Deck 22: Analyzing Financial Statements

Question 1

The sales of Mary's Services for Years 1, 2, and 3 are $25,000, $45,000, $60,000, respectively. The trend percentage for Year 3 is:

A)42%.
B)240%.
C)140%.
D)58%.

Answer 1

B

Question 2

For vertical analysis purposes, a base item on a balance sheet is:

A)total assets.
B)total equity.
C)total liabilities.
D)net equity.

Answer 2

A

Question 3

A statement comparing data from two or more consecutive periods is called a:

A)comparative balance sheet.
B)comparative income statement.
C)common-size statement.
D)both A and B.

Answer 3

D

Question 4

In a common-size income statement, selling expenses are 55%. This means that they are 55% of:

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

Question 5

For trend analysis to work correctly, the accountant uses the:

A)beginning percentage.
B)base year.
C)common-size statement.
D)horizontal analysis.

Question 6

If total assets are $6,000, what is the vertical analysis for Cash when it has a balance of $2,400?

A)40%
B)60%
C)250%
D)25%

Question 7

To find the percent of increase or decrease of an item in a comparative balance sheet you use the formula: % change = amount of change/base (old year).

Question 8

Comparative reports in which each item is expressed as a percentage of a base amount without dollar amounts are called:

A)comparative financial statements.
B)common-size statements.
C)cash flow analysis.
D)horizontal analysis.

Question 9

A common-size comparative statement shows:

A)percents.
B)dollar increases/decreases.
C)whole dollar amounts.
D)None of the above.

Question 10

What was the percentage of decrease in the Accounts Receivable account if the receivables were $80,000 in Year 1, and $60,000 in Year 2?

A)(25%)
B)33.33%
C)(33.33%)
D)25%

Question 11

If Cash is $2,345 in 20X2 and $3,671 in 20X1, what is the percent of increase or (decrease)from 20X1 to 20X2?

A)56.55%
B)(56.55%)
C)36.12%
D)(36.12%)

Question 12

An expression of the amount of each item in a statement shown as a percentage of some designated total for purposes of comparison is called:

A)horizontal analysis.
B)earnings per share analysis.
C)return on total assets.
D)vertical analysis.

Question 13

If Cara's Piano sales increased from $40,000 to $60,000 and its cost of goods sold increased from $20,000 to $40,000, then vertical analysis based on sales would show the following for cost of goods sold (rounded to the nearest percent):

A)40% and 20%.
B)10% and 30%.
C)50% and 67%.
D)67% and 40%.

Question 14

Which analysis deals with the percentage of changes in certain items over several years?

A)Vertical analysis
B)Ratio analysis
C)Trend analysis
D)Common-size statement

Question 15

If current assets were $100,000 in 20x7 and $88,000 in 20x8, what was the amount of increase or decrease? (round to nearest percent):

A)The percentage increase is 13.64%.
B)The percentage decrease is 12%.
C)The percentage decrease is 13.64%.
D)The percentage increase is 12%.

Question 16

For vertical analysis purposes, the base item on an income statement is:

A)net income.
B)net sales.
C)total expenses.
D)total sales.

Question 17

In a comparative balance sheet, the ending Cash for 2012 was $315,000 and is $270,000 for 2013. The net increase or decrease from 2012 to 2013 is:

A)86.0%.
B)14.3%.
C)26.4%.
D)16.7%.

Question 18

The revenue of Carol's Environmental Services for Years 1, 2, and 3 are $40,000, $60,000 and $80,000, respectively. Year 1 is the base year. The trend percentage for Year 2 is:

A)50%.
B)150%.
C)200%.
D)133%.

Question 19

Net income was $45,000 in Year 1 and $60,000 in Year 2. The percentage increase in net income was:

A)33.33%.
B)133.33%.
C)(25%).
D)(33.33).

Question 20

Statements that are often used to compare similar businesses are called:

A)comparative analysis.
B)vertical analysis.
C)horizontal analysis.
D)common-size statements.

