Exam 13: Financial Statement Analysis Available Online in the Connect Library

Various ratios are computed to assess different aspects of a company's financial condition and/or strength. Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

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Question 1

Correct Answer:

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Indicate whether each of the following statements about financial statement analysis is true or false. ___ a) Working capital is a measure of the amount of current assets a company would have left after paying its current liabilities. _ b) If a transaction causes a company's working capital to increase, the transaction caused the company to become less liquid. _ c) Interpretation of a company's working capital can be difficult because it is an absolute amount. _ d) The quick ratio is a less conservative variation of the current ratio. ___ e) The quick ratio is usually calculated by using the following equation: cash + receivables + current marketable securities + prepaid expense/current liabilities

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Question 2

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a) True b) False c) True d) False e) False
Explanation: a) This is true. Working capital is current assets - current liabilities.
b) This is false. If working capital increases, the company would have more working capital which would increase liquidity.
c) This is true. Comparing only absolute amounts has drawbacks, however, because materiality levels differ from company to company or even from year to year for a given company.
d) This is false. The quick ratio is a more conservative variation of the current ratio. Only cash, receivables and current marketable securities are used in the calculation. Inventory and prepaid expenses are omitted.
e) This is false. Only cash, receivables and current marketable securities are used in the calculation. Inventory and prepaid expenses are omitted.

Two ratios that provide insight on the relationship between credit sales and receivables are:

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Question 3

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Select the incorrect statement regarding the analysis of absolute amounts of various accounts reported on the financial statements.

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Question 4

Indicate whether each of the following statements about financial statement analysis is true or false. ___ a) The ratio, plant assets to long-term liabilities, is a measure of a company's ability to obtain additional long-term financing. _ b) Generally, a company's current assets should be purchased using long-term financing such as bonds payable. _ c) Ratios that measure a company's profitability provide some measure of the effectiveness of the company's management. _ d) Net margin indicates the amount remaining from each sales dollar after cost of goods sold has been subtracted out. ___ e) Net margin is also sometimes called the return on sales ratio.

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Question 5

Monte Company reported the following operating results for 2011 and 2012: Required: Express each income statement component for each year as a percentage of sales.

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Question 6

Roanoke Company collected $500 on account. What impact will this transaction have on the firm's current ratio?

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Question 7

Net income divided by sales is the formula for which of these analytical measures?

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Question 8

The following income statement was prepared by Cohen Company for 2012: Required: Perform vertical analysis for Cohen Company's 2012 income statement.

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Question 9

Short-term creditors are usually most interested in assessing:

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Question 10

Leslie Company had a current ratio of 3:1 at the end of 2011. The asset section of the company's balance sheet is provided below: Required: 1) Compute Leslie Company's end-of-year working capital. 2) Compute the company's quick (acid-test) ratio. 3) The company has a debt agreement with its bank that authorizes the bank to call in its loan to the company if the company's current ratio falls below 3:1 as of the last day of any month during the term of the loan. During January 2012, the company engaged in the three following transactions: (a) Collected $100,000 on account; (b) Purchased inventory on account, $50,000 (c) Paid accounts payable, $60,000 Will the company be in default after completing these transactions? Justify your answer.

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Question 11

Describe the factors involved in communicating useful financial information.

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Question 12

Which of the following statements about financial statement analysis is incorrect?

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Question 13

As of December 31, 2012, Grove Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2012, Grove paid $3,600 on accounts payable. Which of the following statements is incorrect?

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Question 14

Jones Company's current ratio is higher than the average for its industry, while its quick ratio is below the industry average. One possible interpretation for these results is that Jones carries more inventory than most companies in its industry.

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Question 15

Comparative income statements for Purcell Company are provided below: Required: Perform a horizontal analysis of Purcell Company's income statement by computing horizontal percentages for each item.

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Question 16

As of December 31, 2012, Grove Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2012 Grove issued common stock for $10,000 cash. Which of the following statement is true?

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Question 17

Keller Company paid its sales employees $1,200 in sales commissions. What impact will this transaction have on working capital?

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Question 18

Indicate whether each of the following statements about financial statement analysis is true or false. ___ a) The value of a corporation's price-earnings ratio indicates how optimistic investors are about a company's growth potential. _ b) The dividend yield ratio indicates the percentage of a company's net income that it paid out in dividends. _ c) Comparing financial statement ratios of companies in different industries can give misleading results. _ d) Changes in general economic conditions (such as rate of inflation) can cause the values for a company's financial statement ratios to change from one year to the next. ___ e) Conservatism produces a positive bias in a company's financial statements and thus in the ratios calculated from the financial statements.

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Question 19

A careless accountant splattered spaghetti sauce on Kite Company's balance sheet. The balance sheet with its missing amounts is provided below: Kite Company's working capital is $138,000. Required: Compute the missing amounts. Record your answers in the following table:

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Question 20

Showing 1 - 20 of 139

Various ratios are computed to assess different aspects of a company's financial condition and/or strength. Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Two ratios that provide insight on the relationship between credit sales and receivables are:

Select the incorrect statement regarding the analysis of absolute amounts of various accounts reported on the financial statements.

Monte Company reported the following operating results for 2011 and 2012: Required: Express each income statement component for each year as a percentage of sales.

Roanoke Company collected $500 on account. What impact will this transaction have on the firm's current ratio?

Net income divided by sales is the formula for which of these analytical measures?

The following income statement was prepared by Cohen Company for 2012: Required: Perform vertical analysis for Cohen Company's 2012 income statement.

Short-term creditors are usually most interested in assessing:

Describe the factors involved in communicating useful financial information.

Which of the following statements about financial statement analysis is incorrect?

Jones Company's current ratio is higher than the average for its industry, while its quick ratio is below the industry average. One possible interpretation for these results is that Jones carries more inventory than most companies in its industry.

Comparative income statements for Purcell Company are provided below: Required: Perform a horizontal analysis of Purcell Company's income statement by computing horizontal percentages for each item.

Keller Company paid its sales employees $1,200 in sales commissions. What impact will this transaction have on working capital?

A careless accountant splattered spaghetti sauce on Kite Company's balance sheet. The balance sheet with its missing amounts is provided below: Kite Company's working capital is $138,000. Required: Compute the missing amounts. Record your answers in the following table:

An Introduction to Accounting

Accounting for Accruals and Deferrals

The Double-Entry Accounting System

Accounting for Merchandising Businesses

Accounting for Inventories

Internal Control and Accounting for Cash

Accounting for Receivables

Accounting for Long-Term Operational Assets

Accounting for Current Liabilities and Payroll

Accounting for Long-Term Debt

Proprietorships, Partnerships, and Corporations

Statement of Cash Flows

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