Deck 12: Financial Statement Analysis

Question 1

The following is an example of:

A) Vertical analysis.
B) Horizontal analysis.
C) Diagonal analysis.
D) Both vertical and horizontal analysis.

Answer 1

B

Question 2

Which of the following ratios is most useful in evaluating liquidity?

A) Return on assets.
B) Return on equity.
C) Debt to equity ratio.
D) Current ratio.

Answer 2

D

Question 3

Which of the following is a sign that a company cannot quickly turn its receivables into cash?

A) A high receivables turnover ratio.
B) A low receivables turnover ratio.
C) A low average collection period.
D) Both a high receivables turnover ratio and a low average collection period.

Answer 3

B

Question 4

Which of the following is an example of horizontal analysis?

A) Comparing COGS with sales.
B) Comparing net income across companies.
C) Comparing debt with equity.
D) Comparing the growth in sales over time.

Question 5

Which of the following ratios is most useful in evaluating solvency?

A) Debt to equity ratio.
B) Current ratio.
C) Receivables turnover ratio.
D) Inventory turnover ratio.

Question 6

The following is an example of: $$\begin{array} { | l r r | } \hline & \text { Amount } & { \% } \\\text { Cash } & \$ 300,000 & \mathbf { 6 . 0 } \\\text { Accounts receivable } & 500,000 & \mathbf { 1 0 . 0 } \\\text { Inventory } & 800,000 & \mathbf { 1 6 . 0 } \\\text { Long-term assets } & 3,400,000 & \mathbf { 6 8 . 0 } \\\text { Total assets } & \$ 5,000,000 & \mathbf { 1 0 0 . 0 } \\\hline\end{array}$$

A) Vertical analysis.
B) Horizontal analysis.
C) Diagonal analysis.
D) Both vertical and horizontal analysis.

Question 7

Horizontal analysis examines trends in a company:

A) Over time.
B) Between income statement accounts in the same year.
C) Between balance sheet accounts in the same year.
D) Between income statement and balance sheet accounts in the same year.

Question 8

Which of the following is an example of vertical analysis?

A) Comparing gross profit across companies.
B) Comparing income statement items as a percentage of sales.
C) Comparing debt with industry averages.
D) Comparing the change in sales over time.

Question 9

When using vertical analysis, we express income statement accounts as a percentage of:

A) Net income.
B) Gross profit.
C) Sales.
D) Total assets.

Question 10

Comparing operating expenses as a percentage of sales is an example of:

A) Vertical analysis.
B) Horizontal analysis.
C) Diagonal analysis.
D) Both vertical and horizontal analysis.

Question 11

The current ratio is calculated as:

A) Current assets divided by noncurrent assets.
B) Current assets divided by current liabilities.
C) Current liabilities divided by noncurrent liabilities.
D) Current liabilities divided by current assets.

Question 12

When using vertical analysis, we express balance sheet accounts as a percentage of:

A) Sales.
B) Total assets.
C) Total liabilities.
D) Total stockholders' equity.

Question 13

Comparing changes in net income for one company over time is an example of:

A) Vertical analysis.
B) Horizontal analysis.
C) Diagonal analysis.
D) Both vertical and horizontal analysis.

Question 14

Which of the following is an example of horizontal analysis?

A) Comparing gross profit across companies.
B) Comparing gross profit with operating expenses.
C) Comparing assets with equity.
D) Comparing the change in sales over time.

Question 15

Which of the following is a sign that a company can quickly turn its receivables into cash?

A) A low receivables turnover ratio.
B) A high receivables turnover ratio.
C) A high average collection period.
D) Both a low receivables turnover ratio and a high average collection period.

Question 16

Which of the following is a positive sign that a company is selling its inventory quickly?

A) A low inventory turnover ratio.
B) A high inventory turnover ratio.
C) A low average days in inventory.
D) Both a high inventory turnover ratio and a low average days in inventory.

Question 17

Which of the following is a negative sign that a company is not selling its inventory quickly?

A) A low inventory turnover ratio.
B) A high inventory turnover ratio.
C) A low average days in inventory.
D) Both a high inventory turnover ratio and a low average days in inventory.

Question 18

Which of the following is not a common type of comparison in accounting?

A) Comparisons of sales growth between companies.
B) Comparisons of earnings per share between companies.
C) Comparisons over time.
D) Comparisons to industry.

Question 19

The acid-test ratio is most similar to the:

A) Current ratio.
B) Debt to equity ratio.
C) Times interest earned ratio.
D) Inventory turnover ratio.

Question 20

Which of the following is correct?

A) Receivables turnover ratio depicts the company's frequency of cash collections.
B) Inventory turnover ratio can be used to assess the company's frequency of selling inventory.
C) Current ratio reflects the company's ability to pay current debt.
D) All of the other options are correct.

Question 21

Stealth Company's 2013 debt to equity ratio is:

A) 77.1%.
B) 80.0%.
C) 40.0%.
D) 60.0%.

Question 22

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio?

A) Increase the current ratio and increase the acid-test ratio.
B) No change to the current ratio and decrease the acid-test ratio.
C) Decrease the current ratio and decrease the acid-test ratio.
D) Increase the current ratio and decrease the acid-test ratio.

Question 23

When a company sells land for cash and makes a $25,000 gain:

A) Its acid-test ratio decreases.
B) Its current ratio decreases.
C) Its debt to equity ratio decreases.
D) Cannot determine from the given information.

Question 24

Stealth Company's 2013 average days in inventory is:

A) 60.5 days.
B) 92.2 days.
C) 100.8 days.
D) 89.7 days.

Question 25

Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio?

A) Increase the current ratio.
B) No change to the current ratio.
C) Decrease the current ratio.
D) Could either increase or decrease the current ratio.

Question 26

TPX Company's 2013 receivables turnover ratio is:

A) 5.3 times.
B) 5.6 times.
C) 5.0 times.
D) 0.2 times.

Question 27

Stealth Company's 2013 receivables turnover ratio is:

A) 2.85.
B) 4.70.
C) 5.00.
D) 10.63.

Question 28

Stealth Company's 2013 inventory turnover is:

A) 3.62 times.
B) 3.96 times.
C) 4.07 times.
D) 6.03 times.

Question 29

Which of the following is not a solvency ratio?

A) Time interest earned ratio.
B) The debt to equity ratio.
C) The current ratio.
D) All of the other options are solvency ratios.

Question 30

Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit. When it makes the purchase:

A) Its current ratio decreases.
B) Its acid-test ratio decreases.
C) Its current ratio remains unchanged.
D) Its acid-test ratio remains unchanged.

Question 31

TPX Company's 2013 average collection period is:

A) 69 days.
B) 65 days.
C) 73 days.
D) 1,825 days.

Question 32

The debt to equity ratio is:

A) 0.33.
B) 0.77.
C) 1.17.
D) 1.30.

Question 33

HHF's times interest earned ratio is:

A) 3.47.
B) 1.72.
C) 2.47.
D) 10.0.

Question 34

Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio?

A) Increase the acid-test ratio.
B) No change to the acid-test ratio.
C) Decrease the acid-test ratio.
D) Could either increase or decrease the acid-test ratio.

Question 35

HHF's debt to equity ratio is:

A) 0.75.
B) 1.13.
C) 0.38.
D) 1.80.

Question 36

Stealth Company's 2013 average collection period is:

A) 73 days.
B) 104 days.
C) 109 days.
D) 128 days.

Question 37

The acid-test ratio is:

A) 0.25.
B) 0.88.
C) 1.17.
D) 1.58.

Question 38

When a company pays a bill from a plumber for previous services on account:

A) Its debt to equity ratio decreases.
B) Its acid-test ratio always remains unchanged.
C) Its current ratio always remains unchanged.
D) All of the other options are correct.

Question 39

The current ratio is:

A) 1.98.
B) 1.58.
C) 1.17.
D) 0.66.

Question 40

The acid-test ratio is:

A) The liquidity ratio divided by the equity ratio.
B) Current assets minus inventory divided by current liabilities minus accounts payable.
C) Cash, net receivables, and current investments divided by current liabilities.
D) Cash divided by accounts payable.

Question 41

TPX Company's 2013 return on assets is:

A) 48.2%.
B) 9.3%.
C) 8.8%.
D) 9.0%.

Question 42

TPX Company's 2013 asset turnover is:

A) 3.7 times.
B) 2.8 times.
C) 2.2 times.
D) 0.5 times.

Question 43

Stealth Company's 2013 return on assets is:

A) 7.1%.
B) 7.8%.
C) 13.5%.
D) 44.7%.

Question 44

Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is:

A) 0.25 times.
B) 0.5 times.
C) 2 times.
D) 8 times.

Question 45

Stealth Company's 2013 gross profit ratio is:

A) 77.1%.
B) 80.0%.
C) 40.0%.
D) 60.0%.

Question 46

TPX Company's 2013 inventory turnover is:

A) 3.0 times.
B) 5.2 times.
C) 3.3 times.
D) 3.6 times.

Question 47

Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is:

A) 10%.
B) 20%.
C) 50%.
D) 5 times.

Question 48

TPX Company's 2013 gross profit ratio is:

A) 57.5%.
B) 36.5%.
C) 63.5%.
D) 60.0%.

Question 49

Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The profit margin is:

A) 10%.
B) 20%.
C) 50%.
D) 5 times.

Question 50

Stealth Company's 2013 profit margin is:

A) 17.1%.
B) 13.5%.
C) 7.6%.
D) 4.5%.

Question 51

Stealth Company's 2013 asset turnover is:

A) 3.7 times.
B) 2.8 times.
C) 2.2 times.
D) 0.5 times.

Question 52

TPX Company's 2013 profit margin is:

A) 18.8%.
B) 9.0%.
C) 19.4%.
D) 15.1%.

Question 53

Given the information below, what is the company's gross profit? $$\begin{array} { | l | r | } \hline \text { Sales Revenue } & \$ 320,000 \\\hline \text { Accounts Receivable } & \$ 50,000 \\\hline \text { Ending Inventory } & \$ 100,000 \\\hline \text { Cost of Goods Sold } & \$ 250,000 \\\hline \text { Sales Returns } & \$ 20,000 \\\hline\end{array}$$

A) $250,000.
B) $70,000.
C) $220,000.
D) $50,000.

Question 54

TPX Company's 2013 debt to equity ratio is:

A) 50.0%.
B) 60.0%.
C) 70.0%.
D) 80.0%.

Question 55

Stealth Company's 2013 return on equity is:

A) 17.1%.
B) 14.0%.
C) 12.6%.
D) 7.1%.

Question 56

Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The return on assets is:

A) 200%.
B) 25%.
C) 50%.
D) 12.5%.

Question 57

Return on assets equals:

A) Gross profit ratio x Inventory turnover.
B) Profit margin x Inventory turnover.
C) Gross profit ratio x Asset turnover.
D) Profit margin x Asset turnover.

Question 58

TPX Company's 2013 return on equity is:

A) 16.7%.
B) 15.0%.
C) 15.8%.
D) 21.4%.

Question 59

Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is:

A) 12.5%.
B) 25%.
C) 50%.
D) 8 times.

Question 60

TPX Company's 2013 average days in inventory is:

A) 121.7 days.
B) 70.2 days.
C) 110.6 days.
D) 101.4 days.

Question 61

We use vertical analysis for income statement accounts, but not balance sheet accounts.

Question 62

Vertical analysis expresses each item in a financial statement as a percentage of the same base amount.

Question 63

The financial statements of a firm that uses more aggressive accounting practices would be likely to report:

A) Higher profitability.
B) Higher dividends.
C) Higher liabilities.
D) Fewer total assets.

Question 64

Which of the following is NOT an example of applying conservatism in accounting?

A) Recording contingent losses that are probable.
B) Expensing all research and development costs are they are incurred.
C) Using the lower-of-cost-or-market rules for inventory accounting.
D) Increasing the useful life used in calculating depreciation.

Question 65

For vertical analysis, we express each balance sheet item as a percentage of sales.

Question 66

Which of the following items is most likely to be reported as an extraordinary loss?

A) Losses due to the write-down of inventory.
B) Losses on the sale of long-term assets.
C) Losses due to business restructuring.
D) Uninsured losses from a natural disaster.

Question 67

Which of the following is an aggressive accounting practice?

A) Change from straight-line to double-declining balance depreciation.
B) Record sales revenue before it is actually earned.
C) Adjust the allowance for uncollectible accounts to a larger amount.
D) Record inventory at lower of cost or market rather than at cost.

Question 68

Extraordinary items:

A) Include very large gains or losses from ordinary business activities.
B) Are items that are both unusual in nature and occur infrequently.
C) Are shown on the income statement before the tax effect.
D) Include the write-down of obsolete inventories.

Question 69

An extraordinary item must meet which of the following criteria?

A) Unusual in nature.
B) Infrequent in occurrence.
C) Unusual in nature and infrequent in occurrence.
D) Unusual in nature or infrequent in occurrence.

Question 70

Which of the following is an aggressive accounting practice?

A) The use of a shorter service life for depreciation.
B) Waiting to record a litigation loss.
C) Adjust the allowance for uncollectible accounts to a larger amount.
D) The write-down of overvalued inventory.

Question 71

We use vertical analysis to express each income statement item as a percentage of sales.

Question 72

Popson Inc. incurred a material loss which was not unusual in character, but was clearly an infrequent occurrence. This loss should be reported as:

A) An extraordinary loss.
B) A loss from discontinued operations.
C) Other revenues and expenses.
D) A separate line item in retained earnings.

Question 73

Which of the following is a conservative accounting practice?

A) Change from double-declining balance to straight-line depreciation.
B) Record sales revenue before it is actually earned.
C) Adjust the allowance for uncollectible accounts to a larger amount.
D) Record inventory at market rather than lower of cost or market.

Question 74

Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The asset turnover is:

A) 0.1 times.
B) 0.5 times.
C) 2 times.
D) 5 times.

Question 75

The sale or disposal of a significant component of a company's operations is referred to as:

A) A discontinued operation.
B) An extraordinary item.
C) Other revenues and expenses.
D) Gain or loss on sale of assets.

Question 76

Vertical analysis calculates the amount and percentage change of an account over time.

Question 77

Which of the following is a conservative accounting practice?

A) The use of a longer service life for depreciation.
B) Waiting to record a litigation loss.
C) Adjust the allowance for uncollectible accounts to a smaller amount.
D) The write-down of overvalued inventory.

Question 78

A discontinued operation refers to:

A) The sale or disposal of a significant component of a company's operations.
B) Discontinued inventory items.
C) Inventory items that have been completed and sold.
D) The sale of most long-term assets.

Question 79

What is the correct order to present the following items on the income statement?

A) Other revenues and expenses, income tax expense, discontinued operations, extraordinary items.
B) Other revenues and expenses, income tax expense, extraordinary items, discontinued operations.
C) Discontinued operations, extraordinary items, other revenues and expenses, income tax expense.
D) Discontinued operations, extraordinary items, income tax expense, other revenues and expenses.

Question 80

We can use ratios to help evaluate a firm's performance and financial position.