Question 21

Complete the horizontal analysis of Soopy's Used Cars. (Round all percentages to the nearest tenth of a percent.)
Total Liabilities and

Question 22

A type of analysis that compares each item with the same item in other periods is called horizontal analysis.

Question 23

The current ratio determines the ability of a company to:

A)pay off all payables.
B)pay off current payables.
C)manage its ability to earn profit.
D)use its equity.

Question 24

Meranda Flower Corporation needs to develop a trend analysis for its sales and gross profit for the past three years to make decisions for the future. Compute the trend percentages with the information below and place your answers in the spaces provided.

Question 25

The current ratio is:

A)quick assets divided by current liabilities.
B)assets divided by liabilities.
C)current assets divided by current liabilities.
D)net sales divided by current liabilities.

Question 26

Define two types of comparative income statements and compare the information provided by them.

Question 27

If Rick's sales increased from $40,000 to $80,000 and its cost of goods sold increased from $30,000 to $50,000, then vertical analysis based on sales would show the following for cost of goods sold for the two periods:

A)75% and 62.5%.
B)62.5% and 75%
C)133.33% and 160%
D)160% and 133.33%.

Question 28

From the following balance sheet for Bricks Corporation, compute the common-size balance sheet amounts. (Round all percentages to nearest tenth of a percent.)
Total Liabilities and

Question 29

The current ratio for a company with current assets of $70,000, current liabilities of $50,000, total assets of $150,000, and net sales of $80,000, would be:

A)1.4.
B)0.714.
C)3.0.
D)0.875.

Question 30

Profitability ratios measure:

A)a company's ability to earn profits.
B)a company's ability to meet short-term obligations.
C)how well a company is using debt versus equity.
D)how effectively a company is using its assets.

Question 31

Common-size statements deal with the percentage of change in a certain item over several years.

Question 32

A form of analysis in which each item on a report is shown as a percent of net sales is called a vertical analysis of the income statement.

Question 33

From the following, complete the common-size income statement for Isaiah's Sporting Goods using net sales as the base. (Round to nearest tenth of a percent.)

Question 34

Using just a base year and one additional year is not sufficient to do a long-term trend analysis of accounts.

Question 35

Liquidity ratios measure:

A)how effectively a company is using its equity.
B)how effectively a company is using its liabilities.
C)a company's ability to pay shareholders.
D)a company's ability to pay off short-term debts.

Question 36

If Rick's sales decreased from $90,000 (year 1)to $45,000 (year 2)and its cost of goods sold decreased from $30,000 (year 1)to $20,000 (year 2), then vertical analysis based on sales would show the following decreases for cost of goods sold for the two periods:

A)33.33% and 44.44%.
B)44.44% and 33.33%.
C)300% and 225%.
D)None of the above.

Question 37

Debt management ratios measure:

A)how effectively a company is using its cash.
B)how well a company is using debt versus equity position.
C)a company's ability to earn profit.
D)a company's ability to meet payable obligations.

Question 38

Common-size statements are used to compare companies of different sizes.

Question 39

An accountant is completing a trend analysis for a company by comparing sales for years 2003 through 2013. The base year for the calculations is 2013.

Question 40

Complete the following horizontal analysis comparative income statements of Websters Corporation.
Expenses:

Question 41

An acid test (quick)ratio of 0.75 to 1 would indicate:

A)a ratio that would not allow a company to pay off all current liabilities with quick assets.
B)for every $1 of short-term debt there is $0.75 of quick assets to meet short-term obligations.
C)for every $1 of current assets there is $0.75 of short-term debt.
D)Both A and B are correct.

Question 42

With a beginning Accounts Receivable balance of $70,000, an ending balance of $140,000, and net credit sales of $800,000, compute accounts receivable turnover ratio (rounded to the nearest tenth):

A)7.6.
B)11.4.
C)5.7.
D)3.8.

Question 43

If management wishes to know the ability to pay off the upcoming debts of a business, they could use the:

A)debt to total assets.
B)current ratio
C)inventory turnover ratio.
D)times interest earned.

