Deck 13: Financial Statement Analysis

Question 1

The following data represent selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
Duenke Company's times- interest- earned ratio for the year ended December 31, 2009, was:

A)22.75.
B)11.88.
C)11.38.
D)10.88.

Answer 1

B

Question 2

The following data represent selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
The accounts receivable turnover for Duenke Company for the year ended December 31, 2009, was:

A)13.45.
B)12.33.
C)12.11.
D)13.32.

Answer 2

A

Question 3

Anacortes Corporation reports the following data: In a vertical analysis, the gross profit percentage is closest to:

A)158%
B)37%
C)63%
D)271%

Answer 3

B

Question 4

Accounts Receivable was $45,000 at the beginning of the year and 55,000 at the end of the year. The percentage change and direction of change for the year was:

A)22% decrease.
B)22% increase.
C)18% decrease.
D)18% increase.

Question 5

The cost of capital is defined as the:

A)rate of return demanded by the stockholders / the rate of return demanded by lenders.
B)weighted average of the returns demanded by the company's stockholders and lenders.
C)sum of liabilities and stockholders' equity accounts.
D)rate of return demanded by stockholders × the rate of return demanded by lenders.

Question 6

Horizontal analysis focuses on:

A)percentage and/or dollar amount changes in various financial statement amounts from year to year.
B)the changes in individual financial statement amounts as a percentage of some related total.
C)the change in key financial statement ratios over a certain time frame or horizon.
D)percentage changes in comparative financial statements.

Question 7

Which of the following is typically used as the base in a vertical analysis of a balance sheet?

A)Cash
B)Net income
C)Gross sales
D)Total assets

Question 8

Given the following data for total sales: A table showing trend percentages for 2008- 2011, respectively, using 2008 as the base year, would show for 2009- 2011:

A)15%, 26%, and 15%.
B)118%, 155%, and 182%.
C)65%, 85%, and 100%.
D)18%, 3%, and 8%.

Question 9

Which of the following would be useful in determining whether a company can pay its current liabilities?

A)Quick ratio
B)Current ratio
C)Debt ratio
D)Both A and B

Question 10

Total revenues and net income for 2008 for Smith Lake Corporation is $3,500,000 and $280,000, respectively. Smith Lake Corporation has had 400,000 common shares of stock outstanding for all of 2008. The selling price of Smith Lake Corporation common stock on December 31, 2008, is $18. Earnings per share for 2008 is:

A)$12.50.
B)$0.70.
C)$35.00.
D)$8.75.

Question 11

If a balance sheet is subjected to vertical analysis which shows that current assets using total assets as the base)have increased from 36% to 53%, this would always mean that:

A)current assets have increased as a percentage of total assets.
B)the dollar amount of current assets has increased.
C)the dollar amount of total assets has decreased.
D)the dollar amount of total assets has increased.

Question 12

If cost of goods sold for the year was overstated, but all other financial statement items were properly reported, the calculated inventory turnover ratio would:

A)indicate the chance of running out of inventory was lower than it was.
B)be unaffected by this error.
C)indicate the company was more profitable than it actually was.
D)indicate that inventory was being turned over more times than it was.

Question 13

Spaceship Enterprises has a current ratio of 1.9 and working capital equal to $75,000. Total current liabilities are equal to:

A)$83,333.
B)$75,000.
C)$142,500.
D)$39,474.

Question 14

Which of the following expresses current cost of goods sold in terms of a base year?

A)Trend analysis
B)Horizontal analysis
C)Ratio analysis
D)Vertical analysis

Question 15

Streyna Company reported net sales of $95,000 for the current year. Accounts Receivable at the beginning of the year was $11,000 and $9,000 at the end of year. The accounts receivable turnover is closest to:

A)10.56.
B)9.5.
C)4.75.
D)8.64.

Question 16

On a common- size balance sheet each item is expressed as a percentage of:

A)total assets.
B)common stock.
C)common shares outstanding.
D)stockholders' equity.

Question 17

The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by:

A)the average of the amounts shown for the base and the current periods.
B)the amount shown for the current period.
C)the base- period amount.
D)none of the above.

Question 18

The following data represent selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
The debt ratio for Duenke Company on December 31, 2009, was:

A)1.87.
B)0.54.
C)1.82.
D)0.55.

Question 19

Trend analysis is most closely related to:

A)vertical analysis.
B)economic value added analysis.
C)horizontal analysis.
D)benchmarking.

