Deck 5: Using Financial Statement Information

Question 1

Which one of the following is a reason a company's reported book value and its true value may differ?

A) Management calculates net worth different than shareholders.
B) GAAP requires too many estimates.
C) Statements are forward-looking.
D) Statements do not reflect the company's prospects within its business environment.

Answer 1

D

Question 2

Operating performance is a company's ability to

A) control acquisitions of other companies in the same industry.
B) generate cash from sources other than regular operations.
C) increase its net assets through regular operations
D) employ off-balance-sheet financing.

Answer 2

C

Question 3

Return on equity helps assess a company's

A) marketability.
B) solvency.
C) profitability.
D) leverage.

Answer 3

C

Question 4

The quick ratio helps assess a company's

A) annual stock price.
B) solvency.
C) inventory turnover.
D) profit during the current period.

Question 5

Liquidity is the ability

A) to increase net assets through regular operations.
B) to generate cash from sources other than regular operations.
C) to convert existing assets into cash.
D) of financial statement users to predict a company's cash flows.

Question 6

Which of the following ratios would be of primary importance to a manager in evaluating the success of a new policy of reducing the stock of goods needed to meet customer demand?

A) Total asset turnover
B) Fixed assets turnover
C) Receivables turnover
D) Inventory turnover

Question 7

Which of the following may be a limitation of financial statements?

A) Subject to biases of management
B) Provides no information on the company's accounting methods
C) Typically reflects the view of inherently unethical managers
D) Communicates only market values and no historical information

Question 8

The dividend yield ratio helps assess the

A) profitability of the current year.
B) cash return on a shareholders' investment.
C) company's ability to pay its current liabilities as they come due.
D) solvency of a company.

Question 9

Return on equity compares

A) the market price of the company's stock to its dividend policy.
B) a company's earnings to the dividends paid for the year.
C) the profits of a company to the investment made by its shareholders.
D) the profits of a company to the selling price of each share of stock.

Question 10

A standard audit report

A) states that a company has the right to select members of its board of directors.
B) serves as the accounting profession's seal of approval.
C) states whether a company will be profitable or not in the future.
D) serves as a guarantee that the financial statements are free of any errors.

Question 11

Which of the following ratios would be of primary importance to a supplier in deciding to extend credit for goods delivered?

A) Earnings per share
B) Debt/equity ratio
C) Accounts receivable turnover
D) Quick ratio

Question 12

The price-earnings ratio is

A) the market price of an equity share divided by earnings per share.
B) the amount of a company's retained earnings.
C) the purchase price of a firm's assets divided by net income.
D) used to measure the speed at which the company sells its inventories.

Question 13

Earnings per share

A) must appear on a company's income statement if the company is publicly traded.
B) is rarely used by analysts since it is not required by GAAP.
C) is based on the market price of the company's stock.
D) is typically presented in its two forms: simple and advanced.

Question 14

Which of the following ratios might a potential investor use to determine if the return to shareholders is a large portion of the total return generated by a company?

A) Earnings per share
B) Common equity leverage
C) Current ratio
D) Total asset turnover

Question 15

Financial flexibility is

A) a good indicator of a company's ability to grow through operations.
B) evident when a company's assets are greater than its liabilities.
C) the ability to convert existing assets into money.
D) the ability to generate cash from sources other than regular operations.

Question 16

The current ratio is

A) current assets divided by current liabilities.
B) current liabilities divided by current assets.
C) current assets divided by total liabilities.
D) total assets divided by total liabilities.

Question 17

The current ratio

A) provides users with an estimate of a company's human resources.
B) is reported on a company's balance sheet in the asset section.
C) is a measure of a company's solvency.
D) is a measure of a company's liquidity.

Question 18

Financial statements help present and potential investors, creditors, and other users in assessing the amount, timing, and uncertainty of

A) future income.
B) future assets.
C) future liabilities.
D) future cash flows.

Question 19

The current ratio helps assess a company's

A) profitability.
B) asset turnover.
C) capital structure leverage.
D) solvency.

Question 20

Assessing a company's inventory turnover helps assess the

A) effectiveness of a company's collection activities.
B) ability to measure the quality of the inventory on hand.
C) speed at which inventories move through operations.
D) efficiency of a company.

Question 21

Information concerning industry averages will likely be found in

A) Barron's.
B) The Wall Street Journal.
C) Dun & Bradstreet's Key Business Ratios.
D) The New York Times.

