Question 1

Profitability ratios allow one to measure the ability of the firm to earn an adequate profit compared to sales, total assets, and invested capital.

Accepted Answer

A) True 
 B)False

Question 2

Ratios are used to compare different firms in the same industry.

Accepted Answer

A) True 
 B)False

Question 3

The _______ method of inventory costing is least likely to lead to inflation-induced profits.

Accepted Answer

A)   FIFO
B)   LIFO
C)   Weighted average
D)   Lower of cost or marketE) A) and D)
F) B) and C)

Question 4

A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of $50,000. Calculate return on equity.

Accepted Answer

A)   40%
B)   20%
C)   25%
D)   There is not enough information to calculate return on equity.E) A) and D)
F) A) and B)

Question 5

Assuming proper accounting disclosure is used, a large extraordinary loss has what effect on the normal operating profits in the future?

Accepted Answer

A)   It raises it.
B)   It lowers it.
C)   It has no effect.
D)   More information is needed to determine the effect.E) C) and D)
F) None of the above

Question 6

The stock market tends to move up when inflation goes up.

Accepted Answer

A) True 
 B)False

Question 7

Investors are most concerned with the liquidity ratios of a company.

Accepted Answer

A) True 
 B)False

Question 8

As long as prices of products continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise.

Accepted Answer

A) True 
 B)False

Question 9

Industries with cyclical products such as lumber and copperare more sensitive to inflation-induced profits because many sales prices and/or expenses are set by the market.

Accepted Answer

A) True 
 B)False

Question 10

If Turnpoint Inc. has net income of $400,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000, what is its return on equity (ROE) ?

Accepted Answer

A)   13.3%
B)   8%
C)   66.7%
D)   2%E) All of the above
F) B) and C)

Question 11

A short-term creditor would be most interested in

Accepted Answer

A)   profitability ratios.
B)   asset utilization ratios.
C)   liquidity ratios.
D)   debt utilization ratios.E) B) and D)
F) B) and C)

Question 12

In addition to comparison with industry ratios, it is also helpful to analyze ratios using

Accepted Answer

A)   future projections
B)   historical data
C)   only industry ratios provide valid comparisons.
D)   trend analysis and historical comparisonsE) A) and D)
F) None of the above

Question 13

Which of the following is not considered to be a profitability ratio?

Accepted Answer

A)   Profit margin
B)   Times interest earned
C)   Return on equity
D)   Return on assets (investment) E) All of the above
F) A) and B)

Question 14

Return on equity will be higher than return on assets if there is higher amounts of debt in the capital structure.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is a potential problem of utilizing ratio analysis?

Accepted Answer

A)   Trends and industry averages are historical in nature.
B)   Financial data may be distorted due to price-level changes.
C)   Firms within an industry may not use similar accounting methods.
D)   All of the options.E) All of the above
F) A) and C)

Question 16

Industries most sensitive to inflation-induced profits are those with

Accepted Answer

A)   seasonal products.
B)   cyclical products.
C)   consumer products.
D)   high-profit products.E) None of the above
F) A) and B)

Question 17

If Randolph Co. has sales of $3,000,000, net income of $200,000, and total asset turnover of 1.5x, what is its return on assets (ROA) ?

Accepted Answer

A)   10%
B)   17%
C)   14%
D)   6%E) A) and C)
F) B) and C)

Question 18

Asset utilization ratios relate balance sheet assets to income statement net income.

Accepted Answer

A) True 
 B)False

Question 19

Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power.

Accepted Answer

A) True 
 B)False

Question 20

A decreasing average receivables collection period could be associated with

Accepted Answer

A)   increasing sales.
B)   decreasing sales.
C)   decreasing accounts receivable.
D)   increasing sales and decreasing accounts receivable.E) A) and B)
F) C) and D)

Exam 3: Financial Analysis

A short-term creditor would be most interested in

Correct AnswerverifiedShow Answer

The stock market tends to move up when inflation goes up.

Correct AnswerverifiedShow Answer

Industries most sensitive to inflation-induced profits are those with

Correct AnswerverifiedShow Answer

Asset utilization ratios relate balance sheet assets to income statement net income.

Correct AnswerverifiedShow Answer

Which of the following is not considered to be a profitability ratio?

Correct AnswerverifiedShow Answer

Industries with cyclical products such as lumber and copperare more sensitive to inflation-induced profits because many sales prices and/or expenses are set by the market.

Correct AnswerverifiedShow Answer

If Turnpoint Inc. has net income of $400,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000, what is its return on equity (ROE) ?

Correct AnswerverifiedShow Answer

The _______ method of inventory costing is least likely to lead to inflation-induced profits.

Correct AnswerverifiedShow Answer

Assuming proper accounting disclosure is used, a large extraordinary loss has what effect on the normal operating profits in the future?

Correct AnswerverifiedShow Answer

In addition to comparison with industry ratios, it is also helpful to analyze ratios using

Correct AnswerverifiedShow Answer

A decreasing average receivables collection period could be associated with

Correct AnswerverifiedShow Answer

Return on equity will be higher than return on assets if there is higher amounts of debt in the capital structure.

Correct AnswerverifiedShow Answer

Ratios are used to compare different firms in the same industry.

Correct AnswerverifiedShow Answer

A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of $50,000. Calculate return on equity.

Correct AnswerverifiedShow Answer

As long as prices of products continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise.

Correct AnswerverifiedShow Answer

Which of the following is a potential problem of utilizing ratio analysis?

Correct AnswerverifiedShow Answer

Investors are most concerned with the liquidity ratios of a company.

Correct AnswerverifiedShow Answer

Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power.

Correct AnswerverifiedShow Answer

If Randolph Co. has sales of $3,000,000, net income of $200,000, and total asset turnover of 1.5x, what is its return on assets (ROA) ?

Correct AnswerverifiedShow Answer

Profitability ratios allow one to measure the ability of the firm to earn an adequate profit compared to sales, total assets, and invested capital.

Correct AnswerverifiedShow Answer

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