Question 20

Cost of goods sold for the current year was $170,000. Last year's cost of goods sold was $190,000. The percentage change and direction of change for the current year was:

A)11.7% increase.
B)10.5% decrease.
C)11.7% decrease.
D)10.5% increase.

Question 21

Accounts receivable turnover is calculated as:

A)average net accounts receivable / 365 days.
B)total cost of goods sold / 365 days.
C)total net credit sales / average net accounts receivable.
D)total net credit sales / cost of goods sold.

Question 22

The following data represents selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
The current ratio for Duenke Company on December 31, 2009, was:

A)0.57.
B)1.26.
C)1.45.
D)0.67.

Question 23

Yukon Company has total current liabilities equal to $600,000 and working capital of $30,000. Northwest Company has the same amount of working capital, but it has total current liabilities of $40,000. The company with the better working capital position is:

A)Northwest Company.
B)Yukon Company.
C)neither Northwest nor Yukon. They both have exactly the same working capital position.
D)indeterminable with the information given.

Question 24

The rate of return on net sales is calculated as:

A)gross profit / net sales.
B)operating income / net sales.
C)dividends paid during the year / net sales.
D)net income / net sales.

Question 25

A company reported $155,000 of income for year 1; $180,000 for year 2; and $200,000 for year 3. The percentage change in net income from year 1 to year 3 is computed as:

A)$20,000 / $155,000.
B)$45,000 / $200,000.
C)$25,000 / $200,000.
D)$45,000 / $155,000.

Question 26

A company wishing to improve its acid- test ratio should:

A)sell inventory on account.
B)purchase additional inventory on account.
C)purchase additional inventory for cash.
D)do all of the above.

Question 27

The current ratio is calculated as:

A)total assets / total liabilities.
B)current assets / current liabilities.
C)current assets × current liabilities.
D)current assets / total liabilities.

Question 28

Given the following data: In a vertical analysis, cash would be expressed as:

A)1435%.
B)830%.
C)12%.
D)7%.

Question 29

The analysis of percentage changes in comparative statements is known as:

A)horizontal analysis.
B)economic value added analysis.
C)vertical analysis.
D)benchmarking analysis.

Question 30

The times- interest- earned ratio is calculated as:

A)income from operations / interest expense.
B)net income after taxes + interest expense)/interest expense.
C)net income / interest expense.
D)income from operations - interest expense)/interest expense.

Question 31

Which of the following is typically used as the base in a vertical analysis of an income statement?

A)Gross sales
B)Cash
C)Net income
D)Net sales

Question 32

If the assets shown on a balance sheet are subjected to vertical analysis using total assets as the base), a decrease in the figure for noncurrent assets from 55% to 40% would always mean that:

A)the dollar amount of current assets has decreased.
B)total noncurrent assets have decreased as a percentage of total assets.
C)both A and B are correct.
D)neither A nor B are correct.

Question 33

Arnold Company's return on sales for the most recent year was 6%. Arnold Company would like to achieve a return on sales of 8% to match those of the current industry leader. This comparison is an example of:

A)intercompany analysis.
B)detail analysis.
C)analytical goal setting.
D)benchmarking.

Question 34

Compute the acid- test ratio using the following data:

A)1.86
B)1.15
C)1.33
D)1.24

Question 35

The following data represent selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
Using 360 days in the year, Duenke Company's days' sales in receivables for the year ended December 31, 2009, was:

A)33.
B)30.
C)25.
D)27.

Question 36

Assuming the Inventory balance at the end of the year is $125,000, and it has increased by 5% during the year. The Inventory balance at the beginning of the year was closest to:

A)$131,579.
B)$119,048.
C)$131,250.
D)$118,750.

Question 37

Which of the following would be most likely to reveal that cost of goods sold increased by a specific dollar amount during the year?

A)Horizontal analysis
B)Vertical analysis
C)Trend analysis
D)Ratio analysis

Question 38

All of the following ratios directly relate to the analysis of a given stock as an investment EXCEPT the:

A)current ratio.
B)book value per share of common stock.
C)earnings per share.
D)dividend yield.

Question 39

A company reported $65,000 of income for year 1; $70,000 for year 2; and $80,000 for year 3. The percentage change in net income from year 2 to year 3 is:

A)12.50%.
B)7.15%.
C)38.46%.
D)14.29%.

