Deck 14: Analyzing Financial Statements

Question 1

Component percentages are used to express items on financial statements as a percentage of a single base amount.

Answer 1

True
Explanation: A component percentage expresses financial statement items relative to a single financial statement amount.

Question 2

Return on equity (ROE)is a function of three ratios:
net profit margin,return on assets,and financial leverage.

Answer 2

False
Explanation: ROE includes asset turnover rather than return on assets.

Question 3

Return on equity (ROE)provides insight with respect to a company's use of its assets.

Answer 3

True
Explanation: ROE includes asset turnover, which is a measurement of the efficient use of resources.

Question 4

The fixed asset turnover ratio increases when net income increases.

Question 5

Earnings per share (EPS)is affected by treasury stock transactions.

Question 6

The return on assets ratio is influenced significantly by a company's relative debt and equity financing of its assets.

Question 7

The financial leverage percentage is positive when return on assets is greater than return on equity.

Question 8

A company that has a high level of inventory and other assets above their investment in property,plant and equipment should calculate the total asset turnover ratio in addition to the fixed asset turnover ratio.

Question 9

The cash ratio is less sensitive to small transactions involving cash than is either the current or quick ratios.

Question 10

Purchasing treasury stock increases the return on equity ratio.

Question 11

Finding comparable companies in order to compare performance is often difficult since no two companies have identical products,markets and operating strategies.

Question 12

Negative financial leverage occurs when a company has more debt than stockholders' equity.

Question 13

Finding comparable companies in order to compare performance is important because ratios in isolation are difficult to evaluate.

Question 14

The quality of income ratio increases when net income increases.

Question 15

A higher current ratio is preferable for companies with variable cash flows.

Question 16

A company with a high amount of inventory will have a much lower fixed asset turnover ratio when compared to its total asset turnover ratio.

Question 17

Financial statement analysis is very precise and doesn't involve judgment.

Question 18

Time series analysis is where we compare information for a specific company over a period of time to determine changes in operations.

Question 19

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

Question 20

The profit margin ratio considers the asset base utilized to earn income.

Question 21

Which of the following statements is incorrect?

A)A company implementing a cost advantage strategy is attempting to reduce investment in assets thereby improving the asset turnover ratio.
B)A company implementing a product differentiation strategy is attempting to improve its profit margin through charging higher prices.
C)A company will attract a higher volume of customers and revenue by following a product differentiation strategy versus a cost advantage strategy.
D)Financial leverage is a function of both total assets and stockholders' equity.

Question 22

Home Depot's operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using highly knowledgeable service-oriented personnel and aggressive advertising.Which of the following is not as critical to achieving its strategy?

A)Cost control
B)Product differentiation
C)High level of customer service
D)High sales volume

Question 23

Which of the following statements is incorrect?

A)Purchasing fixed assets through equity financing decreases asset turnover.
B)Accruing an expense increases the financial leverage ratio.
C)The return on equity ratio increases when treasury stock is purchased.
D)The net profit margin ratio decreases when fixed assets are purchased.

Question 24

Which of the following statements is false?

A)When computing the component percentages for the income statement, net income is the base figure.
B)Time series analysis examines a company's performance over time.
C)It is often useful to compare a company's performance with that of a competitor.
D)The North American Industry Classification System assigns industry codes based on business operations.

Question 25

When considering an investment,which of the following is not one of the three critical factors used to evaluate future earning potential of that investment?

A)Financial analysts' reports.
B)Economy wide factors.
C)Industry factors.
D)Individual company factors.

Question 26

The inventory turnover ratio is significantly affected by the choice of inventory accounting method.

Question 27

Which of the following statements is correct?

A)Purchasing fixed assets through debt financing decreases financial leverage.
B)Accruing an expense does not affect the net profit margin ratio.
C)Return on equity increases when the financial leverage ratio decreases.
D)Purchasing treasury stock results in a decrease in asset turnover.

Question 28

The debt to equity ratio is a risk measure used by both investors and lenders.

Question 29

Which of the following statements is correct?

A)A ratio calculation is most relevant in isolation.
B)One of the advantages of ratio analysis is that it allows companies of different sizes to be compared.
C)Finding benchmarks for comparison is a straight-forward task.
D)It is always preferable to compare a company's performance to industry-wide ratios rather than to use a competitor's ratios.

Question 30

There are several fundamental purposes decision makers consider when they use financial data.Which of the following statements is not one of those fundamental purposes?

A)Measurement of the current condition of the business.
B)Measurement of past performance of the business.
C)Measurement of the book value of the assets.
D)Prediction of future potential of the business.

Question 31

A high price earnings ratio usually indicates the market is optimistic about the company's future earnings potential.

Question 32

The quick ratio decreases when the adjusting entry to record bad debt expense is recorded.

Question 33

Which of the following statements is correct?

