Answer Options:
a. True
b. False
Answer: b. False
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT?
a. In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.
b. The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects.
c. 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.
d. 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 more risky and/or less likely to enjoy higher future growth.
e. It is appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.
Answer: c. 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.
Question: Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a profit margin of 8% for Firm B. Firm A’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is 70% versus one of 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 Options:
a. True
b. False
Answer: b. False
Question: The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
Answer Options:
a. True
b. False
Answer: True
Question: It is appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if the firms being compared have the same proportion of fixed assets to total assets.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books.
b. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
c. The annual report is an internal document prepared by a firm’s managers solely for the use of its creditors/lenders.
d. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders’ equity.
e. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information: audited financial statements.
Answer: b
Question: If a firm utilizes debt financing, a 10% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than 10%, and the higher the debt ratio, the larger this difference will be.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
b. Assets other than cash are expected to produce cash over time, and the amount of cash they eventually produce must be the same as the amounts at which the assets are carried on the books.
c. The income statement shows the difference between a firm’s income and its costs (i.e., its profits) during a specified period of time. However, all reported income comes in the form of cash, and reported costs likewise are consistent with cash outlays. Therefore, there will not be a substantial difference between a firm’s reported profits and its actual cash flow for the same period.
d. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
e. EPS stands for earnings per share, while DPS stands for dividends per share. We would normally expect to see DPS exceed EPS.
Answer Options:
a. Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
b. Assets other than cash are expected to produce cash over time, and the amount of cash they eventually produce must be the same as the amounts at which the assets are carried on the books.
c. The income statement shows the difference between a firm’s income and its costs (i.e., its profits) during a specified period of time. However, all reported income comes in the form of cash, and reported costs likewise are consistent with cash outlays. Therefore, there will not be a substantial difference between a firm’s reported profits and its actual cash flow for the same period.
d. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
e. EPS stands for earnings per share, while DPS stands for dividends per share. We would normally expect to see DPS exceed EPS.
Answer: d. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
Question: Which of the following statements is CORRECT?
Answer Options:
a. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders’ equity.
b. The balance sheet gives us a picture of the firm’s financial position at a point in time.
c. The income statement gives us a picture of the firm’s financial position at a point in time.
d. The statement of cash flows tells us how much cash the firm must pay out in interest during the year.
e. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
Answer: b
Question: Which of the following statements is CORRECT?
Answer Options:
a. Typically, a firm’s DPS should exceed its EPS.
b. Typically, a firm’s net income should exceed its EBIT.
c. If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share.
d. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.
e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.
Answer: c
Question: High current and quick ratios always indicate that the firm is managing its liquidity position well.
a. True
b. False
Answer Options:
for Question 562
a. True
b. False
Answer: False
Question: The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
Answer Options:
a. True
b. False
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 Options:
a. True
b. False
Answer: a. True
Question: For managerial purposes, i.e., making decisions regarding the firm’s operations, the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm’s operations. Related to these modifications, which of the following statements is CORRECT?
a. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
b. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm’s value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
c. The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide.
d. The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP.
e. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.
Answer Options:
a. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
b. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm’s value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
c. The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide.
d. The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP.
e. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.
Answer: b. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm’s value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
Question: Which of the following statements is CORRECT?
a. If one firm has a higher total debt to total capital ratio than another, we can be certain that the firm with the higher total debt to total capital ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
b. A firm’s use of debt will have no effect on its profit margin.
c. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
d. The total debt to total capital ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.
e. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, operating costs, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a higher operating margin and return on assets.
Answer: c. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
Question: If a firm’s ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.
Answer Options:
a. True
b. False
Answer: a. True