Chapter 003 Working with Financial Statements
Multiple Choice Questions
1. Activities of a firm which require the spending of cash are known as:
a. sources of cash.
B. uses of cash.
c. cash payments.
d. cash receipts.
e. cash on hand.
SECTION: 3.1
TOPIC: USES OF CASH
TYPE: DEFINITIONS
2. The sources and uses of cash over a stated period of time are reflected on the:
a. income statement.
b. balance sheet.
c. tax reconciliation statement.
D. statement of cash flows.
e. statement of operating position.
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: DEFINITIONS
3. A common-size statement is an accounting statement that expresses all of a firm's
expenses as a percentage of:
a. total assets.
b. total equity.
c. net income.
d. taxable income.
E. sales.
SECTION: 3.2
TOPIC: COMMON-SIZE STATEMENTS
TYPE: DEFINITIONS
3-1
Chapter 003 Working with Financial Statements
4. A _____ standardizes items on the income statement and balance sheet relative to their
values as of a common point in time.
a. statement of standardization
b. statement of cash flows
C. common-base year statement
d. common-size statement
e. tax reconciliation statement
SECTION: 3.2
TOPIC: COMMON-BASE YEAR STATEMENTS
TYPE: DEFINITIONS
5. Relationships determined from a firm's financial information and used for comparison
purposes are known as:
A. financial ratios.
b. comparison statements.
c. dimensional analysis.
d. scenario analysis.
e. solvency analysis.
SECTION: 3.3
TOPIC: FINANCIAL RATIOS
TYPE: DEFINITIONS
6. Financial ratios that measure a firm's ability to pay its bills over the short run without
undue stress are known as _____ ratios.
a. asset management
b. long-term solvency
C. short-term solvency
d. profitability
e. market value
SECTION: 3.3
TOPIC: SHORT-TERM SOLVENCY RATIOS
TYPE: DEFINITIONS
3-2
Chapter 003 Working with Financial Statements
7. The current ratio is measured as:
a. current assets minus current liabilities.
B. current assets divided by current liabilities.
c. current liabilities minus inventory, divided by current assets.
d. cash on hand divided by current liabilities.
e. current liabilities divided by current assets.
SECTION: 3.3
TOPIC: CURRENT RATIO
TYPE: DEFINITIONS
8. The quick ratio is measured as:
a. current assets divided by current liabilities.
b. (cash on hand plus accounts receivable) divided by current assets.
c. current liabilities divided by current assets.
d. cash on hand divided by current liabilities.
E. (current assets minus inventory) divided by current liabilities.
SECTION: 3.3
TOPIC: QUICK RATIO
TYPE: DEFINITIONS
9. The cash ratio is measured as:
a. current assets divided by current liabilities.
b. (current assets minus cash on hand) divided by current liabilities.
c. (current assets minus current liabilities) divided by cash on hand.
d. (current assets minus inventory) divided by current liabilities.
E. cash on hand divided by current liabilities.
SECTION: 3.3
TOPIC: CASH RATIO
TYPE: DEFINITIONS
3-3
Chapter 003 Working with Financial Statements
10. The financial ratio measured as current assets divided by average daily operating costs
is the:
a. cash ratio.
b. net working capital to total assets ratio.
c. acid-test ratio.
D. interval measure.
e. operating measure.
SECTION: 3.3
TOPIC: INTERVAL MEASURE
TYPE: DEFINITIONS
11. Ratios that measure a firm's financial leverage are known as _____ ratios.
a. asset management
B. long-term solvency
c. short-term solvency
d. profitability
e. book value
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: DEFINITIONS
12. The financial ratio measured as total assets minus total equity, divided by total assets,
is the:
A. total debt ratio.
b. equity multiplier.
c. debt-equity ratio.
d. current ratio.
e. equity ratio.
SECTION: 3.3
TOPIC: TOTAL DEBT RATIO
TYPE: DEFINITIONS
3-4
Chapter 003 Working with Financial Statements
13. The debt-equity ratio is measured as total:
a. equity minus total debt.
b. equity divided by total debt.
C. debt divided by total equity.
d. debt minus total equity.
e. debt plus total equity.
SECTION: 3.3
TOPIC: DEBT-EQUITY RATIO
TYPE: DEFINITIONS
14. The equity multiplier ratio is measured as:
a. total equity divided by total assets.
b. (total equity plus total debt) divided by total assets.
c. (total assets minus total equity) divided by total assets.
d. (total assets minus total equity) divided by total equity.
E. total assets divided by total equity.
SECTION: 3.3
TOPIC: EQUITY MULTIPLIER
TYPE: DEFINITIONS
15. The sum of the long-term debt plus the total equity of a firm is frequently referred to as
the firm's:
a. total assets.
B. total capitalization.
c. total financing.
d. debt-equity consolidation.
e. debt-equity ratio.
SECTION: 3.3
TOPIC: TOTAL CAPITALIZATION
TYPE: DEFINITIONS
3-5
Chapter 003 Working with Financial Statements
16. The financial ratio measured as a firm's long-term debt divided by the firm's total
capitalization is the:
a. interval measure.
b. equity multiplier.
c. total debt ratio.
D. long-term debt ratio.
e. debt-equity ratio.
SECTION: 3.3
TOPIC: LONG-TERM DEBT RATIO
TYPE: DEFINITIONS
17. When you divide EBIT by the amount of the interest expense you are computing the:
a. cash coverage ratio.
b. debt-equity ratio.
C. times interest earned ratio.
d. debt margin.
e. debt ratio.
