Question 1

Auditors find _____ especially useful because it reveals the relationship of each item on the income statement to a specified base.

Accepted Answer

Vertical percentage analysis, also known as common size analysis, expresses each item on the income statement as a percentage of a specified base (usually net sales or total revenue). This allows auditors to better understand the relationship between each item and the base, and to identify trends or outliers. Ratio analysis (A) involves using mathematical relationships between financial statement items, while current ratio analysis (C) focuses specifically on liquidity. Asset valuation (D) involves determining the value of a company's assets, which is not directly related to analyzing the income statement.

Question 2

You can calculate inventory turnover dividing cost of goods sold by _____.

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory during a specific period. A high inventory turnover ratio indicates that a business is efficiently managing its inventory levels by selling its goods quickly, while a low ratio could indicate overstocking or poor sales.

Question 3

What was Rebecca's gross profit margin?

Accepted Answer

The answer of What was Rebecca's gross profit margin?
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Question 4

The _____ ratio may suggest that inventory is moving quickly even though the rate of turnover is slowing.

Accepted Answer

The management efficiency ratio measures how often a company turns over its inventory in a year. A high inventory turnover ratio indicates that inventory is selling quickly, while a low ratio suggests that inventory is moving slowly. However, if a company is discounting its inventory heavily or offering promotions to sell its products faster, its inventory turnover ratio may appear high despite the actual rate of turnover being slower. This shows that the company's management efficiency may be affecting its inventory turnover ratio. Therefore, option C, management efficiency, is the best choice.

Question 5

Last year, Rebecca's Bookstore had $1 million in sales.She spent $590,000 to buy the books that she sold and paid out $300,000 in operating expenses.Interest and taxes came to $3,000.How much profit did Rebecca have for each $1.00 in sales?

Accepted Answer

The answer of Last year, Rebecca's Bookstore had $1 million...

Question 6

Examining both its debt-to-equity and interest coverage, its _____ ratios may show that a company is heading for financial trouble.

Accepted Answer

Debt-to-equity and interest coverage ratios are both indicators of a company's financial condition. A high debt-to-equity ratio indicates that a company has a high level of debt in relation to its equity, which could lead to financial trouble if the company is unable to make its debt payments. Similarly, a low interest coverage ratio suggests that a company may struggle to make its interest payments on its debt, potentially leading to default and financial trouble.

Question 7

A company can assess its financial strengths by analyzing its _____ ratios.

Accepted Answer

Financial ratios provide insight into a company's financial condition by measuring its liquidity, solvency, and profitability. These ratios include liquidity ratios (such as current ratio and quick ratio), solvency ratios (such as debt-to-equity ratio and interest coverage ratio), and profitability ratios (such as return on investment and gross profit margin). By analyzing these ratios, a company can determine its financial strengths and weaknesses and make strategic decisions accordingly.

Question 8

_____ activities create cash inflows or outflows through the selling or buying of long-term assets.

Accepted Answer

Investing activities involve the purchase and sale of long-term assets such as property, equipment, and investments. These activities result in cash inflows or outflows, depending on whether the assets are sold or purchased.

Question 9

To determine a company's interest coverage, you divide its operating income by its _____.

Accepted Answer

Interest coverage ratio is calculated by dividing operating income by interest expense.

Question 10

Its _____ ratio examines the relationship between funds acquired from creditors and funds invested by owners.

Accepted Answer

The debt-to-equity ratio measures the proportion of funds provided by creditors and owners. It compares the amount of long-term debt to the amount of owners' equity, therefore examining the relationship between funds acquired from creditors and funds invested by owners. A is incorrect because current ratio examines the relationship between current assets and current liabilities. B and D are incorrect because there is no such thing as a "top to bottom" or "temporary" ratio.

Question 11

Its _____ ratio indicates that a company is making a reasonable profit on its sales even though its profitability is declining.

Accepted Answer

The profit margin ratio measures the percentage of each sales dollar that represents a company’s profit. A declining profitability may be concerning, however, if the profit margin is still reasonable, it indicates that the company is still making a profit on its sales. Therefore, the best choice is D) profit margin.

Question 12

Its _____ measures the number of times that a firm's operating income can cover its interest expense.

Accepted Answer

Interest coverage ratio measures the ability of a company to pay its interest expenses on outstanding debt. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expense.

Question 13

To calculate a firm's current ratio, you divide its current assets divided by its _____.

Accepted Answer

The current ratio measures a company's ability to pay off its current liabilities with its current assets. Therefore, to calculate the current ratio, you need to divide the current assets by the current liabilities. Choice D is the correct answer.

Question 14

Its _____ ratio may tell us that a company generated an excellent return on assets in its first year and a good return in its second year.

Accepted Answer

The management effectiveness ratio is used to evaluate how effectively a company's management team generates returns on assets or equity. This ratio can indicate how well the company is using its assets to generate profits, which aligns with the context given in the question.

Question 15

The principle of _____ explains that a company makes money when it sells inventory and that the faster it sells it, the more money it makes.

Accepted Answer

The principle being described is the concept of inventory turnover, which refers to the rate at which a company sells its inventory. The faster the company sells its inventory, the higher its inventory turnover rate and the greater its profitability.

Question 16

To find out the relationship between assets that can be converted to cash within a year and liabilities that will be paid within a year, you can look up Zanzibar Corp.'s _____ ratio in its annual report.

Accepted Answer

The ratio that describes the relationship between assets that can be converted to cash within a year and liabilities that will be paid within a year is the current ratio. This ratio is commonly found in the current assets and liabilities section of a company's balance sheet and is a measure of a company's short-term liquidity. Therefore, the best choice to find out the relationship between these two elements is the current ratio.

Question 17

The _____ ratio shows how much of each sales dollar is left after certain costs have been covered.

Accepted Answer

The profit margin ratio measures how much profit a company makes on each dollar of sales after accounting for certain expenses such as cost of goods sold, operating expenses, and taxes. It is a key measure of a company's financial performance and its ability to generate earnings for shareholders.

Question 18

A firm can measure its overall performance and find out how successfully it's being run by analyzing its _____ ratio.

Accepted Answer

The answer of A firm can measure its overall performance...

Question 19

Its debt-to-equity ratio examines the risk entailed by a company's _____.

Accepted Answer

The debt-to-equity ratio is a financial ratio that compares a company's total debt to total equity. It gives investors an idea of the company's financial leverage and risk involved in its capital structure. The debt structure and stock portfolio are not considered in this ratio, and the owner's equity is already included in the calculation.

Question 20

_____ is the same thing as the item called net profit on an income statement.

Accepted Answer

The bottom line refers to the net income or net profit on an income statement, which is the total revenue minus all expenses. Gross margin is the difference between revenue and cost of goods sold, while net worth is the total value of assets minus liabilities. Therefore, the correct choice is C, the bottom line.

Quiz 12: The Role of Accounting in Business