Question: 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 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.

Answer Options:
a. True
b. False

Answer: b. False

Question: Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.

Answer Options:
a. True
b. False

Answer: a. True

Question: The time dimension is important in financial statement analysis. The balance sheet shows the firm’s financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.

Answer Options:
a. True
b. False

Answer: a. True

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to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False

Answer: a. True

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 Options a. True b. False

Answer: a. True

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:
a. True
b. False

Answer: b. False

Question: Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

Answer Options:
a. True
b. False

Answer: b. False

Question: On the balance sheet, total assets must always equal the sum of total liabilities and equity.

Answer Options:
a. True
b. False

Answer: a. True

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:
a. True
b. False

Answer: a. True

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

Answer: a. True

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 Options:
a. True
b. False

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. a. True b. False

Answer: b. False

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 a. True b. False

Answer: a. True

Question: The operating margin measures operating income per dollar of assets. Answer Options a. True b. False

Answer: b. False

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 a. True b. False

Answer: a. True

Question: In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

Answer Options:
a. True
b. False

Answer: b. False

Question: Since managers’ central goal is to maximize stock price, managers’ personal incentives do not interfere with mergers that would benefit the target firm’s stockholders. a. True b. False

Answer: False