Q&A Hero

Q: Coverage ratios, like times interest earned and cash coverage ratio, allow: A) a firm's management to assess how well they meet short-term liabilities. B) a firm's shareholders to assess how well the firm will meet its short-term liabilities. C) a firm's creditors to assess how well the firm will meet its interest obligations. D) a firm's creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

Q: Which one of the following statements is NOT correct? A) A leveraged firm is riskier than a firm that is not leveraged. B) A leveraged firm is less risky than a firm that is not leveraged. C) A firm that uses debt magnifies the return to its shareholders. D) A firm that does not use debt incurs opportunity cost of increasing value of shares.

Q: If firm A has a higher debt-to-equity ratio than firm B, then: A) firm A has a lower equity multiplier than firm B. B) firm B has a lower equity multiplier than firm A. C) firm B has higher financial leverage than firm A. D) None of the above.

Q: Which of the following statements is correct? A) The lower the level of a firm's debt, the higher the firm's leverage. B) The lower the level of a firm's debt, the lower the firm's equity multiplier. C) The lower the level of a firm's debt, the higher the firm's equity multiplier. D) The tax benefit from using debt financing reduces a firm's risk.

Q: Which of the following statements is NOT true of the asset turnover ratio? A) Asset turnover ratio measures the dollar amount of sales per dollar of assets that the firm has. B) The fixed assets turnover ratio is less significant for equipment-intensive manufacturing industry firms than the total assets turnover ratio. C) The higher the total asset turnover, the more efficiently management is using total assets. D) The ratio is quite useful in identifying the inefficient use of current and long-term assets.

Q: Which one of the following statements is NOT true? A) The accounts receivables turnover ratio measures how quickly the firm collects its credit sales. B) One ratio that measures the efficiency of a firm's collection policy is day's sales outstanding. C) The more days that it takes a firm to collect on its receivables, the more efficient the firm is. D) Day's sales outstanding measures in days, the time a firm takes to convert its receivables into cash.

Q: Which of the following is NOT true about the inventory turnover ratio? A) It is calculated by dividing inventory by cost of goods sold. B) It measures how many times the inventory is turned over into saleable products. C) The more times a firm can turnover its inventory, the better. D) Too high a turnover or too low a turnover could be a warning sign.

Q: All else being equal, which of the following will decrease a firm's current ratio? A) A decrease in the net fixed assets B) A decrease in depreciation expense C) An increase in accounts payable D) None of the above

Q: Which of the following does NOT change a firm's current ratio? A) The firm collects its accounts receivables. B) The firm purchases inventory by taking a short-term loan. C) The firm pays down its accounts payables. D) None of the above.

Q: Which of the following is true about the quick ratio? A) The quick ratio is calculated by dividing the least liquid of current assets by current liabilities. B) Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios. C) Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets. D) Quick ratios will tend to be much larger than current ratio for manufacturing firms or other industries that have a lot of inventory.

Q: Which of the following is NOT true of liquidity ratios? A) They measure the ability of a firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. B) There are two commonly used ratios to measure liquiditycurrent ratio and quick ratio. C) For manufacturing firms, quick ratios will tend to be much larger than current ratios. D) The higher the liquidity ratios, the more liquid the firm and the better its ability to pay its short-term bills.

Q: Which of the following is true of ratio analysis? A) A ratio is computed by dividing one balance sheet item or income statement item by another. B) The choice of the scale determines the story that can be garnered from the ratio. C) Ratios can be calculated based on the type of firm being analyzed or the kind of analysis being performed. D) All of the above are true.

Q: Which of the following is a benefit of a common-size income statement? A) It is very useful to assess how effectively a firm collected its accounts receivable. B) It reveals a great deal of information about the adequacy of a firm's net working capital. C) It can tell the analyst a great deal about a firm's efficiency and profitability. D) It reveals how effectively a firm has increased its assets.

Q: Common-size financial statements: A) are a specialized application of ratio analysis. B) allow us to make meaningful comparisons between the financial statements of two firms that are different in size. C) are prepared by having each financial statement item expressed as a percentage of some base number, such as total assets or total revenues. D) All of the above are true.

Q: Which of the following is NOT true of common-size income statements? A) Each income statement item is standardized by dividing it by total assets. B) Income statement accounts are represented as percentages of net sales. C) Each income statement item is standardized by dividing it by net sales. D) Common-size income statements analysis is a specialized application of ratio analysis.

Q: Which of the following is NOT true of common-size balance sheets? A) Each asset and liability item on the balance sheet is standardized by dividing it by total assets. B) Balance sheet accounts are represented as percentages of total assets. C) Each asset and liability item on the balance sheet is standardized by dividing it by sales. D) Common-size balance sheets allow us to make meaningful comparisons between the balance sheets of two firms that are different in size.

Q: An individual analyzing a firm's financial statements should do all but which one of the following? A) Use unaudited financial statements B) Perform a trend analysis C) Perform a benchmark analysis D) Compare the firm's performance to that of its direct competitors

Q: Anyone analyzing a firm's financial statements should: A) use audited financial statements. B) do a trend analysis. C) perform a benchmark analysis. D) All of the above.

Q: A firm's management analyzes financial statements so that: A) they can get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements. B) similar to shareholders, they can focus on profitability, dividend, capital appreciation, and return on investment. C) they can get more stock options. D) Both a and b

Q: The creditors of a firm analyze financial statements so that they can focus on: A) the firm's amount of debt. B) the firm's ability to generate sufficient cash flows to meet its legal obligations first and still have sufficient cash flows to meet debt repayment and interest payments. C) the firm's ability to meet its short-term obligations. D) All of the above.

Q: Shareholders analyze financial statements in order to: A) assess the cash flows that the firm will generate from its operations. B) determine the firm's profitability, their return for that period, and the dividend they are likely to receive. C) focus on the value of the stock they hold. D) All of the above

Q: The three different perspectives on financial statement analysis are those of the: A) manager, regulator, and bondholder. B) manager, shareholder, and creditor. C) regulator, shareholder, and creditor. D) shareholder, creditor, and regulator.

Q: The Standard Industrial Classification (SIC) codes are four-digit numbers in which the last two digits describe the type of business or industry in which the firm is engaged. A) True B) False

Q: While doing an industry group analysis, you form the comparison group by choosing firms that are larger than the firm being compared. A) True B) False

Q: In a peer group analysis, the benchmark for financial statement analysis is the performance of a competitor that is roughly the same size and that offer a similar range of products. A) True B) False

Q: Firms with a lower return on assets (ROA) and higher leverage will have a lower return on equity (ROE) than firms with a higher return on assets (ROA) and lower leverage. A) True B) False

Q: The DuPont equation relates a firm's net profit margin, total asset turnover ratio, and equity multiplier to determine its return on equity. A) True B) False

Q: For a given level of after-tax income, the lower the level of equity a firm has, the higher the return on equity its shareholders will earn. A) True B) False

Q: A firm that has no debt will have its return on assets (ROA) equal to its return on equity (ROE). A) True B) False

Q: For a given share price of a firm's stock, the lower the EPS the lower the price-earnings ratio. A) True B) False

Q: Identify the noncash items that a firm may have on its financial statements and explain their impact on the shareholders of the firm.

Q: Explain the following income statement items. a. Amortization expense b. Extraordinary items c. EBITDA

Q: What are the advantages and disadvantages of using market-value accounting?

Q: Explain the differences while using FIFO versus LIFO method of valuation in accounting for inventory.

Q: Identify and explain the five fundamental principles that form the basis of accounting standards in United States.

Q: United Brands Corp. just completed their latest fiscal year. The firm had sales of $16,650,000. Depreciation and amortization was $832,500, interest expense for the year was $825,000, and selling general and administrative expenses totaled $1,665,000 for the year, and cost of goods sold was $9,990,000 for the year. Assuming a federal income tax rate of 34%, what was the United Brands net income after-tax?A) $2,202,750B) $1,745,325C) $3,505,100D) $2,813,000

Q: Which of the following statements is true? A) Only 20 percent of interest income is taxable for a corporation. B) Dividend income is fully taxable. C) Interest paid on debt obligations is a tax-deductible business expense. D) Dividends paid to stockholders are a tax-deductible business expense.

Q: Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is: A) the average tax rate. B) the marginal tax rate. C) either one. D) None of the above.

Q: Which of the following best represents cash flows to investors? A) Cash flow from operating activity, plus cash flow generated from net working capital B) Earnings before interest and taxes times 1 minus the firm's tax rate C) Net income minus dividends paid to preferred stockholders. D) Cash flow from operating activity minus cash flow invested in net working capital minus cash flow invested in long-term assets.

Q: Chartworth Associates' financial statements indicated that the company has EBITDA of $3,145,903. It had depreciation of $633,000, and its interest rate on debt of $1.25 million was 7.5%. The company is likely to owe $822,512 in taxes. What are the marginal and average tax rates for this company?Tax Rate Taxable Income 15% $0 to $50,00025 50,001 - 75,000 34 75,001 - 100,00039 100,001 - 335,00034 335,001 - 10,000,00035 10,000,001 - 15,000,00038 15,000,001 - 18,333,33335 More than $18,333,333A) 34%, 35%B) 35%, 34%C) 34%, 34%D) none of the above

Q: Chartworth Associates' financial statements indicated that the company had EBITDA of $3,145,903. It had depreciation of $633,000, and its interest rate on debt of $1.25 million was 7.5 percent. Calculate the amount of taxes the company is likely to owe. Round your final answer to the nearest dollar.Tax Rate Taxable Income 15% $0 to $50,00025 50,001 - 75,00034 75,001 - 100,00039 100,001 - 335,00034 335,001 - 10,000,00035 10,000,001 - 15,000,00038 15,000,001 - 18,333,33335 More than $18,333,333A) $1,069,607B) $1,037,732C) $822,512D) none of the above

Q: Trimeton Corporation announced that in the year ended June 30, 2008, its earnings before taxes amounted to $2,367,045. Calculate its taxes using the following table. Round your final answer to the nearest dollar.Tax Rate Taxable Income 15% $0 to $50,00025 50,001 - 75,00034 75,001 - 100,00039 100,001 - 335,00034 335,001 - 10,000,00035 10,000,001 - 15,000,00038 15,000,001 - 18,333,33335 More than $18,333,333A) $804,795B) $690,895C) $713,145D) None of the above

Q: Which of the following presents a summary of the changes in a firm's balance sheet from the beginning of an accounting period to the ending of an accounting period? A) The statement of retained earnings B) The statement of working capital C) The statement of cash flows D) The statement of net worth

Q: Natural Lite, Inc. reported the following items during fiscal 2010. The firm purchased marketable securities of $87,500, paid down a long-term loan in the amount of $650,000, purchased $4,250,000 of new equipment. The firm also issued $6,250,000 of common stock, paid $350,225 in dividends to its common shareholders, and repurchased $1,250,000 of common stock in the open market. What is the net cash provided by financing activities? A) $4,575,210 B) $1,733,285 C) $3,999,775 D) $2,467,915

Q: Which of the following is a cash flow from investing activities? A) Cash payment of dividends to shareholders B) Cash from sale of products C) Purchase of plant and equipment D) Rent received from industrial property owned

Q: What is the firm's cash flow from financing activities?A) -$66,405B) $61,656C) -$61,656D) -$182,057

Q: What is the firm's net cash flow from (used in) investing activities?A) $0B) $46,124C) -$46,124D) None of the above

Q: What is the firm's net cash flow from operating activities?A) $304,322B) $299,176C) $192,602D) None of the above.

