Answer:
Options:
Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
Answer:
Options:
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:
a. True
b. False
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:
Options:
Question: The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. 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.
b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one 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.
c. If a firm’s fixed assets turnover ratio is significantly lower 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.
d. The more conservative a firm’s management is, the higher its total debt to total capital ratio is likely to be.
e. The days sales outstanding ratio 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:
e
Question: An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section.
b. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
c. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
d. In the statement of cash flows, depreciation is subtracted from net income in the operating activities section.
e. In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.
Answer:
c. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
Question: If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If a firm has high current and quick ratios, this always indicates that the firm is managing its liquidity position well.
b. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
c. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
d. 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.
e. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how well a firm is managing its liquidity.
Answer:
c
Question: The change in net operating working capital associated with new projects is always positive, because new projects mean that more operating working capital will be required.
Answer:
Options
Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
Answer:
Options
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital.
b. Changes in working capital have no effect on free cash flow.
c. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Depreciation
– Capital expenditures required to sustain operations
– Required changes in net operating working capital.
d. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Capital expenditures.
e. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the “bottom line” and represents how much the firm can distribute to all its investors, both creditors and stockholders.
Answer:
c. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Depreciation
– Capital expenditures required to sustain operations
– Required changes in net operating working capital.
Question: Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm’s liquidity position.
Answer:
Options:
Question: Considered alone, which of the following would increase a company’s current ratio?
Answer:
Options:
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:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of “window dressing.” Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of “window dressing.”
b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”
c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of “window dressing.”
d. Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.”
e. “Window dressing” is any action that does not improve a firm’s fundamental long-run position and thus increases its intrinsic value.
Answer:
b
Question: High current and quick ratios always indicate that the firm is managing its liquidity position well.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?
Answer Choices:
a. Borrow using short-term notes payable and use the proceeds to reduce accruals.
b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
c. Use cash to reduce accruals.
Answer:
b
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?
Answer Choices:
a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
b. Issue new common stock and use the proceeds to increase inventories.
c. Speed up the collection of receivables and use the cash generated to increase inventories.
d. Use some of its cash to purchase additional inventories.
e. Issue new common stock and use the proceeds to acquire additional fixed assets.
Answer:
a
Question: Which of the following statements is CORRECT?
Answer Choices:
a. 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.
b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one 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.
c. If a firm’s fixed assets turnover ratio is significantly lower 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.
d. The more conservative a firm’s management is, the higher its total debt to total capital ratio is likely to be.
e. The days sales outstanding ratio 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:
e
Question: In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.
Answer:
Options:
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:
Options: