Deck 16: Financial Statement Analysis

Question 1

In determining whether a company's financial condition is improving or deteriorating over time, horizontal analysis of financial statement data would be more useful than vertical analysis.

Answer 1

True

Question 2

The formula for total asset turnover is: Total asset turnover = Total assets ÷ Total stockholders' equity.

Answer 2

False

Question 3

A company whose inventory turnover ratio is much slower than the average for its industry may have too much inventory or the wrong sorts of inventory.

Answer 3

True

Question 4

The formula for the average sale period is: Average sale period = Accounts receivable turnover ÷ Inventory turnover.

Question 5

All other things the same, when a customer purchases an item for cash, the accounts receivable turnover ratio increases.

Question 6

All other things the same, when a company increases its inventories in anticipation of later higher sales, the accounts receivable turnover ratio for the current period increases.

Question 7

As the accounts receivable turnover ratio decreases, the average collection period increases.

Question 8

All other things the same, purchasing merchandise inventory would have no effect on the accounts receivable turnover ratio at a retailer.

Question 9

To increase total asset turnover, management must either increase sales or reduce total stockholders' equity.

Question 10

If the acid-test ratio is less than one, then paying off some current liabilities with cash will increase the acid-test (quick) ratio.

Question 11

Liquidity refers to how quickly an asset can be converted into cash.

Question 12

If a company's operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable.

Question 13

Acquiring land by taking out a long-term mortgage will not affect the current ratio.

Question 14

A common-size financial statement is a vertical analysis in which each financial statement account is expressed as a percentage.

Question 15

A company could improve its acid-test ratio by selling some equipment it no longer needs for cash.

Question 16

Purchasing marketable securities with cash will have no effect on a company's acid-test ratio.

Question 17

Buying inventory in large lots to take advantage of quantity discounts can be responsible for a high inventory turnover ratio.

Question 18

As the inventory turnover increases, the average sales period decreases.

Question 19

All other things the same, purchasing inventory would decrease the inventory turnover ratio.

Question 20

The acid-test ratio is usually greater than the current ratio.

Question 21

The gross margin percentage is computed by dividing the gross margin by net income before interest and taxes.

Question 22

The dividend payout ratio is equal to the dividend per share divided by the earnings per share.

Question 23

If a retailer sells a product whose contribution margin equals the gross margin percentage, the gross margin percentage will be unaffected by the transaction.

Question 24

The times interest earned ratio is based on net income because that is the amount of earnings that is available for making interest payments. Interest expense is deducted before taxes are determined; creditors have first claim on the earnings before taxes are paid.

Question 25

The formula for the times interest earned ratio is: Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense.

Question 26

If a company's return on assets is substantially lower than its cost of borrowing, then the common stockholders would normally want the company to have a relatively high debt/equity ratio.

Question 27

All other things the same, if the company purchases equipment on credit, this transaction would have no impact on the company's book value per share.

Question 28

All other things the same, if long-term debt is exchanged for short-term debt, the debt-to-equity ratio will be unchanged.

Question 29

All other things the same, if a company uses long-term debt to purchase land to develop in the future, the company's return on total assets will decrease.

Question 30

When a company sells used equipment for a loss, the net profit margin percentage is unaffected.

Question 31

The formula for the net profit margin percentage is: Net profit margin percentage = Net income ÷ Sales.

Question 32

All other things the same, those who hold the company's debt (i.e., its creditors) would like a low debt-to-equity ratio to provide a buffer of protection.

Question 33

A high price-earnings ratio means that investors are willing to pay a premium for the company's stock.

Question 34

An increase in the number of shares of common stock outstanding will increase a company's price-earnings ratio if the market price per share remains unchanged.

Question 35

When fixed costs are included in the cost of goods sold, the gross margin percentage should increase and decrease with sales volume.

Question 36

When computing the return on total assets, the interest expense is added back to net income to show what earnings would have been if the company had no debt.

Question 37

When computing the return on equity, retained earnings should be excluded from the average total stockholders' equity.

Question 38

The gross margin percentage is computed by dividing sales by the gross margin.

Question 39

Issuing common stock will decrease a company's financial leverage.

Question 40

The formula for the return on equity is: Return on equity = Net income ÷ Average total stockholders' equity.

Question 41

Sand Company has an acid-test ratio of 0.8. Which of the following actions would improve the acid-test ratio?

A) Collect some accounts receivable.
B) Acquire some inventory on account.
C) Sell some equipment for cash.
D) Use cash to pay off some accounts payable.

Question 42

Zack Company has a current ratio of 2.5. What will be the effect of a purchase of inventory with cash on the acid-test ratio and on working capital?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 43

The Seabury Corporation has a current ratio of 3.5 and an acid-test ratio of 2.8. The corporation's current assets consist of cash, marketable securities, accounts receivable, and inventories. Inventory equals $49,000. Seabury Corporation's current liabilities must be: (Round your intermediate calculations to 1 decimal place.) Garrison 16e Rechecks 2017-10-04

A) $70,000
B) $100,000
C) $49,000
D) $125,000

Question 44

Earnings per share is computed by multiplying net income by the average number of common shares outstanding.

