Deck 24: Analysis of Financial Statements

Question 1

Working capital is the excess of a company's current assets over current liabilities.

Answer 1

True

Question 2

Merchandise inventory turnover measures the relationship between sales and inventory.

Answer 2

True

Question 3

Leverage measures are intended to indicate the extent to which a firm is being financed by debt and the ability of the firm to meet its debt obligations.

Answer 3

True

Question 4

The debt-to-equity ratio is calculated by dividing the net income for the year by the average stockholders' equity for the year.

Question 5

Retention of a major portion of business earnings is a desirable way to finance corporate growth.

Question 6

Profitability measures are intended to indicate the extent to which an entity is being financed by debt and the ability of the entity to meet its debt obligations.

Question 7

The current ratio and the quick or acid-test ratio may be too high for the overall good of the business.

Question 8

Profitability measures focus on relationships between key income statement and balance sheet accounts.

Question 9

The current ratio is calculated by dividing total current assets by total liabilities.

Question 10

Asset turnover ratio measures how effectively a company uses assets to generate sales.

Question 11

As a general rule, a current ratio of 0.5 to 1 or better is satisfactory.

Question 12

In calculating the percentage of change (for a comparative financial statement), the amount for the year prior serves as the base.

Question 13

Quick assets include cash, temporary investments, and receivables.

Question 14

Issuing additional common stock is not a desirable means to finance business growth.

Question 15

The quick or acid-test ratio is calculated by dividing current assets by current liabilities.

Question 16

The return on total assets is calculated by dividing the net income for the year by the average total assets during the year.

Question 17

Vertical analysis of income statements automatically provides the cost of goods sold ratio and the gross profit ratio.

Question 18

Book value per share of common stock is the measure of ownership equity represented by each share.

Question 19

From the standpoint of the individual stockholder, one of the most important measures of profitability of the firm is the earnings per share.

Question 20

When there are preferred shares outstanding, the calculation of book value per share of common stock must first take into consideration the claims or equity of the preferred stock.

Question 21

Merchandise inventory turnover is calculated by dividing cost of goods sold by the average merchandise inventory.

Question 22

The ratio of earnings before interest and taxes to the interest requirement is called the times interest earned ratio.

Question 23

The times interest earned ratio tells a creditor the firm's ability to pay interest on debt.

Question 24

Information not reported in the financial statements is also important in evaluating the financial health of a firm.

Question 25

A period of two consecutive years is sufficient to establish a long-term trend.

Question 26

Profitability measures are intended to indicate an entity's ability to earn income by operating efficiently.

Question 27

The various methods of financial statement analysis need to be used cautiously, with an awareness of the limitations of accounting data.

Question 28

The gross profit ratio is computed by subtracting cost of goods sold from net sales and dividing by net sales.

Question 29

The accounts receivable turnover measures how promptly receivables are collected.

Question 30

The financial statements of a business are intended to supply information to several interested parties such as: management, present and potential owners, creditors, employees and their unions, governmental agencies, and sometimes the general public.

Question 31

Liquidity measures are intended to indicate an entity's ability to pay long-term debts as they come due.

Question 32

If a corporation has only common stock outstanding, book value per share can be determined by dividing the total stockholders' equity by the number of shares outstanding at the end of the year.

Question 33

A comparison of the amounts for the same item in the financial statements of two or more periods is called horizontal analysis.

Question 34

The ratio of liabilities to stockholders' equity is a measure of the extent of leverage, or proportion of borrowed capital, with which a business operates.

Question 35

An expression of the amount of each item in a statement as a percentage of some designated total for comparative purposes is called vertical analysis.

Question 36

Vertical analysis reports the amount of each item in a statement as a percentage of a designated total.

Question 37

Comparisons across companies are difficult due to the possible use of different accounting techniques.

Question 38

The cause of changes in key ratios must be investigated before drawing conclusions.

Question 39

Accounts receivable turnover is calculated by dividing (gross) sales by the average (gross) amount of accounts receivable.

Question 40

The debt-to-equity ratio measures the extent of leverage, or proportion of borrowed capital, with which a business operates.

Question 41

Total liabilities divided by total stockholders' equity is the calculation for the

A) current ratio.
B) ratio of liabilities to stockholders' equity.
C) return on equity ratio.
D) times interest earned ratio.

Question 42

Dividing quick assets by total current liabilities is the calculation for the

A) current ratio.
B) return on investment.
C) quick or acid-test ratio.
D) ratio of liabilities to owner's equity.

Question 43

A company has net sales on account of $1,750,000. Net accounts receivable at the beginning of the year are $147,000 and net accounts receivable at the end of the year are $153,000. The accounts receivable turnover is

A) 11.9.
B) 11.7.
C) 11.4.
D) 1.0.

Question 44

The liabilities of a company at the end of the year are $500,000 and the total stockholders' equity at the end of the year is $1,500,000. The ratio of liabilities to stockholders' equity is

A) 0.50 to 1.
B) 0.33 to 1.
C) 0.67 to 1.
D) 3 to 1.