Question 44

If beginning and ending inventories are $20,000 and $30,000, respectively, and cost of goods sold is $400,000, what is the inventory turnover ratio?

A)18
B)16
C)15.5
D)15

Question 45

If management wishes to determine the average degree of delinquency of the charge customers, they could use the:

A)rate of return on total assets.
B)rate of return on common stockholders' equity.
C)accounts receivable turnover.
D)quick (acid test)ratio.

Question 46

The inventory turnover ratio calculates:

A)how many times the inventory turns over in one period.
B)number of times inventory is purchased in one period.
C)the dollar amount of change in inventory in one period.
D)None of these answers are correct.

Question 47

With a beginning Accounts Receivable balance of $20,000, an ending balance of $26,000, and net credit sales of $408,000, compute accounts receivable turnover ratio.

A)0.05
B)20.4
C)17.7
D)68

Question 48

If management wishes to evaluate the ability of a business to provide funding to cover the operating expenses, they could use the:

A)rate of return on total assets.
B)rate of return on common stockholders' equity.
C)gross profit rate.
D)times interest earned.

Question 49

Which statement below best describes the quick (acid test)ratio?

A)The acid test ratio considers only the most liquid assets: cash, accounts receivable, and temporary investments.
B)The current ratio includes only the assets most easily converted into cash.
C)The acid test adds merchandise inventory and prepaid expenses in the computation of current assets.
D)None of these answers are correct.

Question 50

If management wishes to evaluate how effectively the assets of a business are being used, they could use the:

A)asset turnover.
B)rate of return on common stockholders' equity.
C)acid test ratio.
D)debt to total stockholders' equity.

Question 51

Carla's Fashions has an average collection period of 30 days. You could infer that Carla's Fashions:

A)bills her customers monthly.
B)bills her customers quarterly.
C)has an accounts receivable turnover of approximately 12.
D)Both A and C can be inferred.

Question 52

If the average collection period is 35 days, this means:

A)from the date of purchase to the date of payment is 35 days.
B)from the date of sale to the date of receipt of payment is 35 days.
C)from the date of discount to the date of receipt of payment is 35 days.
D)None of these answers are correct.

Question 53

A company has $56,000 in cash, $12,000 in accounts receivable, $25,000 in temporary investments and $100,000 in merchandise inventory. The company has $60,000 in current liabilities. The company's acid test (quick)ratio is:

A)3.217.
B)1.550.
C)1.133.
D)0.933.

Question 54

The ratio that indicates how many days it takes to turn accounts receivable into cash is the:

A)accounts receivable turnover ratio.
B)average turnover ratio.
C)average collection period.
D)quick assets turnover ratio.

Question 55

If management wishes to evaluate the amount of assets which were financed by creditors, they could use the:

A)debt to total assets.
B)rate of return on common stockholders' equity.
C)debt to total liabilities.
D)times interest earned.

Question 56

If management wishes to know how long it takes to collect from a charge customer, they could use the:

A)rate of return on total assets.
B)average collection period.
C)acid test ratio.
D)current ratio.

Question 57

Chuck Company has a beginning Accounts Receivable balance of $65,000 and an ending balance of $60,000. Net credit sales are $250,000. The company's accounts receivable turnover ratio is:

A)3.846.
B)4.167.
C)4.000.
D)None of the above.

Question 58

If beginning and ending inventories are $100,000 and 150,000, respectively, and the cost of goods sold is $450,000, what is the inventory turnover ratio?

A)4.50
B)3.00
C)3.60
D)0.28

Question 59

If management wishes to measure how effectively the assets were used in generating a profit, they could use the:

A)rate of return on total assets.
B)rate of return on common stockholders' equity.
C)return on sales.
D)times interest earned.

Question 60

Smith Company has the following account balances: Calculate Smith Company's current ratio.

A)8.0:1
B)7.6:1
C)2.2:
D)1.1:

Question 61

The ratio that indicates the amount of assets that are financed by creditors is:

A)debt to stockholders' equity.
B)debt to total retained earnings ratio.
C)rate of return on common stockholders' equity.
D)None of the above.

