Question1) 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 ratios2) ________ 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 leverageB. BenchmarkingC. Fixed payment coverageD. Operating leverage3) If a firm expects short term cash surpluses, it can plan ________.A. short term borrowingB. leverage decisionsC. short term investmentsD. long term investments4) P/E ratio measures the ________.A. intrinsic value of the stock to earnings per shareB. market price of the stock to retained earningsC. market value of the stock to earnings per shareD. book value of the stock to earnings per share5) Which of the following is a source of cash flows?A. repurchase of stockB. increase in accounts payableC. decrease in notes payableD. increase in marketable securities6)________ analysis involves the comparison of different firms’ financial ratios at the same point in time.A. TechnicalB. Cross sectionalC. Time seriesD. Marginal7) The depreciable value of an asset, under MACRS, is the ________.A. current cost minus salvage valueB. the original cost plus installationC. the original cost plus installation costs, minus salvage valueD. current cost8) ________ generally reflect(s) the anticipated financial impact of planned long term actions.A. A cash budgetB. Operating financial plansC. Strategic financial plansD. A pro forma income statement9) The modified DuPont formula relates the firm’s return on total assets (ROA) to its ________.A. operating leverage multiplierB. total asset turnoverC. return on equity (ROE)D. net profit margin10) An internal forecast is based on ________.A. the prediction of a firm’s sales over a given period through surveys sent to financial analystsB. the relationships between a firm’s sales and certain economic indicatorsC. a build-up, or consensus, of sales forecasts through a firm’s own sales channels, adjusted for additional factors such as production capabilitiesD. developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales11) 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 position12) 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 salesB. to break the firm’s historical costs into fixed and variable componentsC. to disproportionately vary the costs with the change in salesD. to adjust for projected fixed asset outlays13) ________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses.A. Gross profit marginB. Net profit marginC. Operating profit marginD. Earnings available to common shareholders14) 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.Solution: 15) The cash flows from operating activities section of the statement of cash flows includes ________.A. labor expenseB. dividends paidC. principal paidD. proceeds from the sale of fixed assets16) 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 sheetB. previous year income statement and statement of retained earningsC. pro forma income statement and pro forma balance sheetD. pro forma income statement and proxy statement17) A firm with a low net profit margin can improve its return on total assets by ________.A. decreasing its fixed asset turnoverB. increasing its total asset turnoverC. decreasing its total asset turnoverD. increasing its debt ratio18) If an inventory turnover is divided into 365, it becomes a measure of ________.A. sales turnoverB. the average age of the inventoryC. financial efficiencyD. the average collection period19) 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 futureB. the difficulty faced in calculation and preparation of such statementsC. 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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