Leach TB Chap05 Ed3

Chapter 5: Evaluating Financial Performance

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CHAPTER 5 EVALUATING FINANCIAL PERFORMANCE True-False Questions T.

1. Showing the relationships between two or more financial variable and /or time, financial ratios are useful means of summarizing large amounts of financial data for comparative purposes.

F.

2. Liquidity ratios indicate the venture’s ability to pay short term assets from short-term liabilities.

F.

3. Net working capital reflects current assets deducted from current liabilities.

T.

4. Conversion period ratios show the average time in days it takes to convert certain current assets and current liabilities into cash.

F.

5. The sum of the inventory-to-sale conversion period and the purchase-topayment conversion period minus the sale-to-cash conversion period is called the cash conversion cycle.

T.

6. The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios.

T.

7. The equity multiplier shows the extent by which assets are supported by equity and debt.

T.

8. Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities.

F.

9. The proportion of a venture’s interest payment that is paid by the government because of the deductibility of interest before taxes are paid is called the income tax shield.

F.

10. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios.

T.

11. Trend analysis is used to examine a venture’s performance over time.

F.

12. Cross-sectional analysis is used to examine a venture’s performance over time.

T.

13. The term “cash build” as used in Chapter 5 is equal to net sales minus the change in receivables.

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Chapter 5: Evaluating Financial Performance

F.

14. The cash conversion cycle refers to the time it takes to convert a sale into net income.

T.

15. The sale-to-cash conversion period is calculated by dividing average revenues by net sales per day.

T.

16. During the development and startup stages of a venture’s life cycle, important financial ratios and measures include cash burn rates, liquidity ratios, and conversion period ratios.

T.

17. During the development and startup stages of a venture’s life cycle, important users of financial ratios and measures include the entrepreneur, business angels, and venture capitalists (VCs).

F.

18. Profitability and efficiency ratios are generally considered to be more important during the development and startup stages compared to the survival and rapid-growth stages.

T.

19. Leverage ratios are generally considered to be more important during the survival and rapid-growth stages compared to the development and startup stages.

F.

20. Commercial banks are important users of financial ratios and measures during the development and startup stages of ventures.

T.

21. Investment bankers are users of financial ratios and measures of ventures primarily during the rapid-growth stage relative to the development and startup stages.

F.

22. Second-round, mezzanine, and liquidity-stage financing generally occur during a venture’s survival stage.

F.

23. “Cash burn” is the cash a venture expends on its operating, financing, and depreciation expenses.

T.

24. “Net cash burn” occurs when cash burn exceeds cash build in a specified time period.

T.

25. The “cash burn rate” is the cash burn for a fixed period of time, typically a month.

F.

26. “Net working capital” is calculated as fixed assets minus current liabilities.

F.

27. The “cash conversion cycle” measures the time it takes to pay off the principal on a loan.

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Multiple-Choice Questions b.

1. Which of the following is used to examine a venture’s performance over time? a. qualitative analysis b. trend analysis c. cross sectional analysis d. industry comparable analysis

c.

2. Which of the following is used to compare a venture’s performance against another firm at the same point in time? a. qualitative analysis b. trend analysis c. cross sectional analysis d. industry comparable analysis

d.

3. Which of the following is used to compare a venture’s performance against the average performance of other firms in the same industry? a. qualitative analysis b. trend analysis c. cross sectional analysis d. industry comparable analysis

d.

4. Which of the following is not part of the operating cycle? a. time it takes to purchase products b. time it takes to produce products c. time it takes to sell the products d. time it takes to pay suppliers e. time it takes to collect receivables

a.

5. Which one of the following “measures” the average days of sales committed to the extension of trade credit? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle period

b.

6. Which of the following is measured by dividing the average daily cost of goods sold into the average inventory? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle

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Chapter 5: Evaluating Financial Performance

c.

7. Which of the following measures the average time from purchase of materials and labor to actual cash payment? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle

d.

8. Which of the following measures the average time it takes a firm to complete its operating cycle after deducting the days supported by trade credit and delayed payroll financing? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle

e.

9. The difference between a venture’s ability to generate cash to pay interest and the amount of interest it has to pay is determined by which of the following ratios? a. fixed charges coverage b. debt to asset c. equity multiplier d. debt to equity e. interest coverage

d.

10. Which of the following is not a profitability and efficiency ratio? a. sales-to-total-assets b. return on equity c. return on assets d. inventory-to-total assets e. NOPAT profit margin

Note: The following information should be used for the next eleven (11 through 21) problems. In its closing financial statements for its first year in business, the Runs and Goses Company, had cash of $242, accounts receivable of $850, inventory of $820, net fixed assets of $3,408, accounts payable of $700, short-term notes payable of $740, long-term liabilities of $1,100, common stock of $1,160, retained earnings of $1,620, net sales of $2,768, cost of goods sold of $1,210, depreciation of $360, interest expense of $160, taxes of $312, addition to retained earnings of $508, and dividends paid of $218.

Chapter 5: Evaluating Financial Performance

a.

11. What is the return on equity for Runs and Goses? a. 26.1% b. 44.7% c. 62.6% d. 18.4% e. 7.9%

b.

