Deck 14: Analyzing Financial Statements: a Managerial Perspective

Question 1

Common size financial statements are an example of horizontal analysis.

Answer 1

False

Question 2

One reason a managerial accountant might need to analyze financial statements of other firms is to assess the viability of a vendor.

Answer 2

True

Question 3

When the amount of net sales is used as the base amount for all income statement items, horizontal analysis is being performed.

Answer 3

False

Question 4

If a company records fictitious sales, income will increase, but operating cash flows will not be affected.

Question 5

If net income is substantially less than operating cash flows, this is a sign of possible accounting irregularities.

Question 6

To assess control of operations, managers expect that successful implementation of their plan will be reflected in subsequent financial statements as substantially increased profits.

Question 7

Whenever an asset increases, the corresponding part of the transaction will always be an increase to net income.

Question 8

One example of vertical analysis is the determination that interest expense rose from 1.2% of net sales to 1.4% of net sales from one period to the next period.

Question 9

Vertical analysis is performed on the balance sheet because it represents a point in time, while horizontal analysis is performed on the income statement because it covers a period of time.

Question 10

A managerial accountant may analyze his/her company's own financial statements in order to assess the appearance of his/her firm to investors.

Question 11

One example of vertical analysis is the determination that long-term assets increased by 2.5% over time.

Question 12

Recording fictitious sales will cause operating cash flows and net income to increase.

Question 13

News articles and credit reports are valuable sources of financial information.

Question 14

If sales revenue of a retail company increases by 10% because the company sells more units of product, the company's cost of goods sold will increase by 10% as well.

Question 15

An increase in gross margin of 7% from one period to the next implies that the company's net income will have increased by 7% as well.

Question 16

The statement of cash flows divides a company's profitability into operating, investing, and financing activities.

Question 17

In general, managers should analyze financial statements primarily from the perspective of their customers.

Question 18

The management discussion and analysis section of the annual report explains financial results that are not obvious simply from reading the basic financial statements.

Question 19

Horizontal analysis examines the change in financial statement amounts over time.

Question 20

It is important for managers to analyze their company's financial statements so that they can anticipate and answer questions from investors and creditors.

Question 21

Which of the following changes is the least favorable?

A)An increase in inventory turnover
B)A decrease in operating expenses
C)An increase in the price-earnings ratio
D)A decrease in the asset turnover

Question 22

The acid-test ratio is a more stringent test of a company's ability to pay its short-term debt compared to the current ratio.

Question 23

Times interest earned measures how many times operating income is able to pay the company's interest expense.

Question 24

Financial leverage relates to a company's use of debt financing to acquire and use productive assets.

Question 25

If a company's return on total assets is higher than its return on common stockholders' equity, a company is using financial leverage effectively.

Question 26

Net cash provided by operations represents

A)net income converted to a cash basis.
B)the net increase in cash and cash equivalents for a period.
C)the cash provided by selling inventory to customers.
D)a measure of profitability.

Question 27

A high debt-to-equity ratio implies that a company has more risk than a company with a low ratio.

Question 28

Which of the following is a reason that managers use financial statements?

A)To assess the company's image
B)To assess the product cost of competitors
C)To assess competitors' contribution margins
D)To assess the long-term viability of key customers

Question 29

The gross margin percentage is a turnover ratio that measures the efficiency with which a company sells its products.

Question 30

Which of the following indicates the amount investors are willing to pay per dollar of earnings?

A)Market price per share of a company's stock
B)Earnings per share
C)Price-earnings ratio
D)Return on total assets

Question 31

Debt-related ratios reveal the ability of a company to pays its obligations when they become due.

Question 32

An increase in inventory turnover implies that a company is selling its inventory and collecting cash from customers more quickly.

Question 33

Turnover ratios involve both a balance sheet and an income statement account.

Question 34

Which of the following does accounts receivable turnover measure?

A)The ability of a company to pay its short-term obligations
B)The number of times receiveables are collected during the period
C)The efficiency with which a company generates sales on credit
D)The length of time it takes to collect receivables

Question 35

Earnings per share is the amount of net income earned in a company that is paid out as cash dividends to shareholders.

