There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

A) Ratio analysis requires the analyst to evaluate a firm's performance over too many years to be of any value.
B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.
C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret.
D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.




Answer: D

Which of the following is not a method of "benchmarking"?

Which of the following is not a method of "benchmarking"?

A) Conduct an industry group analysis.
B) Utilize the DuPont system to analyze a firm's performance.
C) Evaluating a single firm's performance over time.
D) Identify a group of firms that compete with the company being analyzed.





Answer: B

Return on Equity: In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round off to the nearest 0.1%)

Return on Equity: In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round off to the nearest 0.1%)

A) 13.1%
B) 14.6%
C) 22.5%
D) 18.7%









Answer: A

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

A) The quick ratio more accurately reflects a firm's profitability.
B) It omits the least liquid current asset from the numerator of the ratio.
C) The current ratio does not include accounts receivable.
D) It measures how "quickly" cash flows through the firm.




Answer: C

Which of the following is a benefit of a common-size income statement?

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 the firm's efficiency and profitability.
D) It reveals how effectively a firm has increased its sales.







Answer: C

DuPont equation: Sorenstam Corp has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA.

DuPont equation: Sorenstam Corp has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA.

A) 6.23%
B) 4.53%
C) 7.48%
D) 5.79%






Answer: C

DuPont equation: Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income?

DuPont equation: Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income?

A) $75,281.80
B) $514,250.00
C) $51,425.00
D) $7,528.10







Answer: A

DuPont equation: Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity?

DuPont equation: Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity?

A) 7.1%t
B) 34.7%
C) 28.1%
D) 43.2%









Answer: B

Profitability ratios: Tigger Corp. has reported the financial results for year-end 2006. Based on the information given, calculate the firm's gross profit margin and operating profit margin. Net sales = $4,156,700 Net income = $778,321 Cost of goods sold = $2,715,334 EBIT = $1,356,098

Profitability ratios: Tigger Corp. has reported the financial results for year-end 2006. Based on the information given, calculate the firm's gross profit margin and operating profit margin.
Net sales = $4,156,700 Net income = $778,321
Cost of goods sold = $2,715,334 EBIT = $1,356,098

A) 34.7%; 32.6%
B) 32.6%; 18.72%
C) 34.7%; 18.72%
D) None of the above









Answer: A

DuPont equation: GenTech Pharma has reported the following information: Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36% What are the firm's profit margin and equity multiplier?

DuPont equation: GenTech Pharma has reported the following information:
Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36%
What are the firm's profit margin and equity multiplier?

A) 7.1%; 0.53
B) 7.1%; 1.90
C) 3.7%; 0.53
D) 3.7%; 1.90







Answer: D

Profitability ratio: Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's ROA?

Profitability ratio: Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's ROA?

A) 25.6%
B) 18%
C) 27.4%
D) None of the above







Answer: C

Market-value ratios: Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a P-E ratio of 11.2 times. What is the firm's share price?

Market-value ratios: Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a P-E ratio of 11.2 times. What is the firm's share price?

A) $34.05
B) $3.68
C) $11.20
D) $36.80







Answer: A

Market-value ratio: RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio.

Market-value ratio: RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio.

A) 4.87 times
B) 8.12 times
C) 5.17 times
D) None of the above








Answer: C

Leverage ratio: Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio?(Round to nearest whole percent)

Leverage ratio: Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio?(Round to nearest whole percent)

A) 2.31; 1.31
B) 1.75; 0.75
C) 0.75; 1.75
D) 1.31; 2.31






Answer: A

Leverage ratio: What will be a firm's equity multiplier given a debt ratio of 0.45?

Leverage ratio: What will be a firm's equity multiplier given a debt ratio of 0.45?

A) 1.82
B) 1.28
C) 2.22
D) None of the above








Answer: A

Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

A) 0.60
B) 1.47
C) 1.74
D) 0







Answer: B

Coverage ratios: Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company?

Coverage ratios: Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company?

A) 19.4 times; 12.7 times
B) 17.3 time; 11.4 times
C) 13.8 times; 19.4 times
D) None of the above







Answer: C

Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio?

Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio?

A) 15.42 times
B) 18.34 times
C) 14.15 times
D) None of the above







Answer: C

Coverage ratio: Trident Corp. has debt of $3.35 million with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times interest earned?

Coverage ratio: Trident Corp. has debt of $3.35 million with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times interest earned?

A) 13 times
B) 12 times
C) 11 times
D) None of the above






Answer: B 

Efficiency ratio: Deutsche Bearings has total sales of $9,745,923, inventories of $2,237,435, cash and equivalents of $755,071, and days' sales outstanding of 49 days. If the firm's management wanted its DSO to be 35 days, by how much will the accounts receivable have to change?

Efficiency ratio: Deutsche Bearings has total sales of $9,745,923, inventories of $2,237,435, cash and equivalents of $755,071, and days' sales outstanding of 49 days. If the firm's management wanted its DSO to be 35 days, by how much will the accounts receivable have to change?

A) $373,816.23
B) -$373,816.23
C) -$379,008.12
D) $379,008.12








Answer: B