Deck 13: Analyzing Financial Statements

Question 1

Financial leverage will always be which of the following?

A)Positive.
B)Negative.
C)Either positive or negative.
D)Positive,negative,or zero.

Answer 1

D

Question 2

Which of the following ratios usually is not considered to be a test of profitability?

A)Current ratio.
B)Profit margin.
C)Return on assets.
D)Earnings per share.

Answer 2

A

Question 3

Which of the following ratios is NOT a test of liquidity?

A)Receivable turnover.
B)Cash ratio.
C)Current ratio.
D)Return on assets.

Answer 3

D

Question 4

Calculate C Co's financial leverage and identify whether it was positive or negative.
A.14.1% positive
B.15.2% positive
C.17.8% negative
D.19.9% negative

Question 5

When are ratios most useful for analysis?

A)When used alone.
B)When compared with historical ratios of the same company.
C)When compared with ratios for other companies in the industry.
D)When compared with both historical ratios of the same company and ratios for other companies in the industry.

Question 6

Teel Company's working capital was $40,000 and total current liabilities were 1/4 of that amount.What was the current (working capital)ratio?

A)1 to 1
B)3 to 1
C)5 to 1
D)7 to 1

Question 7

Which of the following ratios is not a test of solvency?

A)Debt to equity ratio.
B)Owners' equity to total equity ratio.
C)Creditors' equity to total equity ratio.
D)Earnings per share ratio.

Question 8

Which of the following solvency positions would a company consider most favourable?

A)A high debt to total assets ratio and a low times interest earned ratio
B)A low debt to total assets ratio and a high times interest earned ratio
C)A high debt to total assets ratio and a high times interest earned ratio
D)A low debt to total assets ratio and a low times interest earned ratio

Question 9

May Company's return on equity was 21% and the financial leverage ratio was 13% (positive).What was the return on assets?

A)8%
B)13%
C)21%
D)34%

Question 10

The records of Twain Company include the following: What is the financial leverage factor (rounded to the nearest percent)?

A)4%
B)5%
C)7%
D)9%

Question 11

The records of ZZZZ Better Corporation include the following: What is the return on equity (round to the nearest percent)?

A)6%
B)13%
C)16%
D)24%

Question 12

Which of the following is an important measure of the average movement of goods "on and off the shelf" of a company?

A)Profit margin.
B)Price/earnings ratio.
C)Gross inventory ratio.
D)Inventory turnover ratio.

Question 13

Which of the following items is not a category of commonly used financial ratios?

A)Tests of solvency and equity position.
B)Tests of timing.
C)Tests of liquidity.
D)Tests of profitability.

Question 14

Lyceum Co.reported profit of $8.3 million,interest expense of $.5 million and they are in a 30% tax rate bracket.Their average total assets are $65.8 million and average shareholders' equity is $48.6 million.What is Lyceum's financial leverage advantage or disadvantage?
A.3.7%
B.3.9%
C.4.0%
D.4.7%

Question 15

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 16

Short-term creditors are usually most interested in assessing

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

Question 17

Which of the following statements is true?

A)The inventory turnover ratio is an important solvency test for retail companies.
B)Liquidity focuses on the ability of a company to pay their long- and short-term debts.
C)Tests of profitability focus on measuring the adequacy of profit.
D)The debt to equity ratio is a measure of liquidity.

Question 18

Which of the following describes book value per common share?

A)It is not widely used in assessing the future dividend potential of the corporation.
B)It is a good measure of management performance.
C)It is usually greater than the market value per share.
D)It is a measure of liquidity.

Question 19

What is usually the base amount in preparing a common-size income statement?

A)Cost of goods sold.
B)Gross profit.
C)Net sales.
D)Profit.

Question 20

Long-term creditors are usually most interested in evaluating

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

Question 21

Which of the following accounting ratios considers the importance of cash flows relating to required interest payments?

A)times interest earned ratio
B)debt/equity ratio
C)cash coverage ratio
D)receivables turnover

Question 22

The Able Company had profit of $47,500 and earnings per share of $3.17 during 20B.On December 31,20B,the shares had a market price of $18.50 per share.What is Able's price/earnings ratio?

