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Fsa Theory

The document discusses how different financial transactions would affect a firm's current ratio and quick ratio. It states that if a firm sold inventory for cash and left the funds in its bank account, its current ratio would not change much but its quick ratio would decline. It also states that if a firm sold inventory on credit, its current ratio would not change much but its quick ratio would increase.

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Mj Pacunayen
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55 views

Fsa Theory

The document discusses how different financial transactions would affect a firm's current ratio and quick ratio. It states that if a firm sold inventory for cash and left the funds in its bank account, its current ratio would not change much but its quick ratio would decline. It also states that if a firm sold inventory on credit, its current ratio would not change much but its quick ratio would increase.

Uploaded by

Mj Pacunayen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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S1.

If a firm sold some inventory for cash and left the funds in its bank account, its current
ratio would probably not change much, but its quick ratio would decline.

S2. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt,
the interest rate on that debt, the applicable tax rate, and its operating costs. With this
information, the firm can calculate the amount of sales required to achieve its target TIE
ratio

FALSE, TRUE

1. A decline in a firm's inventory turnover ratio suggests that it is improving both its
inventory management and its liquidity position, i.e., that it is becoming more liquid.

S2. Suppose all firms follow similar financing policies, face similar risks, have equal
access to capital, and operate in competitive product and capital markets. However,
firms face different operating conditions because, for example, the grocery store
industry is different from the airline industry. Under these conditions, firms with high
profit margins will tend to have high asset turnover ratios, and firms with low profit
margins will tend to have low turnover ratios

FALSE, FALSE

S1. If a firm finance with only debt and common equity, and if its equity multiplier is 3.0,
then its debt ratio must be 0.667.

S2. Although a full liquidity analysis requires the use of a cash budget, the current and
quick ratios provide fast and easy-to-use estimates of a firm's liquidity position

TRUE, TRUE

S1. One problem with ratio analysis is that relationships can be manipulated. For
example, we know that if our current ratio is less than 1.0, then using some of our cash
to pay off some of our current liabilities would cause the current ratio to increase and
thus make the firm look stronger.

S2. If our current ratio is greater than 1.5, then borrowing on a short-term basis and
using the funds to build up our cash account would cause the current ratio to increase

FALSE, FALSE
S1. Determining whether a firm's financial position is improving or deteriorating requires
analyzing more than the ratios for a given year. Trend analysis is one method of examining
changes in a firm's performance over time.

S2. In general, it's better to have a low inventory turnover ratio than a high one, as a low
ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will
not lose sales as a result of running out of stock.

TRUE, FALSE

S1. Firm A has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, a zero debt
ratio and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends
that the firm borrow money, use it to buy back stock, and raise the debt ratio to 50% and
the equity multiplier to 2.0. She thinks that operations would not be affected, but interest on
the new debt would lower the profit margin to 4.5%. This would probably be a good move,
as it would increase the ROE from 7.5% to 13.5%.

S2. The inventory turnover ratio and average collection period are two ratios that are used
to assess how effectively a firm is managing its current assets

TRUE, TRUE

S1. Firms A and B have the same current ratio, 0.75, the same amount of sales, and the
same amount of current liabilities. However, Firm A has a higher inventory turnover ratio
than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

S2. If a firm sold some inventory on credit, its current ratio would probably not change
much, but its quick ratio would increase

FALSE, TRUE

S1. Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might
exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's
current ratio is also larger than B's.

S2. If a firm sold some inventory on credit as opposed to cash, there is no reason to
think that either its current or quick ratio would change

FALSE, FALSE
S1. The market/book (M/B) ratio tells us how much investors are willing to pay for a peso of
accounting book value. In general, investors regard companies with higher M/B ratios as
being less risky and/or more likely to enjoy higher growth in the future.

S2. The average collection period tells us how long it takes, on average, to collect after a
sale is made. The average collection period can be compared with the firm's credit terms to
get an idea of whether customers are paying on time.

TRUE TRUE

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