a. True
b. False
Answer: True
Question: The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
Answer Options:
a. True
b. False
Answer: True
Question: The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity.
Answer Options:
a. True
b. False
Answer: True
Question: Two metrics that are used to measure a company’s financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT?
Answer Options:
a. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
b. The balance sheet for a given year tells us how much money the company earned during that year.
c. The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders’ equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).
d. If a company’s statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet.
e. The assets section of a typical company’s balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.
Answer: e
Question: Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow funds using long-term debt, use the funds to repurchase some of the company’s own stock.
Answer Options:
a. True
b. False
Answer: b. False
Question: Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.
Answer Options:
a. True
b. False
Answer: b. False
Question: Operating income is derived from the firm’s regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.
Answer Options:
a. True
b. False
Answer: a
Question: The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm’s financial position at a point in time.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be.
b. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
c. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder’s viewpoint, than the return on total assets (ROA).
d. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth.
e. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A’s total debt to total capital ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A’s higher profit margin.
Answer: b. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Question: The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.
Answer Options:
a. True
b. False
Answer: a. True
Question: The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity.
Answer Options:
a. True
b. False
Answer: a. True
Question: The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm’s financial position at a point in time.
Answer Options:
a. True
b. False
Answer: b. False
Question: Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both firms finance using only debt and common equity and total assets equal total invested capital. Both companies have positive net incomes. Company HD has a higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
a. Company HD pays less in taxes.
b. Company HD has a lower equity multiplier.
c. Company HD has a higher ROA.
d. Company HD has a higher times-interest-earned (TIE) ratio.
e. Company HD has more net income.
Answer: a. Company HD pays less in taxes.
Question: Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.
Answer Options:
a. True
b. False
Answer: b. False
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 Options:
a. True
b. False
Answer: a. True
Question: Assume that Besley Golf Equipment commenced operations on January 1, 2014, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2014 management realized that the assets would last for only 10 years. The firm’s accountants plan to report the 2014 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?
Answer Options:
a. The firm’s reported net fixed assets would increase.
b. The firm’s EBIT would increase.
c. The firm’s reported 2014 earnings per share would increase.
d. The firm’s cash position in 2014 and 2015 would increase.
e. The provision will increase the company’s tax payments.
Answer: a
Question: Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT?
a. Company E probably has fewer growth opportunities.
b. Company E is probably judged by investors to be riskier.
c. Company E must have a higher market-to-book ratio.
d. Company E must pay a lower dividend.
e. Company E trades at a higher P/E ratio.
Answer: e. Company E trades at a higher P/E ratio.