Archive for January 2017

Convergence is the process of the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) and other national accounting standard setters working together to a common set of standards.

Convergence is the process of the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) and other national accounting standard setters working together to a common set of standards.




Answer: True

In conducting an index analysis every balance sheet item is divided by __________ and every income statement is divided by __________.

In conducting an index analysis every balance sheet item is divided by __________ and every income statement is divided by __________.




A.) its corresponding base year balance sheet item; its corresponding base year income statement item
B.) its corresponding base year income statement item; its corresponding base year balance sheet item
C.) net sales or revenues; total assets.
D.) total assets; net sales or revenues









Answer: A

In conducting a common-size analysis every balance sheet item is divided by __________ and every income statement is divided by __________.

In conducting a common-size analysis every balance sheet item is divided by __________ and every income statement is divided by __________.




A.) its corresponding base year balance sheet item; its corresponding base year income statement item
B.) its corresponding base year income statement item; its corresponding base year balance sheet item
C.) net sales or revenues; total assets.
D.) total assets; net sales or revenues








Answer: D

The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = __________.

The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = __________.



A.) Net profit margin × Total asset turnover × Equity multiplier
B.) Total asset turnover × Gross profit margin × Debt ratio
C.) Total asset turnover × Net profit margin
D.) Total asset turnover × Gross profit margin × Equity multiplier







Answer: A

Which of the following statements is most correct regarding the current ratio for a firm that uses industry averages and a peer benchmark as their comparison?

Which of the following statements is most correct regarding the current ratio for a firm that uses industry averages and a peer benchmark as their comparison?




A.) Firms should attempt to maintain a current ratio that is below 0.5.
B.) Firms should always exceed both the industry average and the peer benchmark current ratio.
C.) Firms should strive to maintain a current ratio that seems reasonable when compared to an industry average and a peer benchmark.
D.) Firms should strive to maintain a current ratio of at least 2.0.






Answer: C

Benchmarking can be applied to ratio analysis. How is this different from comparing a firm's ratios to industry averages over time?

Benchmarking can be applied to ratio analysis. How is this different from comparing a firm's ratios to industry averages over time?





A.) In benchmarking you compare your firm's performance to a previous "benchmarked" period and not industry averages.
B.) It creates a benchmark of numerous industries for comparison purposes rather than a single industry due to wild fluctuations within specific industries.
C.) It creates a benchmark that compares your firm to the best world-class competitors rather than an entire industry.
D.) It creates a benchmark by taking an average of a portfolio of industries over a specific time period, usually 5 years, rather than a single industry in a single year due to wild fluctuations within specific industries over short periods of time.








Answer: C

The authors place financial ratios into __________.

The authors place financial ratios into __________.





A.) two broad categories: (1) balance sheet ratios; and (2) income statement ratios
B.) three broad categories: (1) balance sheet ratios; (2) income statement ratios; and (3) income statement/balance sheet ratios
C.) two broad categories: (1) balance sheet and income statement/balance sheet ratios; and (2) income statement ratios
D.) two broad categories: (1) balance sheet ratios; (2) income statement and income statement/balance sheet ratios








Answer: D

Which of the following statements is most accurate?

Which of the following statements is most accurate?



A.) Coverage ratios also shed light on the "liquidity" of these current ratios.
B.) Receivable- and inventory-based activity ratios also shed light on the "liquidity" of these current assets.
C.) Receivable- and inventory-based activity ratios also shed light on the firm's use of financial leverage.
D.) Liquidity ratios also shed light on the firm's use of financial leverage.







Answer: B

Which of the following statements is the least likely to be correct?

Which of the following statements is the least likely to be correct?



A.) A firm that has a high degree of business risk is less likely to want to incur financial risk.
B.) There exists little or no negotiation with suppliers of capital regarding the financing needs of the firm.
C.) Financial ratios are relevant for making internal comparisons.
D.) It is important to make external comparisons or financial ratios








Answer: B

Sales for 1991 (base year) were $800,000 and the year-end total asset turnover ratio was 1.6. With which of the following statements would you agree?

Sales for 1991 (base year) were $800,000 and the year-end total asset turnover ratio was 1.6. With which of the following statements would you agree?




A.) The total assets index analysis value, assuming $1.05 million of assets at the end of 2000, would be 210.
B.) The gross profit margin and the net profit margin are examples of balance sheet ratios.
C.) If total debt in 2000 was $420,000, the debt-to-equity ratio in 2000 would be 84%.
D.) Index analysis supplements the common-size analysis by comparing key industry ratios.








Answer: A

Which of the following statements (in general) is correct?

Which of the following statements (in general) is correct?




A.) A low receivables turnover is desirable.
B.) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
C.) An increase in net profit margin with no change in sales or assets means a weaker ROI.
D.) The higher the tax rate for a firm, the lower the interest coverage ratio.






Answer: B

Which of the following would not improve the current ratio?

Which of the following would not improve the current ratio?



A.) Borrow short term to finance additional fixed assets.
B.) Issue long-term debt to buy inventory.
C.) Sell common stock to reduce current liabilities.
D.) Sell fixed assets to reduce accounts payable.








Answer: A

The process of convergence of accounting standards around the world aims to

The process of convergence of accounting standards around the world aims to





A.) narrow or remove national accounting differences

B.) move non-US accounting standards towards US Generally Accepted Accounting Principles (US GAAP)

C.) create one set of rules-based accounting standards for all countries








Answer: A

When doing an "index analysis," we should expect that changes in a number of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company.

When doing an "index analysis," we should expect that changes in a number of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company.




A.) net sales

B.) cost of goods sold

C.) earnings before interest and taxes (EBIT)

D.) earnings before taxes (EBT)







Answer: A

Which of the following statements (in general) is correct?

Which of the following statements (in general) is correct?




A.) A low receivables turnover is desirable.

B.) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

C.) An increase in net profit margin with no change in sales or assets means a poor ROI.

D.) The higher the tax rate for a firm, the lower the interest coverage ratio.







Answer: B

Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.)

Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.)



A.) $26.1 million

B.) $23.7 million

C.) $7.4 million

D.) $18.7 million








Answer: B

Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company

Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company




A.) will not experience any difficulty with its creditors.

B.) has less liquidity than other firms in the industry.

C.) will be viewed as having high creditworthiness.

D.) has greater than average financial risk when compared to other firms in its industry.







Answer: D

Which of the following would NOT improve the current ratio?

Which of the following would NOT improve the current ratio?




A.) Borrow short term to finance additional fixed assets.

B.) Issue long-term debt to buy inventory.

C.) Sell common stock to reduce current liabilities.

D.) Sell fixed assets to reduce accounts payable.






Answer: A

The researchers found that telomeres were ______.

The researchers found that telomeres were ______.




A) shorter in smokers who exercised compared to those who did not exercise
B) shorter in individuals who ate less and exercised regularly
C) longer in individuals who exercised regularly
D) longer in nonsmokers who did not exercise compared to those who did exercise







Answer: C

The researchers used strands of DNA located at the ends of chromosomes (called telomeres) to classify the cells they studied. What assumption did they make about telomeres?

The researchers used strands of DNA located at the ends of chromosomes (called telomeres) to classify the cells they studied. What assumption did they make about telomeres?





A) Shorter telomeres indicate younger cells.
B) Longer telomeres indicate younger cells.
C) Telomere length is not an accurate indicator of cell age.
D) Longer telomeres indicate that the person from whom the cells came does not exercise.






Answer: B



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