Deck 14: Financial Statement Analysis Available Online in Connect

Question 1

When debt is used to finance the purchase of assets, the term or time span of the debt should always be shorter than the lifespan of the assets.

Answer 1

False

Question 2

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

Answer 2

False

Question 3

The current ratio is one of the most common measures of solvency.

Answer 3

False

Question 4

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

Question 5

While horizontal analysis examines one item over many time periods, vertical analysis examines many items in the same interval of time.

Question 6

The quick ratio although similar to the current ratio is more conservative.

Question 7

The accounts receivable turnover ratio can be used to assess a firm's solvency.

Question 8

Jenkins 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 Jenkins carries less inventory than most companies in its industry.

Question 9

Vertical analysis always involves comparing financial statement elements over a span of time.

Question 10

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Question 11

Working capital is current assets minus current liabilities.

Question 12

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Question 13

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

Question 14

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

Question 15

A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

Question 16

Solvency ratios are used to analyze the long-term debt-paying ability and the composition of the financing structure of the firm.

Question 17

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

Question 18

The accounting profession assumes that financial statement users have an expert knowledge of business.

Question 19

The drawback of studying absolute amounts reported in financial statements is the problem of differing materiality levels.

Question 20

A vertical analysis uses percentages to compare each of the parts of an individual statement to a key statement figure. For example, on an income statement each item would be shown as a percentage of net sales.

Question 21

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?

A)No impact
B)Increase it
C)Decrease it
D)Not enough information is provided to answer the question.

Question 22

Milton Company has total current assets of $50,000, including inventory of $12,500, and current liabilities of $26,000. The company's current ratio is:

A)0.52.
B)1.92.
C)2.40.
D)1.44.

Question 23

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

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

Question 24

Knell Company paid its sales employees $15,000 in sales commissions. What impact will this transaction have on the firm's working capital?

A)No impact
B)Increase it
C)Decrease it
D)Not enough information is provided to answer the question.

Question 25

Working capital is defined as:

A)Current assets divided by current liabilities.
B)Total assets minus total liabilities.
C)Current assets minus current liabilities.
D)Current liabilities divided by total liabilities.

Question 26

Which of the following statements regarding ratio analysis is not true?

A)Ratio analysis is a specific form of horizontal analysis.
B)There are many different ratios available for evaluating a firm's performance.
C)Some ratios involve an account from the balance sheet and one from the income statement.
D)Ratio analysis involves making comparisons between different accounts in the same set of financial statements.

Question 27

Which of the following statements regarding the information disclosed in financial statements is not true?

A)The costs of providing all possible information about a firm would be prohibitively high for the business.
B)Some information disclosed in financial statements may be irrelevant to some users.
C)Financial statements should be detailed enough to answer any financial-related question an investor might have.
D)When too much information is presented users may suffer from information overload.

Question 28

Darden Company has cash of $37,000, accounts receivable of $47,000, inventory of $24,500, and equipment of $67,000. Assuming current liabilities of $32,500, this company's working capital is:

A)$51,500.
B)$76,000.
C)$106,000.
D)$14,500.

Question 29

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

A)Liquidity
B)Solvency
C)Profitability
D)All of these answer choices are correct.

Question 30

Which of the following statements regarding the quick ratio is not true?

A)The quick ratio is also known as the acid-test ratio.
B)The quick ratio ignores some current assets that are less liquid than others.
C)The quick ratio is a conservative variation of the current ratio.
D)The quick ratio equals quick assets divided by total liabilities.

Question 31

Financial statement analysis involves forms of comparison including:

A)Comparing changes in the same item over a number of periods.
B)Comparing key relationships within the same year.
C)Comparing key items to industry averages.
D)All of these answer choices are correct.

Question 32

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

A)$12,000.
B)$52,000.
C)$144,000.
D)$84,000.

Question 33

Select the correct statement regarding vertical analysis.

A)Vertical analysis of the income statement involves showing each item as a percentage of sales.
B)Vertical analysis of the balance sheet involves showing each asset as a percentage of total assets.
C)Vertical analysis examines two or more items from the financial statements of one accounting period.
D)All of these answer choices are correct.

Question 34

All of the following are measures of a company's short-term debt-paying ability except:

A)Current ratio.
B)Earnings per share.
C)Inventory turnover.
D)Average collection period.

Question 35

Which of the following is (are)objective(s)of ratio analysis?

A)Assessing past performance.
B)Assessing the prospects for future performance.
C)Analyzing how a company finances its operations.
D)All of these answer choices are correct.

Question 36

Which of the following statements regarding horizontal analysis is not true?

