Deck 13: Financial Statement Analysis

Question 1

Liquidity refers to how quickly an asset can be converted into cash.

Answer 1

True

Question 2

Buying inventory in large lots to take advantage of quantity discounts can be responsible for a high inventory turnover ratio.

Answer 2

False

Question 3

To increase total asset turnover, management must either increase sales or reduce total stockholders' equity.

Answer 3

False

Question 4

The acid-test ratio is usually greater than the current ratio.

Question 5

In determining whether a company's financial condition is improving or deteriorating over time, horizontal analysis of financial statement data would be more useful than vertical analysis.

Question 6

All other things the same, purchasing merchandise inventory would have no effect on the accounts receivable turnover ratio at a retailer.

Question 7

Purchasing marketable securities with cash will have no effect on a company's acid-test ratio.

Question 8

Acquiring land by taking out a long-term mortgage will not affect the current ratio.

Question 9

If the acid-test ratio is less than one, then paying off some current liabilities with cash will increase the acid-test (quick) ratio.

Question 10

A common-size financial statement is a vertical analysis in which each financial statement account is expressed as a percentage.

Question 11

The formula for total asset turnover is: Total asset turnover = Total assets ÷ Total stockholders' equity.

Question 12

Vertical analysis of financial statements is accomplished by preparing common-size statements.

Question 13

All other things the same, when a company increases its inventories in anticipation of later higher sales, the accounts receivable turnover ratio for the current period increases.

Question 14

All other things the same, purchasing inventory would decrease the inventory turnover ratio.

Question 15

As the inventory turnover increases, the average sales period decreases.

Question 16

The formula for the average sale period is: Average sale period = Accounts receivable turnover ÷ Inventory turnover.

Question 17

All other things the same, when a customer purchases an item for cash, the accounts receivable turnover ratio increases.

Question 18

If a company's operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable.

Question 19

As the accounts receivable turnover ratio decreases, the average collection period increases.

Question 20

A company could improve its acid-test ratio by selling some equipment it no longer needs for cash.

Question 21

The formula for the times interest earned ratio is: Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense.

Question 22

The times interest earned ratio is based on net income because that is the amount of earnings that is available for making interest payments. Interest expense is deducted before taxes are determined; creditors have first claim on the earnings before taxes are paid.

Question 23

The gross margin percentage is computed by dividing the gross margin by net income before interest and taxes.

Question 24

When fixed costs are included in the cost of goods sold, the gross margin percentage should increase and decrease with sales volume.

Question 25

Issuing common stock will decrease a company's financial leverage.

Question 26

All other things the same, if a company uses long-term debt to purchase land to develop in the future, the company's return on total assets will decrease.

Question 27

The dividend payout ratio is equal to the dividend per share divided by the earnings per share.

Question 28

The formula for the net profit margin percentage is: Net profit margin percentage = Net income ÷ Sales.

Question 29

The formula for the return on equity is: Return on equity = Net income ÷ Average total stockholders' equity.

Question 30

When computing the return on total assets, the interest expense is added back to net income to show what earnings would have been if the company had no debt.

Question 31

An increase in the number of shares of common stock outstanding will increase a company's price-earnings ratio if the market price per share remains unchanged.

Question 32

When a company sells used equipment for a loss, the net profit margin percentage is unaffected.

Question 33

If a retailer sells a product whose contribution margin equals the gross margin percentage, the gross margin percentage will be unaffected by the transaction.

Question 34

All other things the same, those who hold the company's debt (i.e., its creditors) would like a low debt-to-equity ratio to provide a buffer of protection.

Question 35

The gross margin percentage is computed by dividing sales by the gross margin.

Question 36

All other things the same, if long-term debt is exchanged for short-term debt, the debt-to-equity ratio will be unchanged.

Question 37

A high price-earnings ratio means that investors are willing to pay a premium for the company's stock.

Question 38

When computing the return on equity, retained earnings should be excluded from the average total stockholders' equity.