SECTION: 3.3
TOPIC: TIMES INTEREST EARNED RATIO
TYPE: DEFINITIONS
18. Which one of the following computations is known as the cash coverage ratio?
A. (EBIT + Depreciation) / Interest
b. EBIT / Interest
c. Cash on hand / Current assets
d. Cash on hand / Current liabilities
e. Cash on hand / Interest
SECTION: 3.3
TOPIC: CASH COVERAGE RATIO
TYPE: DEFINITIONS
3-6
Chapter 003 Working with Financial Statements
19. Ratios that measure how efficiently a firm uses its assets to generate sales are known
as _____ ratios.
A. asset utilization
b. long-term solvency
c. short-term solvency
d. profitability
e. market value
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: DEFINITIONS
20. The inventory turnover ratio is measured as:
a. total sales divided by inventory.
b. inventory divided by total sales.
C. cost of goods sold divided by inventory.
d. inventory divided by cost of goods sold.
e. inventory divided by (sales minus cost of goods sold).
SECTION: 3.3
TOPIC: INVENTORY TURNOVER
TYPE: DEFINITIONS
21. The days' sales in inventory ratio is measured as:
a. sales divided by inventory.
b. cost of goods sold divided by inventory.
c. 365 days divided by (sales divided by inventory).
d. 365 days divided by the inventory amount.
E. 365 days divided by the inventory turnover.
SECTION: 3.3
TOPIC: DAYS' SALES IN INVENTORY
TYPE: DEFINITIONS
3-7
Chapter 003 Working with Financial Statements
22. The receivables turnover ratio is measured as:
a. cash divided by accounts receivable.
B. sales divided by accounts receivable.
c. cost of goods sold divided by accounts receivable.
d. accounts receivable divided by cost of goods sold.
e. accounts receivable divided by sales.
SECTION: 3.3
TOPIC: RECEIVABLES TURNOVER
TYPE: DEFINITIONS
23. Days' sales in receivables is equal to:
a. receivables turnover plus 365 days.
b. accounts receivable times 365 days.
c. accounts receivable plus sales, divided by 365 days.
D. 365 days divided by the receivables turnover.
e. 365 days divided by the accounts receivable.
SECTION: 3.3
TOPIC: DAYS' SALES IN RECEIVABLES
TYPE: DEFINITIONS
24. The net working capital turnover ratio is measured as:
A. sales divided by net working capital.
b. sales minus net working capital.
c. sales times net working capital.
d. net working capital divided by sales.
e. net working capital plus sales.
SECTION: 3.3
TOPIC: NET WORKING CAPITAL TURNOVER
TYPE: DEFINITIONS
3-8
Chapter 003 Working with Financial Statements
25. The fixed asset turnover ratio is measured as:
a. cost of goods sold divided by net fixed assets.
b. total assets divided by net fixed assets.
C. sales divided by net fixed assets.
d. net fixed assets divided by sales.
e. net fixed assets divided by total assets.
SECTION: 3.3
TOPIC: FIXED ASSET TURNOVER
TYPE: DEFINITIONS
26. The total asset turnover ratio is equal to:
a. total equity divided by total assets.
B. sales divided by total assets.
c. total assets divided by cost of goods sold.
d. total assets divided by sales.
e. total assets divided by total equity.
SECTION: 3.3
TOPIC: TOTAL ASSET TURNOVER
TYPE: DEFINITIONS
27. Ratios that measure how efficiently a firm manages its assets and operations to
generate net income are referred to as _____ ratios.
a. asset management
b. long-term solvency
c. short-term solvency
D. profitability
e. turnover
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: DEFINITIONS
3-9
Chapter 003 Working with Financial Statements
28. Net income divided by sales is known as a firm's:
A. profit margin.
b. return on assets.
c. return on equity.
d. asset turnover.
e. earnings before interest and taxes.
SECTION: 3.3
TOPIC: PROFIT MARGIN
TYPE: DEFINITIONS
29. Return on assets is equal to:
a. sales divided by current assets.
b. sales divided by total assets.
c. net income divided by current assets.
d. net income divided by net fixed assets.
E. net income divided by total assets.
SECTION: 3.3
TOPIC: RETURN ON ASSETS
TYPE: DEFINITIONS
30. The financial ratio measured as net income divided by total equity is known as the
firm's:
a. profit margin.
b. return on assets.
C. return on equity.
d. asset turnover.
e. earnings before interest and taxes.
SECTION: 3.3
TOPIC: RETURN ON EQUITY
TYPE: DEFINITIONS
3-10
Chapter 003 Working with Financial Statements
31. The ratio computed by dividing the price per share of stock by the earnings per share is
known as the:
a. return on assets.
b. return on equity.
c. debt-equity ratio.
D. price-earnings ratio.
e. Du Pont identity.
SECTION: 3.3
TOPIC: PRICE-EARNINGS RATIO
TYPE: DEFINITIONS
32. The market-to-book ratio is measured as:
a. the market value of total assets divided by the book value of total assets.
b. the market value of inventory divided by the book value of inventory.
c. net income divided by the market value per share.
d. market value per share of stock divided by earnings per share.
E. market value per share divided by book value per share.
SECTION: 3.3
TOPIC: MARKET-TO-BOOK RATIO
TYPE: DEFINITIONS
33. The PEG ratio is equal to the price per share divided by the:
A. expected future earnings growth rate.
b. profit margin.
c. sales growth rate.
d. growth rate of inflation.
e. earnings per share.
SECTION: 3.3
TOPIC: PEG RATIO
TYPE: DEFINITIONS
3-11
Chapter 003 Working with Financial Statements
34. The market value of a firm's assets divided by the replacement cost of those assets is
referred to as:
A. Tobin's Q.
b. the market-to-book value.
c. the PEG ratio.
d. the asset growth rate.
e. the asset turnover.