A)Percentage analysis involves computing the percentage relationship between two amounts.
B)A horizontal analysis of cost of goods sold on the income statement includes dividing gross margin by total revenue.
C)Horizontal analysis attempts to eliminate the materiality problem of comparing firms of different sizes.
D)In horizontal percentage analysis, a financial statement line item is expressed as a percentage of the previous balance of the same item.

Question 37

Current financial reporting standards assume that users of accounting information:

A)Have an expert's understanding of economic and financial events and conditions.
B)Have a reasonably informed knowledge of business.
C)Have widely differing levels of knowledge about business, and that financial reporting must meet these differing needs.
D)Have only minimal knowledge of business.

Question 38

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

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

Question 39

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

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

Question 40

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is not true?

A)Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area.
B)To correctly evaluate an absolute amount, the analyst must consider its relative importance.
C)Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses.
D)Using absolute amounts eliminates the problem of varying materiality levels.

Question 41

The following balance sheet information is provided for Gaynor Company: Assuming Year 2 cost of goods sold is $122,000, what is the company's inventory turnover?

A)2.77 times
B)3.03 times
C)3.34 times
D)None of these answers choices are correct.

Question 42

The following balance sheet information is provided for Duke Company for Year 2: What is the company's current ratio? (Round your answer to 2 decimal places.)

A)1.16
B)1.31
C)2.53
D)3.79

Question 43

The following balance sheet information was provided by Western Company: Assuming Year 2 net credit sales totaled $365,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations. Round your answer to 2 decimal places.)

A)25.00 days
B)21.50 days
C)28.50 days
D)52.00 days

Question 44

The following balance sheet information is provided for Greene Company for Year 2: What is the company's quick (acid-test)ratio? (Round your answer to 2 decimal places.)

A)1.92
B)1.35
C)0.77
D)3.60

Question 45

The following balance sheet information is provided for Duke Company for Year 2: What is the company's current ratio? (Round your answer to 2 decimal places.)

A)1.66
B)0.76
C)3.19
D)1.38

Question 46

The following balance sheet information was provided by O'Connor Company: If net credit sales for Year 2 totaled $149,000, what is the company's most recent accounts receivable turnover?

A)11.64 times
B)20.14 times
C)23.28 times
D)27.59 times

Question 47

The following balance sheet information is provided for Greene Company for Year 2: What is the company's quick (acid-test)ratio? (Round your answer to 1 decimal place.)

A)0.7
B)1.4
C)1.3
D)3.8

Question 48

The following balance sheet information is provided for Patton Company: Assuming Year 2 cost of goods sold is $730,000, what is the company's average days to sell inventory? (Use 365 days in a year. Do not round your intermediate calculations.)

A)17.5 days
B)18.25 days
C)19 days
D)20.86 days

Question 49

The following balance sheet information is provided for Gaynor Company: Assuming Year 2 cost of goods sold is $153,300, what is the company's inventory turnover?

A)4.0 times
B)4.4 times
C)4.2 times
D)None of these answers choices are correct.

Question 50

The following balance sheet information was provided by O'Connor Company: If net credit sales for Year 2 totaled $270,000, what is the company's most recent accounts receivable turnover?

A)18 times
B)20 times
C)22.5 times
D)7.7 times

Question 51

The following balance sheet information is provided for Santana Company for Year 2: What is the company's debt to equity ratio?

A)126.67%
B)47.76%
C)31.19%
D)57.61%

Question 52

Solvency ratios are used to assess a company's:

A)Long-term debt paying ability.
B)Profitability.
C)Short-term debt paying ability.
D)Efficiency in use of its assets.

Question 53

You are considering an investment in IBM stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:

A)Number of times interest is earned.
B)Debt to assets ratio.
C)Debt to equity ratio.
D)Net margin.

Question 54

The following balance sheet information was provided by Western Company: Assuming Year 2 net credit sales totaled $126,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations. Round your answer to 2 decimal places.)

A)49.25 days
B)46.35 days
C)98.49 days
D)52.14 days

Question 55

You are considering an investment in Apple stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:

A)Debt to equity ratio.
B)Inventory turnover.
C)Quick ratio.
D)Accounts receivable turnover.

Question 56

The following balance sheet information was provided by Western Company: Assuming Year 2 net credit sales totaled $270,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations.)

A)18.25 days
B)47.31 days
C)16.22 days
D)20.28 days

Question 57

The following balance sheet information is provided for Apex Company for Year 2: What is the company's working capital?

A)$20,300
B)$4,900
C)$22,900
D)$24,500

Question 58

The following balance sheet information is provided for Apex Company for Year 2: What is the company's working capital?