Question 45

Merchandise inventory turnover measures the relationship between

A) assets and current liabilities.
B) merchandise inventory and current liabilities.
C) expenses and merchandise inventory.
D) cost of goods sold and merchandise inventory.

Question 46

The net income for the year ended was $720,000; total assets at the beginning of the year was $2,100,000; and total assets at the end of the was $2,300,000. The return on total assets would be

A) 1.1%.
B) 3.1%.
C) 11.2%.
D) 32.7%.

Question 47

A company has cash, $80,000; temporary investments, $20,000; net receivables, $60,000; and inventory, $450,000. Current liabilities are $200,000. The quick or acid-test ratio is

A) 0.54 to 1.
B) 0.80 to 1.
C) 2.25 to 1.
D) 3.05 to 1.

Question 48

The cost of goods sold for a company for the year was $1,900,000. Merchandise inventory at the beginning of the year was $125,000 and merchandise inventory at the end of the year was $133,000. The merchandise inventory turnover for the year was

A) 0.1.
B) 14.7.
C) 33.8.
D) 65.5.

Question 49

A company has cash, $85,000; temporary investments, $30,000; net receivables, $60,000; and inventory, $350,000. Current liabilities are $300,000. The current ratio is

A) 0.58 to 1.
B) 0.74 to 1.
C) 1.75 to 1.
D) 1.86 to 1.

Question 50

Dividing the net income for the year by the average assets for the year is the calculation for the

A) return on assets.
B) earnings per share.
C) book value per share.
D) quick or acid-test ratio.

Question 51

A comparison of the amounts for the same item in financial statements of two or more periods is called

A) vertical analysis.
B) competitive analysis.
C) earnings per share.
D) horizontal analysis.

Question 52

The net income of a company is $175,000. The average book value of the company's assets is $1,300,000. The return on total assets would be

A) 20.00%.
B) 7.43%.
C) 600.00%.
D) 13.46%.

Question 53

Dividing cost of goods sold by the average of merchandise inventory is the calculation for the

A) accounts receivable turnover.
B) working capital turnover.
C) merchandise inventory turnover.
D) plant and equipment turnover.

Question 54

A company has net sales on account of $1,200,000. Net accounts receivable at the beginning of the year are $500,000 and net accounts receivable at the end of the year are $700,000. The average number of days that the accounts receivables were on the books was

A) 8.7 days.
B) 182.5 days.
C) 304.0 days.
D) 439.8 days.

Question 55

Dividing net sales on account by the average amount of net accounts receivable is the calculation for the

A) accounts receivable turnover.
B) working capital turnover.
C) merchandise inventory turnover.
D) plant and equipment turnover.

Question 56

The net sales for a company were $3,600,000; gross profit was $600,000; and net income was $260,000. The net income to net sales ratio would be

A) 7.22%.
B) 16.67%.
C) 23.89%.
D) 43.33%.

Question 57

Dividing the total stockholders' equity by the average number of shares outstanding at the end of the year (if only common stock is outstanding) is the calculation for

A) book value per share.
B) earnings per share.
C) return on equity.
D) the times interest earned ratio.

Question 58

The cost of goods sold for a company for the year was $1,600,000. Merchandise inventory at the beginning of the year was $195,000 and merchandise inventory at the end of the year was $205,000. The average number of days that the inventory was held during the year was

A) 8.0 days.
B) 25.0 days.
C) 39.6 days.
D) 45.6 days.

Question 59

An expression of the amount of each item in a statement as a percentage of some designated total for comparative purposes is called

A) vertical analysis.
B) return on total assets.
C) earnings per share.
D) horizontal analysis.

Question 60

Leverage is

A) the ability to earn a satisfactory return on the investments in the business.
B) the proportion of debt to stockholders' equity.
C) the ability to pay current debts when they come due.
D) also called profit margin.

Question 61

Consider the following: Required:
Prepare a horizontal comparative income statement.

Question 62

Perform a vertical analysis of the following comparative income statements for Cheng Corporation. Use net sales as the comparative base.

Question 63

Match the terms with the definitions.a.accounts receivable turnover
b.book value per share
c.working capital
d.current ratio (working capital ratio)
e.earnings per share
f.gross profit ratio
g.vertical analysis
h.times interest earned ratio
i.leverage measures
j.return on common stockholders' equity
k.quick ratio (acid-test ratio)
l.profitability
m.operating expense ratio
The ratio of common stockholders' equity to the number of common shares outstanding at the end of the year.

Question 64

Use the following comparative income statements and balance sheets to complete the required ratio analysis. Additional information:
All sales are made on account. Balances of selected accounts for December 31, 20-A are accounts receivable (net), $73,800; merchandise inventory, $153,100; total assets, $906,900; common stockholders' equity, $527,200; and common shares outstanding, 42,000. Required:
Prepare a liquidity analysis by calculating for 20-B and 20-C the (a) current ratio, (b) quick ratio, (c) accounts receivable turnover, and (d) merchandise inventory turnover. Indicate whether there has been an improvement or not from 20-B to 20-C. Round all answers to two decimal places.

