Deck 23: Financial Statement Analysis

Question 1

In 2019, net sales were $672,000 and cost of goods sold was $450,000. In 2018, 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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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%.

Question 5

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 6

Since each company is unique, comparison of the company data with industry averages is of no use in financial analysis.

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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 13

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 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

The current ratio is a measure of profitability.

Question 20

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

Question 21

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

Question 22

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 23

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

Question 24

Peterson Company has current liabilities of $210,000 and working capital of $56,000. Its current assets, therefore, must equal $266,000.

Question 25

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 26

Quick assets include cash, receivables, and inventories.

Question 27

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

Question 28

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 29

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

Question 30

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

Question 31

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 32

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

Question 33

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 34

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 35

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 36

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

Question 37

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

Question 38

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

Question 39

Liquidity is the ability of a company to pay its debts when due.

Question 40

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

Question 41

A comparison of data for the current period with the same data of the company for previous periods is called a(n)analysis.

Question 42

A company reported an expense of $30,000 for the current year which was $5,000 higher than the previous year. The percentage increase from last year to this year is .

Question 43

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

Question 44

A company reported net income of $96,000. It paid a cash dividend of $32,000 to preferred stockholders. If the company has 16,000 shares of common stock outstanding, earnings per share is .

Question 45

A vertical analysis of the income statement calculates each income statement item as a percentage of as reported on that income statement.

Question 46

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

Question 47

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

Question 48

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

Question 49

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 50

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

Question 51

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

Question 52

A company reported net income of $84,000 for 2019, and net income of $107,520 for 2020. Net income increased by percent.

Question 53

A firm had current liabilities of $90,000 on December 31, 2019, and $71,100 on December 31, 2020. Current liabilities decreased percent.

Question 54

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 55

Current assets divided by current liabilities is the .

Question 56

A firm reported total liabilities of $50,000 and total stockholders' equity of $150,000. The amount of total liabilities is percent of total assets.

Question 57

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

Question 58

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

Question 59

The current ratio is a measure of the ability of a company to pay its currently maturing debts, which is also known as .

Question 60

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

Question 61

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

Question 62

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)horizontal analysis.
C)vertical analysis.
D)trend analysis.

Question 63

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

Question 64

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

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

Question 65

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 66

The excess of current assets minus current liabilities is known as .

Question 67

A company had income of $136,000 in 2019 and $210,000 in 2020. The increase in net income from 2019 to 2020 is:

A)64.8 percent.
B)35.2 percent.
C)25 percent.
D)54.4 percent.

Question 68

Trend analysis looks at:

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

Question 69

A firm has liabilities of $72,000 and stockholders' equity of $228,000. The percentage of total liabilities to total assets is:

A)25 percent.
B)24 percent.
C)32 percent.
D)76 percent.

Question 70

A company reported net income of $120,000. It paid a cash dividend of $22,000 to preferred stockholders and a cash dividend to common shareholders of $44,000. If the company has 25,000 shares of common stock outstanding, earnings per share is .

Question 71

If liabilities are $75,000, two-thirds of which represent current liabilities, and total assets are
$500,000, what is the ratio of Stockholders' Equity to Total Equities?

A)10 percent
B)6)7 percent
C)12.5 percent
D)85 percent

Question 72

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

Question 73

Cost of goods sold divided by average inventory equals the .

Question 74

A firm had retained earnings of $130,000 in 2019 and $168,000 in 2020. The increase in retained earnings from 2019 to 2020 is:

A)29.2 percent.
B)22.6 percent.
C)38 percent.
D)129 percent.

Question 75

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

A)the amount for the same balance sheet item on a previous 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 total of the assets on the balance sheet for that date.

Question 76

If current liabilities are $90,000, long-term liabilities are $360,000, 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)75 percent

Question 77

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

Question 78

If current assets are $90,000 and total assets are $360,000, what percentage of total assets are the current assets?

A)3)5 percent
B)30 percent
C)25 percent
D)33 percent

Question 79

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

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

Question 80

If long-term liabilities are $62,000 and total assets are $480,000, what percentage of total assets are long-term liabilities?

A)4)8 percent
B)14.8 percent
C)12.9 percent
D)14.3 percent