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Test answers for Financial Analysis Test 2020

(76 / 1) Last updated: September 14
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76 Answered Test Questions:

1. Return on Assets is defined as _______.


• Net Income/Current Assets

• Net Income/Total Assets

• Gross Margin/Current Assets

• Gross Margin/Total Assets

2. Why would a company calculate their Risk Adjusted Return on Capital?


• Is required by the SEC

• Auditors will overlook other abnormalities if a firm demonstrates a favorable RAROC

• Gives companies the ability to allocate capital in the optimal structure

• Keeps the financial analysis department busy

3. What is the purpose of measuring profitability?


• To determine the amount of cash a company brings in on an average in a month

• To analyze specific expenses to look for cost cutting measures

• To measure a company's ability to earn a profit and continue to grow in the short-term and long-term

• To measure a company's ability to pay the highest dividend relative to its competitors

4. Operating Efficiency is defined as ______.


• Net Income/Operating Expenses

• Gross Profit/Operating Expenses

• Gross Profit/Sales

• Net Income/Sales

5. To measure a firm's solvency as completely as possible, we need to consider ______.


• the firm's relative proportion of debt and equity in its capital structure

• the firm's capital structure and the liquidity of its current assets

• the firm's ability to use Net Working Capital to pay off its current liabilities

• the firm's leverage and its ability to make interest payments on its long-term debt

• the firm's leverage and its ability to turn its assets into sales

6. How does Gross Income differ from Net Income?


• Gross Income determines the company's cash flow, Net Income does not

• Gross Income includes several fixed costs, Net Income does not

• Gross Income includes all fixed costs, Net Income does not include any

• Gross Income measures profitability before operating expenses, whereas Net Income is calculated after all operating expenses

7. Which of the following are traded in the capital markets?


• Convertible securities

• Bonds

• Common stock

• Preferred stock

• All of the above

8. By doing/issuing which of the following could a company raise short-term funds by selling receivables?


• By factoring receivable

• By pledging inventory

• By line of credit

• By Notes

• By term loan

9. Government mandated requirements, such as installing pollution control equipment ______.


• increase a company's profits in the long run

• drive many companies out of business

• have resulted in many instances of unethical behavior on the part of managers

• may reduce a company's earnings but are considered a necessary social responsibility for the firm

• do not affect a firm's profit potential

10. Why do you not subtract interest expense from operating profit when calculating Return on Investment Capital?


• Denominator includes debt capital

• Numerator includes debt capital

• Interest is not material in the calculation

• It is important to include interest as it is part of expenses

11. Which of the following is a flaw with financial analysis?


• Each company uses different formulas to calculate the ratios

• Ratios are too difficult to calculate and require a specialist

• Auditors do not look at financial ratios

• One ratio alone does not tell much about the entire financial situation of a company

12. What does the Price to Earnings (P/E) ratio demonstrate?


• The price of the company's products relative to how much they earn on the sale of those products

• A company's stock price relative to its earnings. Higher growth companies have higher P/E ratios

• The prices paid for goods relative to how much the company earns on those goods

• The ability of a company to pay dividends

13. Which of the following is not a part of cost of goods sold?


• Raw material

• Labor

• Capital

• All of the above are part of cost of goods sold

14. What is the purpose of measuring solvency?


• To determine a firm's ability to pay its creditors in the long term

• To determine a firm's ability to pay its creditors in the short term

• To measure a firm's cash flow turnover

• To measure a firm's current assets to current liabilities

15. If a company has a high P/E ratio relative to it's competitors ____.


• it is expected to grow more rapidly

• the analyst has inside information

• it has a bad year for earnings, making the denominator smaller, and the P/E ratio higher

• everyone should invest in this stock and not the competitor's

16. Financial managers use the _____________ to plan for monthly financing needs.


• capital budget

• cash budget

• pro forma

• income statement

17. With which of the following regulatory bodies would a publicly traded company be much more involved than a private company would be?