Question 45

Accounts receivable turnover will normally decrease as a result of:

A) the write-off of an uncollectible account against the allowance for bad debts.
B) a significant sales volume decrease near the end of the accounting period.
C) an increase in cash sales in proportion to credit sales.
D) a change in credit policy to lengthen the period for cash discounts.

Question 46

Norton Incorporated could improve its current ratio of 2 by:

A) paying a previously declared stock dividend.
B) writing off an uncollectible receivable.
C) selling merchandise on credit at a profit.
D) purchasing inventory on credit.

Question 47

A company's current ratio is greater than 1. Purchasing raw materials on credit would:

A) increase the current ratio.
B) decrease the current ratio.
C) increase working capital.
D) decrease working capital.

Question 48

Which one of the following statements about book value per share is most correct?

A) Market price per common share usually approximates book value per common share.
B) Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future.
C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock.
D) Book value per common share is the amount that would be paid to stockholders if the company were sold to another company.

Question 49

Data from Fontecchio Corporation's most recent balance sheet appear below: The corporation's acid-test ratio is closest to:

A) 0.35
B) 0.15
C) 0.68
D) 0.79

Question 50

Which of the following is not a source of financial leverage?

A) Bonds payable.
B) Accounts payable.
C) Taxes payable.
D) Prepaid rent.

Question 51

The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would:

A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.

Question 52

A company's current ratio and its acid-test ratio are both greater than 1. Payment of an account payable would:

A) increase the current ratio but the acid-test ratio would not be affected.
B) increase the acid-test ratio but the current ratio would not be affected.
C) increase both the current and acid-test ratios.
D) decrease both the current and acid-test ratios.

Question 53

Data from Fontecchio Corporation's most recent balance sheet appear below: The corporation's acid-test ratio is closest to:

A) 0.33
B) 0.18
C) 0.69
D) 0.51

Question 54

The price-earnings ratio is determined by dividing market price per share of stock by the earnings per share.

Question 55

The ratio of total cash, marketable securities, and accounts receivable to current liabilities is:

A) the debt-to-equity ratio.
B) the current ratio.
C) the acid-test ratio.
D) working capital.

Question 56

Purchasing inventory on credit increases the book value per share of a retailer.

Question 57

Which of the following actions would improve a current ratio of 0.8?

A) Use cash to pay off some current liabilities.
B) Purchase additional marketable securities with cash.
C) Acquire a parcel of land in exchange for common stock.
D) Purchase additional inventory on credit.

Question 58

If current assets exceed current liabilities, prepaying an expense on the last day of the year will:

A) decrease the current ratio.
B) increase the acid-test ratio.
C) decrease the acid-test ratio.
D) increase the current ratio.

Question 59

The Seabury Corporation has a current ratio of 4.2 and an acid-test ratio of 3.9. The corporation's current assets consist of cash, marketable securities, accounts receivable, and inventories. Inventory equals $18,000. Seabury Corporation's current liabilities must be: (Round your intermediate calculations to 1 decimal place.)

A) $18,000
B) $234,000
C) $60,000
D) $5,400

Question 60

The gross margin percentage is equal to:

A) (Net operating income + Selling and administrative expenses)/Sales
B) Net operating income/Sales
C) Cost of goods sold/Sales
D) Cost of goods sold/Net income

Question 61

McRae Corporation's total current assets are $452,000, its noncurrent assets are $554,000, its total current liabilities are $376,000, its long-term liabilities are $304,000, and its stockholders' equity is $326,000. Working capital is:

A) $102,000
B) $76,000
C) $178,000
D) $126,000

Question 62

Windham Corporation has current assets of $400,000 and current liabilities of $500,000. Windham Corporation's current ratio would be increased by:

A) the purchase of $100,000 of inventory on account.
B) the payment of $100,000 of accounts payable.
C) the collection of $100,000 of accounts receivable.
D) refinancing a $100,000 long-term loan with short-term debt.

Question 63

Calin Corporation has total current assets of $639,000, total current liabilities of $248,000, total stockholders' equity of $1,207,000, total plant and equipment (net) of $982,000, total assets of $1,621,000, and total liabilities of $414,000. The company's working capital is:

A) $414,000
B) $343,000
C) $391,000
D) $473,000

Question 64

Feiler Corporation has total current assets of $483,000, total current liabilities of $347,000, total stockholders' equity of $1,057,000, total plant and equipment (net) of $1,031,000, total assets of $1,514,000, and total liabilities of $457,000. The company's current ratio is closest to:

A) 0.32
B) 0.30
C) 1.39
D) 0.95

Question 65

Dennisport Corporation has an acid-test ratio of 2.6. It has current liabilities of $49,000 and noncurrent assets of $79,000. The corporation's current assets consist of cash, marketable securities, accounts receivable, prepaid expenses, and inventory. If Dennisport's current ratio is 4.1, its inventory and prepaid expenses must be:

