CHAPTER 3

Working with Financial Statements

1.
a.

Activities of the firm that generate cash are known as:

sources of cash.

2.
b.

Activities of the firm in which cash is spent are known as:

uses of cash.

3.

The financial statement that summarizes the sources and uses of cash over a specified period of
time is the:
Balance sheet.

b.
4.
e.
5.
c.
6.
a.

A _____ standardizes items on the income statement and balance sheet as a percentage of total
sales and total assets, respectively.
common-size statement
A _____ standardizes items on the income statement and balance sheet relative to their values as of
a common point in time
Common-base year statement
Relationships determined from a firms financial information and used for comparison purposes
are known as:
financial ratios.

c.

Financial ratios that measure a firms ability to pay its bills over the short run without undue stress
are known as _____ ratios.
short-term solvency

8.
b.

The current ratio is measured as:

current assets divided by current liabilities.

9.
d.

The quick ratio is measured as:

current assets minus inventory, divided by current liabilities.

7.

10. The cash ratio is measured as:

e. cash on hand divided by current liabilities.
11. The financial ratio measured as current assets divided by average daily operating costs is the:
d. interval measure.
12. Ratios that measure a firms financial leverage are known as _____ ratios.
b. long-term solvency
13. The financial ratio measured as total assets minus total equity, divided by total assets, is the:
a. Total debt ratio.
14. The debt-equity ratio is measured as total:
c. debt divided by total equity.
15. The equity multiplier ratio is measured as total:
e. assets divided by total equity.

CHAPTER 3
16. The total long-term debt and equity of the firm is frequently called:
b. Total capitalization.
17. The financial ratio measured as the firms long-term debt divided by its total capitalization is the:
d. long-term debt ratio.
18. The financial ratio measured as earnings before interest and taxes, divided by interest expense is
the:
c. times interest earned ratio.
19. The financial ratio measured as earnings before interest and taxes, plus depreciation, divided by
interest expense, is the:
a. cash coverage ratio.
20. Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____
ratios.
a. asset management
21. The inventory turnover ratio is measured as:
c. cost of goods sold divided by inventory.
22. The financial ratio days sales in inventory is measured as:
e. 365 days divided by the inventory turnover.
23. The receivables turnover ratio is measured as:
b. sales divided by accounts receivable.
24. The financial ratio days sales in receivables is measured as:
d. 365 days divided by the receivables turnover.
25. The net working capital turnover ratio is measured as:
a. sales divided by net working capital.
26. The fixed asset turnover ratio is measured as:
c. sales divided by net fixed assets.
27. The total asset turnover ratio is measured as:
b. sales divided by total assets.
28. Ratios that measure how efficiently a firms management uses its assets and equity to generate
bottom line net income are known as _____ ratios.
d. profitability
29. The financial ratio measured as net income divided by sales is known as the firms:
a. Profit margin.
30. The financial ratio measured as net income divided by total assets is known as the firms:
b. Return on assets.
31. The financial ratio measured as net income divided by total equity is known as the firms:
c. return on equity.

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32. The financial ratio measured as the price per share of stock divided by earnings per share is known
as the:
d. Price-earnings ratio.
33. The market-to-book ratio is measured as:
e. market value of equity per share divided by book value of equity per share.
34. The _____ breaks down return on equity into three component parts.
a. Du Pont identity
35. The U.S. government coding system that classifies firms by their specific type of business
operations is known as the:
c. Standard Industrial Classification system.
36. An increase in which one of the following is a source of cash?
a. accounts payable
37.
I.
II.
III.
IV.
a.

Which of the following is (are) sources of cash?

an increase in accounts receivable
a decrease in common stock
an increase in long-term debt
a decrease in accounts payable
III only

38. Which one of the following is a use of cash?

b. payment to a supplier
39.
I.
II.
III.
IV.
d.

Which of the following is (are) uses of cash?

payment of a note payable
repurchase of common stock
granting of credit to a customer
sale of a fixed asset
I, II, and III only

40. Which one of the following is found in the financing activity section of a statement of cash flows?
b. dividends paid
41. According to the statement of cash flows, an increase in accounts receivable will _____ the cash
flow from _____ activities.
a. decrease; operating
42.
I.
II.
III.
IV.
d.

