Question 1. Ratio analysis involves a comparison of the relationships between

1. Ratio analysis involves a comparison of the relationships between
financial statement accounts so as to analyze the financial position
and strength of a firm.
a. True
b. False
2. The current ratio and inventory turnover ratio measure the liquidity of
a firm. The current ratio measures the relationship of a firm’s
current assets to its current liabilities and the inventory turnover
ratio measures how rapidly a firm turns its inventory back into
a “quick” asset or cash.
a. True
b. False
3. If a firm has high current and quick ratios, this is always a good
indication that a firm is managing its liquidity position well.
a. True
b. False
4. The inventory turnover ratio and days sales outstanding (DSO) are two
ratios that can be used to assess how effectively the firm is managing
its assets in consideration of current and projected operating levels.
a. True
b. False
5. A decline in the inventory turnover ratio suggests that the firm’s
liquidity position is improving.
a. True
b. False
6. The degree to which the managers of a firm attempt to magnify the
returns to owners’ capital through the use of financial leverage is
captured in debt management ratios.
a. True
b. False
7. The times-interest-earned ratio is one indication of a firm’s ability
to meet both long-term and short-term obligations.
a. True
b. False
8. Profitability ratios show the combined effects of liquidity, asset
management, and debt management on operations.
a. True
b. False
9. Since ROA measures the firm’s effective utilization of assets (without
considering how these assets are financed), two firms with the same
EBIT must have the same ROA.
a. True
b. False
10. Market value ratios provide management with a current assessment of how
investors in the market view the firm’s past performance and future
prospects.
a. True
b. False
11. Determining whether a firm’s financial position is improving or
deteriorating requires analysis of more than one set of financial
statements. Trend analysis is one method of measuring a firm’s
performance over time.
a. True
b. False
Medium:
12. If the current ratio of Firm A is greater than the current ratio of
Firm B, we cannot be sure that the quick ratio of Firm A is greater
than that of Firm B. However, if the quick ratio of Firm A exceeds
that of Firm B, we can be assured that Firm A’s current ratio also
exceeds B’s current ratio.
a. True
b. False
13. The inventory turnover and current ratios are related. The combination
of a high current ratio and a low inventory turnover ratio relative to
the industry norm might indicate that the firm is maintaining too high
an inventory level or that part of the inventory is obsolete or damaged.
a. True
b. False
14. We can use the fixed assets turnover ratio to legitimately compare
firms in different industries as long as all the firms being compared
are using the same proportion of fixed assets to total assets.
a. True
b. False
15. Suppose two firms have the same amount of assets, pay the same interest
rate on their debt, have the same basic earning power (BEP), and have
the same tax rate. However, one firm has a higher debt ratio. If BEP
is greater than the interest rate on debt, the firm with the higher
debt ratio will also have a higher rate of return on common equity.
a. True
b. False
16. If the equity multiplier is 2.0, the debt ratio must be 0.5.
a. True
b. False
17. Suppose a firm wants to maintain a specific TIE ratio. If the firm
knows the level of its debt, the interest rate it will pay on that
debt, and the applicable tax rate, the firm can then calculate the
earnings level required to maintain its target TIE ratio.
a. True
b. False
18. If sales decrease and financial leverage increases, we can say with
certainty that the profit margin on sales will decrease.
a. True
b. False
Multiple Choice: Conceptual
19. Other things held constant, which of the following will not affect the
current ratio, assuming an initial current ratio greater than 1.0?

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