Part 1

Question 1

Which of the statements below is FALSE?

A. The income statement summarizes and categorizes a company’s revenues and expenses for that period.

B. Typically, income statements are prepared quarterly and annually for distribution outside the company, but usually monthly for internal managers.

C. The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes (EBIT..

D. The balance sheet reports the performance of the firm over the past period. It summarizes and categorizes a company’s revenues and expenses for that period.

Question 2

A current ratio greater than one can tell us that the company __________.

A. should be able to cover the current liabilities

B. should be able to keep away from short-term cash problems

C. may have too much capital tied up in current assets

D. all of these

Question 3

Computing liquidity ratios is ________ but interpreting them is ________.

A. complex, even more complex

B. complex, more straightforward

C. straightforward, more complex

D. none of these

Question 4

The DuPont Model measures ROE by multiplying __________.

A. the current ratio x total asset turnover x the equity multiplier

B. the profitability ratio x times interest earned x the equity multiplier

C. the profitability ratio x total asset turnover x the equity multiplier

D. the current ratio x times interest earned x the equity multiplier

Question 5

Which of the statements below is FALSE?

A. The textbook uses the framework of the income statement to find the operating income of the company (an accounting measure. and then makes adjustments to find the true cash flow from operations.

B. In accrual-based accounting, revenue is recorded at the time of sale if the revenue has been received in cash.

C. Three fundamental issues separate net income and cash flow: accrual-based accounting, non-cash expense items, and interest expense.

D. Generally Accepted Accounting Principles (GAAP. in the United States allow the use of accrual accounting to record revenue.

Question 6

Orange Electronics Inc. has a profitability ratio of 0.14, an asset turnover ratio of 1.7, a debt to equity ratio of 0.60 and a total asset to equity ratio of 1.60. What is the firm’s ROE?

A. 14.28%

B. 22.85%

C. 38.08%

D. 41.76%

Question 7

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the __________, the so-called bottom line of the income statement.

A. after-tax income

B. before-tax income

C. net income

D. EBIT

Question 8

Which of the statements below is FALSE?

A. The purpose of studying financial statements is to understand those portions of the statements that have relevance for financial decision making.

B. We need to understand how to interpret and use the information presented in financial statements to form a picture of the financial profile of the firm.

C. Accounting, it has been said, looks back to where a company has been — somewhat like looking through a rear view mirror.

D. Accounting and finance view the numbers in the same way.

Question 9

Because financial ratios can vary across industries, it is __________ these ratios by industry.

A. not necessary to study

B. unimportant to benchmark

C. important to benchmark

D. futile to examine

Question 10

Which of the following are liquidity ratios?

A. current ratio

B. the quick ratio

C. the cash ratio

D. all of the above

Question 11

Which of the following address the question of whether a company can meet its obligations over the long term?

A. liquidity ratios

B. asset utilization ratios

C. debt ratios

D. financial leverage ratios

Question 12

__________ break(s. down the return-on-equity into three components.

A. The DuPont Model

B. Market value ratios

C. Profitability ratios

D. Asset management ratios

Question 13

Return on equity can increase as a result of an increase in which of the following ratios?

A. net income/ sales

B. sales/ total assets

C. total assets/ equity

D. All of the above will have a positive influence on the ROE.

Question 14

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the __________ for the period.

A. EBIT

B. after-tax income

C. net income

D. taxable income

Question 15

In finance, we separate operating decisions from financing decisions and thus exclude __________ as a part of operating income from the income statement.

A. cash flow

B. dividends

C. interest expense

D. earnings

Question 16

__________ help(s. us analyze whether a company is moving toward financial stress or is using debt to benefit the company and ultimately, the owners of the company.

A. Financial leverage ratios

B. Asset management ratios

C. Days’ sales in inventory

D. Total asset turnover

Question 17

The fundamental starting point of all the accounting statements is the__________.

A. accounting identity

B. computing identity

C. investing identity

D. financing identity

Question 18

Which of the statements below is FALSE?

A. When the current ratio is greater than one, we are also saying that net working capital is positive as current assets are greater than current liabilities.

B. Financial leverage ratios deal with long-term solvency and the use of debt as a financing tool.

C. The debt ratio is total assets minus total equity divided by equity.

D. Times interest earned equals EBIT divided by interest expense.

Question 19

Which of the statements below is TRUE?

A. DuPont analysis shows that ROE is

B. DuPont analysis shows that ROE is

C. DuPont analysis shows that ROE is

D. DuPont analysis shows that ROE is

Question 20

The purpose of studying financial statements is__________.

A. to mechanically build portfolio analysis

B. to understand those portions of the statements that have relevance for financial decision making

C. to primarily investigate all portions of the statements that have relevance for dividend policy

D. to mechanically learn how to read and understand footnotes