Question 1 Accounting asset values often differ from economic asset values because economic values are based on historical costs. a. True b. False
Question 2 If a company is running short on cash, it can spend some of its shareholders equity. a. True b. False
Question 3 Low or negative cash flow provided by operating activities does not necessarily indicate poor performance. a. True b. False
Question 4 Financial statements are largely transaction-based and reflect historical rather than future values. a. True b. False
Question 5 Management compensation may be structured in such a way that it tempts management to conceal the financial problems of a company. a. True b. False
Question 6 The Sarbanes-Oxley Act emphasized that the regulations for corporate boards and audit committees was most effectively done by state corporate law. a. True b. False
Question 7 The term "customer churn" refers to when customers withdraw from a particular market; this leads to negative market growth. a. True b. False
Question 8 Even though EBITDA excludes the non-cash expenses of depreciation and amortization, it should not be considered a measure of cash flow. a. True b. False
Question 9 A companys current ratio must always be larger than its acid-test ratio. a. True b. False
Question 10 If you learn the warning signs of manipulating revenues or earnings, and you are willing to take the time to thoroughly review the financial statements and the corresponding notes, you will be able to always successfully identify whether a companys earnings are fairly presented. a. True b. False
Question 11 A manager who is concerned with product becoming obsolete would find which of the following ratios to be most useful? a. Return on assets. b. Collection period. c. Inventory turnover. d. Current ratio. e. All of the above.
Question 12 A company has applied for a line of credit to provide quick access to cash when needed. Which of the following ratios would the creditor likely be interested in? a. Current ratio. b. Collection period. c. Payables period. d. All of the above. e. None of the above.
Question 13 Which of the following relationships might an investor consider as an early warning sign of possible earnings manipulation? a. Cash flows are not correlated with earnings. b. Receivables are not correlated with revenues. c. Allowances for uncollectible accounts are not correlated with receivables. d. Acquisitions with no apparent business purpose. e. All of the above.
Question 14 A company sells $100,000 worth of merchandise for cash. How does this affect the financial statements? a. Accounts receivable increases by $100,000 and sales revenue increases by $100,000. b. Sales revenue increases by $100,000, cash increases by $100,000, accounts receivable increases by $100,000, and owners equity increases by $100,000. c. Cash increases by $100,000 and sales increases by $100,000. d. Cash increases by $100,000 and inventory decreases by $100,000. e. None of the above.
Question 15 When evaluating a publicly traded company, multiplying the number of outstanding shares of stock by the market price per share gives you: a. The value of shareholders' equity as reflected in the company's financial statements. b. The market value of shareholders' equity. c. The economic value of the company. d. The accounting value of the company. e. None of the above.
Question 16 Which of the following is NOT one of the common methods used to interpret financial ratios? a. Comparing the ratios to rules of thumb. b. Looking for changes in the ratios over time (trend analysis). c. Comparing individual ratios against those published by the American Finance Association. d. Comparing the ratios to industry standards.
Question 17 Company A has an asset turnover ratio of 2.15 and a profit margin of 0.04. Company B has an asset turnover ratio of 0.40 and a profit margin of 0.47. If you were told that one of these was an oil exploration company and the other was a fast food restaurant, which of the following statements is true? a. Company A is in the fast food restaurant business. b. Company B is in the fast food restaurant business. c. Company A is in the oil exploration business. d. None of the above statements is true.