A)$11,170
B)$29,770
C)$34,200
D)$9,570

Question 59

The following balance sheet information is provided for Santana Company for Year 2: What is the company's debt to equity ratio? (Rounded to nearest whole percent.)

A)42%
B)130%
C)43%
D)77%

Question 60

Milton Company has total current assets of $46,000, including inventory of $10,000, and current liabilities of $20,000. The company's current ratio is:

A)0.4.
B)1.8.
C)2.8.
D)2.3.

Question 61

Which of the following statements regarding net margin is not true?

A)Net margin refers to the percentage of each sales dollar remaining after all expenses are subtracted.
B)Net margin may be calculated in several ways.
C)The amount of net margin is affected by a company's choices of accounting principles.
D)The larger the net margin the better.

Question 62

You are considering an investment in Facebook stock and wish to assess the company's position in the stock market. All of the following ratios can be used except:

A)Dividend yield.
B)Earnings per share.
C)Working capital.
D)Price-earnings ratio.

Question 63

The return on investment measure is also referred to as:

A)Net margin.
B)Return on equity.
C)Return on debt.
D)Return on assets.

Question 64

Miller Company reported gross sales of $850,000, sales returns and allowances of $5,000 and sales discounts of $5,000. The company has average total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?

A)1.70 times
B)0.60 times
C)1.72 times
D)1.68 times

Question 65

Which of the following statements regarding the return on equity (ROE)measure is not true?

A)ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
B)ROE equals net income divided by average total stockholders' equity.
C)ROE is affected by a company's use of leverage.
D)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.

Question 66

Miller Company reported gross sales of $850,000, sales returns and allowances of $15,000 and sales discounts of $5,000. The company has average total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?

A)3.32 times
B)1.67 times
C)1.66 times
D)1.70 times

Question 67

Martin Company reported net income of $15,200 on gross sales of $84,000. The company has average total assets of $119,200, of which $104,000 is property, plant and equipment. What is the company's return on investment? (Round your answer to 2 decimal places.)

A)12.75%
B)70.47%
C)14.62%
D)18.10%

Question 68

Alpha Company provided the following balance sheet for Year 2: What is the company's plant assets to long-term liabilities ratio?

A)2.33
B)4.21
C)1.83
D)None of these answers choices are correct.

Question 69

The following partial balance sheet is provided for Groom Company: What is the company's debt to assets ratio? (Rounded to nearest whole percent.)

A)49%
B)16%
C)33%
D)Cannot be determined with the information given.

Question 70

Abel Company provided the following information from its financial records: What is the company's earnings per share?

A)$0.72
B)$28.26
C)$0.59
D)$0.66

Question 71

Alpha Company provided the following balance sheet for Year 2: What is the company's plant assets to long-term liabilities ratio?

A)2.5
B)4.5
C)1.7
D)None of these answers choices are correct.

Question 72

The Fortune Company reported the following income for Year 2: What is the company's number of times interest earned ratio?

A)3.4 times
B)4.9 times
C)5.9 times
D)None of these answers choices are correct.

Question 73

The Poole Company reported the following income for Year 2: What is the company's net margin?

A)42.61%
B)74.20%
C)28.41%
D)19.88%

Question 74

Martin Company reported net income of $15,000 on gross sales of $80,000. The company has average total assets of $135,000, of which $102,000 is property, plant and equipment. What is the company's return on investment? (Round your answer to 1 decimal place.)

A)18.8%
B)11.1%
C)14.7%
D)12.5%

Question 75

The Fortune Company reported the following income for Year 2: What is the company's number of times interest earned ratio?

A)7 times
B)6 times
C)4 times
D)None of these answers choices are correct.

Question 76

Abel Company provided the following information from its financial records: What is the company's earnings per share?

A)$0.82
B)$1.00
C)$0.90
D)$0.75

Question 77

Dennis Company reported net income of $50,000 on sales of $300,000. The company has average total assets of $500,000 and average total liabilities of $100,000. What is the company's return on equity ratio?

A)10.0%
B)16.7%
C)12.5%
D)50.0%

Question 78

You are considering an investment in Frontier Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except:

A)Average days to collect receivables.
B)Asset turnover.
C)Return on investment.
D)Net margin.

Question 79

Dennis Company reported net income of $66,000 on sales of $460,000. The company has average total assets of $740,000 and average total liabilities of $260,000. What is the company's return on equity ratio?

A)13.75%
B)14.35%
C)25.38%
D)8.92%

Question 80

The Poole Company reported the following income for Year 2: What is the company's net margin? (Rounded to the nearest whole percent.)

A)73%
B)40%
C)18%
D)27%