SECTION: 3.3
TOPIC: TOBIN'S Q
TYPE: DEFINITIONS
35. The price-sales ratio is equal to the:
a. average price of a product divided by the annual sales of a firm.
b. average price of a product divided by the number of products sold in one year.
c. current price of a product divided by the number of products in inventory that are ready
for sale.
d. price per share divided by sales growth rate.
E. price per share divided by the sales per share.
SECTION: 3.3
TOPIC: PRICE-SALES RATIO
TYPE: DEFINITIONS
36. The U.S. government coding system that classifies firms by their specific type of
business operations is known as the:
a. NASDAQ 100.
b. Standard & Poor's 500.
C. Standard Industrial Classification code.
d. Governmental ID code.
e. Government Engineered Coding System.
SECTION: 3.5
TOPIC: SIC CODES
TYPE: DEFINITIONS
3-12
Chapter 003 Working with Financial Statements
37. Which one of the following is a source of cash?
A. an increase in accounts payable
b. an increase in cash
c. a purchase of inventory
d. the payoff of a loan
e. a credit sale to a customer
SECTION: 3.1
TOPIC: SOURCES OF CASH
TYPE: CONCEPTS
38. Which one of the following is a source of cash?
a. an increase in accounts receivable
b. a decrease in common stock
C. an increase in long-term debt
d. a decrease in accounts payable
e. a dividend distribution
SECTION: 3.1
TOPIC: SOURCES OF CASH
TYPE: CONCEPTS
39. Which one of the following is a use of cash?
a. payment received from a customer on his or her account
b. sale of inventory to a cash customer
c. decrease in the cash balance
d. sale of common stock
E. payment to a supplier
SECTION: 3.1
TOPIC: USES OF CASH
TYPE: CONCEPTS
3-13
Chapter 003 Working with Financial Statements
40. Which one of the following is found in the financing activity section of a statement of
cash flows?
a. fixed asset acquisition
b. depreciation expense
c. increase in accounts receivable
D. dividend payment
e. net income
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: CONCEPTS
41. According to the statement of cash flows, an increase in accounts receivable will
_____ the cash flow from _____ activities.
A. decrease; operating
b. decrease; financing
c. increase; operating
d. increase; financing
e. increase; investment
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: CONCEPTS
42. Which of the following appear in the operating activity section of a statement of cash
flows?
I. decrease in long-term debt
II. fixed asset acquisition
III. increase in accounts receivable
IV. net income
a. II only
b. III only
c. I and II only
d. II and III only
E. III and IV only
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: CONCEPTS
3-14
Chapter 003 Working with Financial Statements
43. On a common-size balance sheet all accounts are expressed as:
a. a percentage of sales.
b. whole dollars.
c. the number of dollars in thousands.
D. a percentage of total assets.
e. a percentage of total equity.
SECTION: 3.2
TOPIC: COMMON-SIZE BALANCE SHEET
TYPE: CONCEPTS
44. On a common-base year financial statement, all accounts are expressed relative to the
base:
A. year amount.
b. amount of sales.
c. amount of total assets.
d. net income.
e. net cash flow.
SECTION: 3.2
TOPIC: COMMON-BASE YEAR FINANCIAL STATEMENT
TYPE: CONCEPTS
45. Which of the following are liquidity ratios?
I. interval measure
II. current ratio
III. quick ratio
IV. net working capital to total assets
a. II and III only
b. I and II only
c. II, III, and IV only
d. I, III, and IV only
E. I, II, III, and IV
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: CONCEPTS
3-15
Chapter 003 Working with Financial Statements
46. A decrease in which one of the following will decrease a firm's current ratio without
affecting its quick ratio?
a. prepaid expenses
b. cash
C. inventory
d. accounts receivable
e. fixed assets
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: CONCEPTS
47. A supplier, who requires payment within ten days, is most concerned with which one
of the following ratios when granting credit?
a. current
B. cash
c. debt-equity
d. quick
e. total debt
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: CONCEPTS
48. A firm has an interval measure of 59. This means that the firm must:
a. pay its suppliers in full within the next 59 hours or lose the accounts payable discounts.
B. obtain additional liquid assets within the next 59 days or possibly be forced to cease
operations.
c. repay its long-term debt within the next 59 days or face possible bankruptcy
proceedings by the firm's creditors.
d. pay interest on its long-term debt every 59 days.
e. sell its entire inventory every 59 days to remain profitable.
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: CONCEPTS
3-16
Chapter 003 Working with Financial Statements
49. A firm has a total debt ratio of .63. This means that that firm has $0.63 in debt for
every:
a. $1.00 in total equity.
b. $1.00 in total sales.
c. $1.00 in current assets.
D. $0.37 in total equity.
e. $0.37 in total assets.
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: CONCEPTS
50. The long-term debt ratio is probably of most interest to a firm's:
a. credit customers.
b. employees.
c. suppliers.
D. mortgage holder.
e. shareholders.
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: CONCEPTS
51. A banker considering loaning money to a firm for ten years would most likely prefer
the firm have a debt ratio of _____ and a times interest earned ratio of_____
a. .75; .75.
b. .50; 1.00.
c. .45; 1.75.
d. .40; 2.50.
E. .35; 3.00.
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: CONCEPTS
3-17
Chapter 003 Working with Financial Statements
52. From a cash flow point of view, which one of the following ratios best measures a
firm's ability to pay the interest on its debts?
a. times interest earned ratio
B. cash coverage ratio
c. cash ratio
d. quick ratio
e. interval measure
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: CONCEPTS
53. The lower the inventory turnover, the:
a. faster a firm sells its inventory.
B. longer it takes a firm to sell its inventory.
c. greater the profit margin.
d. longer the receivables period.
e. lower the days' sales in inventory.
