Test Bank: Chapter 11: Financial Statement Analysis: Part 1: Theory & Definitions: Question 11.1.1: Fie areas that financial ratios concentrate on are: a) !" c" " e"
liquid liquidity ity,, prof profita itabi bilit lity y, debt, debt, effici efficien ency cy,, marke markett relate related; d; profi profita ta!i !ilility ty## str strat ate$ e$y y# li% li%ui uii ity ty## au auit itin in$# $# shar share e pric prices' es' li%ui li%uii ity ty## cur curre rent nt rat ratio io## %uic %uick k rati ratio# o# int intere erest st co coer er## i ii ien en coe coer' r' marke markett rela relate te# # shar share e pric prices es## ii iien en poli policy cy## e!t e!t pol polic icy y# strat strate$y e$y'' none of the a!oe.
Question 11.1.(: )atios that measure the a!ility of the company to pay its short*term e!ts are calle: a" !" c) " e"
e!t ratios' coer ratios' liquidity ratios; profita!ility ra ratios' none of the a!oe.
Question 11.1.+: Current assets iie !y current lia!ilities is the efinition of the: a" !" c" d) e"
interest coer ratio' iien coer ratio' %uick ratio' current ratio; none of the a!oe.
Question 11.1.,: The %uick ratio is efine as: a" !" c" d) e"
curr curren entt ass asset ets s i iie ie !y !y cur curre rent nt lia lia!i !ili litties' ies' cur curren rent as asset sets i iie !y tota otal e e!t' curren currentt asset assets s les less s in inent entory ory## ii iie e !y tota totall lia lia!i !ililiti ties es'' curre current nt asset assets s less less invent inventor ory y, divi divided ded by curr curren entt liab liabili ilitie ties; s; none of the a!oe.
Question 11.1.-: )eturn on sales# return on assets an return on e%uity are eamples of: a" b)
li%uiity ratios' profitability ratios;
c" " e"
e!t ratios' efficiency ratios' market*relate ratios.
Question 11.1./: )eturn on assets is efine as: a" !" c) " e"
operatin$ income iie !y o0ners e%uity' operatin$ income iie !y sales' operating income divided by total assets; operatin$ income iie !y lon$*term assets plus e!t' none of the a!oe.
Question 11.1.2: 3et income iie !y shareholers e%uity is the efinition of: a" !" c) " e"
return on sales' return on assets' return on equity; asset turnoer' none of the a!oe.
Question 11.1.4: The e!t to e%uity ratio measures' a" !" c) " e"
the likelihoo of the company $oin$ !ankrupt in the short term' the efficiency of the company' the relative proportions of debt and equity in the capital structure; li%uiity' none of the a!oe.
Question 11.1.5: The interest coer ratio measures: a" !" c" d) e"
the leera$e of the company' the efficiency of e!t' the 0ei$hte aera$e cost of capital' the relationship between interest and profit; none of the a!oe.
Question 11.1.16: Total asset turnoer# receia!les turnoer an inentory turnoer ratios measure: a" !" c)
li%uiity' profita!ility' efficiency;
" e"
e!t' market relate factors.
Question 11.1.11: The receia!les turnoer ratio is efine as: a) !" c" " e"
sales divided by receivables; receia!les iie !y sales' receia!les iie !y one ays sales' receia!les plus !a e!t allo0ances. none of the a!oe.
Question 11.1.1(: To measure the efficiency 0ith 0hich inentory is use the follo0in$ ratio shoul !e use: a" !" c" d) e"
inentory turnoer ratio' inentory holin$ perio' lo0er of cost or market aluation of inentory' a or b, but not c; a# ! or c.
Question 11.1.1+: 7arnin$s per share is affecte !y: a" !" c" d) e"
net income' num!er of shares' iiens' a & b, but not c; a# ! & c.
Question 11.1.1,: The price to earnin$s ratio measures: a" !" c) " e"
the rationality of the stock market' the li%uiity of the company' the public’s perception of the company; the ethics of the company' none of the a!oe.
Question 11.1.1-: The iien coer ratio is efine as: a" !" c"
iien iie !y net income' iien less interest pai an taes' operatin$ income iie !y iien'
d) e"
net income divided by dividend; none of the a!oe.
Part (: Applications: Question 11.(.1: 8inen Co has current assets that consist of cash: 9(6#666# receia!les: 926#666 an inentory: 956#666. Current lia!ilities are 92-#666. The current ratio is: a) b) c) d) e)
2.!"; ##$2%,%%%$'%,%%%$(%,%%%)$'*,%%%+2.) (.(:1' (.6:1' 1.4:1: none of the a!oe.
Question 11.(.(: 8inen Co has current assets that consist of cash: 9(6#666# receia!les: 926#666 an inentory: 956#666. Current lia!ilities are 92-#666. The %uick ratio is: a) b) c) d) e)
1.2:1: ".2!"! ##$2%,%%%$'%,%%%)$'*,%%%+".2!") 1.6:1' 6.4:1 none of the a!oe.
Question 11.(.+: 8inen Co has current assets that consist of cash: 9(6#666# receia!les: 926#666 an inentory: 956#666. Current lia!ilities are 92-#666. n the !asis of the current ratio an the %uick ratio# 8inen Co is: a) b) c) d) e)
hi$hly illi%ui' some0hat illi%ui' adequately liquid; ecessiely li%ui' none of the a!oe.
#-2!", /-"!")
Question 11.(.,: 8inen Co has sales of 9-66#666# operatin$ profit of 9-6#666# interest epense of 916#666# ta epense of 9(6#666# total e%uity of 91(-#666 an total e!t of 9(2-#666. Their return on sales is: a) b) c) d) e)
4.6;' "%.%0; 1(.-;' 1/.6;' (6.6;.
#$*%,%%%$*%%,%%%+"%0)
Question 11.(.-: 8inen Co has sales of 9-66#666# operatin$ profit of 9-6#666# interest epense of 916#666# ta epense of 9(6#666# total e%uity of 91(-#666 an total e!t of 9(2-#666. Their return on assets is: a) b) c) d) e)
4.6;' 16.6;' "2.*0; 1/.6;' (6.6;.
#$*%,%%%#$"2*,%%%$2'*,%%%)+"2.*0)
Question 11.(./: 8inen Co has sales of 9-66#666# operatin$ profit of 9-6#666# interest epense of 916#666# ta epense of 9(6#666# total e%uity of 91(-#666 an total e!t of 9(2-#666. Their return on e%uity is: a) b) c) d) e)
4.6;' 16.6;' 1(.-;' "1.%0; (6.6;.
##$*%,%%%$"%,%%%$2%,%%%)$"2*,%%%) + "10)
Question 11.(.2: 8inen Co has sales of 9-66#666# operatin$ profit of 9-6#666# interest epense of 916#666# ta epense of 9(6#666# total e%uity of 91(-#666 an total e!t of 9(2-#666. Their return on e%uity in comparison to their return on assets is: a" b) c" " e"
roa is hi$her than roe !ecause of leera$e' roa is lower than roe because of leverage; roa is the same as roe' they are !oth relate to the return on sales' none of the a!oe.
Question 11.(.4: 8inen Co has sales of 9-66#666# operatin$ profit of 9-6#666# interest epense of 916#666# ta epense of 9(6#666# total e%uity of 91(-#666 an total e!t of 9(2-#666. Their e!t to assets ratio is: a) b) c) d) e)
-6.66;' /-.66;' 13.'*0; #$2'*,%%%#$2'*,%%%$"2*,%%%)+13.'*0) ((6.66;' none of the a!oe.
Question 11.(.5:
8inen Co has sales of 9-66#666# operatin$ profit of 9-6#666# interest epense of 916#666# ta epense of 9(6#666# total e%uity of 91(-#666 an total e!t of 9(2-#666. n the !asis of the e!t to e%uity ratio# 8ine 0oul !e consiere to hae: a)
too much debt, making it a risky company to invest in; #$2'*,%%%$"2*,%%% + 22%0 #"%%0 is risky))
!" c" " e" f" Question 11.(.16: 8inen Co has sales of 9-66#666# operatin$ profit of 9-6#666# interest epense of 916#666# ta epense of 9(6#666# total e%uity of 91(-#666 an total e!t of 9(2-#666. The e!t carries interest = -; per annum. The interest coer ratio is: a) b) c) d) e)
->' 45; ##$*%,%%%$2%,%%%)$"%,%%%+45) (>' 1.->' none of the a!oe.