Which of the following are types of activities shown on a statement of cash flows?
investment
liquidating
operating
financing
I, III, and IV only

43. On a common-size balance sheet, all _____accounts are shown as a percentage of:
b. liability; net income.
44. On a common-base year financial statement, all accounts are expressed relative to the base:
a. Year amount.

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45. Which one of the following statements is correct concerning ratio analysis?
a. A single ratio is often computed differently by different individuals.
46.
I.
II.
III.
IV.
d.

Which of the following are liquidity ratios?

interval measure
current ratio
quick ratio
net working capital to total assets
I, II, III, and IV

47. An increase in which one of the following accounts increases a firms current ratio without
affecting its quick ratio?
c. Inventory
48. A supplier, who requires payment within ten days, is most concerned with which
one of the following ratios when granting credit?
b. cash
49. A firm has an interval measure of 83. This means that the firm must:
b. get additional financing within the next 83 days or possibly face closing the firm.
50. A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for every:
d. $.53 in equity.
51. The long-term debt ratio is probably of most interest to a firms:
b. mortgage holder.
52. A banker considering loaning a firm money for ten years would most likely prefer the firm have
a debt ratio of _____ and a times interest earned ratio of_____:
b. .35; 3.00.
53. From a cash flow position, which one of the following ratios best measures a firms
ability to pay the interest on its debts?
b. cash coverage ratio
54. The higher the inventory turnover measure, the:
a. faster a firm sells its inventory.
55. Which one of the following statements is correct if a firm has a receivables turnover measure of
10?
b. The firm has an average collection period of 36.5 days.
56. A total asset turnover measure of 1.03 means that a firm has $1.03 in:
b. sales for every $1 in total assets.
57. If a firm wishes to increase its net working capital turnover rate, it should _____, all else constant.
b. increase its sales
58. Bobs Toys has a fixed asset turnover rate of 1.2 and a total asset turnover rate
of .84. Geralds Toys has a fixed asset turnover rate of 1.1 and a total asset
turnover rate of .96. Both companies have similar operations. Bobs Toys:
a. is using its fixed assets more efficiently than Geralds Toys.

CHAPTER 3
59. Puffys Pastries generates five cents of net income for every $1 in sales. Thus,
Puffys has a _____ of 5 percent.
b. profit margin
60. If a firm produces a 10 percent return on assets and also a 10 percent return on
equity, then the firm:
a. has no debt of any kind.
61. If shareholders want to know how much profit a firm is making on their entire
investment in the firm, the shareholders should look at the:
b. return on equity.
62. BGL Enterprises increases its operating efficiency such that costs decrease while sales remain
constant. As a result, given all else constant, the:
a. return on equity will increase.
63. The only difference between Joes and Moes is that Joes has old, fully depreciated equipment.
Moes just purchased all new equipment which will be depreciated over eight years. Assuming all
else equal:
d. Moes will have a lower profit margin.
64. Last year, Alfreds Automotive had a price-earnings ratio of 15. This year, the price
earnings ratio is 18. Based on this information, it can be stated with certainty that:
e. either the price per share, the earnings per share, or both changed.
65. Turners Inc. has a price-earnings ratio of 16. Alfreds Co. has a price-earnings ratio of 19. Thus,
you can state with certainty that one share of stock in Alfreds:
b. has a higher market price per dollar of earnings than does one share of Turners.
66.
I.
II.
III.
IV.
b.

