Question 1

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. This is because the ratio indicates the company's ability to cover its interest payments with its earnings before interest and taxes. A higher ratio means that the company is earning enough to comfortably cover its interest payments, which is seen as lower risk by investors and creditors.

Question 2

According to the full disclosure principle,financial reports should present detailed information about every transaction.

Accepted Answer

Simply put,according to the full disclosure principle,financial reports should present all information that is needed to properly interpret the results of the company's business activities.This doesn't mean that every single transaction needs to be explained in detail,but rather that adequate information needs to be presented to allow financial statement users to fairly interpret reports about the company's income,financial position,and cash flows.

Question 3

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

Accepted Answer

This statement is true. Gains or losses from discontinued operations are reported separately on the income statement and are net of income tax effects. This allows investors and analysts to better understand the financial performance of a company's ongoing business operations.

Question 4

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

Accepted Answer

EPS can decrease due to an increase in the number of shares outstanding, even if net income remains the same or increases.

Question 5

Horizontal analysis involves:
A) Comparing individual financial statement line items with each other to understand the relationships between line items.
B) Comparing individual financial statement line items to some benchmark, typically similar competitors' financial statement line items.
C) Comparing individual financial statement line items over time.
D) Comparing individual financial statement line items that have been arranged horizontally from highest to lowest dollar amounts.

Accepted Answer

Horizontal analysis involves comparing individual financial statement line items over time, typically from one period to the next, in order to understand changes in those line items and their impact on the overall financial health of the company. This type of analysis can help identify trends and patterns in the company's performance and identify areas for improvement or further investigation.

Question 6

Which of the following statements is not true?
A) Horizontal analyses help financial statement users recognize changes that unfold over time.
B) Vertical analyses focus on relationships between items on the same financial statement.
C) Ratio analyses focus on relationships between items on one or more of the financial statements.
D) Horizontal analyses help financial statement users recognize changes that occur between companies.

Accepted Answer

Horizontal analyses only focus on changes that unfold over time within the same company. They do not compare changes between different companies.

Question 7

Benchmarks are required to evaluate a company's performance.

Accepted Answer

Benchmarks provide a standard against which a company's performance can be measured and evaluated.

Question 8

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

Accepted Answer

Liquidity refers to the ability of a company to pay off its current liabilities using its current assets. Therefore, it measures a company's ability to meet its current financial obligations.

Question 9

Horizontal analysis is the comparison of each financial statement amount to another amount on the same financial statement.

Accepted Answer

Horizontal analysis involves comparing results across time,often expressing changes in account balances as a percentage of prior year balances.Vertical (common size)analysis involves expressing each financial statement amount as a percentage of another amount on the same financial statement.

Question 10

The general goal of horizontal analyses is to identify significant trends.

Accepted Answer

The goal of horizontal analysis is to compare financial data over time to identify trends and changes in performance.

Question 11

Which of the following analysis techniques does not pertain to changes over time?
A) Trend analysis
B) Horizontal analysis
C) Time-series analysis
D) Vertical analysis

Accepted Answer

Vertical analysis is a technique that compares line items within a single period and expresses them as a percentage of a base figure, such as total assets or total liabilities. It does not involve changes over time. The other techniques - trend analysis, horizontal analysis, and time-series analysis - all examine changes over time.

Question 12

Trend data can be measured in dollar amounts or percentages.

Accepted Answer

Trend data can be measured in both dollar amounts and percentages. For example, a company's revenue can be tracked over time in dollar amounts or as a percentage increase or decrease from the previous year.

Question 13

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

Accepted Answer

The statement is actually the opposite of the truth. A higher accounts receivable turnover means that accounts receivable are being collected more quickly, not more slowly.

Question 14

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 resulting from changes in the value of certain balance sheet accounts, are reported below the net income line on the income statement.

Question 15

The fixed asset turnover ratio is a profitability ratio.

Accepted Answer

The fixed asset turnover ratio measures a company's ability to generate net sales from its fixed assets. It is a measure of how efficiently a company uses its fixed assets to generate revenue and is therefore considered a profitability ratio.

Question 16

The primary objective of external financial reporting is to:
A) enhance the ability of the company to acquire financial capital from external sources.
B) accurately provide financial results for tax purposes.
C) comply with external regulations and requirements of government and professional associations.
D) provide useful information to decision makers, especially investors and creditors.

Accepted Answer

The primary objective of external financial reporting is to provide useful information to decision makers, especially investors and creditors. While enhancing the ability of the company to acquire financial capital from external sources and complying with external regulations are important factors, the main focus is on providing information that helps investors and creditors make informed decisions about the company. Accurately providing financial results for tax purposes is not the primary objective of external financial reporting, as tax reporting and financial reporting may require different methods of accounting and reporting.

Question 17

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

Accepted Answer

The going-concern assumption and the continuity assumption are the same thing. They both assume that a business will continue to operate in the foreseeable future.

Question 18

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 debt-to-assets ratio of 0.63 indicates that 63% of the company's assets are financed by debt, leaving 37% financed by equity.

Question 19

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 20

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 indicates that the company is selling inventory quickly, which means they do not need to invest in as much inventory to maintain their sales. Therefore, a company with a higher inventory turnover would require a lower investment in inventory compared to a company with a lower inventory turnover.

Quiz 13: Measuring and Evaluating Financial Performance