Question 1

The current ratio determines the ability of a company to:

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay off its current liabilities with its current assets. Therefore, the correct answer is B, which states that the current ratio determines the ability of a company to pay off current payables.

Question 2

Smith Company has the following account balances:
$$\begin{array} { | l | r | } 
\hline \text { Cash } & \$ 100,000 \
\hline \text { Accounts Receivable } & 50,000 \
\hline \text { Merchandise Inventory } & 250,000 \
\hline \text { Equipment } & 400,000 \
\hline \text { Accounts Payable } & 50,000 \
\hline \text { Bonds Payable due in 10 years } & 300,000 \
\hline
\end{array}$$
Calculate Smith Company's current ratio.

Accepted Answer

The answer of Smith Company has the following account balances:
\[\begin{array}...

Question 3

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

Accepted Answer

An acid test ratio of 0.75 to 1 means that for every $1 of current liabilities, there are only $0.75 of quick assets available to pay them off. This is less than a 1 to 1 ratio, indicating that the company may have difficulty paying off all of its current liabilities with its quick assets. Therefore, option A is correct. Option B is incorrect because it is the opposite of the correct explanation. Option C is also incorrect as it has flipped the ratio.

Question 4

The ratios that measure a company's ability to earn profits are known as.

Accepted Answer

Profitability ratios are specifically designed to measure the profitability of a company by analyzing its ability to earn profits from its business operations. Examples of profitability ratios include return on assets (ROA), return on equity (ROE), and gross profit margin. Liquidity ratios measure the company's ability to meet short-term obligations, while debt management ratios measure the company's ability to manage debt and pay off long-term debt.

Question 5

The ratios that measure a company's ability to pay off short-term debt are known as:

Accepted Answer

Liquidity ratios are used to measure a company's ability to pay off short-term debt. These ratios include the current ratio, quick ratio, and cash ratio. Debt management ratios, on the other hand, measure a company's ability to manage its long-term debt obligations, while profitability ratios measure a company's ability to generate profits. Therefore, the best choice is A, which refers to Liquidity Ratios.

Question 6

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

Accepted Answer

The answer of Define two types of comparative income statements...

Question 7

The current ratio is:

Accepted Answer

The current ratio compares current assets to current liabilities, providing insight into a company's ability to pay short-term debts. It is calculated by dividing current assets by current liabilities.

Question 8

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

Accepted Answer

Common-size statements express all items in percentage terms relative to a common base figure, not the percentage of change over time. This technique is often used in financial analysis to compare companies of different sizes or to analyze changes in financial statements of a company over time.

Question 9

The current ratio for a company with current assets of $120,000,current liabilities of $50,000,total assets of $150,000,and net sales of $80,000,would be:

Accepted Answer

Current Ratio = Current Assets/Current Liabilities

Current Ratio = 120,000/50,000 = 2.4

Question 10

Common-size statements are used to compare companies of the same size.

Accepted Answer

Common-size statements are used to compare companies of different sizes by expressing financial information as a percentage of a common base such as total assets or net sales.

Question 11

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

Accepted Answer

Long-term trend analysis requires data from multiple years to identify patterns and trends over time. Using just a base year and one additional year can only provide limited insights and may not accurately reflect the overall trends in the data.

Question 12

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

Accepted Answer

In horizontal analysis, also known as trend analysis, an item is compared with the same item in other periods to identify patterns and changes over time.

Question 13

The ratios that measures a company's mix of debt and equity financing are known as:

Accepted Answer

The ratios that measure a company's mix of debt and equity financing are known as Debt Management Ratios. These ratios include Debt-To-Equity Ratio, Debt-To-Asset Ratio, and Times Interest Earned Ratio. Liquidity ratios measure a company's ability to meet short-term obligations and profitability ratios measure a company's ability to generate profits. Therefore, options A and C are not the best choices. Option D, 'None of the above' is not the best choice because Debt Management Ratios are a well-defined category of financial ratios.

Question 14

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 2003.

Accepted Answer

The fact that the accountant is using 2003 as the base year for trend analysis implies that the accountant is comparing all other years' sales to the sales in the base year. This is a common practice in financial analysis to determine the percentage change or growth over a period of time.

Question 15

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

Accepted Answer

The acid test ratio, also known as the quick ratio, considers only the most liquid assets that can be easily converted into cash, including cash, accounts receivable, and temporary investments. This ratio is a more stringent measure of a company's ability to meet its short-term obligations compared to the current ratio, which includes other assets such as inventory and prepaid expenses.

Question 16

If Rick's sales increased from $40,000 to $80,000 and its cost of goods sold increased from $25,000 to $60,000,then vertical analysis based on sales would show the following for cost of goods sold for the two periods:

Accepted Answer

To calculate the percentage of cost of goods sold based on sales, we divide the cost of goods sold by the sales and multiply by 100.

For the first period:
Cost of goods sold percentage = ($25,000 ÷ $40,000) × 100% = 62.5%

For the second period:
Cost of goods sold percentage = ($60,000 ÷ $80,000) × 100% = 75%

Therefore, the vertical analysis based on sales would show that the cost of goods sold was 62.5% of sales in the first period and 75% of sales in the second period. The best choice is B.

Question 17

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:

Accepted Answer

Vertical analysis, also known as common-size analysis, displays each item on a financial statement as a percentage of a designated base figure. This allows for easy comparison between different companies or periods of time.

Question 18

If Cara's Piano sales increased from $40,000 to $60,000 and its cost of goods sold decreased from $24,000 to $12,000,then vertical analysis based on sales would show the following for cost of goods sold (rounded to the nearest percent):

Accepted Answer

Vertical analysis calculates each item as a percentage of a base figure. Initially, cost of goods sold was $24,000 out of $40,000 sales, which is 60%. After the change, cost of goods sold is $12,000 out of $60,000 sales, which is 20%.

Question 19

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

Accepted Answer

The description given refers to vertical analysis, not horizontal analysis. In vertical analysis, each item on the income statement is expressed as a percentage of net sales, allowing for the assessment of relative size and proportion of each component. Horizontal analysis, on the other hand, involves comparing financial data over multiple periods to identify trends and growth patterns.

Question 20

If Rick's sales decreased from $90,000 (year 1)to $45,000 (year 2)and its cost of goods sold decreased from $40,000 (year 1)to $15,000 (year 2),then vertical analysis based on sales would show the following for cost of goods sold for the two periods:

Accepted Answer

To calculate the vertical analysis based on sales for cost of goods sold, we need to divide cost of goods sold by sales for both years and then multiply by 100.

For year 1: 
Cost of goods sold / Sales = 40,000 / 90,000 = 0.4444
Vertical analysis = 0.4444 x 100 = 44.44%

For year 2: 
Cost of goods sold / Sales = 15,000 / 45,000 = 0.3333 
Vertical analysis =  0.3333 x 100 = 33.33%

Therefore, the vertical analysis based on sales for cost of goods sold for the two periods are 44.44% and 33.33%. The best choice is B.

Quiz 22: Analyzing Financial Statements