Question 22

Using borrowed funds to generate returns for the shareholders is called

A) leverage.
B) profitability.
C) taking a bath.
D) solvency.

Question 23

Which one of the following is a step used in assessing whether a particular investment should be made or not?

A) Determine the number of employees a company has.
B) Obtain an understanding of the company and its industry.
C) Determine the number of years the company has been in business.
D) Calculate the amount of advertising costs incurred by the company during the previous year.

Question 24

Managers that structure financing transactions and choose accounting methods that exclude debt on the company's balance sheet are using

A) hidden reserves.
B) fraudulent methods by default.
C) performance overstatement.
D) off-balance-sheet financing.

Question 25

The primary measure of the overall success of a company is

A) total shareholders' equity.
B) total assets.
C) net income.
D) the number of shares of stock it has sold to investors.

Question 26

A standard audit report states that the financial statements

A) were examined in great detail and contain no errors.
B) were prepared by management.
C) were certified error free by the independent auditor.
D) represent a substantial doubt of the ability of the company to continue as a going concern.

Question 27

Book value fails to reflect true value primarily because:

A) financial statements are irrelevant.
B) financial statements are backward-looking.
C) financial statements are forward-looking.
D) financial statements are typically biased.

Question 28

Many ratios require an average be used for the balance sheet numbers because the

A) income statement refers to a point in time.
B) accountants may have made errors in the financial statements.
C) balance sheet numbers are a point in time and are being compared to an income statement number that covers a period of time.
D) income statement numbers represent a point in time and are being compared to a balance sheet number that covers a period of time.

Question 29

Investors who use accounting information to guide trading in foreign securities

A) should carefully compare expenses, but not revenues to companies in the same industry in the United States.
B) must adjust the numbers of foreign-based companies' financial statements and thoroughly understand the foreign environment.
C) must contact the foreign CEO before any investment in stock occurs.
D) should contact the foreign company's auditors to find out how much dividends will be paid.

Question 30

The item that causes the greatest and most immediate effect on a company's stock price will generally be

A) cash on hand.
B) the company's solvency.
C) profits.
D) dependent upon the industry in which the company operates.

Question 31

Which of the following is a fundamental way in which financial accounting numbers are useful?

A) They can predict the way the stock price will behave.
B) They are used to assess the quality of a company's products.
C) They can be used to predict a company's future earnings.
D) They identify the effect of inflation on the value of company's assets.

Question 32

Which of the following ratios would be of primary importance to a manager in evaluating the success of a computerized collection process?

A) Accounts receivable turnover
B) Account payable turnover
C) Quick ratio
D) Return of equity

Question 33

A company that reports high levels of common equity leverage is probably

A) reporting higher earnings per share than other companies in the same industry.
B) meeting its financing needs effectively.
C) using leverage very effectively.
D) demonstrating it has a large amount of off-balance-sheet financing.

Question 34

Common-size financial statements are expressed as

A) percentages of other numbers on the same statements.
B) a percent comparison of other companies in the same industry.
C) a common way of preparing certain types of financial statements.
D) percentages of increases and decreases compared to the previous accounting period.

Question 35

An analyst assessed a company and determined the company to have reported a "high quality of earnings." This implies that

A) management issued a press release indicating it was not aware of any fraud during the current year.
B) the company's management exercised little or no discretionary influence in reporting financial statement information to shareholders.
C) management has used its influence in determining the dollar amounts reported on financial statements.
D) income statement items reported during the current period can be expected to reflect future income levels.

Question 36

Which of the following ratios would be of primary importance to a creditor in deciding to extend long-term credit?

A) Current ratio
B) Debt/equity ratio
C) Inventory turnover
D) Earnings per share

Question 37

Accounting numbers are useful in that they

A) are easy to manipulate by management and help predict a company's future earnings and cash flows.
B) allow users to see management's predictions of future profits and help predict a company's future cash flows.
C) help investors and creditors influence and monitor management's business decisions and help predict a company's future earnings and cash flows.
D) help investors and creditors influence, manipulate, and monitor management's business decisions so that future profits are high.

Question 38

A company would likely "take a bath"

A) in periods of extraordinary high net income.
B) just prior to creating hidden reserves.
C) when it has experienced an extremely poor year.
D) when its quality of earnings is very high.

