Deck 13: Financial Analysis: the Big Picture

Question 1

From a creditor's point of view, the higher the debt to assets ratio, the lower the risk that the company may be unable to pay its obligations.

Answer 1

False

Question 2

The order of presentation of items that may appear on the statement of comprehensive income is

A)Other comprehensive income, Discontinued operations, Income before income taxes.
B)Discontinued operations, Other comprehensive income, Income before income taxes.
C)Income before income taxes, Discontinued operations, Other comprehensive income.
D)Income before income taxes, Other comprehensive income, Discontinued operations.

Answer 2

C

Question 3

Which one of the following is not a tool used in financial statement analysis?

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

Answer 3

B

Question 4

In horizontal or trend analysis, each item is expressed as a(n)

A)amount.
B)percentage.
C)rate.
D)amount or a percentage.

Question 5

In performing a vertical analysis, the base for sales revenues on the income statement is

A)net sales.
B)sales revenue.
C)net income.
D)cost of goods available for sale.

Question 6

Return on assets is most closely related to

A)profit margin and debt to assets ratio.
B)profit margin and asset turnover.
C)times interest earned and debt to stockholders' equity.
D)profit margin and free cash flow.

Question 7

Somen to Park Corporation had net credit sales of $5,075,000 and cost of goods sold of $3,750,000 for the year.The Accounts Receivable balances at the beginning and end of the year were $650,000 and $750,000, respectively.The accounts receivable turnover was

A)7.8 times.
B)6.8 times.
C)7.3 times.
D)5.4 times.

Question 8

Rama Company reported the following on its income statement: An analysis of the income statement revealed that interest expense was $80,000.Rama Company's times interest earned was

A)5.4 times.
B)7.3 times.
C)6.3 times.
D)4.4 times.

Question 9

A successful grocery store would probably have

A)a low inventory turnover.
B)a high inventory turnover.
C)zero profit margin.
D)low volume.

Question 10

The following information pertains to Blue Flower Company.Assume that all balance sheet amounts represent both average and ending balance figures.Assume that all sales were on credit. What is the price-earnings ratio for this company?

A)4.8 times
B)4.0 times
C)6.8 times
D)12.0 times

Question 11

A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.

Question 12

In a common-size balance sheet, total assets are represented by 100%.

Question 13

A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

Question 14

Which of the following items appears on the income statement before Income before income taxes?

A)Other comprehensive income
B)Comprehensive income
C)Other revenues and gains
D)Discontinued operations

Question 15

All of the following statements are true regarding comprehensive income except

A)companies are required to report comprehensive income.
B)a company would add an unrealized loss on available-for-sale securities to net income to calculate comprehensive income.
C)comprehensive income does not include changes resulting from investments by stockholders.
D)comprehensive income does not include dividends to stockholders.

Question 16

Assume the following sales data for a company: If 2019 is the base year, what is the percentage increase in sales from 2019 to 2020?

A)60%
B)25%
C)125%
D)160%

Question 17

In performing a vertical analysis, the base for sales returns and allowances is

A)sales revenue.
B)sales discounts.
C)net sales.
D)total revenues.

Question 18

Return on common stockholders' equity is most closely related to

A)gross profit rate and operating expenses to sales ratio.
B)profit margin and free cash flow.
C)times interest earned and debt to stockholders' equity ratio.
D)return on asset and leverage (debt to assets ratio).

Question 19

Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year.The average inventory for the year amounted to $1,250,000.The inventory turnover for the year is

A)7.4 times.
B)10.4 times.
C)3.0 times.
D)1.4 times.

Question 20

A company that is leveraged is one that

A)has a high earnings per share.
B)contains debt financing.
C)contains equity financing.
D)has a high current ratio.

Question 21

Net sales are $2,700,000, beginning total assets are $700,000, and the asset turnover is 3.0.What is the ending total asset balance?

A)$900,000
B)$1,100,000
C)$700,000
D)$800,000

Question 22

Listed here are some selected items that may appear on a corporate income statement.Indicate the order in which these items would appear on an income statement.(The first one should 1.

Question 23

Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders.

Question 24

In a vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

Question 25

Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."

Question 26

Which of the following statements is true with respect to financial statement reporting a change in accounting principle?

A)Comparability across periods is impaired
B)Only a footnote is required to report the change
C)Changes in both depreciation methods and inventory methods are reported retroactively.
D)Management must show that the new accounting principle is preferable to the old method.

Question 27

On January 1, 2020, Tri-State Industries had cash and common stock of $180,000.At that date, the company had no other asset, liability or equity balances.On January 2, 2020, it purchased $160,000 of equity securities for cash that it classified as available-for-sale.It received cash dividends of $12,000 during the year on these securities.In addition, it had an unrealized holding gain on these securities of $32,000, net of tax.Based on this information, what is the amount of comprehensive income in 2020?