Which two of the following are most apt to cause a firm to have a higher price-earnings ratio?
slow industry outlook
high prospect of firm growth
very low current earnings
investors with a low opinion of the firm
II and III only

67. Vinnies Motors has a market-to-book ratio of 3. The book value per share is $4.00.
This means that a $1 increase in the book value per share will:
d. tend to cause the market price per share to rise.
68. Which one of the following sets of ratios applies most directly to shareholders?
b. market-to-book ratio and price-earnings ratio

69.
I.
II.
III.
IV.
b.

The three parts of the Du Pont identity can be generally described as:
operating efficiency, asset use efficiency and firm profitability.
financial leverage, operating efficiency and asset use efficiency.
the equity multiplier, the profit margin and the total asset turnover.
the debt-equity ratio, the capital intensity ratio and the profit margin.
II and III only

CHAPTER 3

70. If a firm decreases their operating costs, all else constant, then:
e. both the return on assets and the return on equity increase.
71. Which one of the following statements is correct?
b. Financial statements are frequently the basis used for performance evaluations.
72. It is easier to evaluate a firm using their financial statements when the firm:
c. uses the same accounting procedures as other firms in their industry.
73. Which two of the following represent the most effective methods of
directly evaluating the financial performance of a firm?
I.
comparing the current financial ratios to those of the same firm from prior time
periods
II. comparing a firms financial ratios to those of other firms in the firms peer
group who have similar operations
III. comparing the financial statements of the firm to the financial statements of similar firms operating
in other countries
IV. comparing the financial ratios of the firm to the average ratios of all firms located in the same
geographic area
a. I and II only
74. Which of the following represent problems encountered when comparing the financial
statements of one firm with those of another firm?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods for inventory purposes.
IV. The two firms may be seasonal in nature and have different fiscal year ends.
e. I, II, III, and IV
75. Last year Tys Grocery had inventory of $237,500 and fixed assets of $51,400. This
year, Tys has inventory of $231,900 and fixed assets of $48,700. Depreciation for this
year is $6,300. Which one of the following statements is true given this information?
d. Inventory is a source of cash in the amount of $5,600 and fixed assets is a use of cash
in the amount of $3,600.
76. During the year, Dougs Bakery decreased their accounts receivable by $50, increased
their inventory by $100, and decreased their accounts payable by $50. For these three
accounts, the firm has a net:
b. $100 use of cash.
77. A firm generates net income of $530. The depreciation expense is $60 and dividends
paid are $80. Accounts payable decrease by $40, accounts receivable decrease by $30,
inventory increases by $20, and net fixed assets decrease by $40. What is the net cash
from operating activity?
c. $560
78. A firm has sales of $1,200, net income of $200, net fixed assets of $500, and current
assets of $300. The firm has $100 in inventory. What is the common-size statement
value of inventory?
b. 12.5 percent

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79. A firm has sales of $1,500, net income of $100, total assets of $1,000, and total equity
of $700. Interest expense is $50. What is the common-size statement value of the
interest expense?
a. 3.3 percent
80. Last year, which is used as the base year, a firm had cash of $60, accounts receivable
of $100, inventory of $200, and fixed assets of $500. This year the firm has cash of
$50, accounts receivable of $150, inventory of $250, and fixed assets of $550. What is
the common-base year value of accounts receivable?
e. 1.50
81. Jessicas Boutique has cash of $50, accounts receivable of $60, accounts payable of
$200, and inventory of $150. What is the value of the quick ratio?
b. .55
82. Sing Lees has accounts payable of $300, inventory of $250, cash of $50, fixed assets
of $500, accounts receivable of $200, and long-term debt of $400. What is the value of
the net working capital to total assets ratio?
a. .20
83. A firm has total assets of $2,640 and net fixed assets of $1,500. The average daily
operating costs are $170. What is the value of the interval measure?
a. 6.71
84. A firm has a debt-equity ratio of .40. What is the total debt ratio?
a. .29
85. A firm has total debt of $1,200 and a debt-equity ratio of .30. What is the value of the
total assets?
d. $4,000
86. A firm has sales of $3,600, costs of $2,800, interest paid of $100, and depreciation of
$400. The tax rate is 34 percent. What is the value of the cash coverage ratio?
d. 8
87. Rositas Resources paid $250 in interest and $130 in dividends last year. The times
interest earned ratio is 3.8 and the depreciation expense is $60. What is the value of the
cash coverage ratio?
d. 4.04
88. Marios Home Systems has sales of $2,800, costs of goods sold of $2,100, inventory of
$500, and accounts receivable of $400. How many days, on average, does it take
Marios to sell their inventory?
c. 86.9 days
89. Syeds Industries has accounts receivable of $700, inventory of $1,200, sales of
$4,200, and cost of goods sold of $3,400. How long does it take Syeds to both sell
their inventory and then collect the payment on the sale?
d. 190 days
90. A firm has net working capital of $400, net fixed assets of $2,400, sales of $6,000, and
current liabilities of $800. How many dollars worth of sales are generated from every
$1 in total assets?
b. $1.67