Question 39

The use of financial statements for predicting future earnings and cash flows is limited due to

A) management bias, lack of forward-looking information, and certain inherent limitations.
B) lack of judgment, management bias, and lack of inclusion of inflationary effects.
C) lack of forward and backward-looking information.
D) lack of backward-looking information, the likelihood of management bias, and the omission of historical costs.

Question 40

The long-term debt ratio

A) measures the significance of long-term debt as a source of asset financing.
B) measures the effect of management's use of long-term debt.
C) compares profits to the company's total debt.
D) is a measure of profitability.

Question 41

Norton Company has the following assets on January 1, 2010 and January 1, 2009.
If Norton's current ratio is 2.20 for 2009 and its current liabilities are $550,000, what is the amount of its inventory?
a. $197,000
b. $381,000
c. $238,636
d. There is not enough information to answer this question.

Question 42

Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 45 through 48.

Calculate Campbell's current and quick ratios as of December 31, 2009 and December 31, 2010 and choose the correct answers below:

A) Campbell's quick and current ratios improved from December 31, 2009 to December 31, 2010.
B) Campbell's quick and current ratios worsened from December 31, 2009 to December 31, 2010.
C) Campbell's quick ratio improved but the current ratio worsened December 31, 2009 to December 31, 2010.
D) Campbell's quick ratio worsened but the current ratio improved from December 31, 2009 to December 31, 2010.

Question 43

Norton Company has the following assets on January 1, 2010 and January 1, 2009.
If Norton's quick ratio is 2.60 for 2010 and its current liabilities are $512,000, what is the amount of its accounts receivables?
a. $324,000
b. $204,800
c. $715,200
d. There is not enough information to answer this question.

Question 44

Pasky Company has the following financial data on January 1, 2010 and January 1, 2009.
In terms of the quick and current ratio, which of the following statements is true?
a. Pasky's short-term solvency position has improved.
b. Pasky's short-term solvency position has declined.
c. Pasky's short-term solvency position has remained the same
d. Pasky's quick ratio is increasing, but its current ratio is decreasing.

Question 45

Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 45 through 48.

Calculate Campbell's inventory turnover ratio and accounts receivable turnover ratio for the year ended 2010. Further, assume that in Campbell's industry, the industry average inventory turnover ratio is 12 and the industry average receivables turnover ratio is 14.

A) Campbell's inventory turnover ratio and accounts receivable turnover ratios are better than average for Campbell's industry.
B) Campbell's inventory turnover ratio and accounts receivable turnover ratios are worse than average for Campbell's industry.
C) Campbell's inventory turnover ratio is better but the accounts receivable turnover ratio is worse than average for Campbell's industry.
D) Campbell's inventory turnover ratio is worse and accounts receivable turnover ratio is better than average for Campbell's industry.

Question 46

Justin Company has total assets, liabilities, and shareholders' equity of $36,000, $15,000, and $21,000, respectively, at the beginning of 2010. At the end of 2010, total assets, liabilities, and shareholders' equity were reported at $32,000, $13,000, and $19,000, respectively. How much additional debt can Justin Company incur and still have its debt/equity ratio remain less than or equal to 1.00?
a. $6,000
b. $25,000
c. $12,000
d. $24,000

Question 47

Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 45 through 48.

Calculate Campbell's return on equity and return on assets for the year ended December 31, 2010. Assume that the income tax rate is 30%. Also assume that in Campbell's industry, the industry average return on equity is 19% and the average return on assets is 11%.

A) Campbell's return on equity and return on assets are better than average for Campbell's industry.
B) Campbell's return on equity and return on assets are worse than average for Campbell's industry.
C) Campbell's return on equity is better but return on assets is worse than average for Campbell's industry.
D) Campbell's return on equity is worse but return on assets is better than average for Campbell's industry.

Question 48

Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 45 through 48.

Calculate Campbell's debt to equity ratio as of December 31, 2009 and as of December 31, 2010. Also assume that in Campbell's industry, the industry average debt to equity ratio is 2.75 as of December 31, 2009 and as of December 31, 2010.

