Question 1

Many firms sell to customers on account as a strategy to stimulate sales.Comparing accounts receivable turnovers over time or between firms requires an analysis of
A)the growth rate in sales.
B)the amount of interest revenue generated.
C)the cost of administering the credit-granting activity.
D)the losses from uncollectible accounts.
E)all of the above.

Accepted Answer

Comparing accounts receivable turnovers involves analyzing various factors that can affect the turnover rate, including the growth rate in sales (which impacts the volume of receivables), the cost of administering credit (as it affects the efficiency and cost-effectiveness of credit policies), and the losses from uncollectible accounts (which directly affect the net receivables and the perceived risk of credit sales). Interest revenue generated is not directly related to accounts receivable turnover, which focuses on the efficiency of collecting receivables rather than the income generated from investments or loans.

Question 2

Why would a firm prepare pro forma financial statements?
A)to ascertain whether operations will generate sufficient cash flows to finance expenditures on long-term assets or whether the firm will need to borrow more
B)to analyze the effect of a change its product lines or pricing policies and the impact on rates of return.
C)to project future financial statement amounts for an acquisition target to ascertain the price it should pay
D)all of the above
E)none of the above

Accepted Answer

Pro forma financial statements are used for various purposes such as analyzing the impact of changes in product lines, pricing policies, projecting future financial statement amounts for an acquisition target, and assessing whether the operations will generate sufficient cash flows to finance expenditures on long-term assets or if the firm needs to borrow more. Therefore, option D is the correct answer. Options A, B, and C are specific examples of why a firm may prepare pro forma financial statements.

Question 3

Comparing firms using a common-size balance sheet rests on the assumption that
A)the size or scale of a business does not affect the relation between a given balance sheet item and total assets.
B)the size or scale of a business does affect the relation between a given balance sheet item and total assets.
C)the large purchaser can negotiate better terms, including lower per-unit prices.
D)more negotiating power would appear on the large purchaser's balance sheet as proportionately smaller amounts reported for inventory relative to the amounts reported by a smaller purchaser with less negotiating power.
E)more negotiating power would appear on the large purchaser's balance sheet as proportionately larger amounts reported for accounts payable relative to the amounts reported by a smaller purchaser with less negotiating power.

Accepted Answer

Common-size balance sheets express balance sheet items as a percentage of total assets, which assumes that the size or scale of a business does not affect the relationship between a given balance sheet item and total assets. This allows for easier comparison of firms of different sizes.

Question 4

For each of the following independent situations, suggest what ratio would provide appropriate information to answer the question.
 a.	You need to determine the number of days outstanding for accounts receivable.
b.	You are considering investing in bonds of a publicly held company. You wish to analyze the possibility of the company failing to meet required interest payments.
c.	You wish to measure and compare a firm's performance in using assets independent of the financing of the assets to the industry average.
d.	You wish to assess a company's ability to meet immediate liabilities in an emergency.
e.	You would like to determine how much capital is provided by common shareholders.
f.	You wish to understand how long inventory remains on hand during the period.
g.	You are considering how much additional long-term debt a company may be able to take on.
h.	You are interested in how productive a company's fixed assets have been.

Accepted Answer

The answer of For each of the following independent situations,...

Question 5

Concerning the analysis of financial data to emphasize the comparative and relative importance of data presented and to evaluate the position of the firm, it is important to take into consideration
A)the nature of the general business environment.
B)direct competition in a company's geographical area.
C)special situations not encountered throughout the industry.
D)all of the above.
E)none of the above.

Accepted Answer

All of the above factors are important to consider when analyzing financial data. The general business environment can impact a company's performance, competition can affect market share and profitability, and special situations can provide unique challenges or opportunities that may not be present in the industry as a whole. Taking all of these factors into account is necessary for a comprehensive evaluation of a firm's position.

Question 6

Various techniques are used in the analysis of financial data to emphasize the comparative and relative importance of data presented and to evaluate the position of the firm.These techniques include(s)
A)ratio analysis.
B)common-size analysis.
C)examination of relative size among firms.
D)all of the above.
E)none of the above.

