Question 1

An important difference between accounting and other business functions, such as marketing and management, is that:
A)Accounting functions must be performed by an "outsider" (rather than by an employee of the business) in order to avoid conflicts of interest.
B)Accounting offers us insight into whether the business is financially sound.
C)Accounting involves mainly clerical activities and thus requires very little analysis.
D)Accounting deals exclusively with numbers.

Accepted Answer

While all business functions are important, accounting is unique in that it provides crucial information on the financial health of a business. Through financial statements and other reports, accounting can give insight into whether a business is profitable, solvent, and able to pay its debts. This information is essential for making decisions about future investments, expansions, or cutbacks. While accounting does involve numbers, it also requires significant analysis and interpretation of those numbers in order to make informed decisions.

Question 2

The Barkley Company is a fast growing start-up. The accountant calculated earnings per share = $.13. This information will provide him/her with insight into the firm's ability to pay dividends.

Accepted Answer

Earnings per share is a key financial ratio that measures the amount of net income earned for each share of stock outstanding. It is an important factor to consider when determining a company's ability to pay dividends, as higher earnings per share indicates that the company has more profits to distribute as dividends to shareholders.

Question 3

The inventory turnover ratio measures the speed of inventory moving through the firm and its conversion into sales.

Accepted Answer

The inventory turnover ratio is a measure of how many times a company's inventory is sold and replaced over a period of time, indicating how quickly a company is able to sell its products. A higher inventory turnover ratio indicates that the company is selling its inventory more quickly, which is generally seen as a positive sign.

Question 4

Preferred Pet Care, Inc., has recorded the following on its income statement for the period ending, December 31, 2009:  The return on sales = 34%. This return is outstanding and there is no need to compare this return to competitors in the veterinary services industry.

Accepted Answer

Without comparing the return on sales to industry competitors, it is impossible to determine whether 34% is outstanding or not.

Question 5

Accountant Alison Padilla was asked by her company's CEO to calculate the current return on equity. She quickly gathers Total Assets from the company balance sheet and the total net income from the income statement. Armed with this information, she will be able to provide the CEO with the information he/she requested.

Accepted Answer

To calculate return on equity (ROE), Alison needs the company's net income and shareholders' equity, not total assets.

Question 6

Which of the following is an example of a financial transaction?
A)A firm purchases a fire insurance policy.
B)An internal auditor discovers an error in a firm's inventory valuation.
C)A potential customer accesses a firm's Web page.
D)A manager reviews the financial statements prepared by an accountant.

Accepted Answer

A financial transaction involves the exchange of money or monetary value. In this example, the purchase of a fire insurance policy involves the exchange of money for the coverage provided by the policy. The other choices do not involve a financial exchange.

Question 7

The higher the risk of a particular investment, the greater the expected rate of return required by investors.

Accepted Answer

This is known as the risk-return tradeoff and is a fundamental principle of finance. Investors require higher rates of return to compensate for taking on higher levels of risk.

Question 8

Stockholders of a company in a risky market environment would expect lower return on equity ratio than stockholders in a less risky market.

Accepted Answer

Stockholders in a risky market environment typically expect a higher return on equity to compensate for the increased risk they are taking on.

Question 9

Activity ratios measure the effectiveness of the firm's management in using its various resources to achieve profits.

Accepted Answer

Activity ratios, also known as efficiency ratios, are used to evaluate how efficiently a company uses its resources to generate sales and profits. They measure how well a company manages its assets, liabilities, and inventory to generate revenue. Examples of activity ratios include inventory turnover ratio, accounts receivable turnover ratio, and accounts payable turnover ratio.

Question 10

The basic earnings per share and the diluted earnings per share would have quite different values for a firm that relied heavily on preferred stock and convertible debt securities to acquire funds.

Accepted Answer

Preferred stock and convertible debt securities are considered to be potentially dilutive securities. When these securities are included in the calculation for diluted earnings per share, they can significantly affect the value of earnings per share. Therefore, a company that heavily relies on these securities to obtain funds would have different values for basic and diluted earnings per share.

Question 11

Prattville Manufacturing has applied for a short-term loan with the First National Bank. The loan officers of the bank are likely to look carefully at Prattville's liquidity ratios before they decide to grant the loan.

Accepted Answer

Liquidity ratios measure a company's ability to meet its short-term liabilities, making them important indicators for lenders assessing creditworthiness. Therefore, it is likely that the loan officers of the bank will look carefully at Prattville's liquidity ratios before making a decision on the loan.

Question 12

It is always better for a firm to have a high inventory turnover ratio than a low turnover ratio.

Accepted Answer

The answer of It is always better for a firm...

Question 13

The acid-test ratio emphasizes the ability to convert inventory quickly into cash.

Accepted Answer

The acid-test ratio, also known as the quick ratio, includes only the most liquid assets such as cash, marketable securities, and accounts receivable. Inventory is not included because it may take longer to sell and convert into cash. Therefore, the acid-test ratio emphasizes the ability to quickly convert other assets into cash.

Question 14

To effectively run a business, it is necessary to:
A)Hire a full-time accountant.
B)Use a public accounting firm.
C)Understand and use accounting information.
D)Make certain that you do not spend too much time on your accounting system.

Accepted Answer

Understanding and using accounting information is essential for effective business management, regardless of whether or not you hire an accountant or use a public accounting firm. While these options can be helpful, they are not necessary for a successful business as long as the owner has a basic understanding of financial management. Spending too much time on accounting can also detract from other important aspects of running a business, so finding a balance is key.

Question 15

A debt to owners' equity ratio of 25% indicates that a firm has more debt than equity.

Accepted Answer

A debt to owners' equity ratio of 25% means that the company has $1 of debt for every $4 of equity, indicating that the company has more equity than debt.

Question 16

A lower than average inventory turnover ratio indicates excellent inventory management practices.

Accepted Answer

A lower than average inventory turnover ratio indicates that the inventory is not selling as quickly, which means it may be tied up in excess or obsolete inventory. This is not an indication of excellent inventory management practices. Typically, higher inventory turnover ratios indicate better inventory management practices.

Question 17

Return on equity measures how much was earned for each dollar invested by the firm's creditors.

Accepted Answer

Return on equity measures how much was earned for each dollar invested by the firm's shareholders, not creditors.

Question 18

One way to make ratio analysis more meaningful is to compare the ratios of one firm to those of other firms in the same industry.

Accepted Answer

Comparing the ratios of one firm to those of other firms in the same industry provides a benchmark for the performance of the firm and helps in identifying areas of improvement.

Question 19

Bark Three Times Pet Store's accountant has recorded the following: Total current assets = $60,000, including Cash = $24,000; Accounts Receivable = $20,000; and, Inventory = $16,000. Total assets = $230,000; Total current liabilities = $48,000; and, Total current and long-term liabilities = $98,000. The store's current ratio = 1.25. The store's acid-test ratio = .92

Accepted Answer

The answer of Bark Three Times Pet Store's accountant has...

Question 20

An extremely high inventory turnover ratio may represent lost sales due to holding inadequate stocks of merchandise.

Accepted Answer

An extremely high inventory turnover ratio indicates that a company is selling its merchandise quickly, but it may also suggest that the company is not holding enough inventory to meet the demand. This can result in lost sales and missed opportunities to generate higher revenue.

Quiz 17: Understanding Accounting and Financial Information

An important difference between accounting and other business functions, such as marketing and management, is that: