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Exam 3: Financial Analysis

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Question 21

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Which of the following is not considered to be a profitability ratio?

A) Profit margin
B) Times interest earned
C) Return on equity
D) Return on assets (investment)

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Question 22

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Profitability ratios allow one to measure the ability of the firm to earn an adequate profit compared to sales, total assets, and invested capital.

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Question 23

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Which of the following is a potential problem of utilizing ratio analysis?

Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power.

If Turnpoint Inc. has net income of $400,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000, what is its return on equity (ROE) ?

Return on equity will be higher than return on assets if there is higher amounts of debt in the capital structure.

Industries with cyclical products such as lumber and copperare more sensitive to inflation-induced profits because many sales prices and/or expenses are set by the market.

Assuming proper accounting disclosure is used, a large extraordinary loss has what effect on the normal operating profits in the future?

A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of $50,000. Calculate return on equity.

The stock market tends to move up when inflation goes up.

Asset utilization ratios relate balance sheet assets to income statement net income.

A decreasing average receivables collection period could be associated with

In addition to comparison with industry ratios, it is also helpful to analyze ratios using

If Randolph Co. has sales of $3,000,000, net income of $200,000, and total asset turnover of 1.5x, what is its return on assets (ROA) ?

Industries most sensitive to inflation-induced profits are those with

Investors are most concerned with the liquidity ratios of a company.

The _______ method of inventory costing is least likely to lead to inflation-induced profits.

A short-term creditor would be most interested in

As long as prices of products continue to rise faster than costs in an inflationary environment, reported profits will generally continue to rise.

Ratios are used to compare different firms in the same industry.