Chapter 5: Evaluating Financial Performance

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 summari"ing large amounts of
financial data for comparative purposes.
F. #. $i%uidit& ratios indicate the venture's abilit& to pa& short term assets from
short(term liabilities.
F. ). *et wor+ing capital reflects current assets deducted from current liabilities.
T. ,. Conversion period ratios show the average time in da&s it ta+es to convert
certain current assets and current liabilities into cash.
F. 5. The sum of the inventor&(to(sale conversion period and the purchase(to(
pa&ment conversion period minus the sale(to(cash conversion period is called
the cash conversion c&cle.
T. -. The e.tent to which a venture is in debt and in its abilit& to repa& its debt
obligations is indicated b& leverage ratios.
T. /. The e%uit& multiplier shows the e.tent b& which assets are supported b&
e%uit& and debt.
T. 0. 1ccounting rules re%uire that the current maturities of long(term debt
obligations be classified as short(term liabilities.
F. 2. The proportion of a venture's interest pa&ment that is paid b& the
government because of the deductibilit& of interest before ta.es are paid is
called the income ta. shield.
F. 13. 4ow efficientl& a venture controls its e.penses and uses its assets and debt
is evaluated with profitabilit& and efficienc& ratios.
T. 11. Trend anal&sis is used to e.amine a venture's performance over time.
F. 1#. Cross(sectional anal&sis is used to e.amine a venture's performance over
time.
T. 1). The term 5cash build6 as used in Chapter 5 is e%ual to net sales minus the
change in receivables.
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Chapter 5: Evaluating Financial Performance
F. 1,. The cash conversion c&cle refers to the time it ta+es to convert a sale into
net income.
T. 15. The sale(to(cash conversion period is calculated b& dividing average
revenues b& net sales per da&.
T. 1-. 7uring the development and startup stages of a venture's life c&cle!
important financial ratios and measures include cash burn rates! li%uidit&
ratios! and conversion period ratios.
T. 1/. 7uring the development and startup stages of a venture's life c&cle!
important users of financial ratios and measures include the entrepreneur!
business angels! and venture capitalists 89Cs:.
F. 10. Profitabilit& and efficienc& ratios are generall& considered to be more
important during the development and startup stages compared to the survival
and rapid(growth stages.
T. 12. $everage ratios are generall& considered to be more important during the
survival and rapid(growth stages compared to the development and startup
stages.
F. #3. Commercial ban+s are important users of financial ratios and measures
during the development and startup stages of ventures.
T. #1. ;nvestment ban+ers are users of financial ratios and measures of ventures
primaril& during the rapid(growth stage relative to the development and
startup stages.
F. ##. Second(round! me""anine! and li%uidit&(stage financing generall& occur
during a venture's survival stage.
F. #). 5Cash burn6 is the cash a venture e.pends on its operating! financing! and
depreciation e.penses.
T. #,. 5*et cash burn6 occurs when cash burn e.ceeds cash build in a specified
time period.
T. #5. The 5cash burn rate6 is the cash burn for a fi.ed period of time! t&picall& a
month.
F. #-. 5*et wor+ing capital6 is calculated as fi.ed assets minus current liabilities.
F. #/. The 5cash conversion c&cle6 measures the time it ta+es to pa& off the
principal on a loan.
