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Exam 2: Analysis of Financial Statements

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Question 31

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If a firm has high current and quick ratios,this always is a good indication that a firm is managing its liquidity position well.

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Question 32

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When constructing a Statement of Cash Flows,which of the following actions would be considered a source of funds?

A) increase in the cash account
B) decrease in accounts payable
C) increase in inventory
D) increase in long-term bonds
E) increase in fixed assets

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Question 33

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An analysis of a firm's financial ratios over time that is used to determine the improvement or deterioration in its financial situation is called

Changes in balance sheet accounts are necessary for

If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days,what is its average amount of accounts receivable outstanding (assume a 360 day year) ?

Cannon Company has enjoyed a rapid increase in sales in recent years,following a decision to sell on credit.However,the firm has noticed a recent increase in its collection period.Last year,total sales were $1 million,and $250,000 of these sales were on credit.During the year,the accounts receivable account averaged $41,664.It is expected that sales will increase in the forthcoming year by 50 percent,and,while credit sales should continue to be the same proportion of total sales,it is expected that the days sales outstanding will also increase by 50 percent.If the resulting increase in accounts receivable must be financed by external funds,how much external funding will Cannon need?

The Meryl Corporation's common stock currently is selling at $100 per share,which represents a P/E ratio of 10.If the firm has 100 shares of common stock outstanding,a return on equity of 20 percent,and a debt ratio of 60 percent,what is its return on total assets (ROA) ?

Pepsi Corporation's current ratio is 0.5,while Coke Company's current ratio is 1.5.Both firms want to "window dress" their coming end-of-year financial statements.As part of their window dressing strategy,each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account.Which of the statements below best describes the actual results of these transactions?

Yesterday,Bicksler Corporation purchased (and received) raw materials on credit from its supplier.All else equal,if Bicksler's current ratio was 2.0 before the purchase,what effect did this transaction have on Bicksler's current ratio?

A firm has a profit margin of 15 percent on sales of $20,000,000.If the firm has debt of $7,500,000,total assets of $22,500,000,and an after-tax interest cost on total debt of 5 percent,what is the firm's ROA?

Alumbat Corporation has $800,000 of debt outstanding,and it pays an interest rate of 10 percent annually on its bank loan.Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent.If the company does not maintain a TIE ratio of at least 4 times,its bank will refuse to renew its loan,and bankruptcy will result.What is Alumbat's current TIE ratio?

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

The income statement measures the flow of funds into (i.e.revenue)and out of (i.e.expenses)the firm over a certain time period.It is always based on accounting data.

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

If the current ratio of Firm A is greater than the current ratio of Firm B,we cannot be sure that the quick ratio of Firm A is greater than that of Firm B.However,if the quick ratio of Firm A exceeds that of Firm B,we can be assured that Firm A's current ratio also exceeds B's current ratio.

Which of the following statements is correct?

Which of the following ratios measures how effectively a firm is managing its assets?

The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements.This time sensitivity is especially true with respect to the firm's balance sheet.

Which of the following statements is correct?

The information contained in the annual report is used by investors to form expectations about future earnings and dividends.