Leach TB Chap05 Ed3

Leach TB Chap05 Ed3 - CHAPTER 5 EVALUATING FINANCIAL...

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CHAPTER 5 EVALUATING FINANCIAL PERFORMANCE True-False Questions T. 1. Showing the relationships between two or more financial variable and /or time, financial ratios are useful means of summarizing large amounts of financial data for comparative purposes. F. 2. Liquidity ratios indicate the venture’s ability to pay short term assets from short-term liabilities. F. 3. Net working capital reflects current assets deducted from current liabilities. T. 4. Conversion period ratios show the average time in days it takes to convert certain current assets and current liabilities into cash. F. 5. The sum of the inventory-to-sale conversion period and the purchase-to- payment conversion period minus the sale-to-cash conversion period is called the cash conversion cycle. T. 6. The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios. T. 7. The equity multiplier shows the extent by which assets are supported by equity and debt. T. 8. Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities. F. 9. The proportion of a venture’s interest payment that is paid by the government because of the deductibility of interest before taxes are paid is called the income tax shield. F. 10. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios. T. 11. Trend analysis is used to examine a venture’s performance over time. F. 12. Cross-sectional analysis is used to examine a venture’s performance over time. T. 13. The term “cash build” as used in Chapter 5 is equal to net sales minus the change in receivables. 31
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Chapter 5: Evaluating Financial Performance F. 14. The cash conversion cycle refers to the time it takes to convert a sale into net income. T. 15. The sale-to-cash conversion period is calculated by dividing average revenues by net sales per day. T. 16. During the development and startup stages of a venture’s life cycle, important financial ratios and measures include cash burn rates, liquidity ratios, and conversion period ratios. T. 17. During the development and startup stages of a venture’s life cycle, important users of financial ratios and measures include the entrepreneur, business angels, and venture capitalists (VCs). F. 18. Profitability and efficiency ratios are generally considered to be more important during the development and startup stages compared to the survival and rapid-growth stages. T. 19. Leverage ratios are generally considered to be more important during the survival and rapid-growth stages compared to the development and startup stages. F.
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Leach TB Chap05 Ed3 - CHAPTER 5 EVALUATING FINANCIAL...

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