urnover


19@. What is the the cash cash coverage coverage ratio ratio !4 (.AA %4 3.99 C4 8.91 54 1;.-3 ,4 13.99 !ns" 5

$evel" Intermediate



19A. What is the market/to/book market/to/book ratio if the Smith Co. has (8;3 shares of common stock outstanding with a current market price of J(( per share !4 (.89 %4 3.33 C4 3.83 54 -.39 ,4 8.;8 !ns" C

$evel" Intermediate

Sub&ect"


?age 3A


1@;. 7n a common si+e income statement for (;;3 earnings before interest interest and taes would be assigned assigned a common value of" !4 AL %4 10L C4 (;L 54 ((L ,4 (8L !ns" ,

$evel" Intermediate

Sub&ect" Common Si+e Income Statement


6se the following to answer )uestions 1@1/1@0" '#F Inc. Income Statement for Bear Bear ,nding (;;3 Sales J1;@0; Costs of goods sold J@-1; 5epreciation J1A; ,%I# J((0; Interest J180 ,%# J(;@0 #aes J91; Det Income J1390 5ividends paid J3;; !ddition to retained earnings J1;90 '#F Inc. %alance Sheets as of 5ecember 31 (;;( and (;;3

Cash !ccounts rec. Inventory # #o otal Fied assets

( ; ;( J A @; JA0; J(1(; J-;0; J19;;

( ;; 3 J A8 ; J@@; J190; J30A; J(0-;

#otal assets

J090;

J813;

!ccounts payable Dotes payable #otal $ong/term debt Common stock 'etained earnings #otal liabilities and 7wners e)uity

(; ; ( JA 0 ; J-; JAA; J(((0 J(;3; J0 ;0 J090;

(;;3 J93; J 10 ; J@@; J1;; J309; J10@; J813;

1@1. #he industry in which '#F '#F Inc. operates has an industry average average of (1L for earnings before taes. Is '#F '#F outperforming or underperforming the industry and why !4 7utp 7utper erfo form rmin ing g beca because use '#F '#F has has an ,%# ,%# of of 1AL 1AL %4 7utp 7utper erfo form rmin ing g bec becau ause se '#F '#F has has an an ,%# ,%# of of (1L (1L C4 6nde 6nderp rper erfo form rming ing beca becaus usee '#F '#F has has an an ,%# ,%# of of 1AL 1AL 54 6nde 6nderp rper erfo form rming ing beca becaus usee '#F '#F has has an an ,%# ,%# of (;L (;L ,4 ?erf ?erfor ormin ming g in in lin linee with with the the ind indus ustry try at (1L. (1L. !ns" C

$evel" Intermediate

Sub&ect" ,arnings %efore #aes #aes



?age -;


1@(. #he component values used in the 5u ?ont analysis for for (;;3 are" are" !4 1(.9L ;. ;.39 an and 1. 1.1A. %4 1(.9L 1. 1.99 an and 1. 1.1A. C4 1A.(L 1. 1.99 an and 1. 1.1A. 54 1A.(L ;. ;.39 an and (. (.11. ,4 1(.9L 1. 1.99 an and (. (.11. !ns" %

$evel" Intermediate

Sub&ect" 5u ?ont !nalysis


1@3. 5uring (;;3 the )uick )uick ratio" ratio" !4 increased. %4 decreased. C4 remained c on onstant. 54 change changed d but but the direct direction ion of of the the chang changee can can not be dete determi rmined ned.. !ns" !

$evel" Intermediate

Sub&ect" Current !nd *uick 'atios


1@-. What was the change change in the debt/e)u debt/e)uity ity ratio from from (;;( to (;;3 !4 #he debt/e debt/e)ui )uity ty ratio ratio decline declined d from from 1.(9 1.(9 in in (;;( (;;( to .1A in in (;;3. (;;3. %4 #he debt/e debt/e)ui )uity ty ratio ratio increa increased sed from from .1A .1A in (;;( (;;( to 1.(9 1.(9 in in (;;3. (;;3. C4 #he debt/e debt/e)ui )uity ty ratio ratio decline declined d from from .;0 .;0 in in (;;( (;;( to to .;( .;( in (;; (;;3. 3. 54 #he debt/e debt/e)ui )uity ty ratio ratio decline declined d from from .(( .(( in in (;;( (;;( to to .19 .19 in (;; (;;3. 3. ,4 #he debt/e debt/e)ui )uity ty ratio ratio increa increased sed from from .19 .19 in in (;;( (;;( to to .(( .(( in (;; (;;3. 3. !ns" !