Question 39

If a company's return on assets is substantially lower than its cost of borrowing, then the common stockholders would normally want the company to have a relatively high debt/equity ratio.

Question 40

A company whose inventory turnover ratio is much slower than the average for its industry may have too much inventory or the wrong sorts of inventory.

Question 41

A company's current ratio is greater than 1. Purchasing raw materials on credit would:

A)increase the current ratio.
B)decrease the current ratio.
C)increase net working capital.
D)decrease net working capital.

Question 42

Which one of the following statements about book value per share is most correct?

A)Market price per common share usually approximates book value per common share.
B)Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future.
C)A market price per common share that is greater than book value per common share is an indication of an overvalued stock.
D)Book value per common share is the amount that would be paid to stockholders if the company were sold to another company.

Question 43

Norton Inc. could improve its current ratio of 2 by:

A)paying a previously declared stock dividend.
B)writing off an uncollectible receivable.
C)selling merchandise on credit at a profit.
D)purchasing inventory on credit.

Question 44

Selling used equipment at book value for cash will:

A)increase working capital.
B)decrease working capital.
C)decrease the debt-to-equity ratio.
D)increase net income.

Question 45

A company's current ratio and an acid-test ratio are both greater than 1. Payment of an account payable would:

A)increase the current ratio but the acid-test ratio would not be affected.
B)increase the acid-test ratio but the current ratio would not be affected.
C)increase both the current and acid-test ratios.
D)decrease both the current and acid-test ratios.

Question 46

Which of the following is not a source of financial leverage?

A)Bonds payable.
B)Accounts payable.
C)Taxes payable.
D)Prepaid rent.

Question 47

All other things the same, if the company purchases equipment on credit, this transaction would have no impact on the company's book value per share.

Question 48

The Seabury Corporation has a current ratio of 3.5 and an acid-test ratio of 2.8. The corporation's current assets consist of cash, marketable securities, accounts receivable, and inventories. Inventory equals $49,000. Seabury Corporation's current liabilities must be:

A)$70,000
B)$100,000
C)$49,000
D)$125,000

Question 49

If current assets exceed current liabilities, prepaying an expense on the last day of the year will:

A)decrease the current ratio.
B)increase the acid-test ratio.
C)decrease the acid-test ratio.
D)increase the current ratio.

Question 50

Accounts receivable turnover will normally decrease as a result of:

A)the write-off of an uncollectible account against the allowance for bad debts.
B)a significant sales volume decrease near the end of the accounting period.
C)an increase in cash sales in proportion to credit sales.
D)a change in credit policy to lengthen the period for cash discounts.

Question 51

Data from Fontecchio Corporation's most recent balance sheet appear below: $$\begin{array} { | l r | } \hline \text { Cash } & \$ 18,000 \\\hline \text { Marketable securities } & \$ 24,000 \\\hline \text { Accounts receivable } & \$ 39,000 \\\hline \text { Short-term notes receivable } & \$ 0 \\\hline \text { Inventory } & \$ 60,000 \\\hline \text { Prepaid expenses } & \$ 14,000 \\\hline \text { Current liabilities } & \$ 120,000 \\\hline\end{array}$$ The corporation's acid-test ratio is closest to:

A)0.35
B)0.15
C)0.68
D)0.79

Question 52

Zack Company has a current ratio of 2.5. What will be the effect of a purchase of inventory with cash on the acid-test ratio and on working capital?

A)Option A
B)Option B
C)Option C
D)Option D

Question 53

Turner Co. presently has a current ratio of 0.8. The company has been informed by its bank that it must improve its current ratio to qualify for a line of credit. Which of the following actions would improve the current ratio?

A)Use cash to pay off some current liabilities.
B)Purchase additional marketable securities with cash.
C)Acquire a parcel of land in exchange for common stock.
D)Purchase additional inventory on credit.