SECTION: 3.3
TOPIC: ASSET UTILITIZATION RATIOS
TYPE: CONCEPTS
54. Mansfield Enterprises currently has a total asset turnover of 1.21. Which one of the
following set of circumstances must increase this ratio regardless of the size of the
changes that occur? Assume that all else remains constant.
a. decrease in sales and increase in current assets
b. decrease in sales and increase in total assets
C. increase in sales and decrease in total assets
d. increase in both sales and net fixed assets
e. decrease in both sales and total assets
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: CONCEPTS
3-18
Chapter 003 Working with Financial Statements
55. Which one of the following must increase the net working capital turnover?
a. increase in current assets
b. increase in total assets
c. decrease in current liabilities
d. decrease in total liabilities
E. increase in sales
SECTION: 3.3
TOPIC: AACSB UTILIZATION RATIOS
TYPE: CONCEPTS
56. Delfino's has a fixed asset turnover rate of 1.3 and a total asset turnover rate of .92.
Frederick's has a fixed asset turnover rate of 1.2 and a total asset turnover rate of 1.03.
Both companies have similar operations. Delfino's is:
A. utilizing its fixed assets more efficiently than Frederick's.
b. utilizing its total assets more efficiently than Frederick's.
c. generating $1 in sales for every $1.30 in net fixed assets.
d. generating $1.30 in net income for every $1 in net fixed assets.
e. more profitable than Frederick's.
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: CONCEPTS
57. The Corner Bakery generates $0.035 of net income for every $1 in sales. The bakery
has a _____ of 3.5 percent.
a. return on assets
b. return on equity
C. profit margin
d. Du Pont measure
e. total asset turnover
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: CONCEPTS
3-19
Chapter 003 Working with Financial Statements
58. If a firm produces a twelve percent return on assets and also a twelve percent return on
equity, then the firm:
a. may have short-term, but not long-term debt.
b. is using its assets as efficiently as possible.
c. has no net working capital.
d. has a debt-equity ratio of 1.0.
E. has an equity multiplier of 1.0.
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: CONCEPTS
59. An increase in the profit margin, all else constant, will:
a. lower the return on assets.
b. increase the equity multiplier.
C. increase the return on equity.
d. increase the PEG ratio.
e. decrease Tobin's Q.
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: CONCEPTS
60. If a firm can decrease its costs while maintaining the current level of sales, its:
A. return on equity will increase.
b. return on assets will decrease.
c. profit margin will decline.
d. equity multiplier will decrease.
e. price-earnings ratio will increase.
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: CONCEPTS
3-20
Chapter 003 Working with Financial Statements
61. The only difference between Larry's and Lana's stores is that Larry's store has been in
existence longer. Thus, the assets in Larry's store are almost fully depreciated. Lana's store
opened recently so her store's assets have barely been depreciated. Which one of the
following statements must be true?
a. Larry's store will have a lower profit margin.
b. Larry's store will have a lower return on equity.
c. Lana's store will have a higher net income.
D. Lana's store will have a lower profit margin.
e. Lana's store will have a higher return on assets.
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: CONCEPTS
62. Uptown Express has a price-earnings ratio of 18.5. Downtown Express also has a
price-earnings ratio of 18.5. Which one of the following statements must be true if
Uptown Express has a higher PEG ratio than Downtown Express?
a. Uptown Express has more net income than Downtown Express.
B. Downtown Express is increasing its earnings at a faster rate than the Uptown Express.
c. Uptown Express has a higher market value per share than does Downtown Express.
d. Downtown Express has a lower market-to-book ratio than Uptown Express.
e. Uptown Express has a higher net income than Downtown Express.
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: CONCEPTS
63. Tobin's Q relates the market value of a firm today to:
a. the initial cost of creating the firm.
b. the current book value of the firm.
c. the average cost of similar firms.
d. the average market value of similar firms.
E. today's cost to duplicate the firm.
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: CONCEPTS
3-21
Chapter 003 Working with Financial Statements
64. The price-sales ratio is especially useful when analyzing firms that have:
a. volatile market prices.
B. negative earnings.
c. positive PEG ratios.
d. a negative Tobin's Q.
e. increasing sales.
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: CONCEPTS
65. Which one of the following sets of ratios applies most directly to shareholders?
a. return on assets and profit margin
b. long-term debt and times interest earned ratios
c. price-earnings and debt-equity ratios
d. market-to-book and times interest earned ratios
E. Tobin's Q and price-earnings ratio
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: CONCEPTS
66. The three parts of the Du Pont identity can be described as:
a. operating efficiency, asset use efficiency, and profitability.
b. financial leverage, operating efficiency, and profitability.
C. the equity multiplier, the profit margin, and the total asset turnover.
d. the debt-equity ratio, the capital intensity ratio, and the profit margin.
e. the return on assets, the profit margin, and the equity multiplier.
SECTION: 3.4
TOPIC: DU PONT IDENTITY
TYPE: CONCEPTS
3-22
Chapter 003 Working with Financial Statements
67. An increase in which of the following will increase the return on equity, all else
constant?
I. sales
II. net income
III. total assets
IV. total equity
a. I only
B. II only
c. II and IV only
d. II and III only
e. I, II, and III only
SECTION: 3.4
TOPIC: DU PONT IDENTITY
TYPE: CONCEPTS
68. Which one of the following statements is correct?
a. Book values should always be given precedence over market values.
B. Financial statements are frequently the basis used for performance evaluations.
c. Historical information has no value when predicting the future.
d. Potential lenders place little value on financial statement information.
e. Reviewing financial information over time has very limited value.
SECTION: 3.5
TOPIC: EVALUATING FINANCIAL STATEMENTS
TYPE: CONCEPTS
69. It is easier to evaluate a firm using financial statements when the firm:
a. is a conglomerate.
b. is global in nature.