A)Selling inventory for cost does not affect the net profit margin ratio.
B)Accruing sales revenue doesn't affect the net profit margin ratio.
C)The asset turnover ratio increases when fixed assets are sold for a loss.
D)The net profit margin ratio decreases when common stock is issued.

Question 34

The base amount in preparing a common-size income statement is usually which of the following?

A)Income from operations
B)Gross profit
C)Net income
D)Net sales

Question 35

The dividend yield ratio decreases when earnings per share increases.

Question 36

Dividend yield is calculated by dividing dividends per share by earnings per share and measures the current dividend return to investors.

Question 37

A very high current ratio and low quick ratio may indicate the company is not collecting its accounts receivables in a timely manner.

Question 38

Many companies use high levels of debt to finance their assets because of financial leverage benefits provided to investors when return on assets exceeds the after tax cost of interest.

Question 39

The price earnings ratio is affected by the amount of risk that investors are willing to take.

Question 40

The cash coverage ratio measures a firm's ability to pay its current liabilities with its cash flows from operating activities.

Question 41

Which of the following transactions will not increase the cash ratio?

A)Receiving cash from a common stock issue.
B)Refinancing a current liability with long-term debt.
C)Using cash to purchase a two-month treasury bill.
D)Collecting an account receivable.

Question 42

Which of the following ratios is not an indicator of a company's short-term financial strength?

A)Price/earnings ratio
B)Receivable turnover ratio
C)Working capital
D)Quick ratio

Question 43

The records of Marshall Company include the following: $$\begin{array} { l r } \text { Average total assets } & \$ 3,500,000 \\\text { Average total liabilities } & 1,220,000 \\\text { Total revenue } & 4,580,000 \\\text { Total expense (including income tax) } & 4,100,000 \\\text { Interest expense (included in total expenses) } & 90,000 \\\text { Income tax rate 40\% } &\end{array}$$ The return on assets is (round to the nearest tenth of a percent)

A)14.9%.
B)18.3%.
C)15.3%.
D)14.7%.

Question 44

Which of the following statements is correct?

A)When cost of goods sold as a percentage of sales increases the gross margin percentage will increase.
B)It is possible for cost of goods sold in dollars to increase while cost of goods sold as a percentage of sales decreases.
C)If gross margin percentage is the same for the current and past year, then sales and cost of goods sold in dollars did not change.
D)If gross margin percentage increases from one year to the next, then the net income percentage will also increase from one year to the next.

Question 45

The records of Marshall Company include the following: $$\begin{array} { l r } \text { Average total assets } & \$ 3,500,000 \\\text { Average total liabilities } & 1,220,000 \\\text { Total revenue } & 4,580,000 \\\text { Total expense (including income tax) } & 4,100,000 \\\text { Interest expense (included in total expenses) } & 90,000 \\\text { Income tax rate } 40 \% &\end{array}$$ The financial leverage percentage is which of the following?

A)1.8%
B)2.8%.
C)5.8%.
D)6.4%.

Question 46

The records of Everyday Electronics Corporation for a particular period include the following: $$\begin{array} { l r } \text { Average total assets } & \$ 760,000 \\\text { Average total liabilities } & 485,000 \\\text { Total revenue } & 200,500 \\\text { Total expenses (including income tax) } & 135,000\end{array}$$ What is the return on equity ratio?

A)13.2%.
B)23.8%.
C)24.0%.
D)8.4%.

Question 47

Trenton Company has provided the following information:
Net income,$240,000;
Preferred shares issued,6,000;
Average common shares issued,24,000;
Common cash dividends declared and paid,$30,000;
Market price per share,$36
Average treasury shares of common stock,4,000.
What were Trenton's earnings per share?

A)$8.00
B)$7.00
C)$10.50
D)$12.00

Question 48

Which of the following transactions decreases earnings per share?

A)Collection of an account receivable.
B)Selling treasury stock for an amount less than its cost.
C)A decrease in the market value per share.
D)Paying cash in advance for rent.

Question 49

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

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

Question 50

Which of the following transactions will increase the quality of income ratio?

A)Paying cash to suppliers.
B)Accruing sales revenue.
C)Selling treasury stock for more than its cost.
D)Collecting an account receivable.

Question 51

Trenton Company has provided the following information:
Net income,$240,000;
Preferred shares issued,6,000;
Average common shares issued,24,000;
Common cash dividends declared and paid,$30,000;
Market price per share,$36
Average treasury shares of common stock,4,000.
What was Trenton's price earnings ratio?

A)3.0
B)5.1
C)3.4
D)4.5

Question 52

Which of the following transactions decreases earnings per share?

A)Declaring cash dividends payable to the common stockholders.
B)Purchasing treasury stock.
C)The accrual of revenue.
D)Declaring and distributing a 10% common stock dividend.