CHAPTER 3

91. Fredas, Inc. has sales of $3,200, current liabilities of $900, total assets of $3,000, and
net working capital of $500. How many dollars worth of sales are generated from
every $1 in net fixed assets?
d. $2.00
92. Rositas Restaurante has sales of $4,500, total debt of $1,300, total equity of $2,400,
and a profit margin of 5 percent. What is the return on assets?
a. 5.00 percent
b. 6.08 percent
c. 7.39 percent
d. 9.38 percent
e. 17.31 percent
93. Lee Suns has sales of $3,000, total assets of $2,500, and a profit margin of 5 percent.
The firm has a total debt ratio of 40 percent. What is the return on equity?
c. 10 percent
94. Jupiter Explorers has $6,400 in sales. The profit margin is 4 percent. There are 6,400
shares of stock outstanding. The market price per share is $1.20. What is the priceearnings ratio?
d. 30
95. Pattis has net income of $1,800, a price-earnings ratio of 12, and earnings per share of
$1.20. How many shares of stock are outstanding?
c. 1,500
96. A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a
price-earnings ratio of 10, and a book value per share of $.50. What is the market-tobook ratio?
d. 3.2
97. Fredericos has a profit margin of 6 percent, a return on assets of 8 percent, and an
equity multiplier of 1.4. What is the return on equity?
c. 11.2 percent
98. Samuelsons has a debt-equity ratio of 40 percent, sales of $8,000, net income of $600,
and total debt of $2,400. What is the return on equity?
d. 10.00 percent
99. A firm has a return on equity of 15 percent. The debt-equity ratio is 50 percent. The
total asset turnover is 1.25 and the profit margin is 8 percent. The total equity is
$3,200. What is the amount of the net income?
a. $480

The following balance sheet and income statement should be used for questions #100 through
#110:
Windswept, Inc.
2009 Income Statement
($ in millions)
Net sales
Less: Cost of goods sold

$8,450
7,240

CHAPTER 3
Less: Depreciation
Earnings before interest and taxes
Less: Interest paid
Taxable Income
Less: Taxes
Net income

400
810
70
$ 740
259
$ 481

Windswept, Inc.
2008 and 2009 Balance Sheets
($ in millions)

Cash
Accounts rec.
Inventory
Total
Net fixed assets
Total assets

2008 2009
$ 120 $ 140
930
780
1,480 1,520
$2,530 $2,440
3,150 3,600
$5,680 $6,040

Accounts payable
Long-term debt
Common stock
Retained earnings

2008 2009
$1,110 $1,120
840 1,210
3,200 3,000
530
710

Total liabilities & equity

$5,680 $6,040

100. What is the quick ratio for 2009?

a. .82
101.
a.
b.
c.
d.
e.

What is the days sales in receivables? (use 2009 values)

31.8 days
33.7 days
38.4 days
41.9 days
47.4 days

102.
a.
b.
c.
d.
e.

What is the fixed asset turnover? (use 2009 values)

1.4
1.7
2.1
2.3
2.6

103.
a.
b.
c.
d.
e.

What is the equity multiplier for 2009?

1.6
1.8
2.0
2.3
2.5

104.
a.
b.
c.
d.
e.

What is the cash coverage ratio for 2009?

11.6
12.8
13.7
17.3
18.8

105. What is the return on equity for 2009?

a. 5.7 percent
b. 6.8 percent

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c.
d.
e.