Q: Super Grocers, Inc., provided the following financial information for the quarter ending September 30, 2006:Depreciation and amortization - $133,414 Net income - $341,463Increase in receivables - $112,709 Increase in inventory - $81,336Increase in accounts payables - $62,411Decrease in marketable securities - $31,225What is the cash flow from operating activities generated during this quarter by the firm?A) $308,458B) $374,468C) -$374,468D) -$308,458

Q: Trident Manufacturing Company's treasurer identified the following cash flows during this year as significant. The company repaid existing debt of $425,110, while raising additional debt capital of $750,000. It also repurchased stock in the open markets for a total of $63,250 and paid $233,144 in dividends to its shareholders. What is the net cash provided by (used in) financing activities?A) $28,496B) $91,746C) -$28,496D) -$91,746

Q: During 2008, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable securities of $14,215 mature. What is the net cash provided by (used in) investing activities?A) $132,085B) $145,940C) -$132,085D) -$145,940

Q: Trident Corporation had the following cash flows in the current year. Which of the following will be categorized under the financing activities section of the statement of cash flows? A) Rent on a warehouse amounting to $1.1 million B) Purchase of $125,000 worth of five-year bonds issued by Towson Utilities C) Preferred dividends of $330,000 paid to shareholders D) Lease income received on a piece of land

Q: Which of the following is NOT a cash flow from investing activities? A) Buying and selling bonds of other firms B) Buying or selling of land, buildings, and plant and equipment C) Cash payments of dividends to shareholders D) Buying and selling stocks of other firms

Q: Cash flows from financing activities include all but one of the following: A) Cash payments on the principal of long-term debt B) Buying and selling bonds or stock of other firms C) Cash purchases of treasury stock D) Cash proceeds from a bank loan

Q: Which of the following is NOT a cash flow from operating activities? A) Cash payments on the principal of long-term debt B) Payments for utilities and rent C) Payments to purchase raw materials D) Cash receipts from selling goods and services

Q: Which of the following is an income statement item? A) Accounts payable B) Accrued taxes C) Retained earnings D) Selling and administrative expenses

Q: Arco Steel, Inc. generated total sales of $45,565,200 during fiscal 2010. Depreciation and amortization for the year totaled $2,278,260, and cost of goods sold was $27,339,120. Interest expense for the year was $9,641,300 and selling, general, and administrative expenses totaled $4,556,520 for the year. What is Arco's EBIT for 2010?A) $9,641,300B) $11,391,300C) $13,275,030D) $18,490,000

Q: Parrino Corporation has announced that its net income for the year ended June 30, 2008, is $1,824,214. The company had an EBITDA of $5,174,366, and its depreciation and amortization expense was equal to $1,241,790. The company's average tax rate is 34 percent. What is the amount of interest expense for the firm?A) $2,763,961B) $939,747C) $1,187,720D) $1,168,615

Q: Triumph Trading Company provided the following information to its auditors. For the year ended March 31, 2008, the company had revenues of $1,122,878, operating expenses (excluding depreciation and leasing expenses) of $612,663, depreciation expenses of $231,415, leasing expenses of $126,193, and interest expenses of $87,125. If the company's average tax rate was 34 percent, what is its net income after taxes? Round your final answer to the nearest dollar. A) $43,218 B) $65,482 C) $152,607 D) None of the above.

Q: Simplex Healthcare had net income of $5,411,623 after paying taxes at 34 percent. The firm had revenues of $20,433,770.Its interest expense for the year was $1,122,376, while depreciation expense was $2,079,112. What was the firm's operating expenses excluding depreciation? Round your intermediate calculations and final answer to the nearest dollar. A) $8,199,429 B) $9,032,853 C) $9,321,805 D) None of the above

Q: Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes? Round your final answer to the nearest dollar. A) $120,140 B) $248,475 C) $79,292 D) $40,848

Q: Which of the following is NOT a noncash item? A) Depreciation B) Taxes C) Prepaid expenses D) Prepaid taxes

Q: Which of the following does NOT belong to an income statement? A) Depreciation expense B) Goodwill C) Extraordinary items D) Amortization expense

Q: Which of the following statements is NOT a limitation associated with market valuation of balance sheet accounts? A) It can be difficult to identify the market value of an asset, particularly if there are few transactions involving comparable assets. B) The estimates of market value can involve complex financial modeling, and the resulting numbers can be open to manipulation and abuse. C) Marking to market provides decision makers with a better chance of making the correct economic decision, given the information available. D) Mark-to-market accounting can become inaccurate if market prices deviate from the "fundamental" values of assets and liabilities.

