Question 1

In terms of solvency, the smaller the number of times interest is earned, the better.

Accepted Answer

A) True 
 B)False

Question 2

Ratios can be used for different purposes. For example, a variety of ratios have been developed to assess a firm's liquidity. Similarly, ratios have been developed to assess solvency, profitability, and stock market strength. A sample of commonly used ratios for these purposes is provided in the table below.
Required:
In the middle column of the table, provide the formula to compute the specified ratio. In the final column, indicate the purpose (Liquidity, Solvency, Profitability, and Stock market strength) for which the ratio is most commonly used. The first item is completed as an example.

Accepted Answer

The answer of Ratios can be used for different purposes....

Question 3

Which of the following statements is correct?

Accepted Answer

A) The most widely quoted measure of a company's earnings performance is return on equity. 
B) Earnings per share is calculated for a company's preferred stock. 
C) Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions. 
D) The book value per share measures the market value of a corporation's stock. 
A) The most widely quoted measure of a company's earnings performance is return on equity. 
B) Earnings per share is calculated for a company's preferred stock. 
C) Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions. 
D) The book value per share measures the market value of a corporation's stock.

Question 4

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Accepted Answer

Horizontal analysis means examining indi

Question 5

Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) Ratio analysis may involve studying relationships between an item reported on the balance sheet and another reported on the income statement.
_____ b) Comparing sales in 2012 with sales for 2011 is a form of vertical analysis.
_____ c) Comparing net income in 2012 with sales for 2012 is a form of horizontal analysis.
_____ d) Liquidity ratios measure a company's ability to generate profits in the short term.
_____ e) Working capital is calculated by using the following formula: quick assets - current liabilities.

Accepted Answer

a) True b) False c) False d) False e) Fa

Question 6

Select the incorrect statement regarding the return on equity (ROE) measure.

Accepted Answer

A) ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders. 
B) A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt. 
C) ROE is affected by a company's use of leverage. 
D) ROE equals net income divided by total stockholders' equity. 
A) ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders. 
B) A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt. 
C) ROE is affected by a company's use of leverage. 
D) ROE equals net income divided by total stockholders' equity.

Question 7

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?

Accepted Answer

A) Current assets decrease therefore, the current ratio increases. 
B) Current liabilities decrease therefore, the current ratio decreases. 
C) Current assets and current liabilities decrease by the same amount therefore, the current ratio increases. 
D) Current assets decrease and current liabilities increase by the same amount therefore, the current ratio decreases. 
A) Current assets decrease therefore, the current ratio increases. 
B) Current liabilities decrease therefore, the current ratio decreases. 
C) Current assets and current liabilities decrease by the same amount therefore, the current ratio increases. 
D) Current assets decrease and current liabilities increase by the same amount therefore, the current ratio decreases.

Question 8

Profitability ratios attempt to assess the company's ability to generate earnings.

Accepted Answer

A) True 
 B)False

Question 9

Lilly's Corporation has working capital of $840,000, and Harmon Corporation has working capital of $620,000. Which of the following statements is incorrect?

Accepted Answer

A) Since Lilly's working capital exceeds Harmon's working capital, it is safe to conclude that Lilly is more liquid than Harmon. 
B) Since working capital is an absolute amount, other factors such as size of the company and materiality will help to determine liquidity of these two companies. 
C) If Harmon Corporation is smaller than Lilly or has lower current liabilities; Harmon could be more liquid than Lilly. 
D) None of the other answers are correct. 
A) Since Lilly's working capital exceeds Harmon's working capital, it is safe to conclude that Lilly is more liquid than Harmon. 
B) Since working capital is an absolute amount, other factors such as size of the company and materiality will help to determine liquidity of these two companies. 
C) If Harmon Corporation is smaller than Lilly or has lower current liabilities; Harmon could be more liquid than Lilly. 
D) None of the other answers are correct.

Question 10

Which of the following statements about financial statements is incorrect?

Accepted Answer

A) The net margin ratio is a profitability ratio. 
B) The debt to assets ratio is a liquidity ratio. 
C) The current ratio is a liquidity ratio. 
D) The dividend yield is a stock market ratio. 
A) The net margin ratio is a profitability ratio. 
B) The debt to assets ratio is a liquidity ratio. 
C) The current ratio is a liquidity ratio. 
D) The dividend yield is a stock market ratio.

Question 11

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

Accepted Answer

A) Debt to assets ratio 
B) Earnings per share 
C) Return on investment 
D) Number of times interest is earned 
A) Debt to assets ratio 
B) Earnings per share 
C) Return on investment 
D) Number of times interest is earned

Question 12

A company has an obligation to provide highly detailed information on its financial statements.

Accepted Answer

A) True 
 B)False

Question 13

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Accepted Answer

A) Liquidity 
B) Solvency 
C) Profitability 
D) All of the other answers are correct. 
A) Liquidity 
B) Solvency 
C) Profitability 
D) All of the other answers are correct.

