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Multiple Choice Quiz
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1
Which of the following is the most significant comparability problem encountered when using firms in the same industry as a benchmark for financial ratios?
A)The flexibility of GAAP guidelines in accounting for tax.
B)The size of the firm being analyzed.
C)The flexibility of GAAP guidelines in accounting for depreciation.
D)The flexibility of GAAP guidelines in accounting for corporate debt and equity.
2
_______________ is widely used by the borrowers to ascertain firm's debt capacity and also enable them to determine the bond rating.
A)Interest coverage ratio
B)Debt to Equity ratio
C)Current ratio
D)Leverage ratio
3
A(n) ____________ is ____________ net income when adjusting net income in order to compute cash provided by operations in the statement of cash flows.
A)increase in accounts receivable; added to
B)decrease in inventories; subtracted from
C)increase in accounts payable; added to
D)decrease in wages payable; added to
4
Which among the following ratios is a profitability ratio?
A)Earnings yield
B)Price–earnings ratio
C)Inventory turnover
D)Return on equity
5
A company has EBIT equal to $100,000, an asset/equity ratio of 2.5, a tax rate of 40%, and interest expense of $20,000. The firm's compound leverage factor is ____________.
A)0.5
B)1.0
C)2.0
D)2.5
6
A company in a 30% tax bracket has return on assets (ROA) equal to 16% and asset turnover ratio equal to 2. What is the firm's operating profit margin?
A)8.0%
B)9.6%
C)12.4%
D)32.0%
7
FASB Statement No. 157 places assets in one of three "buckets." Level 1 lists:
A)assets that are not actively traded, but their values still may be estimated using observable market data on similar assets.
B)assets that are traded in active markets and valued at their market price
C)assets that can be valued only with inputs that are difficult to observe.
D)assets that are traded in active markets and valued at their historical price
8
A company has a tax rate of 25%, a debt/equity ratio of 0.50, interest burden ratio of 0.70 and operating profit margin of 10%. The firm generates $2.00 in sales per dollar of assets. Calculate the firm's return on equity (ROE).
A)1.75%
B)5.25%
C)10.50%
D)15.75%
9
National Furniture Company has a return on equity (ROE) of 12%, a debt/equity ratio of 0.4, a tax rate of 20%, and the interest rate on its debt is 10%. Calculate the firm's operating return on assets (ROA).
A)13.6%
B)5.7%
C)9.6%
D)1.3%
10
Economic value added is a measure of the dollar value of a firm's return in excess of its __________ cost.
A)direct
B)sunk
C)opportunity
D)fixed
11
Economic earnings is defined as:
A)Actual cash required by the firm in order to make it economically stable.
B)The real flow of cash that a firm could pay out without impairing its productive capacity.
C)Earnings before interest and taxes divided by total assets.
D)Earnings of a firm as reported on its income statement
12
A company has a price-earnings (P/E) ratio of 20 and return on equity (ROE) of 15%. Calculate the firm's market-to-book-value ratio.
A)3.00
B)3.33
C)5.75
D)0.33
13
Two identical companies (X and Y) use different inventory valuation methods during a period of increasing prices. Company X uses last-in first-out (LIFO) and Company Y uses first-in first-out (FIFO). Company X will have ____________ cost of goods sold, and ___________ inventory level on its balance sheet, compared to Company Y.
A)higher; higher
B)higher; the same
C)higher; lower
D)lower; higher
14
Regarding the interpretation of financial statements, which of the following is generally considered the major additional complication when analyzing foreign firms?
A)fluctuating exchange rates
B)differences in accounting standards
C)lack of common benchmarks
D)differences in inflation rates
15
The term 'quality of earnings' refers to the extent to which a firm's accounting earnings are ______________.
A)equivalent to the firm's operating cash flow
B)sustainable and reflect economic earnings
C)calculated in conformity with GAAP
D)unaffected by inflation and changes in interest rates







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