A firm has a current ratio of 1; in order to improve its liquidity


1) A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might  ________.

A. improve its collection practices by providing extended credit policy.

B. decrease current liabilities by utilizing more longminus term debt, thereby increasing the current and quick ratios.

C. increase inventory, thereby increasing current assets and the current and quick ratios.

D. improve its collection practices and pay accounts payable, thereby decreasing current liabilities and decreasing the current and quick ratios

2) ________ is a term used to describe the magnification of risk and return introduced through the use of fixed cost financing, such as preferred stock and debt.

A. Financial leverage

B. Benchmarking

C. Fixed payment coverage

D. Operating leverage

3) If a firm expects short term cash surpluses, it can plan ________.

A. short term borrowing

B. leverage decisions

C. short term investments

D. long term investments

4) P/E ratio measures the  ________.

A. intrinsic value of the stock to earnings per share

B. market price of the stock to retained earnings

C. market value of the stock to earnings per share

D. book value of the stock to earnings per share

5) Which of the following is a source of cash flows?

A. repurchase of stock

B. increase in accounts payable

C. decrease in notes payable

D. increase in marketable securities

6)________ analysis involves the comparison of different firms’ financial ratios at the same point in time.

A. Technical

B. Cross sectional

C. Time series

D. Marginal

7) The depreciable value of an asset, under  MACRS, is the  ________.

A. current cost minus salvage value

B. the original cost plus installation

C. the original cost plus installation costs, minus salvage value

D. current cost

8) ________ generally reflect(s) the anticipated financial impact of planned long term actions.

A. A cash budget

B. Operating financial plans

C. Strategic financial plans

D. A pro forma income statement

9) The modified DuPont formula relates the firm’s return on total assets (ROA) to its ________.

A. operating leverage multiplier

B. total asset turnover

C. return on equity (ROE)

D. net profit margin

10) An internal forecast is based on ________.

A. the prediction of a firm’s sales over a given period through surveys sent to financial analysts

B. the relationships between a firm’s sales and certain economic indicators

C. a  build-up, or consensus, of sales forecasts through a firm’s own sales channels, adjusted for additional factors such as production capabilities

D. developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales

11) Which of the following is a limitation of ratio analysis?

A. Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.

B. It is difficult to access audited financial statements for ratio analysis.

C. Ratio analysis assumes that inflation has no effect on a firm’s business.

D. Financial ratios cannot reveal certain specific aspects of a firm’s financial position

12) The best way to adjust for the presence of fixed costs when using the simplified approach for pro forma income statement preparation is ________.

A. to proportionately vary the fixed costs with the change in sales

B. to break the firm’s historical costs into fixed and variable components

C. to disproportionately vary the costs with the change in sales

D. to adjust for projected fixed asset outlays

13) ________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses.

A. Gross profit margin

B. Net profit margin

C. Operating profit margin

D. Earnings available to common shareholders

14) Review Question 3-20 (LO3-6) what three areas of analysis are combined in the modified DuPont formula? Explain how the DuPont formula is used to dissect the firm’s results and isolate their causes.


15) The cash flows from operating activities section of the statement of cash flows includes ________.

A. labor expense

B. dividends paid

C. principal paid

D. proceeds from the sale of fixed assets

16) A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected?

A. previous year income statement and previous year balance sheet

B. previous year income statement and statement of retained earnings

C. pro forma income statement and pro forma balance sheet

D. pro forma income statement and proxy statement

17) A firm with a low net profit margin can improve its return on total assets by ________.

A. decreasing its fixed asset turnover

B. increasing its total asset turnover

C. decreasing its total asset turnover

D. increasing its debt ratio

18) If an inventory turnover is divided into 365, it becomes a measure of ________.

A. sales turnover

B. the average age of the inventory

C. financial efficiency

D. the average collection period

19) A weakness of the percent of sales method of preparing a pro forma income statement is  ________.

A. the assumption that the firm’s past financial condition is an accurate predictor of its future

B. the difficulty faced in calculation and preparation of such statements

C. that it forecasts income and then expresses the various income statement items as percentages of projected income.

D. the assumption that the firm faces linear total revenue and total operating cost functions




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