Question 1

The yield rate on stock is measured by dividing dividends per share by market price per share.

Accepted Answer

The yield rate on stock is commonly known as dividend yield and it is calculated by dividing dividends per share by market price per share.

Question 2

The gross profit rate usually is lowest on fast moving merchandise and highest on specialty and novelty products.

Accepted Answer

Fast moving merchandise typically operates on lower margins due to high volume sales and competition, while specialty and novelty products can command higher margins due to their unique value proposition and lower volume.

Question 3

The lower the current ratio, the more liquid the company appears.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. A high current ratio indicates that a company has enough assets to meet its short-term obligations. Therefore, the higher the current ratio, the more liquid the company appears, not the lower.

Question 4

When an income statement does not show gross profit or operating income it is called a consolidated statement.

Accepted Answer

A consolidated statement combines the financial results of multiple companies or subsidiaries into a single statement, but it still includes gross profit and operating income figures. A consolidated statement without gross profit or operating income figures would be incomplete and not accurately reflect the financial performance of the companies included.

Question 5

The gross profit rate is gross profit expressed as a percentage of net sales.

Accepted Answer

The gross profit rate is indeed gross profit divided by net sales, expressed as a percentage.

Question 6

The quality of earnings tends to be higher for a company that uses straight-line depreciation and defers costs whenever possible than for a company which uses accelerated depreciation and defers costs only when necessary.

Accepted Answer

The quality of earnings is generally higher when a company uses conservative accounting practices, such as accelerated depreciation and deferring costs only when necessary, as these practices provide a more realistic view of the company's financial situation.

Question 7

The debt ratio is computed by dividing total liabilities by current assets.

Accepted Answer

The debt ratio is computed by dividing total liabilities by total assets, not current assets.

Question 8

Comparative financial statements show side-by-side financial data for two or more companies.

Accepted Answer

Comparative financial statements are financial statements that show the financial position, results of operations, and cash flows of a single entity for two or more periods side by side, rather than financial data for multiple companies.

Question 9

A company's liquidity refers to its ability to remain profitable.

Accepted Answer

A company's liquidity refers to its ability to meet its short-term financial obligations, such as paying bills and debts, without disrupting its daily operations. It is a measure of the company's ability to convert its assets into cash quickly. Profitability, on the other hand, refers to how much revenue a company generates compared to its expenses over a specified period. A company can be profitable but still have poor liquidity if it cannot meet its financial obligations on time.

Question 10

The quick ratio is especially useful in evaluating the liquidity of a company with fast moving inventories.

Accepted Answer

The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventories, since inventories are not as quickly convertible to cash.

Question 11

If total current assets are $140,000 at the end of Year 1, increase by $50,000 by the end of Year 2, and increase by $50,000 in Year 3, the percentage increase over the preceding year is less in Year 3 than in Year 2.

Accepted Answer

In Year 2, the increase from $140,000 to $190,000 represents a percentage increase of approximately 35.71% ($50,000/$140,000). In Year 3, the increase from $190,000 to $240,000 represents a percentage increase of approximately 26.32% ($50,000/$190,000). Therefore, the percentage increase in Year 3 is less than in Year 2.

Question 12

The trend in ratios is usually more useful than looking at a single year's ratio.

Accepted Answer

Trends in ratios over multiple years provide a more accurate understanding of a company's financial performance and position, compared to looking at a single year's ratio in isolation. This is because ratios can vary significantly from year to year due to various factors such as changes in market conditions, one-time events, and accounting practices. Examining ratios over time allows for identifying trends and patterns, which can be helpful in making informed decisions and assessing long-term performance.

Question 13

The acid test ratio includes marketable securities but does not include accounts receivable.

Accepted Answer

The acid test ratio, also known as the quick ratio, includes both marketable securities and accounts receivable, along with cash and cash equivalents, divided by current liabilities. It is designed to measure a company's ability to cover its short-term liabilities with its most liquid assets.

Question 14

Current assets are those assets that can be converted into cash within a year and never longer.

Accepted Answer

Current assets are typically expected to be converted into cash within one year, but in some cases, they may take longer, such as in industries with longer operating cycles.

Question 15

Deducting the cost of goods sold from net income gives us operating income.

Accepted Answer

Deducting the cost of goods sold from net sales gives us gross profit, not operating income. Operating income is calculated by deducting operating expenses (such as salaries, rent, and utilities) from gross profit.

Question 16

ROE - return on equity - is measured by dividing net income by average number of shares outstanding.

Accepted Answer

ROE is measured by dividing net income by average equity, not by the average number of shares outstanding.

Question 17

Inventory is an example of a quick asset.

Accepted Answer

Inventory is not considered a quick asset because it is not as easily converted into cash within a short period without significant loss of value, unlike cash, marketable securities, and accounts receivable.

Question 18

Working capital is the excess of current assets over current liabilities.

Accepted Answer

Working capital is calculated by subtracting current liabilities from current assets. Therefore, it is the excess of current assets over current liabilities.

Question 19

The owners of a corporation are not personally responsible for the debts of the business.

Accepted Answer

The limited liability of the owners is one of the benefits of incorporating a business. The corporation is considered a separate legal entity and is responsible for its own debts and legal obligations.

Question 20

Vertical analysis compares the results of financial information with a business in the same industry for a number of consecutive periods of time.

Accepted Answer

Vertical analysis compares the financial information of different items within a single period, expressing them as a percentage of a base amount. It does not compare results with other businesses in the same industry or over consecutive periods of time.

Quiz 14: Financial Statement Analysis