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Unformatted text preview: Old Exam Questions - Analysis of Financial Statements - Solutions Page 1 of 53 Pages Analysis of Financial Statements - Solutions 1. A firm with financial leverage will have a larger equity multiplier than an otherwise identical firm with no debt in its capital structure. * A. True B. False 2. If a company were to issue debt and use the proceeds to increase assets, and if the companys return on assets (ROA) remained the same, then the return on equity (ROE) would increase. * A. True B. False 3. If certain ratios for a firms assets, such as accounts receivable turnover, inventory turnover, total asset turnover, etc., are generally constant over time, then the level (amount) of these assets can also be expressed as a percentage of sales. * A. True B. False 4. Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same net income must have the same ROA. A. True * B. False 5. Retained earnings is the cash that has been generated by the firm through its operations which has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm. A. True * B. False 6. In accounting, emphasis is placed on determining net income. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary consideration is cash flow because that's what is used to run the business. A. True * B. False Old Exam Questions - Analysis of Financial Statements - Solutions Page 2 of 53 Pages 7. 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 8. 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 9. One of the problems of ratio analysis is that account relationships can be manipulated. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is low initially, for example, below 1.0. A. True * B. False 1. Your company recently issued new common stock and used the proceeds to reduce its short-term notes payable and accounts payable. This action had no effect on the company's total assets or operating income. Determine which of the following effects did occur as a result of this action....
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