Question 36

Which of the following is the return a company is able to earn on funds invested by shareholders?

A)Return on total assets
B)Return on common stockholders' equity
C)Price-earning ratio
D)Dividends paid

Question 37

Using the balance sheet equation, which of the following is not a possible transaction?

A)Increase an asset and increase stockholders' equity
B)Increase a liability and decrease stockholders' equity
C)Increase an asset and decrease a liability
D)Decrease an asset and decrease a liability

Question 38

Which of the following is not a profitability ratio?

A)Price-earnings ratio
B)Return on total assets
C)Earnings per share
D)Asset turnover

Question 39

Which of the following is not an operating activity on the statement of cash flows?

A)Paying a dividend
B)Paying for inventory purchases
C)Collecting cash from the sale of merchandise
D)Paying cash for income taxes

Question 40

Which of the following is not a reason that managers need to analyze financial reports?

A)To assess control of operations
B)To assess the ability of customers to pay their bills
C)To assess the viability of suppliers
D)To maximize annual bonuses

Question 41

Which ratio measures the rate earned on a company's total economic resources?

A)Price-earnings ratio
B)Earnings per share
C)Return on total assets
D)Return on common stockholders' equity

Question 42

Gross margin in 2017 for Beaver Enterprises totaled $1,000,000.If cost of goods sold is 60% of sales, how much is sales?

A)$400,000
B)$600,000
C)$1,666,667
D)$2,500,000

Question 43

If the rate of growth in sales is greater than the rate of growth in cost of goods sold from one year to the next, which of the following will you most likely expect?

A)The gross margin percentage is increasing.
B)The gross margin percentage is decreasing.
C)Accounts receivable turnover is declining.
D)Inventory turnover is declining.

Question 44

What type of analysis will you perform to compare the gross margin percentage from one year to the next?

A)Debt-related analysis
B)Turnover analysis
C)Horizontal analysis
D)Vertical analysis

Question 45

What does financial leverage measure?

A)How quickly a company generates profit from its assets
B)How quickly a company is turning its net income into cash
C)The overall efficiency with which a company uses assets to generate revenues
D)How effectively the company uses debt financing to acquire economic resources

Question 46

Which of the following will vertical analysis allow managers to readily identify?

A)Sales are increasing at a faster rate than selling expenses
B)The percentage change in sales from the prior year
C)Sales are growing at a faster rate than assets
D)Income taxes are a larger percentage of sales in the current year compared to a previous year

Question 47

Which of the following ratios measures how many multiples of the firm's earnings that investors are willing to pay for the company's stock?

A)Return on total assets
B)Earnings per share
C)Price-earnings ratio
D)Time interest earned

Question 48

Which of the following is a stringent measure of a company's ability to repay obligations in a short period of time?

A)Return on total assets
B)Current ratio
C)Acid-test ratio
D)Debt turnover

Question 49

Which of the following is not a profitability ratio?

A)Inventory turnover
B)Gross margin percentage
C)Earnings per share
D)Return on total assets

Question 50

Which of the following most likely indicates that a company is making good use of financial leverage?

A)The price-earnings ratio exceeds that of competitors.
B)Earnings per share is higher than the dividends paid per share.
C)Net income is higher than cash from operations.
D)Return on common stockholders' equity is higher than the return on total assets.

Question 51

Which ratio is a measure of the profit available to common shareholders on each share of common stock outstanding?

A)Price-earnings ratio
B)Earnings per share
C)Return on total assets
D)Return on common stockholders' equity

Question 52

Which of the following is true concerning vertical analysis?

A)It is a technique for evaluating a series of financial statement data over a period of time.
B)It is used to determine the increase or decrease that has taken place over a period of time.
C)It is expressed as a percentage of the base year amount of the same account.
D)It is also called common size analysis.

Question 53

In which of the following will the percentage increase in sales from one year to the next be most obvious?

A)Profitability analysis
B)Turnover analysis
C)Horizontal analysis
D)Vertical analysis

Question 54

If management is manipulating earnings to achieve performance targets, what outcome may result?

A)Net income may exceed cash from operations.
B)Cash from investing activities will exceed cash from financing activities.
C)Cash will experience a net decrease.
D)Total assets will increase.

