Deck 14: Financial Statement Analysis

Question 1

Vertical analysis compares the results of financial information with a business in the same industry for a number of consecutive periods of time.

Answer 1

False

Question 2

The quality of earnings tends to be higher for a company that uses accounting principles and methods that lead to a conservative measurement of earnings.

Answer 2

True

Question 3

The debt ratio is computed by dividing total liabilities by current assets.

Answer 3

False

Question 4

The lower the current ratio,the more liquid the company appears.

Question 5

If total current assets are $140,000 at the end of Year 1,increase by $50,000 by the end of Year 2,and increase by $50,000 in Year 3,the percentage increase over the preceding year is less in Year 3 than in Year 2.

Question 6

Current assets are those assets that are expected to be converted into cash within a relatively short period of time.

Question 7

The owners of a corporation are not personally responsible for the debts of the business.

Question 8

Inventory is an example of a quick asset.

Question 9

Deducting the cost of goods sold from net income gives us operating income.

Question 10

The current ratio may be less than,equal to,or greater than the quick ratio.

Question 11

Working capital is the excess of current assets over current liabilities.

Question 12

When an income statement does not show gross profit or operating income it is called a consolidated statement.

Question 13

In a classified balance sheet,assets are subdivided into current assets,plant and equipment and other assets,while liabilities are all classified as current.

Question 14

The quick ratio is especially useful in evaluating the liquidity of a company with fast moving inventories.

Question 15

From a creditor's point of view,the lower the debt ratio; the safer the creditor's position.

Question 16

A company's liquidity refers to its ability to remain profitable.

Question 17

A company should carry the amount of working capital necessary to conduct operations,not necessarily maximize its working capital.

Question 18

The gross profit rate is gross profit expressed as a percentage of net sales.

Question 19

The gross profit rate usually is lowest on fast moving merchandise and highest on specialty and novelty products.

Question 20

Comparative financial statements show side-by-side financial data for two or more companies.

Question 21

A single-step and a multiple-step income statement are different in form and in the amount of net income reported.

Question 22

A company cannot be increasing its market share if its net sales are declining.

Question 23

A company whose future earnings are expected to rise substantially is likely to have a higher price-earnings ratio than a company whose future earnings are expected to decline.

Question 24

The measurement of the relative size of each item included in a total is called:

A)Money changes.
B)Trend percentages.
C)Component percentages.
D)Ratios.

Question 25

The acid test ratio includes marketable securities but does not include accounts receivable.

Question 26

The return on equity ratio may be either higher or lower than the return on assets ratio.

Question 27

The more pessimistic investors' expectations regarding a company's future performance,the lower the price-earnings ratio is likely to be.

Question 28

Comparative financial statements compare the company's current statements with:

A)Those of prior periods.
B)Those of other companies in the same industry.
C)Those of the company's principal competitor.
D)The budgeted level of performance for the period.

Question 29

In a single-step income statement,all revenue items are listed,then all expense items are combined and deducted from total revenue.

Question 30

One number expressed as a percentage of another is called:

A)Money changes.
B)Trend percentages.
C)Component percentages.
D)Ratios.

Question 31

The changes in financial statement items from a base year to following years are called:

A)Money changes.
B)Trend percentages.
C)Component percentages.
D)Ratios.

Question 32

Net income stated as a percentage of sales is one means of evaluating a company's ability to control its expenses.

Question 33

The inventory turnover rate indicates how quickly inventory sells.

Question 34

The price-earnings ratio is calculated by dividing earnings per share by the current market price of a share of the company's stock.

Question 35

If the return on total assets ratio is substantially below the cost of borrowing,common stockholders will benefit from a high debt ratio.

Question 36

ROE - return on equity - is measured by dividing net income by average number of shares outstanding.

Question 37

A comparative financial statement:

A)Places the balance sheet,the income statement,and the statement of cash flows side-by-side in order to compare the results.
B)Places two or more years of a financial statement side-by-side in order to compare results.
C)Places the financial statements of two or more companies side-by-side in order to compare results.
D)Places the dollar amounts next to the percentage amounts of a given year for the income statement.

Question 38

The yield rate on stock is measured by dividing dividends per share by market price per share.

Question 39

The trend in ratios is usually more useful than looking at a single year's ratio.

Question 40

A company whose sales are growing at less than the rate of inflation may actually be selling less merchandise every year.

Question 41

Current assets are those assets that can be converted into cash within:

A)One year and never longer.
B)One year or the operating cycle,whichever is longer.
C)One year or the operating cycle,whichever is shorter.
D)Management's discretion.

Question 42

The principle factor/s affecting the quality of working capital is/are:

A)The nature of the current assets.
B)The length of time to convert current assets into cash.
C)Both the nature of the current assets and the length of time to convert current assets into cash.
D)Neither the nature of the current assets nor the length of time to convert current assets into cash.

Question 43

On common size income statements,each component in the income statement is represented as a percentage of:

A)Net income.
B)Net sales.
C)Total assets.
D)Profit.

Question 44

The quick ratio:

A)Is computed by dividing current assets by current liabilities.
B)Is always higher than the current ratio.
C)Cannot be higher than the current ratio.
D)May be higher or lower than the current ratio.

Question 45

Quick assets include which of the following?

A)Cash,marketable securities,and receivables.
B)Cash,marketable securities,and inventories.
C)Cash,prepaid rent,and receivables.
D)Market securities,receivables,and inventories.

Question 46

Which of the following is a measure of short-term liquidity?

A)Quick ratio.
B)Return on assets.
C)Dividend yield.
D)Debt ratio.

Question 47

The operating cycle of a company:

A)Must be less than one year.
B)Is usually greater than one year.
C)Is the time it takes to purchase inventory,sell inventory,and collect cash from the sale.
D)Is the time it takes to acquire a loan,pay the interest,and retire the loan by paying the creditor in full.

Question 48

The measures most often used in evaluating solvency-the current ratio,quick ratio,and amount of working capital-are developed from amounts appearing in the:

A)Balance sheet.
B)Income statement.
C)Statement of retained earnings.
D)Statement of cash flows.

Question 49

A high quality of earnings is indicated by:

A)Earnings derived largely from newly introduced products.
B)Declaration of both cash and stock dividends.
C)Use of the FIFO method of inventory during sustained inflation.
D)A history of increasing earnings and conservative accounting methods.

Question 50

In evaluating the quality of a company's earnings,which of the following factors is least important?

A)The accounting methods used by management.
B)The trend of the company's earnings over a period of years.
C)The dollar amount of earnings per share.
D)The stability and sources of the company's earnings.

Question 51

The current ratio will be _______________ the quick ratio.

A)Less than
B)Greater than or equal to
C)The same as
D)Always different than

Question 52

Working capital is calculated by:

A)Dividing current assets by total assets.
B)Dividing current assets by total liabilities.
C)Subtracting current liabilities from total assets.
D)Subtracting current liabilities from current assets.

Question 53

Which American industry would tend to have the greatest debt ratio?

A)Auto.
B)Retail clothing.
C)Manufacturing.
D)Banking.

Question 54

The excess of current assets over current liabilities is called:

A)Current ratio.
B)Working capital.
C)Debt ratio.
D)Quick ratio.

Question 55

How would a company's working capital be affected if a substantial amount of accounts payable were paid in cash?

A)It would be unaffected.
B)It would fall.
C)It would increase.
D)The change would depend on the relationship between the payables liquidated and current liabilities.

Question 56

The ratio which measures total liabilities as a percentage of total assets is called:

A)Current ratio.
B)Working capital.
C)Debt ratio.
D)Quick ratio.

Question 57

All of the following are measures of liquidity except:

A)Quick ratio.
B)Debt ratio.
C)Current ratio.
D)Working capital.

Question 58

The current ratio:

A)Is computed by dividing current assets by current liabilities.
B)Is computed by subtracting current liabilities from current assets.
C)Remains unchanged throughout the operating cycle.
D)Is a measure of short-term profitability.

Question 59

The term,classified financial statements,

A)To the financial statements of all companies working on government projects.
B)Only to the financial statements of defense contractors working on secret projects.
C)To financial statements prepared for use by management,but not for distribution outside of the organization.
D)To financial statements in which items with certain characteristics are placed together in a group in an effort to develop useful subtotals.

Question 60

During the years 2013 through 2015,Powers,Inc.,reported the following amounts of net income (dollars in thousands): Relative to the prior year,the percentage change in net income:

A)Was the same in 2014 and 2015.
B)Was larger in 2015 than in 2014.
C)Was smaller in 2015 than in 2014.
D)Cannot be determined without knowing how many shares of stock were outstanding.

