Name: __________________________ Score: ______________

8. Suppose you are comparing two firms in the steel industry. One firm is large, and the
1. A useful tool in financial statement analysis is the common-size financial statement. other is small. Which type of numbers would be most meaningful for statement
What does this tool enable the financial analyst to do? analysis?
a. Evaluate financial statements of companies within a given industry of a. Absolute numbers would be most meaningful for both the large and small firms.
approximately the same value. b. Absolute numbers would be most meaningful in the large firm; relative numbers
b. Determine which companies in the same industry are at approximately the same would be most meaningful in the small firm.
stage of development. c. Relative numbers would be most meaningful for the large firm; absolute numbers
c. Compare the mix of assets, liabilities, capital, revenue, and expenses within a would be most meaningful for the small firm.
company over time or between companies within a given industry without respect d. Relative numbers would be most meaningful for both the large and small firm,
to relative size. especially for inter firm comparisons.
d. Ascertain the relative potential of companies of similar size in different industries. 9. What is the market price of a share of stock for a firm that pays dividends of $1.2 per
2. Which of the following is not revealed on a common size balance sheet? share, has a P/E ratio of $14, and a dividend payout ratio of 0.4? $42
a. The debt structure of a firm. 10. A firm with an equity multiplier of 4.0 will have a debt ratio of 0.75
b. The capital structure of a firm. 11. A firm has a higher quick (or acid test) ratio than the industry average, which implies.
c. The peso amount of assets and liabilities.
a. the firm has a higher P/E ratio than other firms in the industry.
d. The distribution of assets in which funds are invested.
3. Which of the following statements is correct? b. the firm is more likely to avoid insolvency in short run than other firms in the
a. An increase in a firm’s inventories will call for additional financing unless the industry.
increase is offset by an equal or larger decrease in some other asset account. c. the firm may be less profitable than other firms in the industry.
b. A high quick ratio is always a good indication of a well-managed liquidity position. d. A and B.
c. A relatively low return on assets (ROA) is always an indicator of managerial
incompetence. e. B and C.
d. A high degree of operating leverage lowers the risk by stabilizing the firm’s 12. Minden Co has sales of $500,000, operating profit of $50,000, interest expense of
earnings stream. $10,000, tax expense of $20,000, total equity of $125,000 and total debt of $275,000.
4. A company issued long-term bonds and used the proceeds to repurchase 40% of the Their return on equity in comparison to their return on assets is:
outstanding shares of its stock. This financial transaction will likely cause the
a. roa is higher than roe because of leverage.
a. Total assets turnover ratio to increase.
b. Times-interest-earned ratio to decrease. b. roa is lower than roe because of leverage.
c. Current ratio to decrease. c. roa is the same as roe;
d. Fixed charge coverage ratio to increase. d. they are both related to the return on sales.
5. What is a creditor’s objective in performing an analysis of financial statements? 13. Which of the following assumptions is usually embodied in the AFN equation?
a. To decide whether or not the borrower has the ability to repay interest and
principal on borrowed funds. a. All balance sheet accounts are tied directly to sales.
b. To determine the firm’s capital structure. b. Accounts payable and accruals are tied directly to sales.
c. To determine the company’s future earnings stream. c. Common stock and long-term debt are tied directly to sales.
d. To decide whether or not the firm has operated profitably in the past. d. Fixed assets, but not current assets, are tied directly to sales.
6. Ratios are used as tools in financial analysis
e. Last year's total assets were not optimal for last year’s sales.
a. instead of horizontal and vertical analysis.
b. because they can provide information that may not be apparent from inspection 14. Last year Wei Guan Inc. made $350 million of sales, and it had $270 million of fixed
of the individual components of a particular ratio. assets that were used at 65% of capacity. In millions, by how much could Wei Guan's
c. because even single ratios by themselves are quite meaningful. sales increase before it is required to increase its fixed assets? $188.46M
d. because they are prescribed by GAAP 15. A firm has a debt-to-equity ratio of 50%, debt of $300,000, and net income of
7. Management is a user of financial analysis. Which of the following comments does
$90,000. The return on equity is ____. 15%
not represent a fair statement as to the management perspective?
a. Management is always interested in maximum profitability.
b. Management is interested in the view of investors.
c. Management is interested in the financial structure of the entity.
d. Management is interested in the asset structure of the entity
PROBLEM SOLVING Compute for the following:

Cash ? 1. Cash Ratio 0.531

Marketable Securities ? 2. Receivables 1187500
Receivables ? 3. Inventory 532500
Inventory ? 4. Total Assets 4750000
Non-Current Assets 2,087,500 5. Debt Ratio 60%
Notes Payable 925,000 6. Profit Margin Ratio 25%
Accounts Payable 850,000 7. Age of Receivables 120
Mortgage Payable (payable in 3 years) ? 8. Sales on Account 7125000
9. Cost of Sales 3993750
10. Gross Profit Ratio 43.95%
Sales (50% on account) ? 11. Interest 125000
Cost of Sales ? 12. Tax 593750
Gross Profit ? 13. Equity Ratio 40%
Operating Expenses 631,250 14. Age of inventory 48
15. Normal Operating Cycle 168
EBIT 2,500,000
Interest ?
Tax ?
Net Profit 1,781,250

Current Ratio 1.5

Quick Ratio 1.2
Return on Equity 0.9375
Times Interest Earned 20
Tax Rate 25%
Return on Assets .375
Accounts Receivable Turnover 3
Asset Turnover 1.5