Deck 23: Financial Statement Analyses

Question 1

In vertical analysis,it is customary to express each item on the balance sheet as a percentage of total liabilities.

Answer 1

False

Question 2

On a comparative income statement,gross revenues were $310,000,sales returns and allowances were $14,000 and sales discounts amounted to $2,200.Selling expenses of $54,000 were incurred during the year.The vertical analysis would show current year selling expenses as 18.4%.

Answer 2

True

Question 3

In horizontal analysis,the change from year to year itself can be interpreted to represent the changes in external prices that impact the business.

Answer 3

False

Question 4

Comparison of amounts and percentages for only two years is adequate to indicate long-term trends.

Question 5

Common-size statements present comparative data side by side with items expressed as percentages.

Question 6

The Terence Hill Company has current assets of $350,000 and a current ratio of .7.Its current liabilities therefore must equal $500,000.

Question 7

On a comparative balance sheet that shows horizontal analysis,the percentage of change in total assets must equal the percentage of change in total liabilities and stockholders' equity.

Question 8

The Yipsilon Company has current assets of $50,000 and current liabilities of $45,000.Its current ratio therefore must equal .9.

Question 9

The current ratio measures a company's ability to pay its current debts using current assets.

Question 10

Most trade associations provide common-size statements based on data gathered from member companies.

Question 11

A decrease in cost of goods sold from 46.5% to 45.0% from year 1 to year 2 indicates a favorable long-term trend.

Question 12

On a comparative income statement that shows horizontal analysis,the percentage of change in each category is based on gross sales for that year.

Question 13

Where the current ratio measures a company's ability to pay its current debts using current assets on a dollar for dollar basis,working capital provides a similar measure by providing the actual margin of security afforded to short-term creditors.

Question 14

Since each firm is a unique entity,comparison of data for the firm with industry averages is of no use in financial analysis.

Question 15

In horizontal analysis,the base year is the most recent year.

Question 16

In vertical analysis,it is customary to express each item on the balance sheet as a percentage of either total assets or total liabilities and stockholders' equity.

Question 17

When horizontal analysis is performed,no percentage change is computed for a given item if there is no balance for that item in the base year.

Question 18

Simon Company has current liabilities of $30,000 and a current ratio of 1.2.Its current assets therefore must equal $25,000.

Question 19

The current ratio is a measure of profitability.

Question 20

In 2016,net sales were $672,000,cost of goods sold was $450,000.In 2015,net sales amounted to $600,000 and cost of goods sold was $400,000.In a comparative income statement,using vertical analysis,the 12% increase in net sales will be presented in the percentage column.

Question 21

Ratios provide useful,stand-alone tools to assess management performance and improvement efforts.

Question 22

Peabody's stock has a market price of $86 per share.The dividend yield is 10 percent.Peabody pays dividends in equal amounts each quarter.The quarterly dividend payment is $8.60.

Question 23

As a result of extraordinary losses during the year,the number of times bond interest earned ratio decreased from 4.5 times to 1.5 times.This change is indicative of increasing financial strength.

Question 24

Ratios are meaningful only when used to compare performance with rates of prior years and with the industry averages.

Question 25

Peterson Company has current liabilities of $130,000 and working capital of $32,000.Its current assets therefore must equal $162,000.

Question 26

A high ratio of stockholders' equity to total liabilities indicates a greater risk for creditors.

Question 27

The price-earnings ratio compares the present market value of a corporation's common stock with the earnings per share of that stock.

Question 28

Aston Corporation has a .7 to 1 ratio of stockholders' equity to total liabilities.If stockholders' equity is $420,000,then its total liabilities are $180,000.

Question 29

A high rate of return on sales is an indication of managerial efficiency and profitability.

Question 30

The fair market value of a share of common stock is determined by dividing the stockholders' equity by the number of shares of common stock outstanding.

Question 31

The rate of return on sales measures how effectively management has used the assets of the company.

Question 32

Because the number of shares of common stock outstanding during the year can fluctuate,computing return on common stockholders' equity is not a useful indicator of profitability.

Question 33

The ability of a company to pay its debts when due is known as liquidity.

Question 34

A common technique for measuring earnings per share requires a company to compute the weighted average shares outstanding during the year.

Question 35

Aston Corporation has a .7 to 1 ratio of stockholders' equity to total equities.If stockholders' equity is $420,000,then its total liabilities are $180,000.

Question 36

The rate of return on total assets measures how effectively management has used the assets of the company.

Question 37

Quick assets include cash,receivables,and inventories.

Question 38

The acid-test ratio is a measure of a company's immediate liquidity and includes only liquid assets that can be quickly converted to cash.

Question 39

The number of times bond interest earned ratio provides bondholders and stockholders with information related to a company's ability to pay required bond interest payments from its earnings.

Question 40

The Szett Company has current assets of $650,000 and total liabilities of $430,000.Its current ratio is 2.The portion of current liabilities therefore must be equal to $300,000.

Question 41

In horizontal analysis,the earlier period is called the ____________________ period.

Question 42

A comparison of data for the current period with the same data of the company for previous periods is called ____________________ analysis.

Question 43

Financial statements presented side-by-side for two or more periods are called ____________________ statements.

Question 44

A firm reported total liabilities of $60,000 and total stockholders' equity of $140,000.The amount of total liabilities is ____________________ percent of total assets.

Question 45

A company reported net income of $80,000 for 2016,and net income of $100,000 for 2017.Net income increased by ____________________ percent.

Question 46

The accounts receivable turnover ratio can be used to assess the collectability of accounts as well as the average collection period.

Question 47

The comparison of dollar amounts or percentages over several periods is called ____________________ analysis.

Question 48

Fielding Corporation has managed to reduce its inventories to half of its prior year total by implementing just-in-time inventory concepts.The significant reduction has led to a higher inventory turnover.Fielding is worried about stock outs and is considering reinvesting in inventory.Fielding should look to industry averages before making a commitment to spend more on restocking their inventory.

Question 49

The ____________________ is calculated by dividing current assets by current liabilities.

Question 50

A company reported net income of $80,000.It paid a cash dividend of $20,000 to preferred stockholders.If the company has 20,000 shares of common stock outstanding,earnings per share would be ______________.

Question 51

If the cost of goods sold is 65 percent of net sales,then gross profit on sales must be ____________________ percent of net sales.

Question 52

Percentages of a base amount rather than dollar amounts are given for the items on ____________________ statements.

Question 53

A vertical analysis of the income statement usually involves a comparison of each income statement item with ____________________ as reported on that income statement.

Question 54

The current ratio is a measure of _____________________;that is,the ability of a company to pay its currently maturing debts.

Question 55

The rate of ____________________ on total assets measures the earnings on the assets used by a company.

Question 56

The yield on common stock is computed by dividing the dividend per share of common stock by the current ____________________ price of the share.

Question 57

Beatrice Corporation currently trades at $12 per share from a high of $32.Increasing competition has resulted in declining earnings per share as well.The company however maintains its dividend policy of $1 per share each quarter.The decrease in market prices will result in a decrease in dividend yield.

Question 58

If the gross profit on sales is 20 percent of net sales,then cost of goods sold must be ____________________ percent of net sales.

Question 59

A firm had current liabilities of $60,000 on December 31,2016,and $51,000 on December 31,2017.Current liabilities decreased by ____________________ percent.

Question 60

A company reported an expense of $30,000 for the current year that was $6,000 higher than the previous year.The increase from last year to this year was ____________________ percent.

Question 61

Comparing the amount of a balance sheet item in one year to the amount for the same item in a prior year is called

A) common-size analysis.
B) vertical analysis.
C) horizontal analysis.
D) trend analysis.

Question 62

Cost of goods sold divided by average inventory equals ___________________.

Question 63

Vertical analysis of income statement data most often involves a comparison of each income statement item with

A) net sales.
B) gross profit on sales.
C) net income before taxes.
D) net income after taxes.

Question 64

The acid-test ratio is computed by dividing ____________________ assets by current liabilities.

Question 65

A firm has current liabilities of $60,000,stockholders' equity of $180,000 and total assets of $300,000.The percentage of total liabilities to total assets is

A) 20 percent.
B) 40 percent.
C) 60 percent.
D) 80 percent.

Question 66

If current liabilities are $90,000,long-term liabilities are $270,000,and total assets are $600,000,what is the percentage of total liabilities to total assets?

A) 15 percent
B) 45 percent
C) 60 percent
D) 100 percent

Question 67

A company reported net income of $120,000.It paid a cash dividend of $20,000 to preferred stockholders and a cash dividend to common shareholders of $40,000.If the company has 20,000 shares of common stock outstanding,earnings per share would be ______________.

Question 68

Which of the following is true of horizontal analysis?

A) The percentages of change can be added or subtracted from top to bottom.
B) The current year is always the base year.
C) The amounts of increase or decrease can be added or subtracted in the column from top to bottom and will give correct subtotals at each point.
D) The amounts and percentages of increase or decrease can be added and subtracted vertically in a column.

Question 69

In vertical analysis of the balance sheet,each item is expressed as a percentage of

A) current liabilities.
B) current assets.
C) long-term liabilities.
D) total assets or of total liabilities and stockholders' equity.

Question 70

In a vertical analysis of data,the cost of goods sold most likely would be expressed as a percentage of

A) net sales.
B) net income.
C) gross profit on sales.
D) total expenses.

Question 71

A firm has liabilities of $60,000 and stockholders' equity of $180,000.The percentage of total liabilities to total assets is

A) 25 percent.
B) 20 percent.
C) 50 percent.
D) 75 percent.

Question 72

A horizontal analysis of balance sheet data involves a comparison of a balance sheet amount on a given date with

A) the total of the assets on the balance sheet for that date.
B) the net sales from the income statement for the period ending on that date.
C) the total stockholders' equity on the balance sheet for that date.
D) the amount for the same balance sheet item on a previous date.

Question 73

Trend analysis looks at

A) selected ratios over a period of time.
B) two years of information for comparison.
C) two or more companies for comparison.
D) profitability by industry.

Question 74

Which of the following is not true of vertical analysis?

A) Each item on the balance sheet is expressed as a percentage of total liabilities.
B) The percentages can be added and subtracted from top to bottom.
C) Each item in the income statement is expressed as a percentage of net sales.
D) Each item on the balance sheet is expressed as a percentage of total assets.

Question 75

Ratios can be classified into all of the following categories except:

A) financial strength.
B) profitability.
C) liquidity.
D) marketability.

Question 76

If total merchandise available for sale is 72 percent of net sales and cost of goods sold is 64 percent of net sales,gross profit on sales is

A) 8 percent of net sales.
B) 36 percent of net sales.
C) 28 percent of net sales.
D) 20 percent of net sales.

Question 77

The rate of return on net sales is a basic measure of operating efficiency and ___________________.

Question 78

The excess of current assets over current liabilities is known as ___________________.

Question 79

The price-earnings ratio is computed by dividing the current market value per share by the ____________________ per share.

Question 80

If the comparative balance sheet shows the amount and percentage of decrease in merchandise inventory from 2016 to 2017,the firm used

A) vertical analysis.
B) horizontal analysis.
C) common-size analysis.
D) trend analysis.