Question 14

Common methods of financial statement analysis include all of the following except:

Accepted Answer

A) Vertical analysis. 
B) Horizontal analysis. 
C) Incremental analysis. 
D) Ratio analysis. 
A) Vertical analysis. 
B) Horizontal analysis. 
C) Incremental analysis. 
D) Ratio analysis.

Question 15

The study of an individual financial statement item over several accounting periods is called:

Accepted Answer

A) Ratio analysis. 
B) Vertical analysis. 
C) Horizontal analysis. 
D) Time and motion analysis. 
A) Ratio analysis. 
B) Vertical analysis. 
C) Horizontal analysis. 
D) Time and motion analysis.

Question 16

Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) Having too little inventory can hurt a company's profitability because of lost sales.
_____ b) Having too much inventory can hurt a company's profitability because of excess costs.
_____ c) Generally, a lower inventory turnover indicates that merchandise is being handled more efficiently.
_____ d) Average days to sell inventory is the number of times, on average, that inventory is replaced during the year.
_____ e) Values for the inventory turnover ratio vary widely among different industries.

Accepted Answer

a) True b) True c) False d) False e) Tru

Question 17

The following information applies to Manuel Company:   Additional information: Net credit sales = $220,000; beginning accounts receivable = $10,000.
Required:
Compute Manuel's
(a) Quick ratio
(b) Current ratio
(c) Working capital
(d) Accounts receivable turnover
(e) Average days to collect receivables

Accepted Answer

(a) Quick ratio = ($5,000 + $12,000)/($4

Question 18

Selected financial information for Maris Company for 2012 follows:   Required:
How many times did Maris' merchandise inventory turnover during 2012?

Accepted Answer

Inventory turnover = cost of g

Question 19

Starlight Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $650,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starlight's accounts receivable turnover?

Accepted Answer

A) 9.7 
B) 10.0 
C) 9.4 
D) 10.49.7 
A) 9.7 
B) 10.0 
C) 9.4 
D) 10.49.7

Question 20

Barrett Company declared and paid a cash dividend totaling $500,000 on its common stock. As a result of this transaction, the company's debt to assets ratio will:

Accepted Answer

A) Increase. 
B) Decrease. 
C) Remain the same. 
D) Cannot be determineD.The transaction will decrease stockholders' equity (retained earnings) and decrease an asset (cash). The debt to asset ratio is total debt/total assets. The reduction in stockholders' equity does not affect the ratio, but the decrease in assets causes an increase in the ratio. 
A) Increase. 
B) Decrease. 
C) Remain the same. 
D) Cannot be determineD.The transaction will decrease stockholders' equity (retained earnings) and decrease an asset (cash). The debt to asset ratio is total debt/total assets. The reduction in stockholders' equity does not affect the ratio, but the decrease in assets causes an increase in the ratio.

In terms of solvency, the smaller the number of times interest is earned, the better.

Which of the following statements is correct?

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Select the incorrect statement regarding the return on equity (ROE) measure.

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?

Profitability ratios attempt to assess the company's ability to generate earnings.

Lilly's Corporation has working capital of $840,000, and Harmon Corporation has working capital of $620,000. Which of the following statements is incorrect?

Which of the following statements about financial statements is incorrect?

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

A company has an obligation to provide highly detailed information on its financial statements.

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Common methods of financial statement analysis include all of the following except:

The study of an individual financial statement item over several accounting periods is called:

The following information applies to Manuel Company: Additional information: Net credit sales = $220,000; beginning accounts receivable = $10,000. Required: Compute Manuel's (a) Quick ratio (b) Current ratio (c) Working capital (d) Accounts receivable turnover (e) Average days to collect receivables

Selected financial information for Maris Company for 2012 follows: Required: How many times did Maris' merchandise inventory turnover during 2012?

Starlight Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $650,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starlight's accounts receivable turnover?

Barrett Company declared and paid a cash dividend totaling $500,000 on its common stock. As a result of this transaction, the company's debt to assets ratio will:

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

Filters

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

In terms of solvency, the smaller the number of times interest is earned, the better.

Which of the following statements is correct?

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Select the incorrect statement regarding the return on equity (ROE) measure.

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?

Profitability ratios attempt to assess the company's ability to generate earnings.

Lilly's Corporation has working capital of $840,000, and Harmon Corporation has working capital of $620,000. Which of the following statements is incorrect?

Which of the following statements about financial statements is incorrect?

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

A company has an obligation to provide highly detailed information on its financial statements.

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Common methods of financial statement analysis include all of the following except:

The study of an individual financial statement item over several accounting periods is called:

Selected financial information for Maris Company for 2012 follows: Required: How many times did Maris' merchandise inventory turnover during 2012?

Starlight Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $650,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starlight's accounts receivable turnover?

Barrett Company declared and paid a cash dividend totaling $500,000 on its common stock. As a result of this transaction, the company's debt to assets ratio will:

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

Filters