Question 55

Which statement is true concerning the gross margin percentage?

A)It indicates how much a company earns per dollar of sales taking into account the cost of items it sells.
B)It indicates how much earnings are generated on each share of common stock.
C)It indicates the amount of sales generated for each dollar of assets.
D)It measures the amount of net income generated for each dollar of sales.

Question 56

Which of the following is true concerning horizontal analysis?

A)It is also called common size analysis.
B)It consists of analyzing changes in financial statement amounts across time.
C)It consists of analyzing financial statements in terms of a base amount.
D)It restates each income statement line item as a percentage of net sales.

Question 57

Where can you find insight of why sales has increased by 32% from a prior period?

A)Common size financial statements
B)Management's discussion and analysis
C)The balance sheet
D)Horizontal analysis

Question 58

What is asset turnover?

A)How quickly a company generates profit from its assets
B)How quickly a company is turning its net income into cash
C)The overall efficiency with which the company uses assets to generate revenues
D)How quickly the company acquires economic resources

Question 59

What effect does financing with debt have on a company?

A)It will increase financial risk.
B)It will decrease the potential return for shareholders.
C)It will create a requirement to pay dividends.
D)It will decrease turnover.

Question 60

Which type of analysis would highlight the percentage increase in sales from one year to the next?

A)Horizontal analysis
B)Vertical analysis
C)Common size analysis
D)Comprehensive analysis

Question 61

Which of the following ratios is a measure of the company's profitability to its market price?

A)Price-earnings ratio
B)Earnings per share
C)Return on total assets
D)Return on common stockholders' equity

Question 62

Which of the following is a common effect when return on common stockholders' equity is greater than return on total assets?

A)Financial leverage is being used effectively.
B)The company has no debt.
C)The company's profit is declining.
D)Earnings per share will be extremely large.

Question 63

Asset turnover is

A)net income divided by sales.
B)net sales divided by total assets.
C)net sales divided by current assets.
D)earnings per share divided by the market price per share of stock.

Question 64

Inventory turnover

A)is a measure of the profitability of selling inventory.
B)is used to calculate how quickly customers pay for inventory they purchased.
C)is an indicator of how quickly suppliers are being paid by the company.
D)measures how efficiently a company sells it inventory.

Question 65

Asset turnover is a measure of

A)how quickly a company is replacing its old plant assets with new plant assets.
B)how quickly a company is turning its sales into cash.
C)the overall efficiency with which the company uses assets to generate revenues.
D)how rapidly the stock market believes the company will grow.

Question 66

Denton Limited Company reported earnings per share of common stock $2 in 2017 and paid dividends of $1.50 per share.Denton has no preferred stock issued.The current market price per share is $15 and the book value per share is $14.How much is Denton's price-earnings ratio?

A)$6.75
B)$7.50
C)$7.00
D)$30.00

Question 67

Cost of goods sold in 2017 for Reno Parts Company totaled $4,530,000.If the gross margin percentage is 56%, how much are sales ?

A)$10,295,454
B)$7,066,800
C)$8,089,286
D)None of these answer choices are correct.

Question 68

Bread Enterprises had a current ratio of 2.5 on December 31 of the current year.On that date, the company's assets were as follows: $$\begin{array} { l c } \text { CASH } & \$ 100,000 \\\text { ACCOUNTS RECEIVABLE, NET } & 600,000 \\\text { INVENTORY } & 960,000 \\\text { PREPAID EXPENSES } & 25,000 \\\text { EQUIPMENT, NET } & 2,200,000 \\\text { TOTAL ASSETS } & \$ 3,985,000\end{array}$$ What impact will an increase in the market price of the company's common stock from $24.50 to $37.20 have on a company's price-earnings ratio?

A)It will increase the price-earnings ratio.
B)It will decrease the price-earnings ratio.
C)There will be no change.
D)There is not enough information to determine the answer.

Question 69

Lane Class Company had 50,000 shares of common stock outstanding and 10,000 shares of preferred stock outstanding.No shares were issued or repurchased during the year.The company paid a dividend of $0.80 per share of common stock and $0.60 per share of preferred stock.If the company reports earnings per common share of $0.85, how much is net income?

