Corporate Finance quiz

Question: If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.

Answer Choices:

Answer: A – True

Question: If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

Answer Choices:

Answer: B – False

Question: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.

Answer Choices:

Answer: A – True

Question: A decline in a firm’s inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.

Answer Choices:

Answer: B – False

Question: In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.

Answer Choices:

Answer: B – False

Question: The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.

Answer Choices:

Answer: A – True

Question: If a firm’s fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

Answer Choices:

Answer: B – False

Question: Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage.

Answer Choices:

Answer: A – True

Question: The more conservative a firm’s management is, the higher its total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is likely to be.

Answer Choices:

Answer: B – False

Question: Other things held constant, the higher a firm’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)), the higher its TIE ratio will be.

Answer Choices:

Answer: B – False

Question: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

Answer Choices:

Answer: A – True

Question: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results.

Answer Choices:

Answer: A – True

Question: The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects.

Answer Choices:

Answer: A – True

Question: The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects.

Answer Choices:

Answer: B – False

Question: The operating margin measures operating income per dollar of assets.

Answer Choices:

Answer: B – False

Question: The profit margin measures net income per dollar of sales.

Answer Choices:

Answer: A – True

Question: The return on invested capital measures the total return that a company has provided for its investors.

Answer Choices:

Answer: A – True

Question: The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

Answer Choices:

Answer: A – True

Question: Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

Answer Choices:

Answer: A – True