Question 65

Dividing the net income for the year by the average number of common shares outstanding during the year (if only common stock is outstanding) is the calculation for the

A) return on stockholders' equity.
B) return on assets.
C) earnings per share.
D) book value per share.

Question 66

Use the following comparative income statements and balance sheets to complete the required ratio analysis: Additional information:
All sales are made on account. Balances of selected accounts for December 31, 20-A are accounts receivable (net), $73,800; merchandise inventory, $139,200; total assets, $906,900; common stockholders' equity, $527,200; and common shares outstanding, 42,000. Required:
Analyze for 20-B and 20-C the extent to which this corporation is being financed by debt using the (a) ratio of liabilities to stockholders' equity, and analyze its ability to meet its debt obligation using the (b) times interest earned ratio. Indicate whether there has been an improvement or not from 20-B to 20-C. Round all answers to two decimal places.

Question 67

Book value per share of common stock is calculated by dividing the

A) number of common shares outstanding at year end by the common stockholders' equity.
B) net income available to common stockholders by the average number of common shares outstanding.
C) common stockholders' equity by the number of common shares outstanding at year end.
D) total liabilities by the total stockholders' equity.

Question 68

Consider the following:
​ Required:
Prepare a vertical comparative income statement basing percentages on net sales for each year.

Question 69

Match the terms with the definitions.a.accounts receivable turnover
b.book value per share
c.working capital
d.current ratio (working capital ratio)
e.earnings per share
f.gross profit ratio
g.vertical analysis
h.times interest earned ratio
i.leverage measures
j.return on common stockholders' equity
k.quick ratio (acid-test ratio)
l.profitability
m.operating expense ratio
The ratio of current assets to current liabilities.

Question 70

Match the terms with the definitions.a.accounts receivable turnover
b.book value per share
c.working capital
d.current ratio (working capital ratio)
e.earnings per share
f.gross profit ratio
g.vertical analysis
h.times interest earned ratio
i.leverage measures
j.return on common stockholders' equity
k.quick ratio (acid-test ratio)
l.profitability
m.operating expense ratio
The ratio of gross profit to net sales.

Question 71

Consider the following: Required:
You have been provided with the balance sheet for Santos Tier I Center. Calculate the following ratios and round answers to two decimal places.

Question 72

A company has 6,000 shares of common stock outstanding and the total common stockholders' equity is $1,500,000. The book value per share of common stock is

A) $.004.
B) $2.50.
C) $4.00.
D) $250.00.

Question 73

The net income for the year ended was $300,000. Common stockholders' equity at the beginning of the year was $1,400,000 and $1,600,000 at the end of the year. The return on common stockholders' equity would be

A) 18.75%.
B) 20.00%.
C) 21.43%.
D) 87.50%.

Question 74

A corporation has 2,000 shares of $50 par, 10% preferred stock, and 6,000 shares of common stock outstanding. The net income for the year is $250,000. The earnings per share of common stock would be

A) $10.83.
B) $31.25.
C) $40.00.
D) $41.67.

Question 75

Use the comparative income statements and balance sheets below to complete the required ratio analysis. Additional information:
All sales are made on account. Balances of selected accounts for December 31, 20-A are accounts receivable (net), $73,800; merchandise inventory, $139,200; total assets, $906,900; common stockholders' equity, $527,200; and common shares outstanding 42,000. Prepare a profitability analysis by calculating for 20-B and 20-C the (a) net sales to assets, (b) return on total assets, (c) return on common stockholders' equity, (d) earnings per share, and (e) book value per share. Indicate whether there has been an improvement or not from 20-B to 20-C. Round to two decimal places.

Question 76

Net income divided by average common stockholders' equity is the calculation for the

A) ratio of net sales to assets.
B) return on total assets.
C) return on common stockholders' equity.
D) earnings per share.

Question 77

Match the terms with the definitions.a.accounts receivable turnover
b.book value per share
c.working capital
d.current ratio (working capital ratio)
e.earnings per share
f.gross profit ratio
g.vertical analysis
h.times interest earned ratio
i.leverage measures
j.return on common stockholders' equity
k.quick ratio (acid-test ratio)
l.profitability
m.operating expense ratio
The excess of a company's current assets over current liabilities.

Question 78

Dividing quick assets by current liabilities is the calculation for the

A) current ratio.
B) return on investment.
C) acid-test ratio.
D) ratio of liabilities to stockholders' equity.

Question 79

The net income of a company for the year just ended is $230,000. Income tax is $80,500 and interest expense is $20,000. The number of times interest was earned would be

A) 0.05.
B) 10.5.
C) 11.5.
D) 16.5.

Question 80

The net income for a company was $315,000 last year and is $270,000 this year. The percent of increase or decrease was

A) 16.7%.
B) 14.3%.
C) 26.4%.
D) 86.0%.