A)0.17
B)5.84
C)8.11
D)25.70

Question 23

A quality of earnings ratio higher than one is an indicator of which of the following?

A)A company's high debt position.
B)That fixed assets are the company's most important resources.
C)That a company has cash generated by operations higher than the amount of profit.
D)That a company has too many fixed assets.

Question 24

What is the use of borrowed funds to enhance the return to the shareholders known as?

A)Liquidity.
B)Factoring.
C)Discounting.
D)Financial leverage.

Question 25

Which of the following ratios would be used to evaluate the long-term risk and capital structure of a company?

A)debt to equity ratio
B)quick ratio
C)profit margin
D)cash ratio

Question 26

If trade receivables are collected quickly,it may indicate which of the following?

A)The trade receivables turnover is low.
B)The company's credit policies may be overly stringent.
C)Credit is often granted to poor credit risks.
D)The company is becoming more profitable.

Question 27

Matt Company paid out $2.30 in dividends per share during 20B.The market price of the share on December 31,20B was $21.00 per share.There were 15,000 shares of share outstanding for the entire year.What was the dividend yield as of December 31,20B?

A)9.13%
B)10.95%
C)16.43%
D)913.04%

Question 28

Hayes Company had an average age of accounts receivable of 25 days and net credit sales of $31,000.Assume a 365 day year.What was the amount of the average net receivables?

A)$1,152
B)$2,123
C)$4,000
D)$5,760

Question 29

Strait Company has outstanding shares as follows: 16,000 common shares and 5,000 preferred shares.What is the number of shares that should be used in the denominator to compute earnings per share?

A)5,000
B)16,000
C)18,000
D)21,000

Question 30

Able Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.The net sales for the year were $983,000 with a gross profit on sales of $295,000.What was the inventory turnover?

A)2.78 times
B)2.89 times
C)6.49 times
D)9.27 times

Question 31

The price/earnings ratio is also referred to as which of the following?

A)Multiple.
B)Dividend yield ratio.
C)Book value per share.
D)Capitalization rate.

Question 32

Box Company reported the following data at the end of 20B: What was the average number of days to collect receivables during 20B?

A)14.3
B)16.2
C)21.9
D)36.5

Question 33

Nunn Company reported the following data: What was the current ratio?

A)0.5 to 1
B)0.75 to 1
C)1.5 to 1
D)2.5 to 1

Question 34

If the current ratio is 2 to 1,the payment of a cash dividend,which was recorded as a liability on the date of declaration,will do which of the following?

A)Increase the current ratio.
B)Decrease the current ratio.
C)Have no effect on the current ratio.
D)Invalidate earnings per share.

Question 35

A common measure of profitability is the

A)current ratio.
B)cash current debt coverage ratio.
C)return on common shareholders' equity ratio.
D)debt to total assets ratio.

Question 36

At the end of 20B,Storage Company reported 15,000 outstanding common shares.Total liabilities were $440,000 and total assets were $860,000.The company had no preferred shares.What was the book value per share of common share?

A)$13.90
B)$14.00
C)$28.00
D)$29.00

Question 37

Bailey Corporation reported the following information for 20A: Bailey's debt/equity ratio was

A).33 or 33%.
B)1.0 or 100%.
C)1.25 or 125 %.
D)3.0 or 300%.

Question 38

Shore Company reported profit plus income tax (net of tax)of $25,000,total liabilities of $150,000,and total shareholders' equity of $100,000.What was the return on assets?

A)10%
B)16.67%
C)25%
D)Cannot be determined from the data given.

Question 39

Which of the following transactions would increase the current ratio of a company if the ratio is currently more than 1 to 1?

A)Paid the principal on a long-term note payable.
B)Borrowed cash on a short-term note.
C)Sold inventory for more than cost.
D)Record amortization expense.

Question 40

The ratio of quick assets to current liabilities is known as which of the following?

A)Working capital.
B)Current ratio.
C)Quick ratio.
D)Cash coverage.

Question 41

Calculate C Co's inventory turnover ratio and the days' sales in inventory for 2012.

