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1. Which of the following is not a category of financial statement ratios?
A) Financial leverage.
B) Liquidity.
C) Profitability.
D) Prospectus.

2. Management's use of resources can best be evaluated by focusing on measures of:
A) Liquidity.
B) Activity.
C) Leverage.
D) Book value.

3. An individual interested in making a judgment about the profitability of a company should:
A) Review the trend of working capital for several years.
B) Calculate the company's ROI for the most recent year.
C) Review the trend of the company's ROI for several years.
D) Compare the company's ROI for the most recent year with the industry average ROI for the most recent year.

4. An entity's current ratio will be influenced by:
A) The inventory cost flow assumption used.
B) Writing off an overdue account receivable against the allowance for uncollectible accounts.
C) The depreciation method used.
D) Issuance of a stock dividend.

5. A potential creditor's judgment about granting credit would be most influenced by the potential customer's:
A) Current ratio at the end of the prior fiscal year.
B) Most recent acid-test ratio.
C) Trend of acid-test ratio over the past three years.
D) Practice with respect to taking cash discounts offered by current suppliers.

6. The comparison of activity measures of different companies is complicated by the fact that:
A) Different inventory cost flow assumptions may be used.
B) Dollar amounts of assets may be significantly different.
C) Only one of the companies may have preferred stock outstanding.
D) The number of shares of common stock issued may be significantly different.

7. The inventory turnover calculation:
A) Is wrong unless cost of goods sold is used in the numerator.
B) is wrong unless sales is used in the numerator.
C) Is an alternative way of expressing the number of days' sales in inventory.
D) Requires knowledge of the inventory cost flow assumption being used.

8. Asset turnover calculations:
A) Are made by dividing the average asset balance during the year by the sales for the year.
B) Are made by dividing sales for the year by the asset balance at the end of the year.
C) Communicate information about how promptly the entity pays its bills.
D) Should be evaluated by observing the turnover trend over a period of time.

9. The price/earnings ratio:
A) Is a measure of the relative expensiveness of a firm's common stock.
B) Does not usually change by more than 1.0 (e.g. 8.2 to 9.2) during the year.
C) Can be used to determine the cash dividend to be received during the year.
D) Is calculated by dividing the earnings multiple by net income.

10. A higher P/E ratio means that:
A) The stock is more reasonably priced.
B) The stock is relatively expensive.
C) Investors are wary of the stock.
D) Earnings are expected to decrease.

11. When a corporation has both common stock and preferred stock outstanding:
A) Dividends on preferred stock are paid only if the company has current earnings.
B) Dividends on preferred stock must be paid before dividends on common stock can be paid.
C) Preferred stockholders receive the same dividend per share as common stockholders.
D) Dividends on preferred stock are paid only if dividends are to be paid on the common stock.

12. A management that wanted to increase the financial leverage of its firm would:
A) Raise additional capital by selling common stock.
B) Use excess cash to purchase preferred stock for the treasury.
C) Raise additional capital by selling fixed interest rate long-term bonds.
D) Try to increase its ROI by increasing asset turnover.

13. Financial leverage:
A) Arises because most borrowed funds have a fixed interest rate.
B) Arises because most borrowed funds have a variable interest rate.
C) Usually has no bearing on the risk associated with a company.
D) Is a concept that does not apply to individuals.

14. Which of the following is(are) an example of a measure of leverage?
A) Debt yield.
B) Debt payout ratio.
C) Preferred dividend coverage ratio.
D) Debt/equity ratio.
E) All of the above.

15. If a firm's debt ratio were 25%, its debt/equity ratio would be:
A) 25%.
B) 50%.
C) 33.33%.
D) 75%.

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  • MS, University of Wisconsin-Madison
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