Deck 9: Financial Statement Analysis

Question 1

The relationship of each asset item as a percent of total assets is an example of horizontal analysis.

Answer 1

False

Question 2

The percentage analysis of increases and decreases in corresponding items in comparative financial statements is referred to as horizontal analysis.

Answer 2

True

Question 3

A balance sheet shows cash,$75,000; marketable securities,$110,000; receivables,$90,000; and $225,000 of inventories.Current liabilities are $200,000.The current ratio is 1.375 to 1.

Answer 3

False

Question 4

The relationship of 120 to 100 can be expressed as 1.2,1.2:1,or 120%.

Question 5

Solvency analysis focuses on the ability of a business to make a profit.

Question 6

The excess of current liabilities over quick assets is referred to as working capital.

Question 7

Current position analysis indicates a company's ability to liquidate current liabilities.

Question 8

The number of days' sales in inventory is one means of expressing the relationship between net sales and accounts receivable.

Question 9

If a company has current assets totaling $56,000 and current liabilities totaling $40,500,then the company's working capital totals $15,500.

Question 10

The comparison of the financial data of a single company for two or more years is called horizontal analysis.

Question 11

The terms acid-test ratio and quick ratio refer to the same ratio which measures the instant debt-paying ability of a company.

Question 12

Using vertical analysis of the income statement,a company's net income as a percentage of net sales is 10%; therefore,the income tax expenses as a percentage of net sales must be 90%.

Question 13

"Working capital" is another term for the current ratio.

Question 14

If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year,there has been an acceleration in the collection of receivables.

Question 15

A company's assets are comprised of the following: Cash,$25,000; Receivables,$5,600; Marketable Securities,$7,200; and Equipment,$65,000.The total of quick assets is $37,800.

Question 16

If a firm has an quick ratio of 1,the subsequent payment of an account payable will cause the ratio to increase.

Question 17

The ratio of current assets to current liabilities is referred to as the acid-test ratio.

Question 18

If the current credit terms are 2/10,n/30 for Jones Inc.,an accounts receivable turnover of 3 for the current year would be considered normal.

Question 19

Statements in which all items are expressed as percentages with no dollar amounts are called common-sized statements.

Question 20

The percentage analysis of the relationship of each component in a financial statement to a total within the statement is referred as vertical analysis.

Question 21

The rate earned on total common stockholders' equity for most thriving businesses will be less than the rate earned on total assets.

Question 22

Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the general economic conditions.

Question 23

In computing the rate earned on total assets,interest expense is added to net income before dividing by average total assets.

Question 24

If a company has issued only one class of stock,the earnings per share is determined by dividing net income by the number of shares outstanding.

Question 25

Basic analytical method in which all items are expressed only in relative terms (percentages of a common base)and are often useful for comparing one company with another or for comparing a company with industry averages are:

A)horizontal analysis.
B)percentage statements.
C)profitability analysis.
D)common-sized statements.

Question 26

The percent of fixed assets to total assets is an example of:

A)vertical analysis.
B)solvency analysis.
C)profitability analysis.
D)horizontal analysis.

Question 27

The relationship of $320,000 to $200,000,expressed as a ratio,is:

A)3.0 to 2.
B)3.8 to 2.
C)3.2 to 2.
D)3.5 to 2.

Question 28

An analysis in which all the components of an income statement are expressed as a percentage of net sales is called:

A)vertical analysis.
B)horizontal analysis.
C)liquidity analysis.
D)solvency analysis.

Question 29

The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

Question 30

The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as:

A)solvency and leverage.
B)solvency and profitability.
C)solvency and liquidity.
D)solvency and equity.

Question 31

Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales,a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in the management of inventory.

Question 32

The percentage analysis of increases and decreases in related items in comparative financial statements is called:

A)vertical analysis.
B)solvency analysis.
C)profitability analysis.
D)horizontal analysis.

Question 33

What type of analysis is indicated by the following?

A)Vertical analysis
B)Horizontal analysis
C)Liquidity analysis
D)Common-size analysis

Question 34

The rate earned on total assets is one of the measures of profitability.

Question 35

Ratios and various other analytical measures are not a substitute for sound judgment,nor do they provide definitive guides for action.

Question 36

The percentage change in long-term liabilities between two balance sheet dates is an example of:

A)vertical analysis.
B)solvency analysis.
C)profitability analysis.
D)horizontal analysis.

Question 37

A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors.

Question 38

The ability of a business to earn a reasonable amount of income is referred to as the factor of:

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

Question 39

Profitability refers to the ability of the business to:

A)earn a reasonable amount of income.
B)provide owners with dividends.
C)pay its current and noncurrent liabilities.
D)manage its accounts receivable and inventory.

Question 40

The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses.

Question 41

What is Transic's current ratio for 2016?

A)2.14
B)0.88
C)0.21
D)1.49

Question 42

The ability to convert assets into cash is called .