A)$44,000
B)$20,000
C)$12,000
D)$32,000

Question 28

Comparative balance sheets

A)are usually prepared for at least one year.
B)are usually prepared for at least two years.
C)do not show both dollar amount and percentage changes.
D)do not show a comparison of total stockholders' equity.

Question 29

In performing a vertical analysis, the base for cost of goods sold is

A)total selling expenses.
B)net sales.
C)total revenues.
D)total expenses.

Question 30

Long-term creditors are usually most interested in evaluating

A)liquidity.
B)marketability.
C)profitability.
D)solvency.

Question 31

Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year.The average inventory for the year amounted to $1,250,000.The average days in inventory during the year was approximately

A)261 days.
B)122 days.
C)49 days.
D)35 days.

Question 32

The current assets of Orangette Company are $292,500.The current liabilities are $130,000.The current ratio expressed as a proportion is

A)225%.
B)2.25:1.
C).44:1.
D)$130,000 ÷ $292,500.

Question 33

The following information pertains to Unique Company.Assume that all balance sheet amounts represent both average and ending balance figures.Assume that all sales were on credit. What is the current ratio for this company?

A)1.42
B)0.80
C)1.16
D)0.60

Question 34

Dos Amugus Company has income from continuing operations of $621,000 (after tax) for the year ended December 31, 2022.It also has the following items (before considering income taxes):
(1) An unrealized loss of $120,000 available-for-sale-securities.
(2) A gain of $60,000 on the discontinuance of a major component.
(3) A cumulative effect of a change in accounting principle that resulted in an increase in prior years' depreciation of $50,000.
Assume all items are subject to income taxes at a 30% tax rate.
Instructions
Prepare a statement of comprehensive income, beginning with income from continuing operations.

Question 35

Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

Question 36

Vertical analysis is useful in making comparisons of companies of different sizes.

Question 37

Declining profitability and liquidity ratios are indications that a company may not survive.

Question 38

Dandy Candy Company sold its licorice division resulting in a loss of $80,000.Assuming a tax rate of 25%, the loss on this disposal will be reported on the income statement at what amount?

A)$100,000
B)$20,000
C)$80,000
D)$60,000

Question 39

A comparison with other companies that provides insight into a company's competitive position is most commonly known as which of the following types of comparisons?

A)Industry average comparison
B)Intracompany comparison
C)Intercompany comparison
D)Comprehensive income comparison

Question 40

Assume the following cost of goods sold data for a company: If 2019 is the base year, what is the percentage increase in cost of goods sold from 2019 to 2021?

A)140%
B)40%
C)20%
D)17%

Question 41

Salamagundi, Inc.has the following Income Statement (in millions): Using vertical analysis, what percentage is assigned to Net sales?

A)160%
B)Can't be computed.
C)60%
D)100%

Question 42

Which one of the following would be considered a long-term solvency ratio?

A)Accounts receivable turnover
B)Return on assets
C)Current ratio
D)Debt to assets ratio

Question 43

Savory Thymes, Inc.had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year.The average inventory for the year amounted to $1,250,000.The inventory turnover for the year is

A)7.2 times.
B)5.6 times.
C)5.2 times.
D)4.2 times.

Question 44

A weakness of the current ratio is

A)the difficulty of the calculation.
B)it uses year-end balances of current asset and current liability accounts.
C)it is rarely used by sophisticated analysts.
D)it can be expressed as a percentage, as a rate, or as a proportion.

Question 45

The following information pertains to Unique Company.Assume that all balance sheet amounts represent both average and ending balance figures.Assume that all sales were on credit. What is the accounts receivable turnover for this company?

A)2.8 times
B)2 times
C)3.4 times
D)3 times

Question 46

An inexperienced accountant for CJS Transport Corporation showed the following in CJS Transport's 2022 income statement: Income before income taxes $420,000; and Unrealized loss on available-for-sale securities (before taxes) $60,000.The unrealized loss and income before income taxes are both subject to a 30% tax rate.
Instructions
Prepare a corrected statement of income.

Question 47

Alternative accounting methods affect the quality of earnings.

Question 48

Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.

Question 49

Liquidity ratios measure the ability of the company to survive over a long period of time.

Question 50

Which of the following is not reported net of tax on the statement of comprehensive income?

A)Discontinued operations
B)Other comprehensive income
C)Other revenues and expenses
D)Net income

Question 51

When a horizontal analysis is performed and a zero or negative amount is reported in the base year, then

A)no percentage change can be computed.
B)the percent change will be negative.
C)the accountant has made a mistake.
D)the percentage change will be 100% or greater.

