Chapter 2--Analysis of Fina - Copy

True false 31 if the current ratio of firm a is

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True False 31. 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. True False
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32. 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the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged. True False 33. We can use the fixed asset 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. True False 34. Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets, and that ROA is positive. However, one firm has a higher debt ratio. Under these conditions, the firm with the higher debt ratio will also have a higher rate of return on common equity. True False 35. 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. True False 36. The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms must meet more than just their scheduled interest payments out of earnings. Therefore, the fixed charge coverage is more inclusive than the TIE ratio. True False 37. If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease. True False 38. Selling new stock is an equity transaction; it does not affect any asset or liability account and therefore, does not appear on the statement of cash flows. True False
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39. Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.) A. Fixed assets are sold for cash. B. Cash is used to purchase inventories. C. Cash is used to pay off accounts payable. D. Accounts receivable are collected. E. Long-term debt is issued to payoff a short-term bank loan.
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