Question 1

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

While most gains and losses are included in the computation of net income,some (such as gains or losses relating to changes in the value of certain balance sheet accounts)are excluded from net income and included only in comprehensive income.

Question 2

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 goal of accounting is to provide information that allows decision makers to evaluate the results of business activities.Financial statements are used in making a variety of decisions.

Question 3

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 better able the company is to meet its interest obligations.

Question 4

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

Accepted Answer

Earnings per share = (Net income − preferred dividends)÷ Average number of common shares outstanding
An increase in EPS could result from an increase in net income,a decrease in preferred dividends,or a decrease in the average number of shares outstanding.

Question 5

If the debt-to-assets ratio is 0.73,it means that 73% of the company's financing has been provided by stockholders' equity.

Accepted Answer

A debt-to-assets ratio of 0.73 indicates that creditors contributed 73% of the company's financing,while stockholders provided only 27% (or 100% − 73%).

Question 6

The fixed asset turnover ratio is a profitability ratio.

Accepted Answer

The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets.

Question 7

Benchmarks are useful when evaluating a company's performance.

Accepted Answer

Benchmarks are help when interpreting a company's financial ratios.These benchmarks may be the company's own results for prior years,the results of competitors,or an average for the industry.

Question 8

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 9

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 is conducted to examine trends over time with individual financial statement line items (e.g. ,trends in Gross Profit or Net Income from one year to the next).

Question 10

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

Accepted Answer

Receivable turnover = Net sales ÷ Average net receivable
The lower the receivables turnover,the slower accounts receivable are being collected.

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 analyses focus on important relationships between items on the same financial statement.Horizontal analyses compare individual financial statement line items horizontally (from one period to the next),with the general goal of identifying significant sustained changes (trends).

Question 12

Liquidity measures the ability of a company to meet its long-term financial obligations.

Accepted Answer

Solvency measures a company's ability to meet its long-term financial obligations.Liquidity relates to the company's short-term survival,in particular,the company's ability to use current assets to repay liabilities as they become due.

Question 13

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 14

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

Accepted Answer

A gain or loss from discontinued operations,net of tax,is reported on the income statement on a separate line below the income tax expense and income from continuing operations lines.

Question 15

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 analysis helps financial users recognize changes that unfold over time,not the changes that occur between companies.

Question 16

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

Accepted Answer

The going-concern (also called the continuity)assumption means that a business is assumed to be capable of continuing its operations long enough to meet its obligations.

Question 17

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 18

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

Inventory turnover = Cost of goods sold ÷ Average inventory
A higher inventory turnover suggests a smaller investment in inventory is required.

Question 19

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 20

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

Accepted Answer

Horizontal analyses compare individual financial statement line items horizontally (from one period to the next),with the general goal of identifying significant sustained changes (trends).

Quiz 13: Measuring and Evaluating Financial Performance