Deck 12: Performance Evaluation Revisited: a Balanced Approach

Question 1

A firm's ability to pay its obligations as they come due and to meet any unforeseen needs for cash is referred to as liquidity.

Answer 1

True

Question 2

Another form of horizontal analysis is called trend analysis.

Answer 2

True

Question 3

In a trend analysis of cost of goods sold over the last three months, all cost of goods sold accounts are shown as a percentage of the current quarter.

Answer 3

False
In a trend analysis of cost of goods sold over the last three months, all cost of goods sold accounts are shown as a percentage of the base quarter,

Question 4

Working capital is the difference between a firm's total assets and total liabilities.

Question 5

In a horizontal analysis balance sheet, the percentage change columns do not add up in the same way as the dollar amounts because each of the percentages was calculated using a different denominator.

Question 6

Generally Accepted Accounting Principles require that companies present financial statements that include the current year and two previous years.

Question 7

In preparing a common-size balance sheet, you express all individual liability or equity account balances as a percentage of total assets.

Question 8

In preparing a common-size income statement, you express all revenue and expense accounts as a percentage of net income.

Question 9

Vertical analysis is also referred to as common-size analysis.

Question 10

Land is the ultimate liquid asset.

Question 11

The first step in preparing a horizontal analysis of a firm's financial statements is to break down the balance sheet to indicate which assets are expected to sold in within the next two years.

Question 12

A helpful approach to examine changes in the relative size of account balances within a single statement is referred to as horizontal analysis.

Question 13

Trend analysis is very useful for analyzing the financial statements, but not for analyzing supplemental information reported in corporate annual reports.

Question 14

The type of analysis that looks at the changes in the account balances over time is referred to as horizontal analysis.

Question 15

Because an absolute dollar change does not give the whole picture, a percentage change is often included in a horizontal analysis.

Question 16

Common-size statements are especially helpful in comparing companies of different size.

Question 17

A firm's ability to convert non-cash assets into cash is referred to as liquidity.

Question 18

In preparing a common-size balance sheet, you express all asset account balances as a percentage of cash.

Question 19

The percentage change, as shown in horizontal analysis, is calculated as:
(current year account balance - previous year account balance) ÷ current year account balance

Question 20

Unlike the percentage columns in a horizontal analysis, the columns in a common-size percentage statement can be totaled.

Question 21

While the current and acid-test ratios provide information about liquidity, they do not indicate the underlying quality of current assets.

Question 22

Inventory turnover measures how many times, on average, a company's inventory is sold during the year.

Question 23

Which of the following is the formula for calculating the percentage change in the horizontal analysis of a financial statement?

Question 24

Rather than looking only at the balances reported on the financial statements, it is helpful to look at the changes in the account balances over time.This is called

A)common analysis.
B)vertical analysis.
C)horizontal analysis.
D)benchmarking

Question 25

Earnings per share represents how much of a company's current net income is available to distribute to each share of stock held by an investor.

Question 26

The most common measure of short-term liquidity is the quick ratio.

Question 27

Turbo Company's accounts receivable account balance was $100,000 at the beginning of the year and $120,000 at the end of the year.Turbo's percentage change calculation at the end of the current year is

A)16.7% decrease.
B)16.7% increase.
C)20% decrease.
D)20% increase.

Question 28

The calculations are the easy part of a horizontal analysis, the challenge is

A)gathering the data.
B)interpreting the results.
C)determining the data.
D)finding a use for the data.

Question 29

Which of the following is the formula for calculating the percentage in trend analysis?

Question 30

Dun & Bradstreet's Industry Norms and Key Business Ratios provide financial ratios for key industries, as well as condensed common-sized balance sheets and income statements.

Question 31

The quality of assets is assessed through the profitability ratios.

Question 32

The gross margin percentage shows how much of each sales dollar is available to cover operating expenses and provide a profit after the cost of goods sold has been covered.

Question 33

The current ratio is also referred to as the quick ratio.

Question 34

Because an absolute dollar change does not give the whole picture, horizontal analysis generally includes which of the following?

A)Rational dollars
B)Percentage changes
C)Explanations
D)Budget amounts

Question 35

A form of horizontal analysis in which each year's account balance is expressed as a percentage of the base year is called

A)trend analysis.
B)percentage analysis.
C)common size analysis.
D)quick analysis.

Question 36

Which of the following authorities require that companies present comparative financial statements that include both the current year and the previous year?

A)IRS
B)GAAP
C)IIA
D)GAAS

Question 37

Horizontal analysis is

A)looking at the changes in the account balances reported on a financial statement over time.
B)looking at the changes in the account balances within a financial statement for one year.
C)preparing an analysis of the profitability ratios in columns.
D)looking at the changes in the account balances within a financial statement for three years.

Question 38

The formula for return on common stockholders' equity is, net sales revenue minus preferred dividends, divided by average common stockholders' equity.

Question 39

Assume that the accounts receivable balances are $110,000, $112,000 and $116,000 for 2021, 2022, and 2023, respectively.The trend percentage for 2023 is

A)3.6%.
B)5.5%.
C)103.6%.
D)105.5%.

Question 40

The price-earnings ratio indicates what multiple of current earnings investors are willing to pay for a share of stock.

Question 41

On a common-size income statement, selling expense is shown as a percentage of

A)net sales revenue.
B)operating income.
C)net income.
D)gross profit.

Question 42

Another term for vertical analysis is

A)common-size analysis.
B)liquidity analysis.
C)horizontal analysis.
D)leverage analysis.

Question 43

On a common-size balance sheet, common stock is shown as a percentage of

A)total liabilities.
B)total assets.
C)current liabilities.
D)total stockholders' equity.

