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Fundamentals of Financial Summary of Results

Site Title:
Management, twelfth edition
Fundamentals of Financial 43% Correct of 21 Scored items:
Book Title:
Management, twelfth edition 9 Correct:
43%
Van Horne/Wachowicz
Book 12 Incorrect:
57%
Author:

Student Resources > Chapter 6 More information about scoring

Location on
> Multiple choice questions
Site:

Date/Time July 27, 2010 at 1:41 AM (EDT)

Submitted:

Determine a firm's total asset turnover (TAT) if its net profit margin is
1. 5 percent, assets are $8 million, and ROI is 8 percent.

Your 1.60
Answer:

Felton Farm Supplies, Inc., has an 8 percent return on total assets of

2. $300,000 and a net profit margin of 5 percent. What are its sales?

Your Answer: $300,000

Correct $480,000
Answer:

Since ROI=8% on $300,000 of assets, then net profit is $24,000 (8%

× $300,000). Using the net profit and given that the NPM=5%, sales
 equals $480,000 ($24,000 / 5%).

Which of the following would not improve the current ratio?

3.
Your Borrow short term to finance additional fixed assets.
Answer:

The gross profit margin is unchanged, but the net profit margin
4. declined over the same period. This could have happened if
__________.

Your Answer: cost of goods sold increased relative to sales

Correct the U.S. Congress increased the tax rate

Answer:

This transaction would decrease the gross profit margin as gross profit
is sales less cost of goods sold.

A company can improve (lower) its debt-to-total asset ratio by doing

5. which of the following?

Your Answer: Shift long-term to short-term debt.

Correct Sell common stock.

Answer:

The firm is simply shifting one type of debt for another. Since the ratio
includes total debt this activity will make no impact on the ratio.

Which of the following statements (in general) is correct?

6.
The higher the tax rate for a firm, the lower the
Your Answer:
interest coverage ratio.
The lower the total debt-to-equity ratio, the lower
Correct
Answer: the financial risk for a firm.
 The interest coverage ratio equals EBIT / Interest expense. EBIT will
not be influenced by a change in the tax rate and interest expense is a
function of the amount and rate of debt already on the books. Thus, no
impact on the interest coverage ratio.

Sales for 1991 (base year) were $800,000 and the year-end total
7. asset turnover ratio was 1.6. With which of the following statements
would you agree?

Index analysis supplements the common-size

Your Answer:
analysis by comparing key industry ratios.
The total assets index analysis value, assuming
Correct
$1.05 million of assets at the end of 2000, would
Answer:
be 210.

Index analysis compares the relative size of each balance sheet or

income statement to a base year (indexed at 100). Therefore it does
not compare key ratios.

Krisle and Kringle's debt-to-total assets ratio is.4. What is its debt-to-
8. equity ratio?

Your .667
Answer:

Which of the following statements is the least likely to be correct?

9.
It is important to make external comparisons or
Your Answer:
financial ratios.
There exists little or no negotiation with suppliers of
Correct
Answer: capital regarding the financing needs of the firm.

This is indeed a useful technique to determine how your firm or

division is performing against other publicly traded firms for example.

Which of the following statements is most accurate?

10
. Receivable- and inventory-based activity ratios also
Your
 Answer: shed light on the "liquidity" of these current assets.

The authors place financial ratios into __________.

11
. two broad categories: (1) balance sheet and
Your Answer:
income statement/balance sheet ratios; and (2)
income statement ratios
two broad categories: (1) balance sheet ratios; (2)
Correct
income statement and income statement/balance
Answer:
sheet ratios

Benchmarking can be applied to ratio analysis. How is this different

12 from comparing a firm's ratios to industry averages over time?
.
It creates a benchmark that compares your firm to the
Your
best world-class competitors rather than an entire
Answer:
industry.

Which of the following statements is most correct regarding the

13 current ratio for a firm that uses industry averages and a peer
. benchmark as their comparison?

Firms should strive to maintain a current ratio that

Your
seems reasonable when compared to an industry
Answer:
average and a peer benchmark.

The DuPont Approach breaks down the earning power on shareholders'

14 book value (ROE) as follows: ROE = __________.
.
Total asset turnover × Gross profit margin × Equity
Your Answer:
multiplier
Net profit margin × Total asset turnover × Equity
Correct
Answer: multiplier

An analyst should never use "rules-of-thumb" due to the dramatic

differences between firms and industries.
 In conducting a common-size analysis every balance sheet item is
15 divided by __________ and every income statement is divided by
. __________.

Your total assets; net sales or revenues

Answer:

In conducting an index analysis every balance sheet item is divided by

16 __________ and every income statement is divided by __________.
.
Your Answer: total assets; net sales or revenues

its corresponding base year balance sheet item; its

Correct
Answer: corresponding base year income statement item

We would actually divide by its corresponding base year balance sheet

item and its corresponding base year income statement item
respectively.

Which group of ratios measure a firm's ability to meet short-term

17 obligations?
.
Your Answer: Coverage ratios.

Correct Liquidity ratios.

Answer:

Coverage ratios relate the financial charges of a firm to its ability to

service, or cover, them.

Which group of ratios relate the financial charges of a firm to its ability
18 to service them?
.
Your Answer: Profitability ratios.

Correct Coverage ratios.

Answer:

Profitability ratios relate profits to sales and investment.

 Which group of ratios measure how effectively the firm is using its
19 assets?
.
Your Activity ratios.
Answer:

Which group of ratios relate profits to sales and investment?

20
.
Your Answer: Coverage ratios.

Correct Profitability ratios.

Answer:

Coverage ratios relate the financial charges of a firm to its ability to

service, or cover, them.

Which group of ratios shows the extent to which the firm is financed
21 with debt?
.
Your Debt ratios.
Answer: