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1. The creditor's perspective in financial statement analysis has its focus on the price of a firm's stock.
A. True
B. False

2. Investors are likely to be most interested in a firm's

A. current ratio
B. price-to-earnings ratio

C. times-interest-earned ratio
D. total asset turnover ratio

3. A commercial bank wants to determine if an applicant for a loan is likely to be able to pay its bills as they come due. Which
type of ratio is most appropriate?
A. efficiency ratio
B. leverage ratio

C. liquidity ratio

D. profitability ratio

4. A common-size balance sheet shows the size of asset, liability, and shareholders' equity accounts relative to total assets.
A. True
B. False

5. A common-size balance sheet presents the amounts in asset, liability, and owners' equity accounts as
A. percentages of total assets
B. percentages of total debt

C. percentages of total equity

D. percentages of total sales

6. Efficiency ratios are used to assess a firm's ability to service its debt.
A. True
B. False

7. The quick ratio may be a better indicator of liquidity than the current ratio because ________ may be relatively difficult to
convert to cash in a short period of time.
A. accounts payable
B. inventory

C. marketable securities
D. plant & equipment

8. A debt ratio of 0.9 means

A. the firm has $0.90 of short-term debt per $1.00 of assets

B. the firm has $0.90 of short-term debt per $1.00 of long-term debt
C. the firm has $0.90 of total debt per $1.00 of assets

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D. the firm has $0.90 of total debt per $1.00 of equity

9. The DuPont equation determines profitability based on a firm's sales, costs, and financing mix.
A. True
B. False

10. In the DuPont method of financial analysis, a decrease in total asset turnover causes ROE to
A. decrease
B. increase

C. not change

D. be indeterminate

11. Bobcat Industries has a net profit margin of 3%, a total asset turnover of 2 times; and a debt ratio of 40%. What is the firm's
ROE?
A. 15%
B. 25%

C. 10%
D. 20%

12. An appropriate benchmark in ratio analysis is

A. the average market share for the industry
B. the average stock price for industry

C. the average profit for a peer group of firms

D. the average collection period for a peer group of firms

13. A common-size income statement is least useful for

A. comparing past and present performance
B. comparing actual and potential performance
C. comparing firms in different industries
D. comparing firms of different sizes

14. Benchmarking is a technique for making meaningful comparisons of financial performance among different companies.
A. True
B. False

15. One reason ratio analysis has limitations is

A. ratios are difficult to calculate
B. ratios do not show dollar amounts
C. ratios depend on historical data

D. ratios may be too high or too low

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16. Financial statements can be viewed from all of the following perspectives except
A. employees' perspective.
B. creditors' perspective.

C. managers' perspective.
D. owners' perspective.

17. Which of the following issues are stockholders primarily concerned about?
A. The value of their stock.

B. How much cash they can receive via dividends and/or capital appreciation.
C. How profitable the firm is.
D. All of these.

18. Broadly speaking, managements' perspective of financial statement analysis is similar to that of the
A. long-term creditors.
B. tax authorities.
C. stock holders.

D. short-term creditors.

19. Which of the following is not a primary concern of a firm's creditors?

A. Whether and when they will receive their entitled interest payment?

B. Whether and when they will be repaid the money that they have loaned the firm?
C. Whether the firm is generating enough cash to pay its day-to-day bills.
D. Whether the firm is generating enough cash to pay dividends?

20. Which of the following is a guideline that can help when analyzing a firm's financial statements?
A. Understand which perspective one is adopting for the analysis i.e. stockholders', managers', or creditors'.
B. Always use audited financial statements if available

C. Use financial statements that cover three to five years to conduct the analysis.
D. All of these

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grade the test.

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100% (20 out of 20 correct)

1. The creditor's perspective in financial statement analysis has its focus on the price of a firm's stock.
A. True

B. False

2. Investors are likely to be most interested in a firm's

A. current ratio

B. price-to-earnings ratio

C. times-interest-earned ratio
D. total asset turnover ratio

3. A commercial bank wants to determine if an applicant for a loan is likely to be able to pay its bills as they come due.
Which type of ratio is most appropriate?
A. efficiency ratio
B. leverage ratio

C. liquidity ratio

D. profitability ratio

4. A common-size balance sheet shows the size of asset, liability, and shareholders' equity accounts relative to total assets.
A. True

B. False

5. A common-size balance sheet presents the amounts in asset, liability, and owners' equity accounts as
A. percentages of total assets
B. percentages of total debt

C. percentages of total equity

D. percentages of total sales

6. Efficiency ratios are used to assess a firm's ability to service its debt.
A. True

B. False

7. The quick ratio may be a better indicator of liquidity than the current ratio because ________ may be relatively difficult
to convert to cash in a short period of time.
A. accounts payable

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B. inventory

C. marketable securities
D. plant & equipment

8. A debt ratio of 0.9 means

A. the firm has $0.90 of short-term debt per $1.00 of assets

B. the firm has $0.90 of short-term debt per $1.00 of long-term debt
C. the firm has $0.90 of total debt per $1.00 of assets

D. the firm has $0.90 of total debt per $1.00 of equity

9. The DuPont equation determines profitability based on a firm's sales, costs, and financing mix.
A. True

B. False

10. In the DuPont method of financial analysis, a decrease in total asset turnover causes ROE to
A. decrease
B. increase

C. not change

D. be indeterminate

11. Bobcat Industries has a net profit margin of 3%, a total asset turnover of 2 times; and a debt ratio of 40%. What is the
firm's ROE?
A. 15%
B. 25%

C. 10%
D. 20%

12. An appropriate benchmark in ratio analysis is

A. the average market share for the industry
B. the average stock price for industry

C. the average profit for a peer group of firms

D. the average collection period for a peer group of firms

13. A common-size income statement is least useful for

A. comparing past and present performance

B. comparing actual and potential performance

C. comparing firms in different industries

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D. comparing firms of different sizes

14. Benchmarking is a technique for making meaningful comparisons of financial performance among different
companies.
A. True

B. False

15. One reason ratio analysis has limitations is

A. ratios are difficult to calculate

B. ratios do not show dollar amounts

C. ratios depend on historical data

D. ratios may be too high or too low

16. Financial statements can be viewed from all of the following perspectives except
A. employees' perspective.
B. creditors' perspective.

C. managers' perspective.
D. owners' perspective.

17. Which of the following issues are stockholders primarily concerned about?
A. The value of their stock.

B. How much cash they can receive via dividends and/or capital appreciation.
C. How profitable the firm is.
D. All of these.

18. Broadly speaking, managements' perspective of financial statement analysis is similar to that of the
A. long-term creditors.
B. tax authorities.
C. stock holders.

D. short-term creditors.

19. Which of the following is not a primary concern of a firm's creditors?

A. Whether and when they will receive their entitled interest payment?

B. Whether and when they will be repaid the money that they have loaned the firm?
C. Whether the firm is generating enough cash to pay its day-to-day bills.
D. Whether the firm is generating enough cash to pay dividends?

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20. Which of the following is a guideline that can help when analyzing a firm's financial statements?
A. Understand which perspective one is adopting for the analysis i.e. stockholders', managers', or creditors'.
B. Always use audited financial statements if available

C. Use financial statements that cover three to five years to conduct the analysis.
D. All of these

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