A) $121,900
B) $73,500
C) $123,000
D) $78,000

Question 66

Calin Corporation has total current assets of $615,000, total current liabilities of $230,000, total stockholders' equity of $1,183,000, total plant and equipment (net) of $958,000, total assets of $1,573,000, and total liabilities of $390,000. The company's working capital is:

A) $615,000
B) $1,183,000
C) $385,000
D) $958,000

Question 67

Gnas Corporation's total current assets are $252,000, its noncurrent assets are $632,000, its total current liabilities are $188,000, its long-term liabilities are $518,000, and its stockholders' equity is $178,000. The current ratio is closest to:

A) 1.34
B) 0.75
C) 1.42
D) 1.06

Question 68

Dennisport Corporation has an acid-test ratio of 2.5. It has current liabilities of $40,000 and noncurrent assets of $70,000. The corporation's current assets consist of cash, marketable securities, accounts receivable, prepaid expenses, and inventory. If Dennisport's current ratio is 3.1, its inventory and prepaid expenses must be:

A) $12,400
B) $24,000
C) $30,000
D) $40,000

Question 69

Stimac Corporation has total cash of $300,000, no marketable securities, total current receivables of $371,000, total inventory of $187,000, total prepaid expenses of $71,000, total current assets of $929,000, total current liabilities of $315,000, total stockholders' equity of $2,814,000, total assets of $4,115,000, and total liabilities of $1,301,000. The company's acid-test (quick) ratio is closest to:

A) 2.36
B) 1.92
C) 2.95
D) 2.13

Question 70

Erastic Corporation has $16,000 in cash, $9,000 in marketable securities, $37,000 in account receivable, $44,000 in inventories, and $44,000 in current liabilities. The corporation's current assets consist of cash, marketable securities, accounts receivable, and inventory. The corporation's acid-test ratio is closest to:

A) 1.41
B) 0.84
C) 2.41
D) 1.20

Question 71

McRae Corporation's total current assets are $380,000, its noncurrent assets are $500,000, its total current liabilities are $340,000, its long-term liabilities are $250,000, and its stockholders' equity is $290,000. Working capital is:

A) $380,000
B) $40,000
C) $250,000
D) $290,000

Question 72

Orem Corporation's current liabilities are $75,000, its long-term liabilities are $225,000, and its working capital is $100,000. If the corporation's debt-to-equity ratio is 0.30, total long-term assets must equal:

A) $1,000,000
B) $1,300,000
C) $1,125,000
D) $1,225,000

Question 73

Dratif Corporation's working capital is $60,000 and its current liabilities are $192,000. The corporation's current ratio is closest to:

A) 1.31
B) 0.31
C) 2.31
D) 0.76

Question 74

Windham Corporation has current assets of $660,000 and current liabilities of $825,000. Windham Corporation's current ratio would be increased by:

A) the purchase of $360,000 of inventory on account.
B) the payment of $360,000 of accounts payable.
C) the collection of $360,000 of accounts receivable.
D) refinancing a $360,000 long-term loan with short-term debt.

Question 75

Feiler Corporation has total current assets of $497,000, total current liabilities of $361,000, total stockholders' equity of $1,071,000, total plant and equipment (net) of $1,045,000, total assets of $1,542,000, and total liabilities of $471,000. The company's current ratio is closest to:

A) 0.77
B) 1.06
C) 1.38
D) 2.22

Question 76

Dratif Corporation's working capital is $33,000 and its current liabilities are $80,000. The corporation's current ratio is closest to:

A) 1.41
B) 0.59
C) 3.42
D) 0.41

Question 77

Stimac Corporation has total cash of $210,000, no marketable securities, total current receivables of $281,000, total inventory of $151,000, total prepaid expenses of $53,000, total current assets of $695,000, total current liabilities of $261,000, total stockholders' equity of $1,014,000, total assets of $1,415,000, and total liabilities of $401,000. The company's acid-test (quick) ratio is closest to:

A) 2.08
B) 1.73
C) 2.66
D) 1.88

Question 78

Erastic Corporation has $14,000 in cash, $8,000 in marketable securities, $34,000 in account receivable, $40,000 in inventories, and $42,000 in current liabilities. The corporation's current assets consist of cash, marketable securities, accounts receivable, and inventory. The corporation's acid-test ratio is closest to:

A) 1.33
B) 0.81
C) 2.29
D) 1.14

Question 79

Orem Corporation's current liabilities are $254,840, its long-term liabilities are $1,327,560, and its working capital is $356,800. If the corporation's debt-to-equity ratio is 0.46, total long-term assets must equal:

A) $3,440,000
B) $4,665,600
C) $4,410,760
D) $3,856,760

Question 80

Gnas Corporation's total current assets are $210,000, its noncurrent assets are $590,000, its total current liabilities are $160,000, its long-term liabilities are $490,000, and its stockholders' equity is $150,000. The current ratio is closest to:

A) 1.31
B) 0.76
C) 0.33
D) 0.36