Question 1

Which of the following would improve a current ratio that is now 1.2?
A) Selling long-term assets for cash
B) Purchasing land for cash
C) Buying equipment in exchange for a two-year note
D) Purchasing inventory on account

Accepted Answer

Selling long-term assets for cash would increase the current assets of the company, resulting in an increase in the numerator of the current ratio without affecting the denominator. This would lead to an improvement in the current ratio.

Choice B (Purchasing land for cash) would not have any immediate impact on the current assets or liabilities of the company and hence would not affect the current ratio.

Choice C (Buying equipment in exchange for a two-year note) would increase the fixed assets of the company and result in an increase in the numerator of the current ratio. However, it would also increase the current liabilities of the company (in the form of the two-year note payable), resulting in an increase in the denominator of the current ratio. The net effect on the current ratio would depend on the magnitude of the increase in current liabilities.

Choice D (Purchasing inventory on account) would increase the current assets of the company but also increase its current liabilities (in the form of accounts payable). This would lead to a minimal change in the current ratio.

Question 2

The conceptual framework for financial accounting and reporting consists of which three main components?
A) Goals, Concepts, and Exceptions.
B) Objective, Codes, and Guidelines.
C) Objective, Elements, and Concepts.
D) Concepts, Principles, and Practices.

Accepted Answer

The three main components of the conceptual framework for financial accounting and reporting are objective, elements, and concepts. The objective is to provide financial information that is useful to users for decision-making purposes. The elements of financial statements include assets, liabilities, equity, income, and expenses, while the concepts include reliability, relevance, comparability, and understandability. Choice A is incorrect as there are no exceptions in the conceptual framework. Choice B is incorrect as there are no specific codes or guidelines in the framework. Choice D is incorrect as it includes "practices," which is not a main component of the framework.

Question 3

Company A has a receivables turnover of 8.0.Company B has a receivables turnover of 10.0.Which of the following statements is correct?
A) Company A collects its receivables faster than Company B.
B) Company B collects its receivables faster than Company A.
C) Company A makes more sales on account than Company B.
D) Company B makes more sales on account than Company A.

Accepted Answer

Receivables turnover indicates how quickly a company collects its accounts receivable. A higher turnover ratio indicates that a company is collecting its accounts receivable more frequently throughout the year. Therefore, Company B with a higher turnover ratio of 10.0 collects its receivables faster than Company A with a ratio of 8.0, making option B the correct choice. Options C and D cannot be inferred from the given information.

Question 4

The ratio that measures the company's ability to meet required interest payments is the:
A) debt-to-equity ratio.
B) current ratio.
C) Price/Earnings ratio.
D) times interest earned ratio.

Accepted Answer

The times interest earned ratio measures the company's ability to meet required interest payments by comparing earnings before interest and taxes (EBIT) to the interest expense. This ratio indicates the extent to which earnings can decline before the company is unable to meet interest expenses. A higher ratio indicates a greater ability to meet interest payments and is therefore favorable for lenders and investors.

Question 5

Which of the following could indicate bad news?
A) An increase in fixed asset turnover ratio
B) A decrease in days to sell
C) A decrease in EPS
D) A decrease in the debt-to-assets ratio

Accepted Answer

A decrease in EPS (earnings per share) indicates a lower profitability for the company, which could be seen as bad news for shareholders and investors. An increase in fixed asset turnover ratio (A) and a decrease in days to sell (B) could be positive news, indicating more efficient use of assets and inventory. Decreasing the debt-to-assets ratio (D) could also be positive news, indicating a healthier financial position for the company.

Question 6

A debt-to-assets ratio of 0.50 indicates that the company has:
A) more liabilities than stockholders' equity.
B) equal amounts of liabilities and stockholders' equity.
C) more stockholders' equity than liabilities.
D) no liabilities.

Accepted Answer

A debt-to-assets ratio of 0.50 indicates the proportion of total assets that creditors finance is 0.50;as such,an equal proportion is from equity financing.

Question 7

The going-concern assumption states that the:
A) company will always maximize the profit for stockholders.
B) company is not expected to go out of business in the near future.
C) company is a separate concern from the stockholders.
D) company's results will be reported in a consistent manner from period to period.

Accepted Answer

The going-concern assumption is based on the notion that the company will continue to operate in the near future and is not expected to go out of business. This assumption is important in that it allows the financial statements to be prepared with the expectation of continuing operations, and not with liquidation or termination in mind.

