PART I: Multiple Choice (each question worth 1 points)

1. Which of the following items would cause the cash conversion cycle to decrease?

a. Increasing the average collection period.

b. Increasing days payable outstanding.

c. Increasing the days inventory held.

d. All of the above.

e. None of the above.

2. What is an investor's objective in financial statement analysis?

a. To determine whether an investment is warranted by estimating a company's future earnings stream.

b. To determine the company's taxes for the current year.

c. To determine if the firm would be a good place to obtain employment.

d. To decide whether the borrower has the ability to repay interest and principal on borrowed funds.

e. All of the above.

3. Which of the following would be helpful to an analyst evaluating the performance of a firm?

a. Understanding the economic and political environment in which the company operates.

b. Reviewing the annual reports of a company's suppliers, customers, and competitors.

c. Preparing common-size financial statements and calculating key financial ratios for the company being evaluated.

d. All of the above.

4. What do the asset turnover ratios measure?

a. Management's effectiveness in generating sales from investments in assets.

b. The liquidity of the firm's current assets.

c. The overall efficiency and profitability of the firm.

d. The distribution of assets in which funds are invested.

e. All of the above.

5. Which of the following is not required to be discussed in the Management Discussion and Analysis of the Financial Condition and Results of Operations?

a. Liquidity

b. Operations

c. Capital resources

d. Earnings projections

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6. What type of information found in supplementary schedules is required for inclusion in an annual report?

a. Material litigation and management photographs

b. Segmental data

c. Inflation data

d. Management remuneration and segmental data

7. Why is the amount of debt in a company's capital structure important to the financial analyst?

a. Debt is equal to total assets.

b. Debt is less costly than equity.

c. Equity is riskier than debt.

d. Debt implies risk.

8. Which of the following is not a tool or technique used by a financial statement analyst?

a. Random sampling analysis

b. Industry comparisons

c. Trend analysis

d. Common-size financial statement

9. What information can be gained from sources such as Industry Norms and Key Business Ratios, Annual Statement Studies, and Industry Surveys?

a. Forecasts of earnings

b. Elaborations of financial statement disclosures

c. The general economic condition

d. A company's relative position within its industry

10. What do liquidity ratios measure?

a. The extent of a firm's financing with debt relative to equity.

b. The liquidity of fixed assets.

c. A firm's ability to meet cash needs as they arise.

d. The overall performance of a firm.

11. Which category of ratios is useful in assessing the capital structure and long-term solvency of a firm?

a. Activity ratios

b. Liquidity ratios

c. Leverage ratios

d. Profitability ratios

12. What is a serious limitation of financial ratios?

a. Ratios are not predictive.

b. Ratios can be used only by themselves.

c. Ratios indicate weaknesses only.

d. Ratios are screening devices.

13. What is the most widely used liquidity ratio?

a. Debt ratio

b. Current ratio

c. Inventory turnover

d. Quick ratio

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14. Why is the quick ratio a more rigorous test of short-run solvency than the current ratio?

a. The quick ratio eliminates prepaid expenses for the denominator.

b. The quick ratio eliminates prepaid expenses for the numerator.

c. The quick ratio eliminates inventories from the numerator.

d. The quick ratio considers only cash and marketable securities as current assets.

15. What does an increasing collection period for accounts receivable suggest about a firm's credit policy?

a. The credit policy is too restrictive.

b. The credit policy may be too lenient.

c. The firm is probably losing qualified customers.

d. The collection period has no relationship to a firm's credit policy.

16. Which of the following statements about inventory turnover is false?

a. Inventory turnover is a gauge of the liquidity of a firm's inventory.

b. Inventory turnover measures the efficiency of the firm in managing and selling inventory.

c. A low inventory turnover is generally a sign of efficient inventory management.

d. Inventory turnover is calculated with cost of goods sold in the numerator.

17. What is a creditor's objective in performing an analysis of financial statements?

a. To determine the company's taxes for the current year.

b. To determine if the firm would be a good place to obtain employment.

c. To decide whether the borrower has the ability to repay interest and principal on borrowed funds.

d. To determine whether an investment is warranted by estimating a company's future earnings stream.

18. What information does the auditor's report contain?

a. A detailed coverage of the firm's liquidity, capital resources, and operations.

b. The results of operations.

c. An opinion as to the fairness of the financial statements.

d. An unqualified opinion.

19. What is a limitation common to both the current and quick ratio?

a. Inventories may not be truly liquid.

b. Prepaid expenses are potential sources of cash.

c. Accounts receivable may not be truly liquid.

d. Marketable securities are not liquid.

20. Why is the fixed charge coverage ratio a broader measure of a firm's coverage capabilities than the times interest earned ratio?

a. The times interest earned ratio does not consider the possibility of higher interest rates.

b. The fixed charge ratio includes lease payments as well as interest payments.

c. The fixed charge ratio includes both operating and capital leases whereas the times interest earned ratio includes only operating leases.

d. The fixed charge ratio indicates how many times the firm can cover interest payments.

21. Which profit margin measures the overall operating efficiency of the firm?

a. Net profit margin

b. Gross profit margin

c. Return on equity

d. Operating profit margin

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22. What is the first step in an analysis of financial statements?

a. Check the auditor's report.

b. Check references containing financial information.

c. Specify the objectives of the analysis.

d. Do a common-size analysis.

23. Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders?

a. Return on investment.

b. Gross profit margin and net profit margin.

c. Total asset turnover and operating profit margin.

d. Return on investment and return on equity.

24. What does a financial level index greater than one indicate about a firm?

a. An increased level of borrowing.

b. Operating returns more than sufficient to cover interest payments on borrowed funds.

c. The unsuccessful use of financial level.

d. More debt financing than equity financing.

25. What does the price to earnings ratio measure?

a. The percentage of dividends paid to net earnings of the firm.

b. The earnings for one common share of stock.

c. The relationship between dividends and market prices.

d. The "multiple" that the stock market places on a firm's earnings.