Question 1

The going-concern assumption is also known as the continuity assumption.

Accepted Answer

The going-concern assumption and continuity assumption are two different names for the same accounting principle, which assumes that an entity will continue to operate in the foreseeable future.

Question 2

The higher the accounts receivable turnover, the slower the accounts receivable are being collected.

Accepted Answer

The higher the accounts receivable turnover, the faster the accounts receivable are being collected.

Question 3

The fixed asset turnover ratio is a measure of the efficiency of a company.

Accepted Answer

The fixed asset turnover ratio is calculated by dividing net sales by average fixed assets. This ratio measures how efficiently a company is using its fixed assets (such as buildings, land, equipment) to generate revenue. A higher ratio indicates that the company is generating more revenue per dollar invested in fixed assets, which is a sign of good efficiency. Therefore, the statement "the fixed asset turnover ratio is a measure of the efficiency of a company" is true.

Question 4

If EPS (earnings per share) decreases, it must mean that the company's net income has fallen.

Accepted Answer

A decrease in EPS can also result from an increase in the number of shares outstanding, not just a fall in net income.

Question 5

Gains or losses from discontinued operations are reported on a separate line on the income statement net of income tax effects.

Accepted Answer

Gains or losses from discontinued operations are reported on a separate line on the income statement net of income tax effects as per generally accepted accounting principles (GAAP).

Question 6

Special items such as gains or losses relating to changes in the value of certain balance sheet accounts are reported below the net income line on the income statement.

Accepted Answer

Special items such as gains or losses relating to changes in the value of certain balance sheet accounts, such as investments or long-term assets, are reported below the net income line on the income statement, often labeled as "other income" or "other expense."

Question 7

Liquidity measures the ability of a company to meet its current financial obligations.

Accepted Answer

Liquidity refers to a company's ability to pay its short-term debts and financial obligations as they come due. It is an important measure of a company's financial health.

Question 8

Horizontal analysis is the comparison of a company's financial information to a base amount.

Accepted Answer

The answer of Horizontal analysis is the comparison of a...

Question 9

To evaluate a company's performance, standards of comparison are required.

Accepted Answer

The answer of To evaluate a company's performance, standards of...

Question 10

The capital acquisitions ratio is a measure of liquidity.

Accepted Answer

The capital acquisitions ratio is a measure of financial leverage, not liquidity. It calculates the extent to which assets are acquired through debt financing.

Question 11

In general, P/E ratios are fairly consistent across industries, regardless of the goods or services sold.

Accepted Answer

While P/E ratios can provide insight into a company's stock valuation, they can vary widely across industries. Different industries often have different growth rates, profit margins, and risks associated with them, which can all impact the P/E ratio. As a result, it's important to compare a company's P/E ratio to others within its own industry, rather than across industries.

Question 12

Limits on the application of accounting principles include the cost-benefit constraint.

Accepted Answer

The cost-benefit constraint requires that the benefits of providing accounting information should outweigh the costs of providing that information. Therefore, if the costs of applying accounting principles are too high, they may not be applied.

Question 13

If the debt-to-assets ratio is 0.63, it means that 37% of the company's financing has been provided by stockholders' equity.

Accepted Answer

The answer of If the debt-to-assets ratio is 0.63, it...

Question 14

Trend data can be measured in dollar amounts or percentages.

Accepted Answer

Trend data show changes over time.These changes can be measured in dollars or in percentages.

Question 15

A company with a high inventory turnover requires a larger investment in inventory than another company of similar sales with a lower inventory turnover.

Accepted Answer

A high inventory turnover means that the company is selling and replenishing their inventory quickly, which requires a smaller investment in inventory. A lower inventory turnover indicates slow-selling inventory, which requires a larger investment in inventory. Therefore, a company with a lower inventory turnover requires a larger investment in inventory than another company of similar sales with a higher inventory turnover.

Question 16

Vertical analysis is the comparison of a company's financial information over time.

Accepted Answer

Vertical (common size)analysis involves expressing each financial statement amount as a percentage of another amount on the same financial statement.

Question 17

The asset turnover ratio is a profitability ratio.

Accepted Answer

The answer of The asset turnover ratio is a profitability...

Question 18

Common size financial statements are not useful in analyzing companies of different size.

Accepted Answer

Common size financial statements are useful in analyzing companies of different sizes because they allow for the comparison of the relative proportions of different line items regardless of the company's overall size.

Question 19

The higher the times interest earned ratio, the greater the risk of nonpayment of interest.

Accepted Answer

The higher the times interest earned ratio, the lower the risk of nonpayment of interest.

Question 20

Trend analysis is a form of horizontal analysis.

Accepted Answer

Trend analysis compares data from different time periods to identify any patterns or trends. It is a type of horizontal analysis, which focuses on the comparison of financial data across the same period of time, such as comparing the revenues of a company in the last quarter to the revenues in the previous quarter.

Quiz 13: Measuring and Evaluating Financial Performance