Question 8

The debt-to-assets ratio is the:
A) ratio of current liabilities to current assets.
B) ratio of long term liabilities to fixed assets.
C) ratio of total liabilities to total assets.
D) proportion of short-term liabilities to total liabilities.

Accepted Answer

The debt-to-assets ratio is calculated by dividing total liabilities by total assets, which gives an indication of the proportion of assets that have been financed by liabilities or debt.

Question 9

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:
A) large percentage of assets and inventory costs are stable.
B) large percentage of assets and inventory costs are not stable.
C) small percentage of assets and inventory costs are not stable.
D) small percentage of assets and inventory costs are stable.

Accepted Answer

Different accounting methods for inventory are least likely to affect the comparison of financial ratios among competitors if inventory is a small proportion of assets and inventory levels are stable.

Question 10

The ratio that measures the percentage of financing from creditors is the:
A) current ratio.
B) times interest earned ratio.
C) debt-to-assets ratio.
D) Price/Earnings ratio.

Accepted Answer

The debt-to-assets ratio measures the percentage of financing that comes from creditors, which is also known as debt financing. The current ratio measures the short-term liquidity of a company, the times interest earned ratio measures the ability of a company to pay its interest obligations, and the Price/Earnings ratio measures the market's perception of a company's future earnings potential.

Question 11

How competitors calculate depreciation is most likely to affect comparisons between competitors if property,plant and equipment:
A) makes up a large percentage of assets and average useful lives are fairly different.
B) makes up a small percentage of assets and assets are financed in a different way.
C) makes up a small percentage of assets and average useful lives are fairly similar.
D) is primarily leased in the industry, not purchased.

Accepted Answer

If property, plant, and equipment make up a large percentage of assets and average useful lives are fairly different, then different depreciation methods used by competitors will have a significant impact on the value of the assets reported on their financial statements. This, in turn, will affect comparisons between competitors. If the assets have significantly different useful lives, then the depreciation expense reported by one company may be much higher or lower than that reported by another company. This can distort the true financial position of the companies and make it difficult to compare their financial results.

Question 12

Puffin Turnovers,Inc.'s fixed asset turnover was 0.9 while Muffin Tops,Inc.'s fixed asset turnover was 0.6.Which of the following statements about Puffin compared with Muffin is correct?
A) Puffin generated more sales per dollar of fixed assets.
B) Puffin has greater depreciation expense.
C) Puffin has more fixed assets.
D) Puffin has greater sales.

Accepted Answer

Fixed asset turnover measures a company's ability to generate sales using its fixed assets. A higher fixed asset turnover indicates that the company is generating more revenue per dollar of fixed assets. Therefore, Puffin generated more sales per dollar of fixed assets compared to Muffin. The other options cannot be determined from the given information.

Question 13

Which of the following nonfinancial factors is most likely to be a cause of a going-concern problem?
A) Hiring a new CEO
B) Loss of a key patent
C) Announcing a new stock issue
D) Replacing an old product line

Accepted Answer

Losing a key patent can significantly impact a company's ability to generate revenue and compete in the market, making it a significant nonfinancial factor that can contribute to a going-concern problem. Hiring a new CEO or replacing an old product line may have implications for the company's financial performance, but are not necessarily indicative of a going-concern problem. Announcing a new stock issue is a financial factor, not a nonfinancial one.

Question 14

A current ratio of less than one is not so much of a concern when the company has a:
A) low fixed asset turnover ratio.
B) high days to collect number.
C) high inventory turnover ratio.
D) high debt-to-equity ratio.

Accepted Answer

A high inventory turnover ratio means the company is able to sell its inventory quickly and therefore generate cash flow, which can help offset the current liabilities.

Question 15

A company that has a current ratio less than one cannot cover:
A) current liabilities with its current cash flow.
B) current expenses with its current sales revenue.
C) expenses with its current revenues.
D) current liabilities with its current assets.

Accepted Answer

The current ratio is a financial ratio that measures a company's ability to pay its current liabilities with its current assets. A current ratio less than one indicates that a company does not have enough current assets to cover its current liabilities, meaning that it cannot cover its current debts and obligations with its current assets on hand. Therefore, choice D is the correct answer.

Question 16

Listed below are the current ratios of four different companies.Based on these current ratios,which company is in the most liquid position?
A) 2.0
B) 1.8
C) 2.5
D) 2.1

Accepted Answer

The higher the current ratio, the more liquid a company is considered to be. Therefore, Company C with a current ratio of 2.5 is in the most liquid position.

