3310 – Ch 2 Homework questions – Flashcards
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Time-series analysis is the evaluation of the firm's financial performance in comparison to other firm(s) at teh same point in time.
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FALSE
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The liquidity of a business firm refers to the solvency of the firm's overall financial position.
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TRUE
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The magnification of risk and return introduced through the use of fixed-cost financing such as debt and preferred stock is called financial leverage.
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TRUE
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Earnings per share represent the dollar amount earned and distributed to shareholders.
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FALSE
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The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity.
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TRUE
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The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they come due.
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FALSE
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The DuPont formula allows the firm to break down its return into the net profit margin, which measures the firm's profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales.
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TRUE
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Since the differences in the composition of a firm's current assets and liabilities can significantly affect the firm's "true" liquidity, it is important to look beyond measures of overall liquidity to assess the activity (liquidity) of specific current accounts.
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TRUE
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In general, the more debt (other people's money) a firm uses in relation to its assets, the smaller its financial leverage.
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FALSE
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Return on total assets (ROA) measures teh overall effectiveness of management in generating profits with the owners' investment in the firm.
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FALSE
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The DuPont system merges the income statement and balance sheet into two summary measures of profitability:
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return on total assets and return on equity.
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The average age of inventory is viewed as the average length of time inventory is held by the firm or as teh average number of days' sales in inventory.
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TRUE
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The lower the fixed-payment coverage ratio, the lower is the firm's financial leverage.
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FALSE
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The firm's creditors are primarily interested in the short-term liquidity of the company and its ability to make interest and principal payments.
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TRUE
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The higher the debt ratio, the more financial leverage a firm has and, thus, the greater will be its risk and return.
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TRUE
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Common stock dividends paid to stockholders are equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding.
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FALSE
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Typically, higher coverage ratios are preferred, but too high a ratio may indicate under-utilization of fixed-payment obligations, which may result in unnecessarily low risk and return.
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TRUE
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Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.
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TRUE
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The average age of inventory can be calculated as 365 divided by inventory turnover.
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TRUE
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Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.
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TRUE
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The [BLANK] ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.
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times interest earned
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The [BLANK] measures the overall effectiveness of management in generating profits with its available assets.
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return on total assets
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A decrease in total asset turnover will result in [BLANK] in the return on equity.
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a decrease
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The [BLANK] is useful in evaluating credit and collection policies.
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average collection period.
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The [BLANK] measures the activity, or liquidity, of a firm's inventory.
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inventory turnover
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A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total liabilities of $750,000 has a return on equity of
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4%
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The two basic measures of liquidity are
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current ratio and quick ratio.
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Ratios provide a [BLANK] measure of a company's performance and condition.
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relative
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[BLANK] is a term used to describe the magnification of risk and return introduced through the use of fixed cost financing such as preferred stock and long-term debt.
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Financial leverage
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When assessing the fixed-payment coverage ratio,
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the lower its value the more risky is the firm.
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[BLANK] analysis involves comparison of current to past performance and the evaluation of developing trends.
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Time-series
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The primary concern of creditors when assessing the strength of a firm is the firm's
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short-term liquidity.
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A U.S. parent company's foreign retained earnings are adjusted to reflect gains and losses resulting from currency movements as well as each year's operating profits or losses.
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FALSE
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A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might
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decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios.
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As a firm's cash flows become more predictable,
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current assets should decrease.
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In ratio analysis, a comparison to a standard industry ratio is made to isolate [BLANK] deviations from the norm.
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any
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The analyst should be careful when conducting ratio analysis to ensure that
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the dates of the financial statements being compared are the same, audited statements are used, the same accounting procedures were used, the overall performance of the firm is not judged on a single ratio (all of the above)
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The two categories of ratios that should be utilized to assess a firm's true liquidity are the
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liquidity and activity ratios.
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One of the most influential documents issued by a publicly-held corporation is the
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annual report
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[BLANK] is where the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement.
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Benchmarking
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A firm with a total asset turnover lower than industry standard may have
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insufficient sale.
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The stockholder's annual report must include
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a statement of cash flows, an income statement, a balance sheet, and a statement of retained earnings