C. uses the same accounting procedures as other firms in their industry.
d. has a different fiscal year than other firms in their industry.
e. tends to have many one-time events such as asset sales and property acquisitions.
SECTION: 3.5
TOPIC: EVALUATING FINANCIAL STATEMENTS
TYPE: CONCEPTS
3-23
Chapter 003 Working with Financial Statements
70. The most acceptable method of evaluating the financial statements of a firm is to
compare the firm's current:
A. financial ratios to the firm's historical ratios.
b. financial statements to the financial statements of similar firms operating in other
countries.
c. financial ratios to the average ratios of all firms located within the same geographic
area.
d. financial statements to those of larger firms in unrelated industries.
e. financial statements to the projections that were created based on Tobin's Q.
SECTION: 3.5
TOPIC: EVALUATING FINANCIAL STATEMENTS
TYPE: CONCEPTS
71. Which of the following represent problems encountered when comparing the financial
statements of one firm with those of another firm?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of
business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods for inventory purposes.
IV. The two firms may be seasonal in nature and have different fiscal year ends.
a. I and II only
b. II and III only
c. I, III, and IV only
d. I, II, and III only
E. I, II, III, and IV
SECTION: 3.5
TOPIC: EVALUATING FINANCIAL STATEMENTS
TYPE: CONCEPTS
3-24
Chapter 003 Working with Financial Statements
72. Margo's Dress Shoppe had the following values as of the end of last year and the end
of this year. Which of the following are sources of cash for the year?
a. cash and accounts receivable
b. cash and accounts payable
c. accounts receivable and inventory
d. cash, accounts payable, and inventory
E. accounts payable, accounts receivable, and inventory
AACSB TOPIC: ANALYTIC
SECTION: 3.1
TOPIC: SOURCES AND USES OF CASH
TYPE: PROBLEMS
73. During the year, The Train Stop decreased its accounts receivable by $60, increased its
inventory by $130, and decreased its accounts payable by $20. For these three accounts,
the firm has a net:
A. $90 use of cash.
b. $50 use of cash.
c. $170 use of cash.
d. $90 source of cash.
e. $50 source of cash.
Net cash flow = +$60
$130
$20 =
$90, which is a use of cash
AACSB TOPIC: ANALYTIC
SECTION: 3.1
TOPIC: SOURCES AND USES OF CASH
TYPE: PROBLEMS
3-25
Chapter 003 Working with Financial Statements
74. A firm generated net income of $624. The depreciation expense was $58 and
dividends were paid in the amount of $72. Accounts payables decreased by $28, accounts
receivables increased by $16, inventory increased by $41, and net fixed assets increased
by $28. What was the net cash flow from operating activity?
a. $497
b. $553
C. $597
d. $608
e. $641
Net cash from operating activities = $624 + $58
$28
$16
$41 = $597
AACSB TOPIC: ANALYTIC
SECTION: 3.1
TOPIC: SOURCES AND USES OF CASH
TYPE: PROBLEMS
75. A firm has sales of $1,640, net income of $135, net fixed assets of $1,200, and current
assets of $530. The firm has $280 in inventory. What is the common-size statement value
of inventory?
a. 15.01 percent
b. 15.68 percent
C. 16.18 percent
d. 30.42 percent
e. 52.83 percent
Common-size inventory = $280
($1,200 + $530) = .1618497 = 16.18 percent
AACSB TOPIC: ANALYTIC
SECTION: 3.2
TOPIC: COMMON-SIZE STATEMENTS
TYPE: PROBLEMS
3-26
Chapter 003 Working with Financial Statements
76. A firm has sales of $1,800, net income of $210, total assets of $1,400, and total equity
of $950. Interest expense is $35. What is the common-size statement value of the interest
expense?
A. 1.94 percent
b. 2.50 percent
c. 3.69 percent
d. 12.58 percent
e. 16.67 percent
Common-size interest = $35
$1,800 = .01944 = 1.94 percent
AACSB TOPIC: ANALYTIC
SECTION: 3.2
TOPIC: COMMON-SIZE STATEMENTS
TYPE: PROBLEMS
77. Last year, which is used as the base year, a firm had cash of $46, accounts receivable
of $132, inventory of $319, and net fixed assets of $640. This year, the firm has cash of
$52, accounts receivable of $147, inventory of $312, and net fixed assets of $576. What is
the common-base year value of accounts receivable?
a. .88
b. .90
C. 1.11
d. 1.13
e. 1.18
Common-base year accounts receivable = $147
AACSB TOPIC: ANALYTIC
SECTION: 3.2
TOPIC: COMMON-BASE YEAR STATEMENTS
TYPE: PROBLEMS
3-27
$132 = 1.11
Chapter 003 Working with Financial Statements
78. Monika's Gift Barn has cash of $316, accounts receivable of $687, accounts payable of
$709, and inventory of $2,108. What is the value of the quick ratio?
a. .23
b. .45
c. .71
D. 1.41
e. 4.38
Quick ratio = ($316 + $687)
$709 = 1.41
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: PROBLEMS
79. Jeminson's Hardware has accounts payable of $682, inventory of $3,608, cash of $340,
fixed assets of $4,211, accounts receivable of $418, and long-term debt of $3,750. What is
the value of the net working capital to total assets ratio?
a. .29
b. .37
C. .43
d. .47
e. .56
Net working capital to total assets = ($340 + $418 + $3,608
$3,608 + $4,211) = $3,684 $8,577 = .4295 = .43
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: PROBLEMS
3-28
$682)
($340 + $418 +
Chapter 003 Working with Financial Statements
80. A firm has total assets of $126,740 and net fixed assets of $82,408. The average daily
operating costs are $1,211. What is the value of the interval measure?
a. 1.47 days
b. 2.73 days
C. 36.61 days
d. 68.05 days
e. 104.66 days
Interval measure = ($126,740
$82,408)
$1,211 = 36.6078 = 36.61 days
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: PROBLEMS
81. A firm has a debt-equity ratio of .56. What is the total debt ratio?
a. .29
B. .36
c. .44
d. 1.44
e. 1.56
The debt-equity ratio is .56. Thus, if total debt is $56, total equity is $100, and total assets
are $156. Total debt ratio = $56 $156 = .3590 = .36
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: PROBLEMS
3-29
Chapter 003 Working with Financial Statements
82. A firm has total debt of $1,850 and a debt-equity ratio of .64. What is the value of the
total assets?
a. $1,128.05
b. $1,184.00
c. $2,571.95
d. $3,034.00
E. $4,740.63
Total equity = $1,850 .64 = $2,890.625; Total assets = $1,850 + $2,890.625 =
$4,740.625 = $4,740.63
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: PROBLEMS
83. A firm has sales of $49,800, costs of $36,100, interest paid of $380, and depreciation
of $3,200. The tax rate is 35 percent. What is the value of the cash coverage ratio?
a. 25.73
b. 30.00
c. 32.11
D. 36.05
e. 41.08
Cash coverage ratio = ($49,800
$36,100)
$380 = 36.05
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: PROBLEMS
3-30
Chapter 003 Working with Financial Statements
84. Herman's Bar and Grill paid $1,618 in interest and $265 in dividends last year. The
times interest earned ratio is 1.9 and the depreciation expense is $50. What is the value of
the cash coverage ratio?
a. 1.62
b. 1.87
C. 1.93
d. 1.99
e. 2.11
EBIT = 1.9
1.93
$1,618 = $3,074.20; Cash coverage ratio = ($3,074.20 + $50)
$1,618 =
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LONG-TERM SOLVENCY RATIOS
TYPE: PROBLEMS
85. Big Foot Wholesalers has sales of $1,387,400, costs of goods sold of $891,400,
inventory of $188,936, and accounts receivable of $94,800. How many days, on average,
does it take the firm to sell its inventory assuming that all sales are on credit?
a. 49.8 days
b. 53.2 days
C. 77.4 days
d. 84.1 days
e. 86.3 days
Inventory turnover = $891,400
77.4 days
$188,936 = 4.718; Days in inventory = 365
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: PROBLEMS
3-31
4.718 =
Chapter 003 Working with Financial Statements
86. Qwik Stop has accounts receivable of $4,830, inventory of $9,083, sales of $38,600,
and cost of goods sold of $21,400. How many days does it take the firm to both sell their
inventory and collect the payment on the sale?
a. 186 days
b. 193 days
C. 201 days
d. 214 days
e. 217 days
Days in inventory = 365 ($21,400 $9,083) = 154.92 days; Days' sales in receivables
= 365 ($38,600 $4,830) = 45.67 days; Total days in inventory and receivables =
154.92 + 45.67 = 200.59 days = 201 days
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: PROBLEMS
87. A firm has net working capital of $2,580, net fixed assets of $13,120, sales of $22,580,
and current liabilities of $1,610. How many dollars worth of sales are generated from
every $1 in total assets?
a. $1.27
B. $1.30
c. $1.67
d. $1.72
e. $1.75
Total asset turnover = $22,580
assets generates $1.30 in sales.
($2,580 + $13,120 + $1,610) = 1.30; Every $1 in total
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: PROBLEMS
3-32
Chapter 003 Working with Financial Statements
88. Gateway Lodging has annual sales of $1.22 million, total debt of $380,000, total
equity of $750,000, and a profit margin of 7.45 percent. What is the return on assets?
a. 6.97 percent
b. 7.13 percent
c. 7.56 percent
d. 7.78 percent
E. 8.04 percent
Return on assets = (.0745 $1,220,000)
$1,130,000 = .08043 = 8.04 percent
($380,000 + $750,000) = $90,890
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: PROBLEMS
89. Baker's Used Autos has sales of $638,400, total assets of $524,200, and a profit margin
of 9.8 percent. The firm has a total debt ratio of 35 percent. What is the return on equity?
a. 11.93 percent
b. 14.47 percent
C. 18.36 percent
d. 21.05 percent
e. 28.00 percent
Return on equity = (.098 $638,400)
$340,730 = .18362 = 18.36 percent
[$524,200
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: PROBLEMS
3-33
(1
.35)] = $62,563.20
Chapter 003 Working with Financial Statements
90. Katrina's Fury has $697,400 in sales. The profit margin is 3.4 percent and the firm has
12,500 shares of stock outstanding. The market price per share is $33. What is the priceearnings ratio?
a. 15.8
b. 16.2
c. 16.6
d. 17.1
E. 17.4
Earnings per share = (.034 $697,400)
$33.00 1.89693 = 17.3965 = 17.4
12,500 = .1.89693; Price-earnings ratio =
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: PROBLEMS
91. Patti's Pizza has net income of $218,490, a price-earnings ratio of 14.6, and earnings
per share of $1.32. How many shares of stock are outstanding?
a. 14,965
b. 19,754
C. 165,523
d. 171,000
e. 173,407
Number of shares = $218,490
$1.32 = 165,522.73 = 165,523
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: PROBLEMS
3-34
Chapter 003 Working with Financial Statements
92. A firm has 11,000 shares of stock outstanding, sales of $1.62 million, net income of
$20,020, a price-earnings ratio of 21.6, and a book value per share of $8.64. What is the
market-to-book ratio?
a. 1.82
b. 2.11
c. 2.50
d. 3.79
E. 4.55
Earnings per share = $20,020 11,000 = $1.82; Price per share = $1.82
$39.312; Market-to-book ratio = $39.312 $8.64 = 4.55
21.6 =
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: PROBLEMS
93. The Furniture Barn has a profit margin of 8.7 percent, a return on assets of 11.6
percent, and an equity multiplier of 1.87. What is the return on equity?
a. 17.14 percent
b. 19.87 percent
c. 20.67 percent
D. 21.69 percent
e. 24.08 percent
Return on equity = 11.6 percent
1.87 = 21.69 percent, using the Du Pont Identity
AACSB TOPIC: ANALYTIC
SECTION: 3.4
TOPIC: DU PONT IDENTITY
TYPE: PROBLEMS
3-35
Chapter 003 Working with Financial Statements
94. Taylor's Men's Wear has a debt-equity ratio of 55 percent, sales of $587,000, net
income of $63,400, and total debt of $196,000. What is the return on equity?
a. 15.80 percent
B. 17.79 percent
c. 18.03 percent
d. 19.41 percent
e. 19.58 percent
Return on equity = $63,400
($196,000
.55) = .17791 = 17.79 percent
AACSB TOPIC: ANALYTIC
SECTION: 3.4
TOPIC: DU PONT IDENTITY
TYPE: PROBLEMS
95. A firm has a debt-equity ratio of 62 percent, a total asset turnover of 1.39, and a profit
margin of 7.8 percent. The total equity is $672,100. What is the amount of the net
income?
A. $118,048
b. $119,600
c. $120,202
d. $121,212
e. $124,097
Using the Du Pont identity: Total assets = (1 + .62) $672,100 = $1,088,802; Total sales
= $1,088,802 1.39 = $1,513,434.78; Net income = $1,513,434.78 .078 = $118,048
AACSB TOPIC: ANALYTIC
SECTION: 3.4
TOPIC: DU PONT IDENTITY
TYPE: PROBLEMS
3-36
Chapter 003 Working with Financial Statements
* The par value of the common stock is $1 per share.
96. What is the quick ratio for 2007? (Use 2007 values.)
A. .58
b. .63
c. 1.58
d. 1.74
e. 2.47
Quick ratio for 2007 = ($167,600 - $128,500)
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: PROBLEMS
3-37
$67,900 = .5758 = .58
Chapter 003 Working with Financial Statements
97. What is the days' sales in receivables? (Use 2007 values.)
A. 17.08 days
b. 23.33 days
c. 26.49 days
d. 29.41 days
e. 32.65 days
Accounts receivable turnover for 2007 = $318,400
receivables for 2007 = 365 21.36913 = 17.08
$14,900 = 21.36913; Days' sales in
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: PROBLEMS
98. What is the price-sales ratio if the market price is $17.70 per share?
a. 2.67
b. 3.29
C. 3.34
d. 3.41
e. 3.55
Price-sales ratio = $17.70
[$318,400
($60,000
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: PROBLEMS
3-38
$1)] = $17.70
$5.30667 = 3.34
Chapter 003 Working with Financial Statements
99. What is debt-equity ratio? (Use 2007 values.)
a. .84
b. .92
c. .97
d. 1.09
E. 1.19
Debt-equity ratio = ($67,900 + $89,600)
= 1.19
($60,000 + $71,900) = $157,500
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: FINANCIAL LEVERAGE RATIOS
TYPE: PROBLEMS
100. What is the cash coverage ratio for 2007?
a. 8.74
b. 8.80
c. 11.64
d. 11.82
E. 12.31
Cash coverage ratio = ($79,500 + $9,100)
$7,200 = 12.31
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: FINANCIAL LEVERAGE RATIOS
TYPE: PROBLEMS
101. What is the return on equity? (Use 2007 values.)
a. 17.82 percent
b. 18.47 percent
c. 27.70 percent
d. 29.96 percent
E. 35.63 percent
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: PROBLEMS
3-39
$131,900
Chapter 003 Working with Financial Statements
102. What amount should be included in the financing section of the 2007 statement of
cash flows for dividends paid?
a. $0
b. $5,400
C. $8,600
d. $14,500
e. $27,300
Dividends paid = $47,000
($71,900
$33,500) = $8,600
AACSB TOPIC: ANALYTIC
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: PROBLEMS
103. What is the amount of the net cash from investment activity for 2007?
a. $37,300
b. $41,800
C. $46,400
d. $52,000
e. $52,400
Cash flow from investment activity = $121,800
AACSB TOPIC: ANALYTIC
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: PROBLEMS
3-40
$84,500 + $9,100 = $46,400
Chapter 003 Working with Financial Statements
104. What is the net working capital to total assets ratio for 2007?
a. 24.18 percent
b. 26.23 percent
C. 26.38 percent
d. 37.43 percent
e. 40.17 percent
Net working capital to total assets for 2007 = ($7,594
26.38 percent
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: LIQUIDITY RATIOS
TYPE: PROBLEMS
3-41
$2,607)
$18,904 = .26381 =
Chapter 003 Working with Financial Statements
105. How many days on average does it take Waxham's Feed Mill to sell its inventory?
(Use 2007 values)
a. 72.18
b. 87.77
c. 90.18
d. 111.02
E. 114.71
Days' sales in inventory = 365
($16,829
$5,289) = 114.71 days
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: PROBLEMS
106. How many dollars of sales are being generated from every dollar of fixed assets?
(Use 2007 values.)
a. $1.49
b. $1.53
c. $1.86
D. $1.89
e. $1.99
Fixed asset turnover for 2007 = $21,407
assets, the firm generates $1.89 in sales.