Question 54

Purchasing inventory on credit increases the book value per share of a retailer.

Question 55

The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is:

A)the debt-to-equity ratio.
B)the current ratio.
C)the acid-test ratio.
D)working capital.

Question 56

Sand Company has an acid-test ratio of 0.8. Which of the following actions would improve the acid-test ratio?

A)Collect some accounts receivable.
B)Acquire some inventory on account.
C)Sell some equipment for cash.
D)Use cash to pay off some accounts payable.

Question 57

The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would:

A)increase.
B)decrease.
C)remain unchanged.
D)impossible to determine.

Question 58

The price-earnings ratio is determined by dividing market price per share of stock by the earnings per share.

Question 59

Earnings per share is computed by multiplying net income by the average number of common shares outstanding.

Question 60

The gross margin percentage is equal to:

A)(Net operating income + Selling and administrative expenses)/Sales
B)Net operating income/Sales
C)Cost of goods sold/Sales
D)Cost of goods sold/Net income

Question 61

Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The beginning inventory balance was $24,000 and the ending inventory balance was $22,000. The company's average sale period was closest to:

A)36.5 days
B)73.0 days
C)38.1 days
D)34.9 days

Question 62

Frantic Corporation had $130,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $16,000. The corporation's accounts receivable turnover was closest to:

A)5.00
B)13.00
C)10.00
D)8.13

Question 63

During the year just ended, the retailer James Corporation purchased $425,000 of inventory. The inventory balance at the beginning of the year was $175,000. If the cost of goods sold for the year was $450,000, then the inventory turnover for the year was:

A)2.77
B)2.57
C)3.00
D)2.62

Question 64

Orem Corporation's current liabilities are $75,000, its long-term liabilities are $225,000, and its working capital is $100,000. If the corporation's debt-to-equity ratio is 0.30, total long-term assets must equal:

A)$1,000,000
B)$1,300,000
C)$1,125,000
D)$1,225,000

Question 65

Windham Corporation has current assets of $400,000 and current liabilities of $500,000. Windham Corporation's current ratio would be increased by:

A)the purchase of $100,000 of inventory on account.
B)the payment of $100,000 of accounts payable.
C)the collection of $100,000 of accounts receivable.
D)refinancing a $100,000 long-term loan with short-term debt.

Question 66

Data from Keniston Corporation's most recent balance sheet and income statement appear below: $$\begin{array} { | l r | r | } \hline & \text { This Year } & \text { Last Year } \\\hline \text { Accounts receivable } & \$ 128,000 & \$ 114,000 \\\hline \text { Inventory } & \$ 228,000 & \$ 193,000 \\\hline \text { Sales on account } & \$ 813,000 & \\\hline \text { Cost of goods sold } & \$ 597,000 & \\\hline\end{array}$$ The average collection period for this year is closest to:

A)39.1 days
B)45.1 days
C)54.3 days
D)57.5 days

Question 67

Dratif Corporation's working capital is $33,000 and its current liabilities are $80,000. The corporation's current ratio is closest to:

A)1.41
B)0.59
C)3.42
D)0.41

Question 68

Erastic Corporation has $14,000 in cash, $8,000 in marketable securities, $34,000 in account receivable, $40,000 in inventories, and $42,000 in current liabilities. The corporation's current assets consist of cash, marketable securities, accounts receivable, and inventory. The corporation's acid-test ratio is closest to:

A)1.33
B)0.81
C)2.29
D)1.14

Question 69

Dennisport Corporation has an acid-test ratio of 2.5. It has current liabilities of $40,000 and noncurrent assets of $70,000. The corporation's current assets consist of cash, marketable securities, accounts receivable, prepaid expenses, and inventory; it has no short-term notes receivable. If Dennisport's current ratio is 3.1, its inventory and prepaid expenses must be:

A)$12,400
B)$24,000
C)$30,000
D)$40,000

Question 70

Harris Corporation, a retailer, had cost of goods sold of $290,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The corporation's inventory turnover was closest to:

