Chapter 04 Question 1 All but one of the following is true of common-size balance sheets. a) Each asset and liability item on the balance sheet is standardized by dividing it by sales. b)Balance sheet accounts are represented as percentages of total assets. c)Common-size financial statements allow us to make meaningful comparisons between the financial statements of two firms that are different in size. d)Each asset and liability item on the balance sheet is standardized by dividing it by total assets. Question 2 Which of the following is true of ratio analysis? a)Ratios can be calculated based on the type of firm being analyzed or the kind of analysis being performed. b)The choice of the scale determines the story that can be garnered from the ratio. c)All of these are true. d)A ratio is computed by dividing one balance sheet or income statement item by another. Question 3 All else being equal, which one of the following will decrease a firm's current ratio? a) a decrease in the net fixed assets b) a decrease in depreciation c) an increase in accounts payable d) none of these Question 4 For a firm that has both debt and equity, a) ROE > ROA. b) ROE = ROA c) None of these. d) ROE < ROA. Question 5 Which one of the following is NOT an advantage of using ROE as a goal? a) All of these are advantages of using ROE as a goal. b) ROE does not consider risk. c) ROE is highly correlated with shareholder wealth maximization. d) ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses. Question 6 A company can improve its liquidity by increasing its accounts payable, while holding all else constant a) True b) False Question 7 A firm increased its days' sales outstanding from 35 days to 43 days. This implies the firm is more efficient. a) True b) False Question 8 The higher the times interest earned ratio, the more comfortable are a firm's creditors in the ability of the firm to meet its interest obligations. a) True b) False Question 9 The DuPont equation relates a firm's net profit margin, total asset turnover ratio, and equity multiplier to determine its return on equity a) False b) True Question 10 In doing an industry group analysis, you form the comparison group by choosing firms that are larger than the firm being compared. a) False b) True