Q: Which of the following is the best example of how a market-value balance sheet item differs from the firm's book-value balance sheet item? A) A firm issued long-term bonds five-years ago that currently sell for par value. B) A firm sold common stock twenty-years ago for $20.00 a share. The firm's common stock is currently selling for $96.50 per share. C) A firm has $5 million of accrued liabilities on the books. D) A firm issued preferred stock ten-years ago. These shares of preferred stock currently are selling for par value.

Q: The major disadvantages of market-value accounting include: A) the difficulty in estimating the current value for some assets. B) the difficulty in applying some of the valuation models used to estimate market values. C) the resulting numbers are potentially open to abuse. D) All of the above are disadvantages of market-value accounting.

Q: Spartan, Inc., is a manufacturer of automobile parts located in Greenville, South Carolina. At the end of the current fiscal year, the company had net working capital of $157,903. The company showed accounts payables of $94,233, accounts receivables of $83,112, inventory of $171,284, and cash and marketable securities of $12,311. Calculate the amount of notes payables. (Assume that notes payable and accounts payable are the only two current liabilities of the company.) A) $14,571 B) $26,882 C) $15,471 D) None of the above

Q: Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of $6,145. The net working capital of the firm is A) $68,931. B) $63,510. C) $69,655. D) None of the above

Q: Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital? A) $3,596,632 B) $1,801,784 C) $2,123,612 D) $1,673,421

Q: Teakap, Inc., has current assets of $1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have? A) $1,844,022 B) $2,303,010 C) $2,123,612 D) $803,010

Q: Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountant. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm has long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities does this firm have? A) $94,792 B) $505,678 C) $171,217 D) None of the above.

Q: Galan Associates prepared its financial statement for 2008 based on the information given here. The company had cash worth $1,234, inventory worth $13,480, and accounts receivables worth $7,789. The company's net fixed assets are $42,331, and other assets are $1,822. It had accounts payables of $9,558, notes payables of $2,756, common stock of $22,000, and retained earnings of $14,008. How much long-term debt does the firm have? A) $54,342 B) $76,342 C) $12,314 D) $18,334

Q: Maddux, Inc., has completed its fiscal year and reported the following information. The company had current assets of $153,413, net fixed assets of $412,331, and other assets of $7,822. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and common stock of $162,000. Calculate the amount of retained earnings. A) $405,648 B) $243,648 C) $167,918 D) $573,566

Q: Which of the following is NOT true about treasury stock? A) It is a firm's own shares repurchased in the market by the firm. B) It can be reissued under stock option and other employee benefit plans. C) It lowers the value of the company. D) It increases the net worth of the company.

Q: Which of the following is NOT true about goodwill? A) It is an intangible asset. B) It represents the value of all unrecorded assets acquired in a merger. C) It equals the premium paid over the fair market value of the assets acquired in a merger. D) When goodwill appears on a firm's balance sheet, it reduces the firm's net worth by that amount.

Q: When prices are falling, valuing inventory using the LIFO method rather than FIFO gives: A) inventory a higher value but lowers net income. B) inventory a lower value and also lowers net income. C) both inventory and net income a higher value. D) inventory a lower value and net income a higher value.

Q: When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives: A) inventory a higher value but lowers net income. B) inventory a lower value and also lowers net income. C) both inventory and net income a higher value. D) inventory a lower value and net income a higher value.

Q: Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders? A) Current assets, goodwill, and plant and equipment. B) Current assets, plant and equipment, and goodwill. C) Goodwill is not an asset and is not listed here. D) None of the above.

Q: The conventional way of preparing a balance sheet is to list all assets in the order of their: A) market value. B) risk. C) liquidity. D) historical cost.

Q: Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2008. The net value of the asset that should be reported on the balance sheet is: A) $2.3 million. B) $1.61 million. C) $230,000. D) $1.75 million.