$11,310 = 1.89; For every $1 in net fixed
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: ASSET UTILIZATION RATIOS
TYPE: PROBLEMS
3-42
Chapter 003 Working with Financial Statements
107. What is the equity multiplier for 2007?
a. 1.67
b. 1.72
C. 1.91
d. 1.94
e. 2.03
Equity multiplier for 2007 = $18,904
($7,500 + $2,397) = 1.91
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: FINANCIAL LEVERAGE RATIOS
TYPE: PROBLEMS
108. What is the times interest earned ratio for 2007?
a. 1.63
b. 2.12
c. 2.51
d. 2.63
E. 3.51
Times interest earned for 2007 = $3,254
$927 = 3.51
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: FINANCIAL LEVERAGE RATIOS
TYPE: PROBLEMS
109. What is the return on equity for 2007? (Use 2007 values.)
A. 15.29 percent
b. 16.46 percent
c. 17.38 percent
d. 18.04 percent
e. 18.12 percent
Return on equity for 2007 = $1,513
($7,500 + $2,397) = .15287 = 15.29 percent
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: PROFITABILITY RATIOS
TYPE: PROBLEMS
3-43
Chapter 003 Working with Financial Statements
110. What is the net cash flow from investment activity for 2007?
A. $1,115
b. $887
c. $614
d. $209
e. $308
Cash flow from investment activity for 2007 = $1,115; Addition to net fixed assets =
$11,310 $11,519 + $1,324 = $1,115
AACSB TOPIC: ANALYTIC
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: PROBLEMS
111. How does accounts receivable affect the statement of cash flows for 2007?
a. a use of $115 of cash as an investment activity
b. a source of $115 of cash as an operating activity
c. a use of $115 of cash as a financing activity
d. a source of $115 of cash as an investment activity
E. a use of $115 of cash as an operating activity
Change in accounts receivable for 2007 = $1,318 $1,203 = $115; An increase in
accounts receivable is a use of cash as an operating activity.
AACSB TOPIC: ANALYTIC
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
TYPE: PROBLEMS
3-44
Chapter 003 Working with Financial Statements
112. Lander & Sons have earnings per share of $1.32. The firm's earnings have been
increasing at an average rate of 2.3 percent annually and are expected to continue doing
so. The firm has 14,500 shares of stock outstanding at a price per share of $26.40. What is
the firm's PEG ratio?
a. 6.10
B. 8.70
c. 11.48
d. 13.20
e. 20.00
PEG ratio = ($26.40
$1.32)
(.023
100) = 20
2.3 = 8.696 = 8.70
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: PROBLEMS
113. Katylyn Designers has a PEG ratio of 4.6, net income of $68,400, a price-earnings
ratio of 22.4, and a profit margin of 6.4 percent. What is the earnings growth rate?
a. 1.39 percent
b. 2.47 percent
c. 3.50 percent
D. 4.87 percent
e. 5.00 percent
4.6 = 22.4
(Earnings growth rate
100); Earnings growth rate = 4.87 percent
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: PROBLEMS
3-45
Chapter 003 Working with Financial Statements
114. A firm has total assets with a current book value of $52,900, a current market value
of $69,200, and a current replacement cost of $81,600. What is the value of Tobin's Q?
A. .85
b. .87
c. .92
d. .95
e. .99
Tobin's Q = $69,200
$81,600 = .848 = .85
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: PROBLEMS
115. Bradford Industrial Supply has total assets with a current book value of $201,016 and
a current replacement cost of $271,500. The market value of the firm's debt is $75,000 and
the market value of the firm's equity is $213,400. What is the value of Tobin's Q?
a. .86
b. .92
c. .97
d. 1.01
E. 1.06
Tobins' Q = ($75,000 + $213,400)
$271,500 = 1.062 = 1.06
AACSB TOPIC: ANALYTIC
SECTION: 3.3
TOPIC: MARKET VALUE RATIOS
TYPE: PROBLEMS
3-46
Chapter 003 Working with Financial Statements
Essay Questions
116. Assume your firm has a positive cash balance which is increasing annually. Why then
is it important to analyze a statement of cash flows?
It is possible that the increase in the cash flows is a result of issuing more equity or
assuming more debt and not the result of generating cash from operations. If a firm cannot
generate positive cash flows internally, the firm may eventually encounter difficulties in
raising external funds and could encounter financial difficulties and possibly face
bankruptcy.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 3.1
TOPIC: STATEMENT OF CASH FLOWS
117. What analytical benefit do common size statements provide to financial managers?
Common size statements provide an easy means of comparing relative values across
various time periods and across firms of various sizes.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 3.2
TOPIC: COMMON SIZE STATEMENTS
118. In general, what does a high Tobin's Q value indicate and how reliable does that
value tend to be?
A high Tobin's Q indicates that the current market value of a firm's assets represents a high
percentage of the firm's replacement cost. Higher Q values tend to indicate that a firm has
a significant competitive advantage and /or has attractive investment opportunities. The
problem with Tobin's Q is that the information used in the computation of the Q value is
often questionable.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 3.3
TOPIC: TOBIN'S Q
3-47
Chapter 003 Working with Financial Statements
119. What value does the PEG ratio provide to financial analysts?
The PEG ratio divides the PE ratio by the expected future earnings growth rate. A high
PEG value tends to indicate that the firm's PE ratio, and thus the stock price, is too high
relative to the expected growth rate of the firm's earnings.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 3.3
TOPIC: PEG RATIO
120. What value does the price-sales ratio provide to financial managers that the priceearnings ratio cannot?
The price-earnings ratio loses its value when a firm has either zero or negative earnings.
This problem is avoided when the price-sales ratio is applied as sales should always be a
positive value. In addition, the price-sales ratio is not affected by a firm's expenses
whereas the price-earnings ratio is. Thus, both ratios can be used to ascertain if there is
any major change in the relationship between a firm's costs and its sales.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 3.3
TOPIC: PRICE-SALES RATIO
3-48