18. Which of the following transactions would have no impact on the stockholder's equity?


• Purchase of land from the proceeds of a bank loan

• Dividends to stockholders

• Net loss

• Investments in cash by stockholders

19. Which of the following is a flaw with financial analysis?


• It is complicated

• Changes in accounting policy can drastically affect the results of a ratio, making comparison analysis difficult

• Companies are required by law to do it, even when they do not want to

• Errors are inherent in financial analysis, rendering it useless

20. What is historical value?


• Prices adjusted for inflation

• The current sale value of an asset

• The original cost or price paid for an asset

• The average value of an asset

21. Which is the primary financial statement used to measure profitability?


• Balance Sheet

• Income Statement

• Cash Flow Statement

• Statement of Retained Earnings

22. What is operating leverage defined as?


• Extent to which variable costs are utilized

• Extent to which fixed assets are utilized

• Extent to which fixed assets and fixed costs are utilized

• Extent to which fixed costs are utilized

• Extent to which prices change

23. Which report does a publicly traded company file quarterly with the SEC?


• 8K

• 10K

• 10Q

• Prospectus

24. If a company using financing has a 60% chance of a $75,000 return under normal conditions but a 40% chance of a $20,000 return when money is tight and borrowing costs are higher, what is the expected return for this firm ?


• $75,000

• $60,000

• $53,000

• $40,000

• $20,000

25. What is one caveat when calculating ROA and comparing to other companies?


• Asset values change over time

• Carrying value of assets may be valued differently (historical, market) by different companies

• Liabilities vary month to month making this ratio difficult to track accurately

• Every financial analyst calculates it differently making comparison useless

26. Which is/are the primary financial statements used to measure stability?


• Balance Sheet

• Income Statement

• Balance Sheet and Income Statement

• Statement of Cash Flows and Income Statement

27. Which ratio would you use to assess a company's ability to pay bills?


• Interest coverage ratio

• Times interest earned ratio

• Price earnings ratio

• Current ratio

• Profit margin

28. In breakeven analysis, if fixed costs rise, then the breakeven point will __________.


• fall

• rise

• stay the same

• none of the above

29. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has a ROE of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. From this, it can be assessed that ______.


• Firm A has a higher profit margin than firm B

• Firm B has a higher profit margin than firm A

• Firm A and B have the same profit margin

• Firm A has a higher equity multiplier than firm B

• more information is needed to say anything about the firm's profit margin

30. In 2002, the US passed the Sarbanes-Oxley law which ____.


• did not change any function of the Boards of Directors of publicly traded corporations

• gave the Financial Accounting Standards Board the oversight responsibility for public auditing firms

• does not change the responsibilities of independent auditors

• was developed in response to the accounting scandals at Enron, Tyco, WorldCom and others

• protects senior executives from prosecution for accounting fraud if they are unaware of its existence

31. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the final inventory valuation is ________.




• Retail

• Weighted-average

32. What is financial analysis?


• Comparing ratios using numbers from the income statement and balance sheet

• Determining a company's financing needs

• Determining the pricing model for the next year

• Determining the company's stock price

33. Which of the following equations properly represents a derivation of the fundamental accounting equation?


• Assets + liabilities = owner's equity

• Assets = owner's equity

• Cash = assets

• Assets - liabilities = owner's equity

34. Accounting scandals of the past 5 years ______.


• resulted in criminal convictions of senior executives at large US corporations like Enron and WorldCom

• resulted in the criminal conviction of at least one major independent auditing firm

• resulted in record fines being paid by major brokerage companies to the SEC

• resulted in the strengthening of the SEC's enforcement powers

• All of the above are true

35. CAPM formula calculates which of the following?


• Present value of equity

• Expected return on equity

• Discounted rate on equity

• Weighted interest rate on equity

36. Which of the following is an example of an area of business where use of "questionable" ethics is considered a necessity?