Accepted Answer

All of the above techniques - ratio analysis, common-size analysis, and examination of relative size among firms - are used in the analysis of financial data to emphasize comparative and relative importance and evaluate a firm's position. Ratio analysis involves calculating and interpreting financial ratios that provide insight into a firm's liquidity, profitability, and other key performance indicators. Common-size analysis involves expressing financial statement items as a percentage of a common base to allow for comparison across time periods or with other firms. Examination of relative size among firms involves benchmarking a firm's performance metrics against those of its peers to evaluate its competitive position.

Question 7

What is the first step in preparing pro forma financial statements?
A)Project operating revenues.
B)Project operating expenses other than the cost of financing and income taxes.
C)Project the assets required to support the level of projected operating activity.
D)Project the financing (liabilities and contributed capital) required to fund the level of assets.
E)Project the cost of financing the debt, income tax expense, net income, dividends, and the change in retained earnings.

Accepted Answer

The first step in preparing pro forma financial statements is to project operating revenues. This allows the company to estimate its potential revenue streams and plan accordingly for future expenses, assets, and financing.

Question 8

The preparation of pro forma financial statements typically begins with the _____, followed by the _____ and then the _____.
A)balance sheet; income statement; statement of cash flows
B)statement of cash flows; income statement; balance sheet
C)income statement; balance sheet; statement of cash flows
D)income statement; statement of cash flows; balance sheet
E)balance sheet; statement of cash flows; income statement

Accepted Answer

The preparation of pro forma financial statements typically begins with the income statement, followed by the balance sheet and then the statement of cash flows. This order makes sense as the income statement provides information on the company's revenue and expenses, which are necessary for calculating net income. The balance sheet can then be prepared using information on assets, liabilities, and equity, while the statement of cash flows can be constructed using information from both the income statement and balance sheet.

Question 9

Inventory turnover ratio
A)indicates how fast firms sell their inventory items.
B)measured in terms of the rate of movement of goods into and out of the firm.
C)equals cost of goods sold divided by the average inventory during the period.
D)all of the above
E)none of the above

Accepted Answer

The inventory turnover ratio measures the efficiency of a company in selling its inventory by calculating how many times a company has sold and replaced its inventory during a period. It is calculated by dividing the cost of goods sold by the average annual inventory. Therefore, options A, B and C are all correct and option D is the best choice as it covers all correct options.

Question 10

An analyst examines changes in a firm's various ratios over a three-year period-a so-called _____ analysis and performs a _____ analysis comparing a given firm's ratios with those of other firms for a specific period.
A)cross-section; time-series
B)time-series; cross-section
C)profitability; time-series
D)time-series; profitability
E)none of the above

Accepted Answer

The first part of the statement refers to time-series analysis, as it examines changes in a firm's ratios over a three-year period. The second part refers to cross-section analysis, as it compares a given firm's ratios with those of other firms for a specific period. Therefore, the correct answer is option B, which matches these two types of analysis with their respective descriptions.

Question 11

Indicate the effects (increase, decrease, no effect) of the following independent transactions on (1) the profit margin ratio, (2) the plant asset turnover, and (3) the inventory turnover.
 $\begin{array}{lll}
&&\text { Profit Margin } & \text { Plant Asset } & \text { Inventory } \
&&\text { Ratio } & \text { Turnover } & \text { Turnover }\
a.& \text {Payment of various repair expenses }&\_\_\_\_&\_\_\_\_&\_\_\_\_\
b.& \text {Purchase of inventory on account }&\_\_\_\_&\_\_\_\_&\_\_\_\_\
c.& \text { Purchase of equipment}&\_\_\_\_&\_\_\_\_&\_\_\_\_\
d.& \text {Payment of bonds payable }&\_\_\_\_&\_\_\_\_&\_\_\_\_\
\end{array}$

Accepted Answer

The answer of Indicate the effects (increase, decrease, no effect)...