Question 62

Saxon Corporation's beginning inventory was $30,000. The cost of goods sold was $350,000 for the year, with an ending inventory of $40,000. Inventory turnover for the year is:

A)20 times.
B)10 times.
C)11.67 times.
D)8.75 times.

Question 63

Scott Company had a current ratio of 2.76:1 in Year 1 and 2.57:1 in Year 2. This change in current ratio indicates:

A)the company's debt paying ability has improved.
B)the company's debt paying ability has weakened.
C)the company's customers are paying their accounts sooner.
D)the company is able to sell its inventory faster.

Question 64

If current assets are $75,000 and current liabilities are $15,000, the current ratio is:

A)5:1.
B)0.2:1.
C)0.5:1.
D)None of the above.

Question 65

Asset management ratios measure:

A)a company's ability to earn a profit.
B)a company's ability to meet short-term obligations.
C)how well a company is using debt versus equity.
D)how effectively a company is using its assets.

Question 66

Accounts receivable on January 1 was $30,000 and, at the end of the year it was $50,000. Net credit sales were $200,000. Accounts receivable turnover is:

A)2.5 times.
B)4 times.
C)5 times.
D)6.67 times.

Question 67

The ratio that measures the productivity of total assets used is the:

A)rate of return on total assets.
B)return on sales.
C)Inventory turnover.
D)rate of return on common stockholders' equity.

Question 68

What is the inventory turnover if the beginning inventory was $60,000, cost of goods sold was $200,000, and ending inventory was $45,000?

A)8.8 times
B)6.7 times
C)3.8 times
D)None of the above

Question 69

Which of the following ratios helps evaluate how well a company is earning profit for the common stockholders?

A)Times interest earned ratio
B)Return on sales ratio
C)Return on total assets
D)Rate of return on common stockholders' equity

Question 70

If management wishes to know how well the inventory is moving for a business, they could use the:

A)accounts receivable turnover.
B)inventory turnover.
C)acid test ratio.
D)current ratio.

Question 71

Compute the gross profit rate when net sales are $350,000 and gross profits are $178,500.

A)51:10
B)54%
C)51%
D)54:10

Question 72

The lower the times interest earned ratio, the more likely:

A)a default in payment will occur.
B)a business needs to borrow money.
C)a business will suffer a loss.
D)interest payments can be made.

Question 73

Which of the following ratios measures the earnings of a company on each sales dollar?

A)Return on assets
B)Return on sales
C)Return on inventory
D)Return on stockholders' equity

Question 74

If current assets are $60,000 and current liabilities are $50,000, the current ratio is:

A)0.8:1.
B)8.3:1.
C)2.1:1.
D)1.2:1

Question 75

The ratio that indicates how much profit is generated from each sales dollar to cover general and selling expenses is:

A)gross profit rate.
B)return on sales.
C)rate of return on total assets.
D)rate of return on common stockholders' equity.

Question 76

If management wishes to measure a business's ability to pay upcoming debts, they could refer to measures for:

A)leverage.
B)liquidity.
C)debt management.
D)profitability.

Question 77

Noble Company's accounts receivable turnover was 18.2 in Year 1 and 24.6 in Year 2. This change in accounts receivable turnover indicates:

A)the company is not selling its inventory as fast.
B)the company is selling its inventory faster.
C)the company's customers are paying faster.
D)the company's customers are paying slower.

Question 78

Interest expense was $10,000, income tax expense $20,000, and net income after taxes is $60,000. The number of times interest was earned is:

A)9 times.
B)8 times.
C)7 times.
D)6 times.

Question 79

The debt in relation to the risk taken by stockholders is measured by:

A)debt to stockholders' equity.
B)gross profit ratio.
C)rate of return to stockholders.
D)None of these answers are correct.

Question 80

Compute the gross profit rate when sales are $400,000; net sales are $380,000 and gross profits are $125,000.

A)31.25%
B)32.89%
C)0.3125 to 1
D)0.3289 to 1