Chapter 13 Financial Statement Analysis Solutions

Question 1 Five areas that financial ratios concentrate on are: a) b) c) d) e)

liqu liquid idit ity, y, pro profi fita tabi bili lity ty,, debt debt,, effi effici cien ency cy,, mark market et rel relat ated ed;; prof profit itab abil ilit ity, y, str strat ateg egy, y, liq liqui uidi dity ty,, audi auditi ting ng,, shar share e pric prices es;; liquid liquidity ity,, curr curren entt rat ratio, io, quick quick ratio ratio,, int intere erest st cover, cover, divide dividend nd cover; cover; marke markett rela relate ted, d, shar share e pric prices, es, divid dividend end polic policy, y, debt debt poli policy cy,, stra strateg tegy; y; none of the above.

Question 2 Ratios that measure the ability of the company to pay its short-term debts are called: a) b) c) d) e)

debt ratios; cover ratios; liquidity ratios; profitability ratios; none of the above.

Question 3 Current assets divided by current liabilities is the definition of the: a) b) c) d) e)

interest cover ratio; dividend co cover ra ratio; quick ratio; current ratio; none of the above.

Question 4 The quick ratio is defined as: a) b) c) d) e)

curr curren entt ass asset ets s div divid ided ed by curr curre ent liab liabil ilit itie ies; s; cur current rent ass assets div divided ided by tota otal de debt; bt; curr curren entt ass asset ets s les less s inv inven ento tory ry,, div divid ided ed by tota totall liab liabil ilit itie ies; s; curr curren entt asse assets ts les less s inve invent ntor ory, y, div divid ided ed by by curr curren entt liab liabil ilit itie ies; s; none of the above.

Question 5 Return on sales, return on assets and return on equity are examples of: a) b) c) d) e)

liquidity ratios; profitability ratios; debt ratios; efficiency ratios; market-related ra ratios.

Question 6 Return on assets is defined as: a) operating income divided by owners’ equity; b) operating income divided by sales; c) operating income divided by total assets; d) operating income divided by long-term assets plus debt; e) none of the above. Question 7 Net income divided by shareholders’ equity is the definition of: a) b) c) d) e)

return on sales; return on assets; return on equity; asset turnover; none of the above.

Question 8 The debt to equity ratio measures; a) b) c) d) e)

the likelihood of the company going bankrupt in the short term; the efficiency of the company; the relative proportions of debt and equity in the capital structure; liquidity; none of the above.

Question 9 The interest cover ratio measures: a) b) c) d) e)

the leverage of the company; the efficiency of debt; the weighted average cost of capital; the relationship between interest and profit; none of the above.

Question 10 Total asset turnover, receivables turnover and inventory turnover ratios measure: a) b) c) d) e)

liquidity; profitability; efficiency; debt; market related factors.

Question 11 The receivables turnover ratio is defined as: a) b) c) d) e)

sales divided by receivables; receivables divided by sales; receivables divided by one days’ sales; receivables plus bad debt allowances. none of the above.

Question12 To measure the efficiency with which inventory is used the following ratio should be used: a) b) c) d) e)

inventory turnover ratio; inventory holding period; lower of cost or market valuation of inventory; a or b, but not c; a, b or c.

Question 13 Earnings per share is affected by: a) b) c) d) e)

net income; number of shares; dividends; a & b, but not c; a, b & c.

Question 14 The price to earnings ratio measures: a) b) c) d) e)

the rationality of the stock market; the liquidity of the company; the public’s perception of the company; the ethics of the company; none of the above.

Question 15 The dividend cover ratio is defined as: a) b) c) d) e)

dividend divided by net income; dividend less interest paid and taxes; operating income divided by dividend; net income divided by dividend; none of the above.