Question 53

Cecilia Company reported net income of $1,200,000.Their average total liabilities were $4,300,000 and average total stockholders' equity was $5,200,000.Interest expense was $100,000 and their tax rate was 40%.What was their return on assets ratio?

A)13.7%.
B)12.6%.
C)11.6%.
D)13.3%.

Question 54

Which of the following transactions will increase a current ratio which is currently 2.5?

A)Receiving cash from signing a 6-month note payable.
B)Accruing an expense.
C)Using cash to pay an account payable.
D)Collecting an account receivable.

Question 55

Negative financial leverage occurs when the

A)average net (after tax) interest rate on borrowed funds is less than the company's earnings rate on its assets.
B)return on assets is more than return on equity.
C)return on equity is more than return on assets.
D)operating expenses exceed gross margin.

Question 56

Which of the following statements is incorrect?

A)If selling and administrative expenses as a percentage of sales increases, then gross margin percentage will decrease.
B)If the cost of goods sold percentage decreases and other expenses do not change, then profit margin will increase as a percentage of sales.
C)If sales dollars decrease, a company might still report a higher gross profit percentage if cost of goods sold decreases at a faster rate than the decrease in sales.
D)It is possible for selling and administrative expense in dollars to decrease, while selling and administrative expenses as a percentage of sales to increase.

Question 57

Agnes Company reported the following data: $$\begin{array} { l r } \text { Quick assets } & \$ 55,000 \\\text { Current assets } & 150,000 \\\text { Total liabilities } & 300,000 \\\text { Average net receivables } & 12,600 \\\text { Beginning inventory } & 38,000 \\\text { Long-term liabilities } & 200,000 \\\text { Net credit sales } & 126,000 \\\text { Cost of goods sold } & 84,000 \\\text { Ending inventory } & 46,000\end{array}$$ What was the current ratio?

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

Question 58

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

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

Question 59

The records of Marshall Company include the following: $$\begin{array} { l r } \text { Average total assets } & \$ 3,500,000 \\\text { Average total liabilities } & 1,220,000 \\\text { Total revenue } & 4,580,000 \\\text { Total expense (including income tax) } & 4,100,000 \\\text { Interest expense (included in total expenses) } & 90,000 \\\text { Income tax rate } 40 \% &\end{array}$$ The return on equity is (round to the nearest tenth of a percent)

A)21.1%.
B)10.2%.
C)16.4%.
D)17.1%.

Question 60

During 2010,Home Style's cost of goods sold percentage was 68.2% and selling and store operating costs was 19.3% of sales.During 2009,their cost of goods sold percentage was 68.9% while selling and store operating costs was 19.2% of sales.What effect would the change in these percentages have on 2010's gross margin percentage and profit margin percentage?

A)The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages, but the increase in the selling and store operating costs percentage would decrease both the gross margin and profit margin percentages.
B)The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but the increase in the selling and store operating costs would increase both the gross margin and profit margin percentages.
C)The decrease in the cost of goods sold percentage would increase both the gross margin and profit margin percentages and the decrease in the selling and store operating costs percentage would decrease the profit margin percentage.
D)The decrease in the cost of goods sold percentage would decrease both the gross margin and profit margin percentages, but selling and store operating costs would increase the profit margin percentage.

Question 61

The debt-to-equity ratio measures which of the following?

A)Liquidity
B)Solvency
C)Profitability
D)Market strength

Question 62

Thomas Company had income before interest and taxes of $120,000.Interest expense for the period was $17,000 and income taxes amounted to $28,500.The average stockholders' equity was $680,000.What is Thomas' return on equity (ROE)?

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

Question 63

Which of the following transactions would increase the current ratio of a company if the ratio is currently greater than 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)Purchased supplies with cash.

Question 64

Cromwell 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 ratio?

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

Question 65

Which of the following is correct?

A)The times interest earned ratio is considered a better test of the ability to cover interest charges than the cash coverage ratio.
B)The debt to equity ratio shows the relative proportion of total assets financed by debt.
C)The higher the debt-to-equity ratio, the higher the potential return to the stockholders if return on assets (ROA) exceeds the after tax cost of interest.
D)The cash coverage ratio compares the cash generated by a company to its cash obligations for the prior period.

Question 66

Agnes Company reported the following data: $$\begin{array} { l r } \text { Quick assets } & \$ 55,000 \\\text { Current assets } & 150,000 \\\text { Total liabilities } & 300,000 \\\text { Average net receivables } & 12,600 \\\text { Beginning inventory } & 38,000 \\\text { Long-term liabilities } & 200,000 \\\text { Net credit sales } & 126,000 \\\text { Cost of goods sold } & 84,000 \\\text { Ending inventory } & 46,000\end{array}$$ What was the inventory turnover ratio?

A)2.2
B)1.8
C)2.0
D)3.0

Question 67

Wildlife Co.reported net income 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 stockholders' equity is $48.6 million.What is Wildlife's financial leverage percentage?