A) Campbell's debt to equity ratio improved from 2009 to 2010.
B) Campbell's debt to equity ratio was better than average for the industry both years.
C)
C) Campbell's debt to equity is worse than average for the industry for both years.
D) Both a and b above, but not

Question 49

Justin Company has total assets, liabilities, and shareholders' equity of $36,000, $15,000, and $21,000, respectively, at the beginning of 2010. At the end of 2010, total assets, liabilities, and shareholders' equity were reported at $32,000, $13,000, and $19,000, respectively. What is Justin's debt to equity ratio?
a. 0.70
b. 1.17
c. 0.71
d. 1.13

Question 50

What type of audit report do most companies receive from their auditors?

A) standard audit reports
B) no report unless the company has problems
C) a GAAP report
D) a comprehensive report

Question 51

Sheena Company has current assets, current liabilities, and long-term liabilities of $19,000, $13,000, and $17,000, respectively. Within these amounts, $3,000 is accounts payable, and $3,500 is accounts receivable. If $2,000 of cash were used to pay off the accounts payable, what effect would this have on the current ratio?
a. The current ratio would increase by approximately 0.09.
b. The current ratio would decrease by approximately 0.09.
c. The current ratio would decrease by approximately 0.03.
d. There would be no change in the current ratio.

Question 52

Walker Company has the following assets on January 1, 2010 and January 1, 2009.
If Walker's quick ratio is 3.00 for 2010, what is the amount of its current liabilities?
a. $325,000
b. $259,000
c. $285,000
d. There is not enough information to answer this question.

Question 53

Rudy Company has total assets, liabilities, and shareholders' equity of $35,000, $28,000, and $7,000, respectively. Assume no material change occurred during the year to totals on the balance sheet. What amount of long-term debt must Rudy exchange for new shares of common stock issued in order to decrease its debt/equity ratio to 1.0?
a. $17,500
b. $10,500
c. $14,000
d. $21,000

Question 54

True value of a company is determined by

A) adding adjustments for the business environment, unrecorded events, and types of shareholders to the book value of a company.
B) adding adjustments for the business environment, unrecorded events, and cumulative profits to the book value of a company.
C) adding adjustments for the business environment, management bias, and cumulative profits to the book value of a company.
D) adding adjustments for the business environment, unrecorded events, and management bias to the book value of a company.

Question 55

Buffalo Company has current assets, current liabilities, and long-term liabilities of $9,000, $3,000, and $4,000, respectively at the end of 2010. How much cash can Buffalo use to acquire equipment and retain a current ratio of at least 2.0?
a. $1,000
b. $3,000
c. $4,000
d. $6,000

Question 56

The two fundamental ways in which financial accounting numbers are useful are

A) prediction and influence.
B) control and monitoring.
C) prediction and monitoring.
D) control and prediction.

Question 57

Grey Company has a current ratio of 0.30 and return on equity of 0.05. Which of the following statements is the best regarding Grey's profitability and solvency?
a. Grey is very profitable, but not very solvent.
b. Grey is very profitable and very solvent.
c. Grey is not very profitable, but very solvent.
d. Grey is not very profitable and not very solvent.

Question 58

Samson Company has common stock of $150,000 and retained earnings of $140,000 at yearend. During the year, 20,000 shares of stock were outstanding. Net income was reported as $70,000. What is the company's earnings per share?
a. $3.50
b. $1.07
c. $0.73
d. $10.25

Question 59

The following ratios were computed from the financial statement of Darren Technologies: Which of the following statements is true?

A) There has been a steady decline in ROE from 2009 through 2011.
B) The increase in ROA is due primarily to the changes in asset turnover.
C) The changes in ROA could be due to increasing sales.
D) The change in ROA could be due to a large increase in the asset base of the company.

Question 60

Devin Inc. has an inventory turnover ratio of 30. Devin's average number of day's inventory is:

A) Less than 10.
B) Between 10 and 12.
C) More than 12.
D) Unable to be determined based on this limited information.

Question 61

Madison Company has current assets, current liabilities, and long-term liabilities of $8,000, $4,000, and $6,000, respectively. Within these amounts, inventory was $2,000, receivables were $2,000, cash was $4,000, and payables were $1,000. Calculate Madison's quick ratio. What information does this provide?

Question 62

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

If the industry in which Carter is a member has an average accounts receivable turnover of 27 times, determine if in 2010, Carter is more or less efficient at converting sales to cash than the average firm in its industry. Assume all sales were credit sales.

Question 63

Smith Company has total assets, liabilities, and shareholders' equity of $20,000, $7,000, and $13,000, respectively, at the beginning of 2010. At the end of 2010, total assets, liabilities, and shareholders' equity were reported at $16,000, $5,000, and $11,000, respectively.
A. How much additional debt can Smith incur and still have its debt/equity ratio remain less than or equal to 1.00?
B. What information does the debt/equity ratio provide you?

Question 64

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

If the industry in which Carter is a member has an average current ratio of 1.9, determine if, on December 31, 2010, Carter is more or less solvent than the average firm in its industry as measured by its current ratio.

Question 65

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

Using the two solvency ratios (current and quick), indicate whether Carter's solvency position improved or deteriorated during 2010.

Question 66

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

If the industry in which Carter is a member has an inventory turnover of 11 times, determine if in 2010, Carter is more or less efficient at converting inventory into sold units than the average firm in its industry. Explain what information this ratio provides you.

Question 67

Match the correct ratio name from the list below labeled a through f with the ratio formulas appearing in items 1 through 4.
____ 1. Market price per share / earnings per share
____ 2. Dividends per share / market price per share
____ 3. Average total liabilities / average total shareholders' equity
____ 4. Net income / average shareholders' equity

Question 68

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

Washington Company has current assets, current liabilities, and long-term liabilities of $8,000, $2,000, and $5,000, respectively at the end of 2010. How much cash can Washington use to acquire equipment and retain a current ratio of at least 2.0?

Question 69

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

The industry in which Carter is a member has an average debt/equity ratio of 0.83. Determine if, as measured by the debt/equity ratio on December 31, 2010, Carter is taking full advantage of investing borrowed capital in its operations relative to that of the average firm in its industry. Explain.

Question 70

Assume that the following financial ratios were computed from the 2009 financial statements of Florida Industries:
What was the return on equity for Florida in 2009?
a. 4%
b. 33%
c. 51%
d. 11%

Question 71

Briefly describe the solvency and profitability of a company with a quick ratio of 4.74 and return on equity of 0.49.

Question 72

For each characteristic which appears numbered from 1 through 5 below, select the correct factor which should be considered in each assessment as listed in items a through e.

____ 1. Ability to get cash from sale of assets and issuance of debt or stock
____ 2. Avoiding reporting financial responsibilities on the balance sheet
____ 3. Measured by profitability and activity ratios and cash provided by operations
____ 4. Delaying the sale of inventory until the following year because current profits are satisfactory
____ 5. Ability to convert existing assets into cash

Question 73

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

The industry in which Carter is a member has an average return on assets of 18%. Carter reported no interest expense during 2010. Determine if Carter is more or less profitable in 2010 than the average firm in its industry.

Question 74

Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 13 through 19.

The industry in which Tyler is a member has an average accounts receivable turnover of 10 times. How does Tyler compare in 2010? Comment on what information is provided with this calculation and how credit managers might use it to make decisions. Assume all sales were credit sales.

Question 75

Use the information that follows taken from Tyler Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 13 through 19.

If the industry in which Tyler is a member has an inventory turnover of 9 times, determine if Tyler is more or less efficient at converting inventory into sales than the average firm in its industry during 2010.

Question 76

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2010 and 2009 to answer problems 3 through 9.

If the industry in which Carter is a member has an average return on equity of 22%, determine if in 2010, Carter is more or less profitable than the average firm in its industry.

Question 77

Assume that the following financial ratios were computed from the 2009 financial statements of Florida Industries:
If Florida holds its other ratios constant in 2010, but increases its capital structure leverage ratio to 3.00, what will be the 2010 return on equity?
a. 15%
b. 51%
c. 86%
d. 44%

Question 78

Monroe Company has current assets, current liabilities, and long-term liabilities of $12,000, $3,000, and $9,000, respectively. Within these amounts, $1,000 is accounts payable, and $1,500 is accounts receivable. What effect will the payment of the accounts payable have on the current ratio? Should Monroe pay the accounts payable on the last day of the year? Explain.

Question 79

Match the correct ratio category from the list below labeled a through e with each ratio that appears in items 1 through 12.

Question 80

Assume that the following financial ratios were computed from the 2009 financial statements of Florida Industries:
If Florida holds its other ratios constant in 2010, but increases its profit margin to 36%, what will be the 2010 return on assets?
a. 5%
b. 78%
c. 61%
d. 51%