Question 52

In horizontal analysis, each item is expressed as a percentage of the

A)net income amount.
B)stockholders' equity amount.
C)total assets amount.
D)base-year amount.

Question 53

Salamagundi, Inc.has the following Income Statement (in millions): Using vertical analysis, what percentage is assigned to Gross profit?

A)37.5%
B)100%
C)60%
D)62.5%

Question 54

Stockholders are most interested in evaluating

A)liquidity.
B)solvency.
C)profitability.
D)marketability.

Question 55

Savory Thymes, Inc.had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year.The average inventory for the year amounted to $1,250,000.The average days in inventory during the year was approximately

A)51 days.
B)65 days.
C)70 days.
D)87 days.

Question 56

A supplier to a company would be most interested in the

A)asset turnover.
B)profit margin.
C)current ratio.
D)earnings per share.

Question 57

The following information pertains to Unique Company.Assume that all balance sheet amounts represent both average and ending balance figures.Assume that all sales were on credit. What is the inventory turnover for this company?

A)2 times
B)2.25 times
C)1 time
D).44 times

Question 58

Comparative information taken from the Bergeron Company financial statements is shown here: Instructions
Using horizontal analysis, show the percentage change from 2021 to 2022 with 2021 as the base year.

Question 59

Improper recognition of income is not one of the factors affecting the quality of earnings.

Question 60

In the vertical analysis of an income statement, each item is generally stated as a percentage of net income.

Question 61

A solvency ratio measures the income or operating success of a company for a given period of time.

Question 62

Which of the following would not be considered an example of a discontinued operation?

A)Shifting production processes within an operation
B)Elimination of a major class of customers
C)Elimination of an entire activity
D)Disposal of a significant component of a business

Question 63

Danner Corporation reported net sales of $650,000, $720,000, and $780,000 in the years 2019, 2020, and 2021, respectively.If 2019 is the base year, what percentage do 2021 sales represent of the base?

A)108%
B)120%
C)83%
D)20%

Question 64

Boone Trading Company reported net sales of $400,000, $440,000, and $560,000 in the years 2019, 2020, and 2021, respectively.If 2019 is the base year, what is the trend percentage for 2021?

A)71%
B)127%
C)140%
D)110%

Question 65

Cochran Corporation, Inc.has the following income statement (in millions): Using vertical analysis, what percentage is assigned to Cost of goods sold?

A)37%
B)63%
C)100%
D)50%

Question 66

In ratio analysis, the ratios are never expressed as a

A)rate.
B)logarithm.
C)percentage.
D)simple proportion.

Question 67

Which one of the following would not be considered a liquidity ratio?

A)Current ratio
B)Inventory turnover
C)Average collection period
D)Return on assets

Question 68

Which one of the following ratios would not likely 1.evaluating whether to sell on credit to a company?

A)Current ratio
B)Inventory turnover
C)Asset turnover
D)Accounts receivable turnover

Question 69

The following information pertains to Unique Company.Assume that all balance sheet amounts represent both average and ending balance figures.Assume that all sales were on credit. What is the return on assets for this company?

A)6.8%
B)10.0%
C)11.7%
D)26.7%

Question 70

The following items were taken from the financial statements of Kramer Manufacturing, Inc., over a 3-year period: Instructions
Using horizontal analysis and 2019 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit.Explain whether the trends are favorable or unfavorable for each item.

Question 71

Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Question 72

Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends.

Question 73

The current ratio is a measure of all the ratios calculated for the current year.

Question 74

Other comprehensive income is reported on the statement of comprehensive income immediately

A)before Income from continuing operations.
B)after Comprehensive income.
C)before Income before income taxes.
D)after Discontinued operations.

Question 75

In analyzing financial statements, horizontal analysis is a

A)requirement.
B)tool.
C)principle.
D)theory.

Question 76

Comparisons of data within a company are an example of the following comparative basis

A)industry averages.
B)intercompany.
C)intracompany.
D)interregional.

Question 77

Cochran Corporation, Inc.has the following income statement (in millions): Using vertical analysis, what percentage is assigned to Net income?

A)100%
B)90%
C)10%
D)17%

Question 78

The current ratio is

A)calculated by dividing current liabilities by current assets.
B)used to evaluate a company's liquidity and short-term debt-paying ability.
C)used to evaluate a company's solvency and long-term debt-paying ability.
D)calculated by subtracting current liabilities from current assets.

Question 79

The asset turnover is

A)net sales divided by net income.
B)average total assets divided by net income.
C)net sales divided by average total assets.
D)average total assets divided by net sales.

Question 80

Ratios are used as tools in financial analysis

A)instead of horizontal and vertical analyses.
B)because they can provide information that may not be apparent from inspection of the individual components of the financial statements.
C)because even single ratios by themselves are quite meaningful.
D)because they are prescribed by GAAP.