Question 11.(.11: 8inen Co has current assets of 9146#666 ?cash: 9(6#666# accounts receia!le: 926#666# inentory: 956#666"# an lon$*term assets that ha cost 9,66#666# 0ith accumulate epreciation to ate of 9146#666. Sales 0ere 9-66#666# an operatin$ profit 0as 9-6#666. Ta 0as 9(6#66 an interest pai 0as 916#666. Their receia!les turnoer ratio 0as: a) b) c) d) e)
16.(>' 5.,>' '."5; #$*%%,%%%$'%,%%%+'."5) -./>' none of the a!oe.
Question 11.(.1(: 8inen Co has current assets of 9146#666 ?cash: 9(6#666# accounts receia!le: 926#666# inentory: 956#666"# an lon$*term assets that ha cost 9,66#666# 0ith accumulate epreciation to ate of 9146#666. Sales 0ere 9-66#666# an operatin$ profit 0as 9-6#666. Ta 0as 9(6#66 an interest pai 0as 916#666. Their inentory holin$ perio ?to the nearest ay" 0as: a) b)
11 days; -1 ays'
#$(%,%%%641*$*%%,%%%+11 days)
c) d) e)
,/ ays' +( ays' none of the a!oe.
Question 11.(.1+: 8inen Co has current assets of 9146#666 ?cash: 9(6#666# accounts receia!le: 926#666# inentory: 956#666"# an lon$*term assets that ha cost 9,66#666# 0ith accumulate epreciation to ate of 9146#666. Sales 0ere 9-66#666# an operatin$ profit 0as 9-6#666. Ta 0as 9(6#66 an interest pai 0as 916#666. @f 8ine chan$e to a policy of
ecrease' stay the same' increase; #with 7ero inventory, to ratio is infinitely high) there is insufficient information' none of the a!oe.
Question 11.(.1,: 8inen Co has current assets of 9146#666 ?cash: 9(6#666# accounts receia!le: 926#666# inentory: 956#666"# an lon$*term assets that ha cost 9,66#666# 0ith accumulate epreciation to ate of 9146#666. Sales 0ere 9-66#666# an operatin$ profit 0as 9-6#666. Ta 0as 9(6#66 an interest pai 0as 916#666. Their total asset turnoer ratio is: a) b) c) d) e)
1.66>' ".2*5; ##$*%%,%%%#$"3%,%%%$%%,%%%$22%,%%%)+".2*5) 1.-66>' (.+>' none of the a!oe.
Question 11.(.1-: 8inen Co has current assets of 9146#666 ?cash: 9(6#666# accounts receia!le: 926#666# inentory: 956#666"# an lon$*term assets that ha cost 9,66#666# 0ith accumulate epreciation to ate of 9146#666. Sales 0ere 9-66#666# an operatin$ profit 0as 9-6#666. Ta 0as 9(6#66 an interest pai 0as 916#666. a iien of 916#666 0as pai to the common shareholers. There are 1#666 shares in issue. Their earnin$s per share are: a) b) c) d) e)
91: 9(' 916' $2%; #$2%,%%%",%%% shares + $2% per share) none of the a!oe.
Question 11.(.1/:
8inen Co has current assets of 9146#666 ?cash: 9(6#666# accounts receia!le: 926#666# inentory: 956#666"# an lon$*term assets that ha cost 9,66#666# 0ith accumulate epreciation to ate of 9146#666. Sales 0ere 9-66#666# an operatin$ profit 0as 9-6#666. Ta 0as 9(6#66 an interest pai 0as 916#666. a iien of 916#666 0as pai to the common shareholers. There are 1#666 shares in issue. Their iien coer ratio is: a) b) c) d) e)
->' +>' (.->' 25; ##$*%,%%%$2%,%%%$"%,%%%)$"%,%%%+25) none of the a!oe.
Question 11.(.12: 8inen Co has current assets of 9146#666 ?cash: 9(6#666# accounts receia!le: 926#666# inentory: 956#666"# an lon$*term assets that ha cost 9,66#666# 0ith accumulate epreciation to ate of 9146#666. Sales 0ere 9-66#666# an operatin$ profit 0as 9-6#666. Ta 0as 9(6#66 an interest pai 0as 916#666. a iien of 916#666 0as pai to the common shareholers. There are 1#666 shares in issue# an the share price is 9(,6 per share. The price to earnin$s ratio is: a) b) c) d) e)
(,>' "25; #$2%$2% 89: + "25) 16>' 4>' none of the a!oe.