Question 61

Short-term creditors are most likely to use the quick ratio instead of the current ratio in evaluating the solvency of a company with large,slow-moving:

A)Plant and equipment.
B)Receivables.
C)Inventories.
D)Employees.

Question 62

Which of the following is considered a quick asset?

A)Accounts receivable.
B)Inventory.
C)Automobiles.
D)Prepaid expenses.

Question 63

In a multiple-step income statement,interest expense usually is not classified as an operating expense because interest charges:

A)Do not contribute to the production of revenue.
B)Stem from the manner in which assets are financed,not the manner in which they are used in business operations.
C)Relate directly to the cost of goods sold.
D)The statement is incorrect.Interest usually is classified as an operating expense.

Question 64

The gross profit rate represents:

A)Total sales revenue.
B)The percentage change in net sales from the prior period.
C)The percentage of sales revenue remaining after providing for the cost of the merchandise sold.
D)Net income stated as a percentage of total sales revenue.

Question 65

The debt ratio indicates the percentage of:

A)Total assets financed by long-term mortgages.
B)Revenue consumed by interest expense.
C)Total assets financed by creditors.
D)Total liabilities classified as current.

Question 66

If a retail store has a current ratio of 2.5 and working capital of $117,000.What are the total of the current assets?

A)$46,800.
B)$117,000.
C)$195,000.
D)$292,500.

Question 67

If a company has a current ratio of 2 to 1,and purchases inventory on credit,what will this do to its current ratio?

A)Increase the current ratio.
B)Decrease the current ratio.
C)Does not change the current ratio.
D)Cannot be determined.

Question 68

A rising gross profit rate most strongly suggests:

A)An increase in physical sales volume.
B)Strong consumer demand for the company's products.
C)Intense competition.
D)Increased short-term solvency.

Question 69

If a retail store has a current ratio of 2.5 and current assets of $195,000,the amount of working capital is:

A)$78,000.
B)$380,000.
C)$330,000.
D)$117,000.

Question 70

The Piazza Company has working capital of $540,000 and current assets of $810,000.The current ratio is:

A)0.67.
B)1.50.
C)2.00.
D)3.00.

Question 71

Operating income excludes each of the following,except:

A)Interest expense.
B)Income taxes.
C)Depreciation.
D)Purchase discounts lost.

Question 72

In calculating earnings per share,the denominator of the equation includes:

A)Only common stock outstanding.
B)Common stock plus preferred stock.
C)Common stock less preferred stock.
D)The total shares of authorized common stock.

Question 73

In a multiple-step income statement,income taxes are not classified as operating expenses because:

A)Income taxes do not contribute to the production of revenue.
B)Income taxes stem from the manner in which assets are financed,not the manner in which they are used in business operations.
C)Not all forms of business organization are subject to income taxes.
D)The statement is incorrect; income taxes are classified as operating expenses.

Question 74

Which of the following transactions would cause a change in the amount of a company's working capital?

A)Collection of an account receivable.
B)Payment of an account payable.
C)Borrowing cash over a 60-day period.
D)Selling merchandise at a price above its cost.

Question 75

When comparing the current ratio to the quick ratio:

A)The current ratio will be greater or equal.
B)The quick ratio will always be greater.
C)The quick ratio is sometimes greater and sometimes less than the current ratio.
D)They always will be the same.

Question 76

Generally speaking,which appears to be a desirable current ratio?

A)20 to 1.
B)1 to 20.
C)2 to 1.
D)1 to 2.

Question 77

All of the following captions or subtotals are typical of a multiple-step income statement,except:

A)Net sales.
B)Gross profit.
C)Total costs and expenses.
D)Operating income.

Question 78

The debt ratio is used primarily as a measure of:

A)Short-term liquidity.
B)Creditors' long-term risk.
C)Profitability.
D)Return on Investment.

Question 79

All of the following are true of operating expenses except:

A)Operating expenses are incurred for the purpose of producing revenue.
B)Operating expenses are subdivided into the classifications of component and trend.
C)The administrative expenses portion of operating expenses tends to remain constant from period to period.
D)Subdividing operating expenses into different classifications helps managers and investors evaluate different aspects of the company's operations.

Question 80

The Plaza Company has working capital of $540,000 and a current ratio of 3 to 1.The amount of current assets is:

A)$405,000.
B)$540,000.
C)$810,000.
D)$270,000.