Question 12

For each of the following independent situations, solve for the unknown amount.
 $\begin{array}{lllll}&\text { CASE A }&\text { CASE B }&\text { CASE C }&\text { CASE D }\
\text { Current ratio } & \text { A } & 1.14 & 2.0 & 0.67 \
\text { Quick ratio } & 0.2 & \text { B } & 1.0 & 0.60 \
\text { Current liabilities } & 400 & 175 & 100 & 360 \
\text { Current assets } & 150 & 200 & \text { C } & 240 \
\text { Highly liquid assets } & 80 & 75 & 100 & \text { D }
\end{array}$

Accepted Answer

The answer of For each of the following independent situations,...

Question 13

The analysis of business transactions is facilitated by
A)reconciliation of bank balances at the end of the reporting period.
B)good internal controls and performing daily cash reconciliation.
C)developing an electronic spreadsheet showing the transactional effects.
D)maintaining a written copy of all invoices and receipts of the company for a period of at least 7 years.
E)None of these answer choices is correct.

Accepted Answer

Developing an electronic spreadsheet showing the transactional effects helps to easily track, organize and analyze business transactions. It allows for quick identification of patterns, trends and potential issues, which can help in making informed business decisions. Reconciliation of bank balances, good internal controls, and maintaining records are all important for accurate accounting, but they do not necessarily facilitate analysis of transactions.

Question 14

A common-sized income statement permit(s)
A)analysis of changes or differences in relations between revenues, expenses, and net income.
B)identification of relations that the analyst should explore further.
C)analysis of changes or differences in relations between assets, liabilities, and shareholders' equity.
D)both choices a and b.
E)both choices a and c.

Accepted Answer

A common-sized income statement provides a percentage breakdown of each line item in relation to total revenues. This allows for analysis of changes or differences in relations between revenues, expenses, and net income, as well as identification of relations that the analyst should explore further. It does not, however, provide information on changes or differences in relations between assets, liabilities, and shareholders' equity, which would require a common-sized balance sheet.

Question 15

The traditional use of the term _____ financial statements refers to projected financial statements based on some set of assumptions about the future.One set of assumptions might be that historical patterns (for example, growth rates or rates of return) will continue.
A)what-if
B)estimated
C)planned
D)pro forma
E)future

Accepted Answer

The term "pro forma" is commonly used to refer to projected financial statements based on assumptions about the future. These statements are typically used for planning purposes, such as to assess the potential impact of a new project or investment. Pro forma financial statements are not based on actual results, but rather on estimated or projected results.

Question 16

A common-size income statementpermits an analysis of changes or differences in the relations between revenues, expenses, and net income and identifies relations that the analyst should explore further, such as
A)time series analysis.
B)economic analysis.
C)cross-section analysis.
D)both choices a and c.
E)both choices b and c.

Accepted Answer

A common-size income statement allows for a comparison of different line items as a percentage of total revenue. This allows for a time series analysis, looking at changes in the ratios over time, and a cross-section analysis, comparing the ratios of different companies or industries. Therefore, the correct choice is D. Economic analysis (choice B) is not directly related to the use of a common-size income statement.

Question 17

Use the following comparative balance sheet to compute ratios as requested.
Buff Company
COMPARATIVE BALANCE SHEET
As of December 31 , Year 1 and Year 2
\(\begin{array}{lcc}\text { Assets }&\text { Year } 2&\text { Year } 1\
\text { Current assets }\\text { Cash } & \$ 10,000 & \$ 5,000 \
\text { Accounts receivable } & 6,000 & 4,000 \
\text { Merchandise inventory } & 20,000 & 15,000\
\text { Total Current assets } & \$ 36,000 & \$ 24,000 \
\text { Property, plant, and equipment } \
\text { Building }& 30,000 & 30,000 \\text { Liabilities and Shareholders' Equity }\\text { Current liabilities }\\text { Advance from customer } & \$ 400 & \$ 500 \
\text { Accounts payable } & 1,000 & 1,000 \
\text { Rent payable } & 2,000 & 1,500 \
\text { Utilities pavable } & 200 & 200\\text { Salaries payable }&1,000&800\
\text { Total Current liabilities }&\$4,600&\$4,000\\text { Shareholders' Equity }\
\text { Common stock, } 2,000 \text { shares } & 5,000 & 5,000 \
\text { Additional paid-in capital } & 40,000 & 40,000 \
\text { Retained eamings } & 16.400 & 5,000\
\text { Total Shareholders' equity }&61,400&50,000\
(\text { Total Liabilities and shareholders' equity }&\$66,000&\$54,000
\end{array}\)
Compute the following ratios at year end for Year 2 for Buff Company:
a. Long-term debt ratio
b. Debt-equity ratio
c. Current ratio
d. Leverage ratio