A)12.08
B)11.60
C)5.80
D)11.15

Question 71

Gnas Corporation's total current assets are $210,000, its noncurrent assets are $590,000, its total current liabilities are $160,000, its long-term liabilities are $490,000, and its stockholders' equity is $150,000. The current ratio is closest to:

A)1.31
B)0.76
C)0.33
D)0.36

Question 72

Natcher Corporation's accounts receivable at the end of Year 2 was $126,000 and its accounts receivable at the end of Year 1 was $130,000. The company's inventory at the end of Year 2 was $127,000 and its inventory at the end of Year 1 was $120,000. Sales, all on account, amounted to $1,380,000 in Year 2. Cost of goods sold amounted to $800,000 in Year 2. The company's operating cycle for Year 2 is closest to:

A)44.7 days
B)17.3 days
C)62.8 days
D)90.2 days

Question 73

Kopas Corporation has provided the following data: $$\begin{array} { | l r | r | } \hline & \text { This Year } & \text { Last Year } \\\hline \text { Accounts receivable } & \$ 89,000 & \$ 107,000 \\\hline \text { Inventory } & \$ 160,000 & \$ 156,000 \\\hline \text { Sales on account } & \$ 627,000 & \\\hline \text { Cost of goods sold } & \$ 488,000 & \\\hline\end{array}$$ The inventory turnover for this year is closest to:

A)3.09
B)0.98
C)1.03
D)3.05

Question 74

Mcrae Corporation's total current assets are $380,000, its noncurrent assets are $500,000, its total current liabilities are $340,000, its long-term liabilities are $250,000, and its stockholders' equity is $290,000. Working capital is:

A)$380,000
B)$40,000
C)$250,000
D)$290,000

Question 75

Calin Corporation has total current assets of $615,000, total current liabilities of $230,000, total stockholders' equity of $1,183,000, total net plant and equipment of $958,000, total assets of $1,573,000, and total liabilities of $390,000. The company's working capital is:

A)$615,000
B)$1,183,000
C)$385,000
D)$958,000

Question 76

Spomer Corporation's inventory at the end of Year 2 was $114,000 and its inventory at the end of Year 1 was $120,000. Cost of goods sold amounted to $710,000 in Year 2. The company's inventory turnover for Year 2 is closest to:

A)5.92
B)1.05
C)6.07
D)6.23

Question 77

Laverde Corporation has provided the following data: $$\begin{array} { | l | r | r | } \hline & \text { Year } \mathbf { 2 } & \text { Year 1 } \\\hline \text { Inventory } & \$ 185,000 & \$ 200,000 \\\hline \begin{array} { l } \text { Total } \\\text { assets }\end{array} & \$ 1,489,000 & \$ 1,470,000 \\\hline \text { Sales } & \$ 1,220,000 & \\\hline\end{array}$$ The company's total asset turnover for Year 2 is closest to:

A)1.22
B)7.60
C)0.13
D)0.82

Question 78

Granger Corporation had $180,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $18,000. The corporation's average collection period was closest to:

A)20.3 days
B)28.4 days
C)36.5 days
D)56.8 days

Question 79

Feiler Corporation has total current assets of $483,000, total current liabilities of $347,000, total stockholders' equity of $1,057,000, total net plant and equipment of $1,031,000, total assets of $1,514,000, and total liabilities of $457,000. The company's current ratio is closest to:

A)0.32
B)0.30
C)1.39
D)0.95

Question 80

Stimac Corporation has total cash of $210,000, no marketable securities, total current receivables of $281,000, total inventory of $151,000, total prepaid expenses of $53,000, total current assets of $695,000, total current liabilities of $261,000, total stockholders' equity of $1,014,000, total assets of $1,415,000, and total liabilities of $401,000. The company's acid-test (quick) ratio is closest to:

A)2.08
B)1.73
C)2.66
D)1.88