Question 17

Which of the following will not improve a company's gross profit percentage?
A) An increase in the sales price
B) A decrease in the cost of inventory
C) A decrease in the shipping cost for merchandise purchased
D) Collecting cash from customers in advance

Accepted Answer

Collecting cash from customers in advance will not directly impact the gross profit percentage. It may improve the company's cash flow and reduce the risk of bad debts, but it will not affect the calculation of gross profit percentage, which is determined by deducting the cost of goods sold from the total revenue and dividing it by the total revenue. Option A, B, and C will increase the gross profit percentage by reducing the cost of goods sold or increasing the revenue.

Question 18

A times interest earned ratio of 11 means that the company's:
A) net income is large enough to pay interest and taxes 11 times.
B) net cash flow from operations before taxes and interest is large enough to pay interest and taxes 11 times.
C) net cash flow from operations is large enough to pay interest and taxes 11 times.
D) income before taxes and interest is large enough to pay interest 11 times.

Accepted Answer

Times interest earned = (Net income + Interest expense + Income tax expense)÷ Interest Expense
This ratio indicates how many times the company's interest expense was covered by its operating income.Or,in other words,the company's net income before interest expense and income tax expense is 11 times greater than its interest expense.

Question 19

A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%.If the company then issues additional shares of common stock for cash,which of the following is a correct statement?
A) The debt-to-assets ratio will decrease and the return on equity ratio will decrease.
B) The debt-to-assets ratio will increase and the return on equity ratio will increase.
C) The debt-to-assets ratio will not change and the return on equity ratio will not change.
D) The debt-to-assets ratio will decrease and the return on equity ratio will increase.

Accepted Answer

Debt-to-assets ratio = Total liabilities ÷ Total assets
Return on equity (ROE)= [(Net income − Preferred dividends)÷ Average common stockholders' equity] × 100
If the company issues additional shares of common stock for cash,both assets and stockholders' equity will increase as a result of this transaction.The debt-to-assets ratio will decrease since assets increase.The return on equity ratio will decrease since average common stockholders' equity increases.

Question 20

Company A uses the FIFO inventory method and Company B uses the LIFO method.If prices are rising and there are no other significant differences between the companies,which of the following is correct?
A) Company A will report a higher current ratio and lower earnings per share than Company B.
B) Company A will report a higher current ratio and higher earnings per share than Company B.
C) Company A will report a lower current ratio and higher earnings per share than Company B.
D) Company A will report a lower current ratio and lower earnings per shares than Company B.

Accepted Answer

Current ratio = Current assets ÷ Current Liabilities
Earnings per share = (Net income − preferred dividends)÷ Average number of common shares outstanding
During a period of rising prices,current assets (inventory)will be higher if FIFO is used,so the current ratio will be higher for Company A.Net income will also be higher when FIFO is used,so Company A's EPS will also be higher.

Quiz 13: Measuring and Evaluating Financial Performance

Which of the following would improve a current ratio that is now 1.2?

The conceptual framework for financial accounting and reporting consists of which three main components?

Company A has a receivables turnover of 8.0.Company B has a receivables turnover of 10.0.Which of the following statements is correct?

The ratio that measures the company's ability to meet required interest payments is the:

Which of the following could indicate bad news?

A debt-to-assets ratio of 0.50 indicates that the company has:

The going-concern assumption states that the:

The debt-to-assets ratio is the:

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:

The ratio that measures the percentage of financing from creditors is the:

How competitors calculate depreciation is most likely to affect comparisons between competitors if property,plant and equipment:

Puffin Turnovers,Inc.'s fixed asset turnover was 0.9 while Muffin Tops,Inc.'s fixed asset turnover was 0.6.Which of the following statements about Puffin compared with Muffin is correct?

Which of the following nonfinancial factors is most likely to be a cause of a going-concern problem?

A current ratio of less than one is not so much of a concern when the company has a:

A company that has a current ratio less than one cannot cover:

Listed below are the current ratios of four different companies.Based on these current ratios,which company is in the most liquid position?

Which of the following will not improve a company's gross profit percentage?

A times interest earned ratio of 11 means that the company's:

A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%.If the company then issues additional shares of common stock for cash,which of the following is a correct statement?

Company A uses the FIFO inventory method and Company B uses the LIFO method.If prices are rising and there are no other significant differences between the companies,which of the following is correct?