Question 44

On a common-size income statement, income taxes are shown as a percentage of

A)operating income.
B)net sales revenue.
C)net income.
D)gross profit.

Question 45

Common-size statements are especially useful in comparing

A)a company's performance across time.
B)companies of different sizes.
C)supplemental information included in the corporate annual report.
D)companies of the same size.

Question 46

The following financial statement items are shown for J&T Manufacturing. Calculate the common-size percentage for salaries payable.

A)7%
B)10%
C)23%
D)433%

Question 47

The following financial statement items are shown for J&T Manufacturing. Calculate the common-size percentage for inventory.

A)8%
B)14%
C)20%
D)500%

Question 48

The formula for preparing a common-size income statement is

Question 49

A helpful approach in examining changes in the relative size of account balances within a single statement is referred to as

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

Question 50

On a common-size income statement, interest expense is shown as a percentage of

A)operating income.
B)net sales revenue.
C)net income.
D)gross profit.

Question 51

The formula used in preparing a common-size balance sheet is

Question 52

In preparing a common-size balance sheet, you express all account balances as a percentage of

A)total stockholders' equity.
B)total liabilities.
C)total assets plus total liabilities minus stockholders' equity.
D)total assets.

Question 53

On a common-size balance sheet, notes receivable is shown as a percentage of

A)total liabilities.
B)current liabilities.
C)total stockholders' equity.
D)total assets.

Question 54

Which of the following is not a use of trend analysis?

A)For revealing more information about performance than is revealed by just one year's worth of change
B)For comparing changes in related accounts
C)For analyzing information other than that found on the balance sheet and income statement, such as supplemental information reported in annual reports
D)For comparing changes in unrelated accounts

Question 55

The following financial statement items are shown for J&T Manufacturing. Calculate the common-size percentage for gross margin.

A)0.8%
B)11.6%
C)42.8%
D)57.1%

Question 56

The formula for determining the common-size percentage for liabilities is

Question 57

In preparing a common-size income statement, you express all revenue and expense account as a percentage of

A)net income.
B)operating income.
C)gross profit.
D)net sales revenue.

Question 58

In interpreting common-size financial statements denominated in a foreign currency, a word of caution is that there may be differences in the

A)accounting principles the companies use for reporting.
B)culture of the company's stakeholders.
C)time period covered in the statements.
D)classification of balance sheet items.

Question 59

On a common-size balance sheet, notes payable is shown as a percentage of

A)total liabilities.
B)current liabilities.
C)total assets.
D)total stockholders' equity.

Question 60

Which of the following is not a use of trend analysis?

A)For revealing more information about performance than is revealed by just one year's worth of change
B)For comparing changes in related accounts
C)To measure liquidity
D)For analyzing information other that found on the balance sheet and income statement, such as supplemental information reported in annual reports

Question 61

The calculation of working capital is

A)current assets plus current liabilities.
B)current assets less current liabilities.
C)current assets times current liabilities.
D)current assets divided by current liabilities.

Question 62

The accounts receivable turnover is calculated as

Question 63

The average collection period is calculated as

Question 64

The quality of assets is assessed through

A)turnover ratios.
B)working capital.
C)current ratio.
D)profitability ratios.

Question 65

Which of the following will probably not be a result if a company's liquidity is poor?

A)Workers will quit if they are not paid on time.
B)Debt and/or equity will exceed the company's maximum allowed amount.
C)Banks may not loan the company funds.
D)Customers will seek other sources of goods when the company's product is not available.

Question 66

The average collection period reveals how many days, on average,

A)it takes between when an order is placed until the cash is collected.
B)the company takes to collect cash from a credit sale.
C)the company takes to collect past due accounts.
D)it takes between when an original contact is made to collect an account until the cash is collected.

Question 67

The current ratio is calculated as

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

Question 68

The most common measure of short-term liquidity is the

A)acid-test.
B)current ratio.
C)quick ratio.
D)working capital.

Question 69

The acid-test is calculated as

Question 70

Investigating liquidity is important because

A)if a company cannot pay its bills on time, it will have difficulty obtaining resources needed to continue operating.
B)a company needs the ability to buy long-term assets.
C)a company's price earnings ratio will decline.
D)GAAP requires that assets must exceed liabilities.

Question 71

The following financial statement items are shown for J&T Manufacturing. Calculate the common-size percentage for insurance expense.

A)3.3%
B)5.8%
C)23.3%
D)50.0%

Question 72

Because the assets included in the current ratio have different levels of liquidity that reflect different degrees of collectability, many companies use which of the following ratios to measure current liquidity?

A)Current ratio
B)Acid-test
C)Working capital
D)Return on equity

Question 73

A firm's ability to pay its obligations as they come due and to meet any unforeseen needs for cash is called

A)current ratio.
B)liquidity.
C)working capital.
D)accounts receivable turnover.

Question 74

A problem with the current and acid test ratios is that, although they provide information about liquidity, they do not indicate

A)the dollar amounts of the differences.
B)the underlying quality of the current assets.
C)all the current assets.
D)the nature of the liabilities.

Question 75

The difference between a firm's current assets and its current liabilities is

A)cash flow.
B)working capital.
C)current ratio.
D)return on Assets.

Question 76

Which of the following is not a measure of liquidity?

A)Working capital
B)Average collection period
C)Acid-test
D)Price-earnings ratio

Question 77

Which of the following ratios uses the smallest dollar value of assets?

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

Question 78

The average days to sell inventory is calculated as

Question 79

The inventory turnover is calculated as

Question 80

A more stringent measure of liquidity than the current ratio is referred to as

A)current asset turnover.
B)acid-test.
C)collectability test.
D)debt to equity ratio.