12. What is Runs and Goses’ return on total assets? a. 9.6% b. 13.7% c. 19.1% d. 37.9% e. 22.5%

e.

13. What is the net profit margin for Runs and Goses? a. 60.0% b. 22.7% c. 7.9% d. 18.4% e. 26.2%

c.

14. Runs and Goses operating profit margin is? a. 26.2% b. 56.3% c. 43.3% d. 30.3% e. 60.0%

d.

15. The gross profit margin for Runs and Goses is? a. 26.2% b. 30.3% c. 43.3% d. 56.3% e. 60.0% 16. What is Runs and Goses’ sales to total asset ratio? a. 1.91 b. 0.25 c. 0.52 d. 0.23 e. 0.57

c.

b.

17. What is the current ratio for Runs and Goses? a. 1.46 b. 1.33 c. 1.23

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Chapter 5: Evaluating Financial Performance

d. 1.21 e. 1.13 a.

18. The total-debt-total-asset ratio for Runs and Goses is? a. 0.48 b. 0.71 c. 0.27 d. 0.53 e. 0.82

d.

19. What is Runs and Goses’ debt-to-equity ratio? a. 0.92 b. 2.15 c. 0.48 d. 1.12 e. 2.32

e.

20. What is the equity multiplier for Runs and Goses? a. 4.59 times b. 2.35 times c. 0.48 times d. 1.12 times e. 1.91 times

c.

21. The interest coverage ratio for Runs and Goses is: a. 6.5 times b. 4.5 times c. 7.5 times d. 3.5 times e. 1.5 times

c.

22. Which one of the following conversion periods operates to reduce the length of the cash conversion cycle? a. inventory-to-sale conversion period b. sale-to-cash conversion period c. purchase-to-payment conversion period d. fixed assets-to-usage conversion period

c.

23. The term “cash build” is measured as: a. net income plus depreciation b. net sales minus expenses minus (pus) an increase (decrease) in inventories c. net sales minus (plus) an increase (decrease) in receivables

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d. net income plus depreciation minus (plus) an increase (decrease) in payables d.

24. Which one of the following conversion periods is not a component in the cash conversion cycle? a. inventory-to-sale conversion period b. sale-to-cash conversion period c. purchase-to-payment conversion period d. fixed assets-to-usage conversion period

b.

25. Which one of the following is not a basic ratio techniques used to conduct financial analysis? a. trend analysis b. sensitivity analysis c. cross-sectional analysis d. industry comparables analysis

c.

26. Based on the following information, determine the venture’s cash conversion cycle: Inventory-to-sale conversion period = 112.9 days; Sale-tocash conversion period= 57.1 days; and Purchase-to-payment conversion period = 76.8 days. a. 170.0 days b. 189.7 days c. 93.2 days d. 246.8 days e. 133.9 days

a.

27. Based on the following information, determine the average receivables (rounded to thousands of dollars) that were outstanding: Net sales = $575,000; Sale-to-cash conversion period = 57.1 days; Purchase-to-payment conversion period = 76.8 days; and Cost of goods sold = $380,000. a. $90,000 b. $180,000 c. $121,000 d. $31,000 e. $41,000

d.

28. Based on the following information, determine the venture’s inventory-tosale conversion period: cash conversion cycle = 250 days; sale-to-cash conversion period = 60 days; and purchase-to-payment conversion period = 70 days. a. 70 days b. 140 days c. 240 days d. 260 days

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Chapter 5: Evaluating Financial Performance

e. 330 days d.

29. Investment bankers and commercial banks are important users of financial ratios and measures during which of the following life cycle stages? a. Development stage b. Startup stage c. Survival stage d. Rapid-growth stage e. All four stages

e.

30. The entrepreneur, angels, and VCs are important users of financial ratios and measures during which of the following life cycle stages? a. Development stage b. Startup stage c. Survival stage d. Rapid-growth stage e. All four stages

c.

31. “Net cash burn” is calculated as: a. cash burn plus cash build b. cash build minus cash burn c. cash burn minus cash build d. cash burn minus cash build squared

b.

32. Using the following information, determine the monthly net cash burn rate: net income = $20,000; interest = $10,000; cash build = $150,000; and cash burn = $186,000. a. $1,000 b. $3,000 c. $4,000 d. $6,000 e. $7,000

a.

33. Determine the cash conversion cycle based on the following information: inventory-to-sale conversion period = 112.9 days; sale-to-cash conversion period = 57.1 days; and purchase-to-payment conversion period = 76.8 days. a. 93.2 days b. 132.6 days c. 170.0 days d. 246.8 days e. 365.0 days

e.

34. Use the following information to determine a firm’s “cash build:” net sales = $150,000; net income = $15,000; beginning-of-period accounts

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receivable = $60,000; end-of-period accounts receivable = $90,000; and interest = $10,000. a. $10,000 b. $15,000 c. $30,000 d. $60,000 e. $120,000 c.

35. Calculate the sale-to-cash conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000. a. 240.0 days b. 180.0 days c. 90.0 days d. 60.0 days e. 45.0 days

a.

36. Calculate the inventory-to-sale conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000. a. 240.0 days b. 180.0 days c. 90.0 days d. 60.0 days e. 45.0 days