$evel" Intermediate



1@0. >ow many days days does it take take for inventory inventory to sell sell !4 %4 8 C4 0A 54 98 ,4 AA !ns" 5

$evel" Intermediate

Sub&ect" 5ays In Inventory


1@8. >ow many additional assets can '#F '#F Inc. ac)uire if the company issues an additional additional J1;;; in common stock !4 J1;;; %4 J11A; C4 J10;; 54 J19@; ,4 Can Can not not be dete determ rmine ined d from from the the inf infor orma matio tion n give given. n. !ns" %

$evel" Intermediate

Sub&ect" ,)uity


?age -1


6se the following to answer )uestions 1@9/1A;" '#F Inc. Income Statement for Bear Bear ,nding (;;3 Sales Costs of goods sold 5epreciation ,%I# Interest ,%# #aes Det Income 5ividends paid !ddition to retained earnings

J1;@0; J@-1; J 1 A; J((0; J180 J(;@0 J9 1 ; J1390 J3;; J1;90 '#F Inc. %alance Sheets as of 5ecember 31 (;;( and (;;3

Cash !ccounts rec. Inventory #otal Fied assets

(;;( JA@; JA0; J(1(; J-;0; J19;;

(;;3 JA8; J@@; J190; J30A; J(0-;

#otal assets

J090;

J813;

!ccounts payable Dotes payable #otal $ong/term debt Common stock 'etained earnings #otal liabilities and 7wners e)uity

1@9. #he sources sources of of cash cash include" include" !4 J((; J(( ; from from accoun accounts ts payable payable and J@J@-; ; from from fied fied assets assets.. %4 J@-; J@; from from fied fied assets assets and J9; from from acco account untss rece receiva ivable ble.. C4 J9; from from accou accounts nts receiv receivable able and J10-; J10-; from from common common stock. stock. 54 J10-; J10-; from from commo common n stock stock and J(( J((; ; from from acco accounts unts payabl payable. e. ,4 J(1 J(1(0 (0 fro from m long long term term deb debtt and and J10J10-; ; from from com common mon sto stock ck.. !ns" C

$evel" Intermediate



1@@. #he uses uses of cash include" include" !4 J11 J11; fr from note notess p pay ayab able le.. %4 J1; J1;90 90 from from reta retain ined ed earn earnin ings gs.. C4 J@-; fr from fi fieed as assets. ts. 54 J39; from inv inventory ,4 J9; J9; from from acco accoun unts ts rece receiv ivab able le.. !ns" C

$evel" Intermediate




?age -(

(;;( JA0; J-; JAA; J(((0 J(;3; J0;0 J090;

( ; ;3 J93; J1 0 ; J@@; J1;; J309; J10@; J813;


1@A. #he net cash cash from financing financing activity activity for (;;3 (;;3 is" !4 /JA90 %4 /J990 C4 /J-90 54 J-90 ,4 J990 !ns" %

$evel" Intermediate

Sub&ect" Financing !ctivity


1A;. #he net cash cash from investment investment activity activity for (;;3 (;;3 is" !4 /J1;3; %4 /J@-; C4 /J80; 54 J@-; ,4 J1;3; !ns" !

$evel" Intermediate

Sub&ect" Investment !ctivity


Essay

1A1. 5un H %radstreet Canada publishes peer peer group financial financial information for a host of industries yet the numbers typically only appear in common/si+e common/si+e form. Why not report average average dollar amounts instead !ns" #he common/si+e common/si+e numbers numbers are inherently inherently more more useful since since they can be directly compared compared to the financial statements of any firm. If average dollar figures were presented presented these numbers would have to be converted to common/si+e numbers to facilitate comparisons. ?lus since 5H% Canada also publishes average sales and average total assets the user can always always work backwards to figure out the dollar amounts represented by each category. $evel" Challenge

Sub&ect" Common Si+e Statements

#ype" #ype" ,ssays

1A(. ?repare common/si+e common/si+e balance sheets for
(;;( Current !ssets Cash !ccounts 'eceivable Inventory #otal Fied !ssets

J 1;0 1;8 1-; 301 @A

#otal !ssets

J --;

'etained ,arnings J --9

#otal $iab. and 7,


1@-

(;0

J --;

J --9

?age -3


!ns" #his is a relatively relatively straightforwa straightforward rd eercise eercise to test the students students ability to construct construct a common/si+e common/si+e balance sheet. In terms of li)uidity both cash and !' increased as a percent of total assets while inventory decreased indicating the firms li)uidity is on the increas,4 increas,4 In addition total C! increased and total C$ decreased as a percent of total assets again increasing the firms li)uidity.