A)Solvency
B)Profitability
C)Working capital
D)Liquidity

Question 43

For most profitable companies,the rate earned on total assets will be less than:

A)the rate earned on stockholders' equity.
B)the rate earned on total liabilities and stockholders' equity.
C)the rate earned on sales.
D)cannot be determined without more information.

Question 44

The following information is available for Morgan Corporation:

A)The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of 2015.
B)The price-earnings ratio is 5.0% and a share of common stock was selling for 5.0% more than the amount of earnings per share at the end of 2015.
C)The price-earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings per share at the end of 2015.
D)The market price per share and the earnings per share are not statistically related to each other.

Question 45

Which of the following is included in the computation of the quick ratio?

A)Net Sales
B)Working capital
C)Average daily sales
D)Accounts receivable

Question 46

Univeo Company reported the following on its income statement:

A)7 times.
B)7.7 times.
C)4.1 times.
D)4 times.

Question 47

The balance sheet and income statement for the year ended 2016 indicate the following:

A)2.6
B)3.6
C)0.7
D)2.9

Question 48

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability.As a result of this transaction,the current ratio and working capital will:

A)both decrease.
B)both increase.
C)increase and remain the same,respectively.
D)remain the same and decrease,respectively.

Question 49

Which of the following measures the liquidity position of a corporation?

A)Earnings per share
B)Inventory turnover
C)Current ratio
D)Number of times interest charges earned

Question 50

Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long- term basis?

A)Ratio of fixed assets to long-term liabilities
B)Ratio of net sales to assets
C)Number of days' sales in receivables
D)Rate earned on stockholders' equity

Question 51

What is Transic's working capital for 2016?

A)$35,000
B)$90,000
C)$125,000
D)$18,000

Question 52

Based on Washington's current ratio,which of the following statements is true regarding the company?

A)Washington's current ratio has increased,indicating that the company is in a more favorable position to obtain short-term credit than in 2015.
B)Washington's current ratio has decreased,indicating that the company is in a less favorable position to obtain short-term credit than in 2015.
C)Washington's current ratio has increased,indicating that the company is in a less favorable position to obtain short-term credit than in 2015.
D)Washington's current ratio has decreased,indicating that the company is in a more favorable position to obtain short-term credit than in 2015.

Question 53

A company with working capital of $600,000 and a current ratio of 3.25 pays a $200,000 short-term liability.The amount of working capital immediately after payment is:

A)$400,000.
B)$600,000.
C)$800,000.
D)$200,000.

Question 54

Which of the following is included in the computation of the quick ratio?

A)Prepaid rent
B)Accounts receivable
C)Inventory
D)Supplies

Question 55

An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to:

A)decrease.
B)remain the same.
C)neither increase nor decrease.
D)increase.

Question 56

Which of the following is an analysis used in assessing solvency?

A)Accounts receivable analysis
B)Fixed assets turnover
C)Earnings per share
D)P/E ratio

Question 57

The ratio of the sum of cash and other current assets that can be easily converted to cash to current liabilities is called as:

A)price-earnings ratio.
B)earnings ratio.
C)quick ratio.
D)current ratio.

Question 58

The current ratio is computed by dividing current assets by .

A)fixed assets
B)inventories
C)current liabilities
D)accounts receivable

Question 59

The number of times interest charges are earned is computed as:

A)net income plus interest expense,divided by interest expense.
B)income before income tax plus interest expense,divided by interest expense.
C)net income divided by interest expense.
D)income before income tax divided by interest expense.

Question 60

The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is sometimes referred as:

A)leverage.
B)solvency.
C)yield.
D)quick assets.

Question 61

A company reports the following:

Determine the (a) accounts receivable turnover and (b) number of days’ sales in receivables. Round your answers to one decimal place.

Question 62

Which one of the following is not a characteristic generally evaluated in ratio analysis?

A)Liquidity
B)Profitability
C)Solvency
D)Marketability

Question 63

Condensed data taken from the ledger of Crawford Company at December 31,2016 and 2015,are as follows:

Question 64

The following data are taken from the financial statements:

Question 65

Sarbanes-Oxley Act of 2002 requires which of the following report to be prepared by the management of the company?

A)A report evaluating the probability that the company will remain in business.
B)A report showing management's assessment of internal control.
C)A report assessing the market value of the company's current stock price.
D)A report identifying the competency of the company's board of directors.

Question 66

Revenue and expense data for Reuters Company are as follows:

Question 67

The independent auditor's report does which of the following?

A)Describes that the common-sized statements are covered by the audit.
B)Gives the auditor's opinion regarding the fairness of the financial statements.
C)Summarizes what the auditor did.
D)States that the financial statements are effective.

Question 68

The purpose of an audit is to:

A)determine whether or not a company is a good investment.
B)render an opinion on the fairness of the statements.
C)determine whether or not a company complies with income tax regulations.
D)determine whether or not a company has a good credit risk.

Question 69

The following items are reported on a company's balance sheet: