1. Which of the following items is NOT a source of
information from the corporate annual report?
Supplementary schedule of segment information.
Management's discussion and analysis.
Auditor's report.
Value Line Investment Survey.
Which of the following tools and techniques are the
most useful to the financial statement analyst?
Public relations material and pro forma statements prepared by the firm.
Common size financial statements and financial ratios.
The letter to the shareholders and a map.
None of the above.
What type of ratios measure the liquidity of specific
assets and the efficiency of managing assets?
Liquidity ratios.
Leverage ratios.
Profitability ratios.
Activity ratios.
Which of the following statements is false?
No rules of thumb apply to the interpretation of financial ratios.

2. Financial ratios are predictive.
Financial ratios can indicate areas of potential strength and weakness.
Financial ratios can serve as screening devices.
Which of the following ratios would be useful in
assessing short-term liquidity?
Quick ratio, accounts receivable turnover, return on assets.
Average collection period, debt ratio, return on assets.
Current ratio, inventory turnover, fixed asset turnover.
Current ratio, quick ratio, cash-flow liquidity ratio.
What does a decreasing inventory turnover ratio
usually indicate about a firm?
The firm is selling more inventory.
The firm is managing its inventory well.
The firm is inefficient in the management of inventory.
Both (a) and (b).
What relationship exists between the average
collection period and accounts receivable turnover?
Both ratios are expressed in number of times receivables are collected per
year.
As average collection period increases (decreases) the accounts receivable
turnover decreases (increases).
There is a direct and proportional relationship.

3. Both ratios are expressed in number of days.
Why is it important to calculate cash flow ratios?
Firms need cash to service debt, dividends and expenses.
Companies that generate healthy profit may be unable to convert profits
into cash.
Cash flow ratios help the analyst assess the long-term profitability of a
firm.
Both (a) and (b).
What is the net trade cycle?
The amount of time needed to complete the normal operating cycle of a
firm.
The amount of time it takes to manufacture or buy inventory.
The amount of time it takes to sell inventory.
None of the above.
If a firm is using financial leverage successfully
what would be the impact of doubling operating
earnings?
The return on equity will decline by half.

4. The return on equity will increase, but not double.
The return on equity will double.
The return on equity will more than double.
Use the following data to answer questions 11-15.
Lazy O's current ratio is:
2.1 to 1
0.9 to 1
1.1 to 1
0.1 to 1
Lazy O's quick ratio is:
0.9 to 1

5. 0.75 to 1
1.1 to 1
0.87 to 1
Lazy O's average collection period is:
15 days
24 days
9 days
4 days
Lazy O's inventory turnover is:
18 times
14 times
9 times
7 times
Lazy O's net trade cycle is:
5 days
35 days
20 days
(11 days)

6. Use the following data to answer questions 16-20.
Happy Valley's debt ratio is:
150%
67%
60%
8%
Happy Valley's cash flow margin is:
6.3%
2.5%
50.0%
2.8%
Happy Valley's operating profit margin is:

7. 40%
15%
5%
55%
Happy Valley's return on equity is:
8%
33%
17%
5%
Happy Valley's net profit margin is:
2.7%
5.5%
5.0%
2.5%
Profitability ratios measure:
a. the speed at which the firm is turning over its assets
b. the ability of the firm to earn an adequate return on sales, total assets,
and invested capital
c. the firm's ability to pay off short term obligations as they are due
d. the debt position of the firm in light of its assets and earning power

8. 3-2. Asset utilization ratios measure:
a. the speed at which the firm is turning over its assets
b. the ability of the firm to earn on adequate return on sales, total assets,
and invested capital
c. the firm's ability to pay off short term obligations as they are due
d. the debt position of the firm in light of its assets and earning power
3-3. Liquidity ratios measure:
a. the speed at which the firm is turning over its assets
b. the ability of the firm to earn an adequate return on sales, total assets,
and invested capital
c. the firm's ability to pay off short term obligations as they are due
d. the debt position of the firm in light of its assets and earning power.
3-4. Debt utilization ratios measure:
a. the speed at which the firm is turning over its assets
b. the ability of the firm to earn an adequate return on sales, total assets,
and invested capital
c. the firm's ability to pay off short term obligations as they are due
d. the debt position of the firm in light of its assets and earning power
3-5. Return on assets is computed:
a. net income/sales
b. net income/total assets
c. net income/current assets

9. d. income before interest and taxes (EBIT)/total assets
3-6. Under the Du Pont method of analysis, return on total assets is:
a. profit margin times assets turnover
b. net income/total assets
c. income before interest and taxes (EBIT)/total assets
d. net income/sales
3-7. Receivables turnover is:
a. a profitability ratio
b. a debt utilization ratio
c. an asset utilization ratio
d. a liquidity ratio
3-8. Among the liquidity ratios, one would include:
a. receivables turnover and inventory turnover
b. current ratio and quick ratio
c. capital asset turnover and total asset turnover
d. receivables turnover and total asset turnover
3-9. All of the following are debt utilization ratios except:
a. debt to total assets
b. times interest earned
c. fixed charge coverage
d. debt to sales
3-10. Analyzing the performance of the firm through ratios over a number of years is
referred to as:

10. a. financial analysis
b. ratio analysis
c. trend analysis
d. operations analysis
3-11. Which of the following does not cause a distortion in the reporting of income?
a. The reporting of revenue.
b. The treatment of non-recurring items.
c. The tax-write off policy.
d. The firm's dividend policy.
3-12. Financial ratios are used to:
a. weigh and evaluate the operating performance of the firm
b. provide an absolute benchmark of industry performance
c. determine which firm will provide the highest return to investors
d. None of the above are correct
3-13. To the securities analyst, the most important ratio group is:
a. asset utilization
b. profitability
c. liquidity
d. debt utilization
3-14. To the banker/creditor, the most important ratio group is:
a. asset utilization
b. profitability
c. liquidity
d. debt utilization

11. 3-15. To the bondholder, the most important ratio is:
a. profit margin
b. quick ratio
c. times interest earned
d. debt to total assets