?age --


$iab. and ,)uity (;;(

Current !ssets Cash !ccounts 'eceivable Inventory #otal Fied !ssets #otal !ssets $evel" Intermediate

(;;3

(3.AL (-.1 31.@ 9A.@L (;.(

(-.8L 3;.8 (9.3 @(.0 19.0

1;;.;L

1;;.;L

( ; ;( Current $iabilities !ccounts ?ayable Dotes ?ayable #otal $ong/#erm 5ebt Common Stock 'etained ,arnings #otal $iab. and 7,

Sub&ect" Common/Si+e Statements

(;;3

1-.0L 1-.@L 11.9.@ (0.A ((.8 1A.@ 1A.( 1(.0 1(.3 -1.@ -0.A 1;;.;L 1;;.;L

#ype" #ype" ,ssays

1A3. $ist and interpr interpret et three li)uidity li)uidity ratios. ratios. !ns" !ns" Choo Choose se any any thr three ee of" of" 14 Current Current ratio" the firms ability to meet its financial obligations as they come due over the coming year (4 *uick ratio"the firms ability to meet its near/term financial obligations 34 Cash ratio" the firms ability to meet its near/term financial obligations without depending on the li)uidation of inventory or accounts receivable -4 Det working capital to total assets" #he firms investment in DWC for each dollar of assets and 04 Interval measure" #he amount of time a firm can operate if no further sales are made. $evel" %asic

Sub&ect" $i)uidity 'atios

#ype" #ype" ,ssays

1A-. ! firm has has days sales in inventory of 1;0 days an average collection collection period of 30 days and and takes -( days on average to pay its accounts payable. #aken #aken together what do these three figures imply about the firms operations and its cash flows !ns" It takes takes on average average 1;0 days to sell inventory inventory once once it is purchased purchased by the firm firm then it takes another another 30 days to collect on the receivables. #hus the firm must finance the inventory and receivables for 1-; days. #he first -( days are financed with payables on average leaving A@ days worth of inventory and receivables that it must finance using other sources. In terms of cash flow the average average cash outflow occurs -( days after inventory is purchased while the average cash inflow occurs A@ days later 1-; days after the inventory is purchased. $evel" Intermediate

Sub&ect" 5ays 'atios

#ype" #ype" ,ssays

1A0. Which is a more meaningful measure measure of profitability for a firm firm return on assets or return return on e)uity Why Why !ns"
Sub&ect" '7, vs. '7!

#ype" #ype" ,ssays


?age -0


1A8. Suppose you calculated the following following ratio ratio for a firm" #he sum of the compensation paid to owners owners directors and managers divided by total sales. Which class of financial financial ratios should this be included in and why Who might be interested in such such a ratio !ns" #his doesnt doesnt fit well into any of the the five categories categories present presented ed in the book although although it would most most likely be included as a profitability ratio because it is a measure of how much of each dollar in sales is used to pay these salaries. salaries. #he ratio would likely be important to all of the three groups Eowners directors managers4 included in the ratio plus it would likely be important to lenders as a measure of how much of the firms income these groups draw out of the business. $evel" Challenge

Sub&ect" 7ther 'atios

#ype" #ype" ,ssays

1A9. It is often said that anyone with a pencil can calculate financial ratios but it takes a brain to interpret them. What kinds of things should the analyst keep in mind when evaluating the financial statements of a given firm !ns" #his )uestion )uestion is totally open/ende open/ended d and allows students students to call into play knowledge knowledge gleaned gleaned from other courses this course and personal eperience. $evel" Challenge

Sub&ect" ,valuating Financial Statements

#ype" #ype" ,ssays

1A@. #he Gice Gice ?resident of Finance of !lpha Inc. wants to improve the current ratio on the companys net net financial statement. ,plain what heshe can legitimately do now to help accomplish this goal. ?rovide specific eamples in your answer. !ns" Some eamples eamples of actions actions that could could be taken to improve improve the current current ratio include" include" a. Selling long/term assets either for cash or on account. b. 6sing cash to reduce current liabilities. c. !c)uiring long/term financing for current assets. d. Selling inventory at a profit. e. Converting short/term debt to long/term debt. $evel" Intermediate


#ype" #ype" ,ssays

1AA. #he financial manager of !%C Inc. would like to somehow do a comparison of financial statements statements to determine how !%C Inc. is performing both historically and competitively. 5evelop and eplain a plan for performing these comparisons. !ns" #he simplest simplest way to do comparison comparison analysis analysis is to use use common/si+e common/si+e statement statements. s. For a historical historical comparison common si+e statements for several of the past months )uarters andor years can be compared to ascertain what trends are developing. For a competitive analysis the common/si+e statement for the firm can be compared to industry averages or other comparable firms. $evel" Intermediate Intermediate

Sub&ect" Common Si+e Statement !nalysis


#ype" #ype" ,ssays ,ssays

?age -8

Chapter 03

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