Deck 9: Financial Statement Analysis

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

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.

Question 5

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

Question 6

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

Question 7

Statements in which all items are expressed in relative terms are called common-size statements.

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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 17

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 18

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

Question 19

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

Question 20

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

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

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

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

Question 23

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 24

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)common-size analysis.

Question 25

Statements in which all items are expressed only in relative terms (percentages of a common base)are

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

Question 26

The relationship of $225,000 to $100,000,expressed as a ratio,is

A)2.0 to 1.
B)1.8 to 1.
C)1.5 to 1.
D)2.25 to 1.

Question 27

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 28

The percentage of 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 29

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

Question 30

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

Question 31

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 32

What type of analysis is indicated by the following?
Increase (Decrease*)
2011
2010
Amount
Percent
Current assets
$ 380,000
$ 500,000
$(120,000*)
(24%)*
Fixed assets
1,680,000
1,500,000
180,000
12%

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

Question 33

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 34

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

Question 35

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

Question 36

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 37

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 38

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

Question 39

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

Question 40

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 41

Based on the following data for the current year,what is the number of days' sales in accounts receivable?

A)12.5
B)14.17
C)25.76
D)15.8

Question 42

Based on the following data for the current year,what is the accounts receivable turnover?

A)13.14
B)11.7
C)10.35
D)8.3

Question 43

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 2010.
B)Washington's current ratio has decreased,indicating that the company is in a less favorable position to obtain short-term credit than in 2010.
C)Washington's current ratio has increased,indicating that the company is in a less favorable position to obtain short-term credit than in 2010.
D)Washington's current ratio has decreased,indicating that the company is in a more favorable position to obtain short-term credit than in 2010.

Question 44

Which of the following is a measure of the liquid position of a corporation?

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

Question 45

The ratio of the sum of cash,receivables,and marketable securities to current liabilities is called the

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

Question 46

Based on the following data for the current year,what is the inventory turnover?

A)7.2
B)3.6
C)3.2
D)4.2

Question 47

Which of the following is NOT an analysis used in assessing solvency?

A)Number of times interest charges are earned
B)Current position analysis
C)Ratio of net sales to assets
D)Inventory analysis

Question 48

Based on the following data for the current year,what is the inventory turnover?

A)3.0
B)2.7
C)4.0
D)3.3

Question 49

Based on the following data for the current year,what is the accounts receivable turnover?

A)12.5
B)14.3
C)11.1
D)7.5

Question 50

Based on the following data for the current year,what is the number of days' sales in accounts receivable?

A)7.5
B)18.25
C)16.0
D)20.5

Question 51

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 52

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

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

Question 53

Which of the following is NOT an analysis used in assessing solvency?

A)Inventory analysis
B)Number of times interest charges are earned
C)Asset turnover
D)Accounts receivable analysis

Question 54

Washington Corporation has the following financial data for 2011 and 2010.

What is Washington's working capital for 2011?

A)$6,000
B)$19,000
C)$0
D)$120,000

Question 55

Which of the following is NOT included in the computation of the quick ratio?

A)Inventory
B)Marketable securities
C)Accounts receivable
D)Cash

Question 56

Thomson Company reported the following on its income statement:

An analysis of the income statement revealed that interest expense was $40,000.Thomson Company's number of times interest charges are earned was

A)8 times.
B)7.5 times.
C)9.5 times.
D)11.5 times.

Question 57

Washington Corporation has the following financial data for 2011 and 2010.

What is Washington's current ratio for 2011?

A)1.08
B).79
C)1.27
D)1.50

Question 58

Balance sheet and income statement data indicate the following:

Based on the data presented above,what is the number of times interest charges were earned (rounded to one decimal place)?

A)3.5
B)2.2
C)4.0
D)The answer cannot be determined.

Question 59

A company with working capital of $500,000 and a current ratio of 2.25 pays a $100,000 short-term liability.The amount of working capital immediately after payment is

A)$600,000.
B)$400,000.
C)$500,000.
D)$100,000.

Question 60

The ratio computed by dividing current assets by current liabilities is the

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

Question 61

The balance sheets at the end of each of the first two years of operations indicate the following:

If net income is $130,000 and interest expense is $40,000 for 2011,and the market price is $40,what is the price-earnings ratio on common stock (rounded to one decimal place)?

A)14.9
B)18.4
C)17.3
D)19.8

Question 62

The balance sheets at the end of each of the first two years of operations indicate the following:

If net income is $130,000 and interest expense is $40,000 for 2011,what is the rate earned on common stockholders' equity for 2011 (rounded to one decimal place)?

A)12.3%
B)14.0%
C)13.0%
D)17.4%

Question 63

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

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

Question 64

The balance sheets at the end of each of the first two years of operations indicate the following:

If net income is $130,000 and interest expense is $40,000 for 2011,what is the rate earned on stockholders' equity for 2011 (rounded to one decimal place)?

A)12.0%
B)12.7%
C)13.2%
D)16.5%

Question 65

Which additional report is required of independent auditors since the passage of the Sarbanes-Oxley Act in 2002?

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

Question 66

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

A)decrease.
B)remain the same.
C)either increase or decrease.
D)increase.

Question 67

Based on the following data,what is the quick ratio,rounded to one decimal place?

A)3.2
B)2.1
C)1.9
D)1.4

Question 68

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 69

Based on the following data for the current year,what is the number of days' sales in inventory (rounded to the nearest whole day)?

A)58
B)48
C)53
D)30

Question 70

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

A)Describes which financial 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 truthful

Question 71

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 is a good credit risk.

Question 72

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

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

Question 73

Revenue and expense data for Reuters Company are as follows:

Question 74

Based on the following data,what is the amount of quick assets?

A)$228,000
B)$188,000
C)$116,000
D)$114,000

Question 75

Based on the following data,what is the amount of working capital?

A)$190,000
B)$134,000
C)$118,000
D)$62,000

Question 76

The following information is available for Morgan Corp.:

Which of the following statements is correct?

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 2010.
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 2010.
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 2010.
D)The market price per share and the earnings per share are not statistically related to each other.

Question 77

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 78

Condensed data taken from the ledger of Crawford Company at December 31,2011 and 2010,are as follows:

Prepare a comparative balance sheet,with horizontal analysis,for December 31,2011 and 2010.(Round percents to one decimal place. )

Question 79

The balance sheets at the end of each of the first two years of operations indicate the following:

If net income is $130,000 and interest expense is $40,000 for 2011,what are the earnings per share on common stock for 2011 (rounded to two decimal places)?

A)$2.17
B)$2.68
C)$2.02
D)$2.32

Question 80

The number of times interest charges are earned is computed as

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