A)$42,500
B)$56,500
C)$48,500
D)$57,000

Question 70

McDonald Company's net income in 2017 was $200,000.The company paid preferred dividends of $32,000 and common stock dividends of $10,000.It average common stockholders' equity was $850,000 during 2017.How much is the company's return on common stockholders' equity for 2017?

A)19.8%
B)23.5%
C)18.6%
D)4.3%

Question 71

The gross margin amount in 2017 for the Billings Corporation totaled $800,000.If cost of goods sold is 80% of sales, how much is sales?

A)$960,000
B)$4,000,000
C)$3,200,000
D)$1,440,000

Question 72

Bread Enterprises had a current ratio of 3.5 on December 31 of the current year.On that date, the company's assets were as follows: $$\begin{array} { l c c } \text { CASH } & \$ 200,000 \\\text { ACCOUNTS RECEIVABLE, NET } & 600,000 \\\text { INVENTORY } & 960,000 \\\text { PREPAID EXPENSES } & 25,000 \\\text { EQUIPMENT, NET } & 2,200,000 \\\text { TOTAL ASSETS } & \underline { \$ 3,985,000 }\end{array}$$ What impact will issuing common stock for cash have on the company's earnings per share?

A)It will increase earnings per share.
B)It will decrease earnings per share.
C)There will be no change.
D)The number of common shares outstanding is needed to determine the answer.

Question 73

Best Corporation's net income in 2017 was $1,295,000.The company had 500,000 shares of common stock outstanding and 90,000 shares of preferred stock outstanding.No shares were issued or repurchased during the year.The company paid dividends of $0.70 per share on the common stock and $0.80 per share on the preferred stock.How much profit did Best generate for each share of outstanding common stock in 2017?

A)$1.15
B)$2.45
C)$2.59
D)$2.19

Question 74

Relish Holdings had 250,000 shares of common stock outstanding and 40,000 shares of preferred stock outstanding.No shares were issued or repurchased during the year.The company paid a dividend of $1.50 per share of common stock and $2 per share of preferred stock.If the company reported earnings per common share of $1.60, how much would net income have been?

A)$480,000
B)$400,000
C)$156,250
D)$320,000

Question 75

Blue Corporation reported earnings per share of common stock at $12 in 2017 and paid dividends of $3 per share.The current market price per share is $102 and the book value per share is $54.Blue Corporation has no preferred stock.How much is the company's price-earnings ratio?

A)$11.80
B)$1.90
C)$8.50
D)$11.30

Question 76

Bonanza, Incorporated's net income in 2017 was $378,000.The company had 75,000 shares of common stock outstanding and 35,000 shares of preferred stock outstanding.No shares were issued or repurchased during the year.The company paid dividends of $1.50 per share on the common stock and $1.80 per share on the preferred stock.How much is earnings per share for 2017?

A)$3.44
B)$4.20
C)$4.34
D)$5.04

Question 77

Which of the following is not used to measure the efficiency with which a firm uses its assets?

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

Question 78

Which statement is true concerning the current ratio?

A)It is usually a larger amount than the acid-test ratio.
B)It is a more stringent test of a company's ability to pay its short-term obligations.
C)It measures a company's ability to manage its assets efficiently.
D)It measures a company's ability to make interest payments on debt.

Question 79

The following is from Nantucket Limited's records for 2017: $\begin{array}{lr}\text { ACCOUNT BALANCES}&\text { JANUARY } 1&\text { DECEMBER } 31\\\text { COMMON STOCK }&\$210,000&\$250,000\\\text { ADDITIONAL PAID-IN-CAPITAL }&95,000&110,000\\\text { RETAINED EARNINGS }&105,000&195,000\end{array}$
During 2017, the company paid dividends of $15,000 on its common stock.The company's net income for the year was $105,000.How much is the company's return on common stockholders' equity for the year ending December 31, 2017?

A)18.9%
B)16.2%
C)22.0%
D)25.6%

Question 80

The higher the amount of a company's accounts receivable turnover,

A)the shorter time period it takes to collect a receivable.
B)the more assets a company has tied up in receivables.
C)the longer it takes a company to collect its receivables.
D)the more likely a company will experience cash flow problems.