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Exam 2: Analysis of Financial Statements

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Question 1

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Which of the following statements is most correct?

A) An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales.
B) An increase in DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio.
C) An increase on the DSO, other things held constant, would generally lead to an increase in the ROE.
D) In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets.
E) It is more important to adjust the Debt/Asset ratio than the inventory turnover ratio to account for seasonal fluctuations.

F) A) and E)
G) C) and E)

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Question 2

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The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements.This time sensitivity is especially true with respect to the firm's balance sheet.

A) True
B) False

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Question 3

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Which of the following statements is correct?

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements.Trend analysis is one method of measuring a firm's performance over time.

We can use the fixed asset turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.

Which of the following ratios measures how effectively a firm is managing its assets?

Assume Meyer Corporation is 100 percent equity financed.Calculate the return on equity, given the following information: (1) Earnings before taxes = $1,500; (2) Sales = $5,000; (3) Dividend payout ratio = 60%; (4) Total assets turnover = 2.0; (5) Applicable tax rate = 30%.

Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan.Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent.If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result.What is Alumbat's current TIE ratio?

A statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting is the statement of cash flows.

Harvey Supplies Inc.has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of 6.Harvey's total assets are $1 million and its debt ratio is 0.20.The firm has no long-term debt.What is Harvey's sales figure if the total cost of goods sold is 75% of sales?

On its December 31st balance sheet, LCG Company reported gross fixed assets of $6,500,000 and net fixed assets of $5,000,000.Depreciation for the year was $500,000.Net fixed assets a year earlier on December 31st, had been $4,700,000.What figure for "Cash Flows Associated with Long-Term Investments (Fixed Assets) " should LCG Report on its Statement of Cash Flows for the current year?

In accounting, emphasis is placed on determining net income.In finance, the primary emphasis also is on net income because that is what investors use to value the firm.However, a secondary consideration is cash flow because that's what is used to run the business.

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year) ?

Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5.Both firms want to "window dress" their coming end-of-year financial statements.As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account.Which of the statements below best describes the actual results of these transactions?

An analysis of a firm's financial ratios over time that is used to determine the improvement or deterioration in its financial situation is called

Which of the following statements is correct?

Bubbles Soap Corporation has a quick ratio of 1.0 and a current ratio of 2.0 implying that

When constructing a Statement of Cash Flows, which of the following actions would be considered a source of funds?

When a firm conducts a seasoned equity offering, it increases an equity account which is an example of a source of funds.