• Attracting and sustaining new customers

• Aggressive accounting practices that stretch the intent of accounting standards

• Dealing with other firms who use "questionable" ethics

• Suppressing information that may negatively affect a firm's reputation

• None of the statements above is correct

37. The accounting scandals of recent years ______.


• had no effect on the level of prices in the US stock markets

• were a complete surprise to analysts who followed the stocks of the companies involved as they were issuing positive recommendations of the securities to their clients

• brought out the fact that brokerage firms were promoting stocks to earn hefty fees for underwriting new security issues

• were of such a small magnitude that the government did not feel it was warranted to prosecute the companies and their officers that were involved

• have been dismissed as falling within the latitude of judgment for applying GAAP rules

38. Which ratio would you use to measure how effectively the firm uses the money shareholders have invested?


• Return on assets

• Profit margin

• Earnings per share

• Price earnings ratio

• Return on equity

39. Which of the following types of firms may operate with high operating leverage?


• A doctor's office

• An auto manufacturing facility

• A mental health clinic

• None of the above would have high operating leverage

40. What is meant by "the goal of the corporation is to maximize shareholder wealth"?


• Pay out dividends

• Maximize profits

• Achieve the highest possible value for the firm

• Control costs

• Increase sales

41. Which of the following is considered a profitability measure?


• Day's sales in inventory

• Fixed asset turnover

• Price-earnings ratio

• Cash coverage ratio

• Return on Assets

42. Which is/are the primary financial statements used to measure liquidity?


• Balance Sheet

• Income Statement

• Balance Sheet and Income Statement

• Cash Flow Statement and Balance Sheet

43. What does CAPM stand for?


• Current Asset Pricing Model

• Capital Asset Pricing Model

• Current Average Product Model

• Capital Average Product Model

44. Which is a characteristic of an efficient market?


• Stock prices are high

• Prices adjust rapidly to new information

• Stock prices are low

• Trading is difficult

• There are only small daily changes in price

45. What does Return on Assets indicate?


• How well a company employs its capital investments

• How much cash the company has generated over the last year

• How much debt the company has to pay relative to its asset base

• How profitable a company is before leverage

46. Which of the following would not be included in a balance sheet?


• Accounts receivable

• Accounts payable

• Sales

• Cash

47. Gerald's had opening total stockholders' equity of $160,000. During the year, total assets increased by $240,000 and total liabilities increased by $120,000. Their net income was $180,000. No additional investments were made. However, some amount was paid as dividend during the year. What was the amount of the dividend paid?


• $20,000

• $60,000

• $140,000

• $220,000

48. Which short-term financing rate always requires the use of international data?


• Cost of failing to take a cash discount

• Prime rate


• Effective rate

• Effective rate with compensating balances

49. A company wants to increase its current ratio. Which of the following would help the most?


• Borrowing a long term loan

• Borrowing a short term loan

• Creating more stringent collection policies to decrease accounts receivable

• Using cash to pay down accounts payable

50. Rate of profit (r) is defined as ______.


• r=(surplus-value)/(fixed assets)

• r=(surplus+value)/(capital invested)

• r=(surplus+value)/(fixed assets)

• r=(surplus-value)/(capital invested)

51. Which of the following is not a financial intermediary?


• Commercial banks

• Credit unions

• Insurance companies

• Credit card companies

• Pension funds

52. Which is an example of a variable cost?


• Management salaries

• Utilities

• Property taxes

• Raw material

• Depreciation

53. Insider trading _____.


• is permitted by the SEC as long as the information becomes public within 30 days

• is a victimless crime as no one suffers an economic loss

• serves no beneficial or economic purpose

• is not legal under any circumstances

• is not illegal as long as the person using the information obtained it from someone else

54. If a firm has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firm's Net Working Capital?


• $0

• $100

• $200

• $1,000

• $1,200

55. Which of these items would be accounted for as an expense?


• Repayment of a bank loan

• Dividends to stockholders

• Purchase of land

• Payment of the current period's rent

56. Which of the following inventory methods will always produce the same results under both a periodic and a perpetual system?