13.0 percent
15.3 percent
16.0 percent

106. Windswept, Inc. has 90 million shares of stock outstanding. Their price-earnings ratio for 2009 is
12. What is the market price per share of stock?
a. $57.12
b. $59.94
c. $62.82
d. $64.13
e. $65.03
107. What amount should be included in the financing section of the 2009 statement of cash flows for
dividends paid?
a. $180 million
b. $301 million
c. $481 million
d. $530 million
e. $710 million
108.
a.
b.
c.
d.
e.

What is the amount of the net cash from investment activity for 2009?
-$50 million
$250 million
$450 million
$700 million
$850 million

109.
a.
b.
c.
d.
e.

What is the net change in cash during 2009?

-$40 million
-$20 million
$0
$20 million
$40 million

110.
a.
b.
c.
d.
e.

How will accounts payable appear on the 2009 statement of cash flows?
increase of $10 million in cash from an operating activity
decrease of $10 million in cash from an operating activity
increase of $10 million in cash from an investment activity
decrease of $10 million in cash from a financing activity
increase of $10 million in cash from a financing activity

The following balance sheet and income statement should be used for questions #111 through
#121:
Bayside Inc.
2009 Income Statement
($ in thousands)
Net sales
Less: Cost of goods sold
Less: Depreciation
Earnings before interest and taxes
Less: Interest paid
Taxable Income

$5,680
4,060
420
1,200
30
$1,170

CHAPTER 3
Less: Taxes
Net income

410
$ 760
Bayside, Inc.
2008 and 2009 Balance Sheets
($ in thousands)

Cash
Accounts rec.
Inventory
Total
Net fixed assets
Total assets

2008 2009
70 $ 180
980
840
1,560 1,990
$2,610 $3,010
3,600 3,360
$6,210 $6,370
$

Accounts payable
Long-term debt
Common stock
Retained earnings

2008 2009
$1,350 $1,170
720
500
3,200 3,500
940 1,200

Total liabilities & equity

$6,210 $6,370

111.
a.
b.
c.
d.
e.

What is the net working capital to total assets ratio for 2009?
18.4 percent
21.9 percent
28.9 percent
31.0 percent
47.3 percent

112.
a.
b.
c.
d.
e.

How many days on average does it take Bayside to sell their inventory? (Use 2009 values)
126.1 days
127.9 days
153.8 days
176.5 days
178.9 days

113.
a.
b.
c.
d.
e.

How many dollars of sales are being generated from every dollar of fixed assets? (use 2009 values)
$.59
$.89
$1.02
$1.69
$1.76

114.
a.
b.
c.
d.
e.

What is the debt-equity ratio for 2009?

22.5 percent
26.2 percent
35.5 percent
45.1 percent
47.7 percent

115.
a.
b.
c.
d.
e.

What is the times interest earned ratio for 2009?

30
36
40
50
54

116.
a.
b.
c.

What is the equity multiplier for 2009?

1.21
1.36
1.44

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d.
e.

1.82
1.91

117.
a.
b.
c.
d.
e.

What is the return on equity for 2009?

16.2 percent
20.9 percent
21.7 percent
22.1 percent
23.3 percent

118.
a.
b.
c.
d.
e.

What is the net cash flow from investment activity for 2009?
-$320 thousand
-$240 thousand
$180 thousand
$240 thousand
$660 thousand

119.
a.
b.
c.
d.
e.

How does inventory affect the statement of cash flows for 2009?
a use of $430 thousand of cash as an investment activity
a source of $430 thousand of cash as an operating activity
a use of $400 thousand of cash as a financing activity
a source of $400 thousand of cash as an investment activity
a use of $430 thousand of cash as an operating activity

120.
a.
b.
c.
d.
e.

How does the long-term debt affect the statement of cash flows for 2009?
a source of $500 thousand of cash as a financing activity
a use of $500 thousand of cash as an operating activity
a use of $220 thousand of cash as a financing activity
a source of $220 thousand of cash as financing activity
a source of $220 thousand of cash as an operating activity

121.
a.
b.
c.
d.
e.

What is the net change in cash for 2009?

-$180 thousand
-$110 thousand
$70 thousand
$110 thousand
$180 thousand