Question 40

If all else is held equal, an increase in the current ratio of a company is generally considered to be an indication that:

A)current assets have decreased.
B)current liabilities have increased.
C)the company will be better able to meet short- term debt obligations.
D)the company will have increased difficulty meeting short- term obligations.

Question 41

Assuming the balance in Retained Earnings at the end of year is $100,000, and that it decreased by 15% during the year. The balance in Retained Earnings at the beginning of the year was closest to:

A)$120,000.
B)$85,000.
C)$117,647.
D)$115,000.

Question 42

Given the following data: In a vertical analysis, noncurrent liabilities would be expressed as:

A)148.74%.
B)354.00%.
C)51.16%.
D)67.23%.

Question 43

Guliana Company reported net sales of $150,000 for the current year. Accounts Receivable at the beginning of the year was $17,000 and $15,000 at the end of year. The days' sales in average receivables was closest to:

A)38.9 days.
B)36.5 days.
C)41.4 days.
D)75.4 days.

Question 44

A very low accounts receivable turnover would most likely indicate that:

A)net credit sales for the year have been understated.
B)policies for extending credit to customers are too tight.
C)the company is unsuccessful in its efforts to collect cash from customers.
D)accounts receivable balances have been overstated.

Question 45

Compute working capital using the following data:

A)$80,000
B)$770,000
C)$290,000
D)$295,000

Question 46

The following data represent selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
The inventory turnover for Duenke Company for the year ended December 31, 2009, was:

A)3.86.
B)3.61.
C)3.49.
D)4.

Question 47

The dividend yield is calculated as:

A)dividends per share / number of shares of common stock.
B)dividends per share / book value per share of common stock.
C)dividends per share / earnings per share of common stock.
D)dividends per share / market price per share of common stock.

Question 48

Which of the following is the best measure of a firm's ability to pay its long- term debt?

A)Cash flows from financing activities
B)Debt ratio
C)Current ratio
D)Net income

Question 49

On a common- size income statement each item is expressed as a percentage of:

A)total revenues.
B)net income.
C)operating income.
D)gross margin.

Question 50

Assume a company has a current ratio of 1.8 and working capital equal to $48,000. If the company's current liabilities are equal to $60,000, its total current assets are:

A)$54,000.
B)$6,000.
C)$108,000.
D)$10,800.

Question 51

Stocks with a high price/earnings ratio:

A)are often purchased by smart investors who interpret an increase in the P/E ratio as a signal to buy a stock.
B)would typically be found in older, stable industries where little future growth is expected.
C)tend to be less risky.
D)tend to be more risky.

Question 52

Inventory turnover is calculated as:

A)cost of goods sold / average inventory for the period.
B)gross profit for the period / average inventory for the period.
C)average inventory for the period / gross profit for the period.
D)average inventory for the period / cost of goods sold.

Question 53

Given the following data: If net sales decreases by 10%, and cost of goods sold increases by 15%, gross profit would:

A)increase by 25%.
B)decrease by 80%.
C)decrease by 25%.
D)increase by 80%.

Question 54

Which of the following is NOT included in the calculation of the numerator in the acid- test ratio?

A)Cash and prepaid expenses
B)Inventory and net current receivables
C)Short- term investments and net current receivables
D)Prepaid expenses and inventory

Question 55

Expressing current operating income as a percentage of current net sales is an example of:

A)vertical analysis.
B)horizontal analysis.
C)economic value added.
D)ratio analysis.

Question 56

The following data represent selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
For the year ending on December 31, 2008, Duenke Company's rate of return on net sales was:

A)0.19.
B)0.21.
C)0.18.
D)0.17.

Question 57

Which of the following statements about inventory turnover is most appropriate?

A)The most profitable turnover ratio may not necessarily be the highest.
B)Companies generally strive to have the lowest possible inventory turnover ratio.
C)A high ratio indicates the company is having trouble selling its inventory.
D)A low ratio generally means the company is not keeping enough inventory on hand.

Question 58

On a statement of cash flows of a financially healthy company, net income should ordinarily be:

A)more than depreciation expense.
B)more than cash provided by operating activities.
C)less than depreciation expense.
D)less than cash provided by operating activities.

Question 59

An "efficient capital market" is one where:

A)stock market prices fully reflect all information available to the public.
B)regulatory bodies are doing a good job of controlling the sale of publicly available stock securities.
C)stock prices are set by the law of supply and demand.
D)companies can easily and efficiently raise capital when needed.