• Average

• All of these

57. Which of the following does the cash flow cycle measure?


• The time between purchase of raw materials and collection of cash

• The time it takes to invest liquid funds

• The time it takes for a check to get cleared in the bank

• The maturity date of corporate bonds

• The time between offering a marketable security and receiving funds from sale of one

58. If two companies have equal risk, which one will have the higher stock price?


• The one with the expectations of higher returns

• The one that pays dividends

• The one that splits its stock

• The one whose stock is traded most frequently

• All of the above

59. Which of the following is not an area which is assessed by financial analysis?


• Profitability

• Solvency

• Stability

• Adequate Cash balances

60. What is the formula for Return on Investor Capital?


• ROIC = (NetOperatingProfitLessAdjustedTaxes) / (Fixed Assets)

• ROIC = (NetOperatingProfit) / (InvestedCapital)

• ROIC = (NetOperatingProfitLessAdjustedTaxes) / (InvestedCapital)

• ROIC = (NetOperatingProfitLess) / (Fixed Assets)

61. Which financial statement best allows a firm to assess its ability to pay dividends?


• Statement of Cash Flows

• Income Statement

• Balance Sheet

• Statement of Retained Earnings

• Statement of Operations

62. How often can a company change its inventory valuation methodology and still be compliant with GAAP?


• Once per month

• Anytime, there are no rules

• Once per year, but not every year

• Never, you decide once and only once

63. Which security makes up the majority of external financing for corporations?


• Common stock

• Preferred stock

• Bank loans

• Bonds

• Venture capital funds

64. What type of analysis will describe how changes in volume affect costs and profits?


• Trend analysis

• Break even analysis

• Common size analysis

• Ratio analysis

• DuPont analysis

65. The three sections of a Statement of Cash Flows are _____.


• Leverage, liquidity, financing

• Operating, investing, profit

• Operating, investing, financing

• Sales, investing, financing

• Operating, investing, borrowing

66. What is the DuPont analysis?


• Breaks Return on Equity into 3 pieces: Operating Efficiency, Asset Use Efficiency, Financial Leverage

• An analysis created by the DuPont paint company

• A ratio analysis style based on factors beyond the financial numbers

• A modified cash flow analysis

67. How does Cash Flow Return on Investment differ from most financial ratios?


• It is the only ratio involving cash flow

• It can be calculated from the income statement

• It assumes the stock market sets prices based on cash flow, not profitability

• It is the only ratio where a negative number is a good result

68. Which cash collection technique is the most cost-effective for companies with many locations?


• Self-addressed stamped envelopes

• Centralized collection system

• Lockbox system

• Using a post office box

• Regional collection offices

69. What is the purpose of measuring stability?


• To determine if management is being ethical

• To determine if the company has an adequate product mix

• To determine the firm's ability to stay in business in the long run

• To determine if the company has too many high level executives

70. Retained earnings will change over time because of several factors. Which of the following factors would lead to an increase in the Retained Earnings?


• Net loss

• Net income

• Dividends

• Investments by stockholders

71. Planning for future growth is called ________.


• capital budgeting

• working capital management

• financial forecasting

• none of the above

72. Pro forma statements are _______ statements.


• actual

• projected

• previous years'

• next years'

73. Which of the following is not a fundamental of accounting?


• Materiality

• Timeliness

• Matching

• Magnitude

74. Asset Turnover is defined as ______.


• Assets/Inventory

• Sales/Assets

• Sales/Net Income

• Assets/Net Income

75. What is the purpose of measuring liquidity?


• To determine if the firm is keeping enough cash on hand to pay accounts payable

• To determine if the firm is investing their liquid assets to earn the highest return available

• To measure a firm's ability to remain cash flow positive and meet its short-term obligations

• To measure a firm's return on investment

76. Which is/are the primary financial statements used to measure solvency?


• Balance Sheet

• Income Statement

• Balance Sheet and Statement of Retained Earnings

• Cash Flow Statement and Income Statement

1 NOT Answered Yet Test Questions:

(hold on, will be updated soon)
77. When a company files a statement of their financial plans for the next two years with the SEC,  it is called a ______.


• Market plan

• Shelf registration

• Stock plan

• Statement of intent

• Prospectus