A)3.7%
B)4.5%
C)4.0%
D)4.7%

Question 68

Potaw Company reported the following data at the end of 2010: $$\begin{array} { l r } \text { Sales revenue } ( 75 \% \text { on credit) } & \$ 300,000 \\\text { Expenses ( } 26 \% \text { on credit) } & 60,000 \\\text { Accounts receivable, net at December } 31,2010 \text { (a decrease } & \\\text { of } \$ 4,000 \text { during } 2010 ) & 8,000 \\\text { Total assets } & 200,000 \\\text { Stockholders' equity } & 150,000\end{array}$$ What was the accounts receivable turnover ratio?

A)30.0
B)37.5
C)36.5
D)22.5

Question 69

Which of the following is not a measure of solvency?

A)Debt to equity ratio.
B)Cash coverage ratio.
C)Times interest earned ratio.
D)Earnings per share.

Question 70

Main Street Company paid out $2.30 in dividends per share and had earnings per share of $5.00 during 2010.The market price of the stock on December 31,2010 was $21.00 per share.There were 15,000 shares of stock outstanding for the entire year.What was the dividend yield as of December 31,2010?

A)16.43%.
B)10.95%.
C)9.13%.
D)46.00%.

Question 71

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

A)Times interest earned
B)Debt-to-equity
C)Cash coverage
D)Quick

Question 72

MusicPod's earnings per share ratios were $2.47 and $2.07 respectively for 2011 and 2010.MusicPod's stock was trading at $53.00 and $41.50 per share at the end of 2011 and 2010 respectively.The company paid cash dividends per share of $.85 in 2011 and $.63 in 2010.Total stockholders' equity was $13,572 million and $11,896 million in 2011 and 2010 respectively.The common shares outstanding were approximately 1,782,000 in both 2011 and 2010.What was MusicPod's price/earnings ratio for 2011?

A)21.5
B)62.4
C)20.0
D)2.9

Question 73

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

A)An increase in the current ratio.
B)A decrease in the current ratio.
C)No effect on the current ratio.
D)A decrease in the cash coverage ratio

Question 74

Which of the following is false?

A)The major difference between the quick and current ratios is inventory.
B)Current liabilities are the denominator in the cash, quick, and current ratios.
C)Companies that sell expensive merchandise tend to have high inventory turnover ratios.
D)Some analysts do not use the cash ratio because it is very sensitive to small events.

Question 75

Which ratio reflects the stock market's assessment of a company's future performance?

A)Price/earnings ratio
B)Dividend yield ratio
C)Fixed asset turnover ratio
D)Cash coverage ratio

Question 76

Which of the following is false?

A)The cash ratio is the most stringent and reliable test of liquidity.
B)A company with a high level of inventory will have a quick ratio significantly lower than its current ratio.
C)A current ratio that is too high could indicate funds tied up in inventory and other working capital assets.
D)Analysts consider a current ratio of 2 to be financially conservative.

Question 77

Agnes Company reported the following data: $$\begin{array} { l r } \text { Quick assets } & \$ 55,000 \\\text { Current assets } & 150,000 \\\text { Total liabilities } & 300,000 \\\text { Average net receivables } & 12,600 \\\text { Beginning inventory } & 38,000 \\\text { Long-term liabilities } & 200,000 \\\text { Net credit sales } & 126,000 \\\text { Cost of goods sold } & 84,000 \\\text { Ending inventory } & 46,000\end{array}$$ What was the average days' supply in inventory?

A)165.9
B)202.7
C)182.5
D)121.7

Question 78

Bailey Corporation reported the following information for 2010: $$\begin{array} { l r } \text { Net income } & \$ 10,000 \\\text { Total assets } & 16,000 \\\text { Total stockholders' equity } & 8,000\end{array}$$ What is Bailey's debt-to-equity ratio?

A)2
B)1.25
C)1.0
D)3.0

Question 79

Potaw Company reported the following data at the end of 2010: $$\begin{array} { l r } \text { Sales revenue } ( 75 \% \text { on credit) } & \$ 300,000 \\\text { Expenses } ( 26 \% \text { on credit) } & 60,000 \\\text { Accounts receivable, net at December } 31,2010 \text { (a decrease } & \\\text { of } \$ 4,000 \text { during } 2010 ) & 8,000 \\\text { Total assets } & 200,000 \\\text { Stockholders' equity } & 150,000\end{array}$$ What was the average number of days to collect receivables during 2010?

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

Question 80

The Apple Pie Company had net income of $47,500,earnings per share of $3.17 and declared dividends per share of $2.00 during 2010.On December 31,2010,the stock had a market price of $18.50 per share.What is Apple Pie's price/earnings ratio?

A)9.25
B)8.11
C)5.84
D)0.17