1.Some have argued that analyzing balance sheet items are more important than income statement items. Which of the following could be a reason for this?

a. The balance sheet is a better measure of cash flow.

b. The income statement is a poor tool for analyzing current transactions, while the balance sheet is better at this.

c. The balance sheet is a collection of all transactions, past and present, while the income statement only reflects the most recent events.

d. Profitability ratios use items from the balance sheet and profitability is the most important issue.

2.A comparison of the amounts for the same item in financial statements of two or more periods is called

a. Earnings per share.

b. Vertical analysis.

c. Horizontal analysis.

d. Return on total assets.

3.Leverage is

a. The proportion of debt to stockholders' equity.

b. The ability to earn a satisfactory return on the investments in the business.

c. The ability to pay current debts when they come due.

d. Also called profit margin.

4.When reviewing a credit application, the credit manager should be most concerned with the applicant company's

a. Profit margin and return on assets.

b. Price-earnings ratio and current ratio.

c. Working capital and current ratio.

d. Working capital and return on equity.

5.An expression of the amount of each item in a statement as a percentage of some designated total for comparative purposes is called

a. Vertical analysis.

b. Earnings per share.

c. Return on total assets.

d. Horizontal analysis.

6.Which of the following statements is correct? Statement 1. Ratios are used to compare different companies in the same industry. Statement 2. Financial ratios are used to weigh and evaluate the operational performance of the company. Statement 3. Liquidity ratios indicate how fast a company can generate cash to pay bills.

a. Statement 1 only.

b. Statement 2 only.

c. Statement 3 only.

d. All of the statements are correct.

e. None of the statement is correct.

7.Which of the following statements is correct? Statement 1. Asset utilization ratios describe how capital is being utilized to buy assets. Statement 2. Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital. Statement 3. Asset utilization ratios measure the returns on various assets such as return on total assets.

a. Statement 1 only.

b. Statement 2 only.

c. Statement 3 only.

d. All of the statements are correct.

e. None of the statement is correct.

8.Which of the following statements is NOT correct? Statement 1. Debt utilization ratios are used to evaluate the firm's debt position with regard to its asset base and earning power. Statement 2. The DuPont system of analysis emphasizes that profit generated by assets can be derived by various combinations of profit margins and asset turnover. Statement 3. Satisfactory return on assets may be achieved through high profit margins or rapid turnover of assets, but not a combination of both.

a. Statement 1 only.

b. Statement 2 only.

c. Statement 3 only.

d. All of the statements are NOT correct.

e. All of the statements are correct.

9.Which one of the following ratios would be of greatest interest to a bank that is considering lending money to a firm?

a. Return on equity

b. Inventory turnover

c. Times interest earned

d. Average collection period

10.Which of the following ratios is the best measure of profitability based upon the core running of the business?

a. Return on assets

b. Gross profit margin

c. Net profit margin

d. Operating profit margin