Assume that a bank loans $ \$ 10,000 $ cash (due in 5 years) to the company on December 31 , Year 2 . Make the appropriate adjustments to the financial statements and compute the following ratios:
e. Long-term debt ratio
f. Debt-equity ratio
g. Current ratio
h. Leverage ratio

Accepted Answer

The answer of Use the following comparative balance sheet to...

Question 18

What is the last step in preparing pro forma financial statements?
A)Project the statement of cash flows from amounts on the projected balance sheet and income statement.
B)Project operating revenues and operating expenses other than the cost of financing and income taxes.
C)Project the assets required to support the level of projected operating activity.
D)Project the financing (liabilities and contributed capital) required to fund the level of assets.
E)Project the cost of financing the debt, income tax expense, net income, dividends, and the change in retained earnings.

Accepted Answer

The last step in preparing pro forma financial statements involves projecting the statement of cash flows. This step integrates the data from the projected balance sheet and income statement to show how changes in balance sheet accounts and income affect cash and cash equivalents, thus completing the financial picture for the period being forecasted.

Question 19

In a modern corporate environment, the trial balance is prepared from the
A)financial statements.
B)computerized accounting systems.
C)journals.
D)subsidiary ledgers.
E)chart of accounts.

Accepted Answer

In a modern corporate environment, most accounting functions are performed using computerized accounting systems. These systems automatically generate a trial balance by compiling data from various modules and ledgers, making it the best choice for preparing a trial balance in a modern corporate environment. The financial statements, journals, subsidiary ledgers, and the chart of accounts are important components of the accounting process, but they are not typically used to prepare a trial balance in a modern corporate environment.

Question 20

Ratio analysis is one tool management may use to examine a firm's profitability and risk.Another tool often used by management are pro forma financial statements.
Required:
 a.	Describe the purpose of pro forma financial statements.
b.	Describe how pro forma financial statements may be constructed.

Accepted Answer

The answer of Ratio analysis is one tool management may...

Quiz 7: Introduction to Financial Statement Analysis

Many firms sell to customers on account as a strategy to stimulate sales.Comparing accounts receivable turnovers over time or between firms requires an analysis of

Why would a firm prepare pro forma financial statements?

Comparing firms using a common-size balance sheet rests on the assumption that

Concerning the analysis of financial data to emphasize the comparative and relative importance of data presented and to evaluate the position of the firm, it is important to take into consideration

Various techniques are used in the analysis of financial data to emphasize the comparative and relative importance of data presented and to evaluate the position of the firm.These techniques include(s)

What is the first step in preparing pro forma financial statements?

The preparation of pro forma financial statements typically begins with the ___, followed by the _ and then the ___.

Inventory turnover ratio

An analyst examines changes in a firm's various ratios over a three-year period-a so-called _ analysis and performs a _ analysis comparing a given firm's ratios with those of other firms for a specific period.

The analysis of business transactions is facilitated by

A common-sized income statement permit(s)

The traditional use of the term _____ financial statements refers to projected financial statements based on some set of assumptions about the future.One set of assumptions might be that historical patterns (for example, growth rates or rates of return) will continue.

A common-size income statementpermits an analysis of changes or differences in the relations between revenues, expenses, and net income and identifies relations that the analyst should explore further, such as

What is the last step in preparing pro forma financial statements?

In a modern corporate environment, the trial balance is prepared from the

Ratio analysis is one tool management may use to examine a firm's profitability and risk.Another tool often used by management are pro forma financial statements. Required: a. Describe the purpose of pro forma financial statements. b. Describe how pro forma financial statements may be constructed.