A)5.89 times and 62.0 days
B)18.41 times and 19.8 days
C)5.58 times and 65.4 days
D)6.11 times and 59.7 days

Question 42

Calculate C Co's return on equity (ROE)for 2012.

A)25.6%
B)27.1%
C)30.9%
D)31.8%

Question 43

Calculate P Co's book value per share in 2012 and 2011 respectively.

A)4.14 and cannot compute 2012's book value
B)4.14 and 4.49
C)4.21 and 4.42
D)4.21 and cannot compute 2012's book value

Question 44

Calculate C Co's gross profit ratio for 2012 and 2011 respectively.

A)30.3% and 29.6%
B)69.7% and 70.4%
C)20.1% and 26.4%
D)40.6% and 45.7%

Question 45

A company with a very high gross profit ratio would most likely be

A)an advertising agency.
B)a firm.
C)a grocery store.
D)a retail fur store.

Question 46

Calculate C Co's financial leverage and identify whether it was positive or negative.

A)14.1% positive
B)15.2% positive
C)17.8% negative
D)19.9% negative

Question 47

Lyceum Co.reported profit of $8.3 million,interest expense of $.5 million and they are in a 30% tax rate bracket.Their average total assets are $65.8 million and average shareholders' equity is $48.6 million.What is Lyceum's financial leverage advantage or disadvantage?

A)3.7%
B)3.9%
C)4.0%
D)4.7%

Question 48

Calculate P Co's dividend payout for 2012 and 2011 respectively.

A)38.6% and 34.5%
B)39.3% and 33.8%
C)1.3% and 1.3%
D)3.5% and 3.6%

Question 49

Calculate C Co's receivables turnover ratio and the days' sales in receivables for 2012.

A)11.43 times and 31.9 days
B)11.02 times and 33.1 days
C)11.15 times and 32.7 days
D)3.47 times and 105.2 days

Question 50

Calculate C Co's profit margin ratio for 2012 and 2011 respectively.

A)69.7% and 70.4%
B)19.3% and 27.6%
C)20.1% and 26.4%
D)12.3% and 18.8%

Question 51

Calculate C Co's current ratio for 2012 and 2011 respectively.

A).54 and .59
B).60 and .70
C).66 and .74
D).63 and .72

Question 52

Calculate P Co's dividend yield for 2012 and 2011 respectively.

A)3.5% and 3.6%
B)39.3% and 33.8%
C)1.3% and 1.3%
D)38.6% and 34.5%

Question 53

Calculate C Co's debt to equity ratio for 2012 and 2011 respectively.

A)1.27 and 1.28
B).79 and .78
C).56 and .56
D).66 and .66

Question 54

Calculate C Co's return on assets (ROA)for 2012.

A)11.9%
B)13.0%
C)13.6%
D)17.7%

Question 55

Calculate P Co's price earnings ratios for 2012 and 2011 respectively.

A)30.9 and 25.5 times
B)3.2% and 3.9%
C)29.7 and 26.5 times
D)29.7% and 26.5%

Question 56

Calculate C Co's times interest earned ratio for 2012 and 2011 respectively.

A)11.82 and 17.93
B)7.21 and 12.75
C)12.33 and 19.77
D)11.33 and 18.77

Question 57

Which of the following statements is true?

A)Return on equity (ROE)divides profit by average total assets.
B)Return on assets (ROA)divides operating profit by average total assets.
C)When return on assets (ROA)is greater than return on equity (ROE)we have negative financial leverage.
D)The current ratio is a measure of solvency.

Question 58

Calculate C Co's fixed asset turnover ratio for 2012.

A).97
B)3.79
C)4.87
D)4.99

Question 59

Perot Company had profit before interest and taxes of $120,000.Interest expense for the period was $17,000 and income taxes amounted to $28,500.The average shareholders' equity was $680,000.What is Perot's return on equity?

A)10.96%
B)13.46%
C)15.15%
D)17.65%

Question 60

Calculate C Co's quick ratio for 2020 and 2011 respectively.

A).30 and .32
B).37 and .40
C).55 and .64
D).56 and .54

Question 61

Ratio analysis only involves relationships within a single accounting period.

Question 62

The current ratio is one indicator of the liquidity of a company.

Question 63

The debt to equity ratio is a test of liquidity of the company.

Question 64

A primary objective of financial statements is to provide information to current and potential investors and creditors.

Question 65

To compute component percentages for the income statement,the base amount is profit.

Question 66

In 2012,C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9 days.In 2012,P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and 37.6 days.Which of the following statements is false?

A)The higher turnover ratio for C Co hurts their liquidity.
B)P Co's lower turnover ratio has an inverse relationship to its days' sales tied up in receivables.
C)P Co's management has done a better job of managing their receivables.
D)C Co appears to be more profitable than P Co.

Question 67

Management's success at containing the effects of uncontrollable risks and managing in the face of uncertainties plays a role in analysts' predictions of the future economic health of a specific company.

Question 68

Financial statements provide important information to help users understand and evaluate corporate strategy.

Question 69

In 2012,C Co's total liabilities were $10,742 million and shareholders' equity was $8,403 million.In 2012,P Co's total liabilities were $16,259 million and their shareholders' equity was $6,401 million.Which of the following statements is false?

A)C Co's debt to equity ratio was 1.28 and P Co's was 2.54.
B)C Co has only about 56.1% of its assets financed by debt while P Co has about 71.8% of assets financed by debt.
C)P Co is a much higher leveraged company providing greater financial risk for investors but potential higher return on owners' investment to its shareholders.
D)C Co is more profitable than P Co.

Question 70

A weakness of the current ratio is

A)the difficulty of the calculation.
B)that it doesn't take into account the composition of the current assets.
C)that it is rarely used by sophisticated analysts.
D)that it can be expressed as a percentage,as a rate,or as a proportion.

Question 71

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability.As a result of this transaction,the current ratio and working capital will

A)both decrease.
B)both increase.
C)remain the same and decrease,respectively.
D)increase and remain the same,respectively.

Question 72

An aircraft company would most likely have

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

Question 73

A new company with a high property,plant,and equipment balance would most likely be which of the following?

A)A tee shirt company.
B)A hotel.
C)A pizza take-out company.
D)A hot dog vendor on an airport concourse.

Question 74

In 2012,C Co's gross profit ratio was 70.4% and their profit margin was 18.8%.In 2012,P Co's gross profit ratio was 58.3% and their profit margin was 8.9%.Which of the following is false?

A)C Co's cost of goods sold was a lower percentage of sales than P Co's.
B)In 2012,C Co's profit margin was 111.2% greater than P Co's which would contribute to a higher return on total investment.
C)The major reason for P Co's lower profit margin is that their selling,general and administrative expenses were double the percentage of sales compared to C Co's percentage.
D)C Co looks to be a better investment than P Co.

Question 75

The inventory turnover ratio is calculated by dividing

A)cost of goods sold by the ending inventory.
B)cost of goods sold by the beginning inventory.
C)cost of goods sold by the average inventory.
D)average inventory by cost of goods sold.

Question 76

The only way an investor will get a return on shares while they own the shares is for the corporation to distribute a dividend.

Question 77

A general rule to use in assessing the average collection period is that it

A)should not greatly exceed the credit term period.
B)should not exceed 30 days.
C)can be any length as long as the customer continues to buy merchandise.
D)should not greatly exceed the discount period.

Question 78

In 2012,C Co's return on owners' equity (ROE)was 45.1%,and return on assets (ROA)was 19.6%.In 2012,P Co's return on owners' equity (ROE)was 29.9% while return on assets was 9.3%.Which of the following statements is false?

A)P Co's return on assets (ROA)was less than half of C Co's ROA.
B)P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA.This difference is caused by P Co's higher use of debt financing to leverage their assets.
C)C Co provided higher positive financial leverage for their shareholders compared to P Co.
D)C Co.is considerably more liquid than P Co.

Question 79

In simple terms,a business strategy establishes the objectives a business is trying to achieve.

Question 80

The quality of earnings computation is a test of the solvency of the company.