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Chapter 5: Evaluating Financial Performance
Multiple-Coi!e Questions
b. 1. <hich of the following is used to e.amine a venture's performance over
time=
a. %ualitative anal&sis
b. trend anal&sis
c. cross sectional anal&sis
d. industr& comparable anal&sis
c. #. <hich of the following is used to compare a venture's performance against
another firm at the same point in time=
a. %ualitative anal&sis
b. trend anal&sis
c. cross sectional anal&sis
d. industr& comparable anal&sis
d. ). <hich of the following is used to compare a venture's performance against
the average performance of other firms in the same industr&=
a. %ualitative anal&sis
b. trend anal&sis
c. cross sectional anal&sis
d. industr& comparable anal&sis
d. ,. <hich of the following is not part of the operating c&cle=
a. time it ta+es to purchase products
b. time it ta+es to produce products
c. time it ta+es to sell the products
d. time it ta+es to pa& suppliers
e. time it ta+es to collect receivables
a. 5. <hich one of the following 5measures6 the average da&s of sales
committed to the e.tension of trade credit=
a. sale(to(cash conversion period
b. inventor&(to(sale conversion period
c. purchase(to(pa&ment conversion period
d. cash conversion c&cle period
b. -. <hich of the following is measured b& dividing the average dail& cost of
goods sold into the average inventor&=
a. sale(to(cash conversion period
b. inventor&(to(sale conversion period
c. purchase(to(pa&ment conversion period
d. cash conversion c&cle
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Chapter 5: Evaluating Financial Performance
c. /. <hich of the following measures the average time from purchase of
materials and labor to actual cash pa&ment=
a. sale(to(cash conversion period
b. inventor&(to(sale conversion period
c. purchase(to(pa&ment conversion period
d. cash conversion c&cle
d. 0. <hich of the following measures the average time it ta+es a firm to
complete its operating c&cle after deducting the da&s supported b& trade credit
and dela&ed pa&roll financing=
a. sale(to(cash conversion period
b. inventor&(to(sale conversion period
c. purchase(to(pa&ment conversion period
d. cash conversion c&cle
e. 2. The difference between a venture's abilit& to generate cash to pa& interest
and the amount of interest it has to pa& is determined b& which of the
following ratios=
a. fi.ed charges coverage
b. debt to asset
c. e%uit& multiplier
d. debt to e%uit&
e. interest coverage
d. 13. <hich of the following is not a profitabilit& and efficienc& ratio=
a. sales(to(total(assets
b. return on e%uit&
c. return on assets
d. inventor&(to(total assets
e. *>P1T profit margin
Note: The following information should be used for the next eleven (11 through 21)
problems.
;n its closing financial statements for its first &ear in business! the ?uns and
@oses Compan&! had cash of A#,#! accounts receivable of A053! inventor& of
A0#3! net fi.ed assets of A)!,30! accounts pa&able of A/33! short(term notes
pa&able of A/,3! long(term liabilities of A1!133! common stoc+ of A1!1-3!
retained earnings of A1!-#3! net sales of A#!/-0! cost of goods sold of A1!#13!
depreciation of A)-3! interest e.pense of A1-3! ta.es of A)1#! addition to
retained earnings of A530! and dividends paid of A#10.
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Chapter 5: Evaluating Financial Performance
a. 11. <hat is the return on e%uit& for ?uns and @oses=
a. #-.1B
b. ,,./B
c. -#.-B
d. 10.,B
e. /.2B
b. 1#. <hat is ?uns and @oses' return on total assets=
a. 2.-B
b. 1)./B
c. 12.1B
d. )/.2B
e. ##.5B
e. 1). <hat is the net profit margin for ?uns and @oses=
a. -3.3B
b. ##./B
c. /.2B
d. 10.,B
e. #-.#B
c. 1,. ?uns and @oses operating profit margin is=
a. #-.#B
b. 5-.)B
c. ,).)B
d. )3.)B
e. -3.3B
d. 15. The gross profit margin for ?uns and @oses is=
a. #-.#B
b. )3.)B
c. ,).)B
d. 5-.)B
e. -3.3B
c. 1-. <hat is ?uns and @oses' sales to total asset ratio=
a. 1.21
b. 3.#5
c. 3.5#
d. 3.#)
e. 3.5/
b. 1/. <hat is the current ratio for ?uns and @oses=
a. 1.,-
b. 1.))
c. 1.#)
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Chapter 5: Evaluating Financial Performance
d. 1.#1
e. 1.1)
a. 10. The total(debt(total(asset ratio for ?uns and @oses is=
a. 3.,0
b. 3./1
c. 3.#/
d. 3.5)
e. 3.0#
d. 12. <hat is ?uns and @oses' debt(to(e%uit& ratio=
a. 3.2#
b. #.15
c. 3.,0
d. 1.1#
e. #.)#
e. #3. <hat is the e%uit& multiplier for ?uns and @oses=
a. ,.52 times
b. #.)5 times
c. 3.,0 times
d. 1.1# times
e. 1.21 times
c. #1. The interest coverage ratio for ?uns and @oses is:
a. -.5 times
b. ,.5 times
c. /.5 times
d. ).5 times
e. 1.5 times
c. ##. <hich one of the following conversion periods operates to reduce the
length of the cash conversion c&cle=
a. inventor&(to(sale conversion period
b. sale(to(cash conversion period
c. purchase(to(pa&ment conversion period
d. fi.ed assets(to(usage conversion period
c. #). The term 5cash build6 is measured as:
a. net income plus depreciation
b. net sales minus e.penses minus 8pus: an increase 8decrease: in
inventories
c. net sales minus 8plus: an increase 8decrease: in receivables
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Chapter 5: Evaluating Financial Performance
d. net income plus depreciation minus 8plus: an increase 8decrease: in
pa&ables
d. #,. <hich one of the following conversion periods is not a component in the
cash conversion c&cle=
a. inventor&(to(sale conversion period
b. sale(to(cash conversion period
c. purchase(to(pa&ment conversion period
d. fi.ed assets(to(usage conversion period
b. #5. <hich one of the following is not a basic ratio techni%ues used to conduct
financial anal&sis=
a. trend anal&sis
b. sensitivit& anal&sis
c. cross(sectional anal&sis
d. industr& comparables anal&sis
c. #-. Cased on the following information! determine the venture's cash
conversion c&cle: ;nventor&(to(sale conversion period D 11#.2 da&sE Sale(to(
cash conversion periodD 5/.1 da&sE and Purchase(to(pa&ment conversion
period D /-.0 da&s.
a. 1/3.3 da&s
b. 102./ da&s
c. 2).# da&s
d. #,-.0 da&s
e. 1)).2 da&s
a. #/. Cased on the following information! determine the average receivables
8rounded to thousands of dollars: that were outstanding: *et sales D A5/5!333E
Sale(to(cash conversion period D 5/.1 da&sE Purchase(to(pa&ment conversion
period D /-.0 da&sE and Cost of goods sold D A)03!333.
a. A23!333
b. A103!333
c. A1#1!333
d. A)1!333
e. A,1!333
d. #0. Cased on the following information! determine the venture's inventor&(to(
sale conversion period: cash conversion c&cle D #53 da&sE sale(to(cash
conversion period D -3 da&sE and purchase(to(pa&ment conversion period D /3
da&s.
a. /3 da&s
b. 1,3 da&s
c. #,3 da&s
d. #-3 da&s
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Chapter 5: Evaluating Financial Performance
e. ))3 da&s
d. #2. ;nvestment ban+ers and commercial ban+s are important users of financial
ratios and measures during which of the following life c&cle stages=
a. 7evelopment stage
b. Startup stage
c. Survival stage
d. ?apid(growth stage
e. 1ll four stages
e. )3. The entrepreneur! angels! and 9Cs are important users of financial ratios
and measures during which of the following life c&cle stages=
a. 7evelopment stage
b. Startup stage
c. Survival stage
d. ?apid(growth stage
e. 1ll four stages
c. )1. 5*et cash burn6 is calculated as:
a. cash burn plus cash build
b. cash build minus cash burn
c. cash burn minus cash build
d. cash burn minus cash build s%uared
b. )#. Fsing the following information! determine the monthl& net cash burn
rate: net income D A#3!333E interest D A13!333E cash build D A153!333E and
cash burn D A10-!333.
a. A1!333
b. A)!333
c. A,!333
d. A-!333
e. A/!333
a. )). 7etermine the cash conversion c&cle based on the following information:
inventor&(to(sale conversion period D 11#.2 da&sE sale(to(cash conversion
period D 5/.1 da&sE and purchase(to(pa&ment conversion period D /-.0 da&s.
a. 2).# da&s
b. 1)#.- da&s
c. 1/3.3 da&s
d. #,-.0 da&s
e. )-5.3 da&s
e. ),. Fse the following information to determine a firm's 5cash build:6 net
sales D A153!333E net income D A15!333E beginning(of(period accounts
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Chapter 5: Evaluating Financial Performance
receivable D A-3!333E end(of(period accounts receivable D A23!333E and
interest D A13!333.
a. A13!333
b. A15!333
c. A)3!333
d. A-3!333
e. A1#3!333
c. )5. Calculate the sale(to(cash conversion period based on the following
information: average inventories D A1#3!333E average receivables D A23!333E
average pa&ables D A,3!333E cost of goods sold D A10#!533E and net sales D
A)-5!333.
a. #,3.3 da&s
b. 103.3 da&s
c. 23.3 da&s
d. -3.3 da&s
e. ,5.3 da&s
a. )-. Calculate the inventor&(to(sale conversion period based on the following
information: average inventories D A1#3!333E average receivables D A23!333E
average pa&ables D A,3!333E cost of goods sold D A10#!533E and net sales D
A)-5!333.
a. #,3.3 da&s
b. 103.3 da&s
c. 23.3 da&s
d. -3.3 da&s
e. ,5.3 da&s

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