Question 60

Compute the current ratio using the following data:

A)1.73
B)1.8
C)0.55
D)0.35

Question 61

Beginning inventory was $28,000 and ending inventory was $22,000. Cost of goods sold was $190,000 and net sales were $360,000. Inventory turnover for the year was closest to:

A)14.4.
B)6.79.
C)8.64.
D)7.6.

Question 62

Mickey Corporation has total current assets equal to $80,000 and working capital of $20,000. Minnie Company has the same amount of working capital, but it has total current assets of $300,000. The company with the better working capital position is:

A)Mickey Corporation.
B)Minnie Company.
C)They both have equally good working capital positions.
D)indeterminable with the information given.

Question 63

Economic value added may be computed as:

A)the change in capital / net income.
B)the change in capital × net income + interest expense).
C)net income + interest expense - the capital charge.
D)net income / the change in capital.

Question 64

Compute the times interest earned ratio given the following data:

A)12.9 times
B)15.6 times
C)9.8 times
D)12.5 times

Question 65

Assume a company has working capital equal to $23,000 and total current liabilities equal to $75,000. The current ratio:

A)is 1.31.
B)is 0.31.
C)is 3.26.
D)cannot be determined from this information.

Question 66

A vertical analysis is primarily concerned with:

A)percentage changes in the balances shown in comparative financial statements.
B)the change in key financial statement ratios over a specified period of time.
C)individual financial statement items expressed as a percentage of a base which represents 100%).
D)the dollar amount of the change in various financial statement amounts from year to year.

Question 67

Compute the return on sales given the following data:

A)47.20%
B)40.00%
C)18.06%
D)7.22%

Question 68

When preparing a trend analysis, a trend percent is computed as:

A)dollar change in item / current year.
B)current year / base year.
C)dollar change in item / base year.
D)base year / current year.

Question 69

Earnings per share of common stock measures the market value of one share of common stock.

Question 70

When using common- size financial statement to evaluate the operating results of two different companies, the gross margin of Company A is expressed as a percentage of:

A)a common standard for both Company A and Company B.
B)the total gross margins of Companies A and B.
C)Company B's gross margin.
D)Company A's sales.

Question 71

The dividend yield for young, growth- oriented companies is generally high in order to attract potential investors.

Question 72

To be truly useful, financial ratios should be tracked over multiple accounting periods.

Question 73

Capital charge is computed as:

A)Cost of capital + Notes payable + Loans payable + Long- term debt + Stockholders' equity.
B)Notes payable + Loans payable + Long- term debt)× Stockholders' equity + Cost of capital).
C)Notes payable + Loans payable + Long- term debt + Stockholders' equity)× Cost of capital.
D)Cost of capital - Notes payable - Loans payable - Long- term debt - Stockholders' equity.

Question 74

Working capital is defined as:

A)current assets + current liabilities.
B)current liabilities - current assets.
C)total assets - total liabilities.
D)current assets - current liabilities.

Question 75

The debt ratio is an indicator of a company's:

A)relationship between current liabilities and current assets.
B)percentage of assets financed with debt.
C)relationship between debt and interest expense.
D)relationship between interest expense and income.

Question 76

The following data represent selected information from the comparative income statement and balance sheet for Duenke Company for the years ended December 31, 2009 and 2008: * 10,000 shares of common stock have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2008, and they were selling for $91.50 on December 31, 2009.
Using 360 days in the year, Duenke Company's days' sales in receivables for the year ended December 31, 2009, was:

A)27.
B)30.
C)25.
D)33.

Question 77

If the ending inventory balance was overstated on the financial statements and the beginning inventory balance was understated, but all other items were properly reported, the calculated inventory turnover ratio would be:

A)unaffected by these errors.
B)too low.
C)too high.
D)indeterminable with the information given.

Question 78

Of the items listed below, the one most helpful in the comparison of different size companies is:

A)preparation of common- size financial statements.
B)horizontal analysis.
C)comparison of their net incomes.
D)comparison of their working capital balances.

Question 79

Analyzing the statement of cash flows may help analysts determine the financial health of a company. Which of the following signs below is NOT an indicator of a financially healthy company?

A)The company's operations are a major source not a use)of cash.
B)The company's financing activities are not dominated by borrowing.
C)The company's investing activities include more purchases than sales of long- term assets.
D)The company's operations are a major use not a source)of cash..

Question 80

Common- size financial statements represent a form of:

A)trend analysis.
B)ratio analysis.
C)horizontal analysis.
D)vertical analysis.