Question 1

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?
A)No impact
B)Increase it
C)Decrease it
D)Not enough information is provided to answer the question.

Accepted Answer

A collection on account is an asset exchange transaction;the current asset account Cash increases and the current asset account Accounts Receivable decreases.The current ratio is calculated by dividing current assets by current liabilities.Since there is no impact on either the numerator or denominator,this transaction has no impact on the current ratio.

Question 2

Milton Company has total current assets of $50,000, including inventory of $12,500, and current liabilities of $26,000. The company's current ratio is:
A)0.52.
B)1.92.
C)2.40.
D)1.44.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. In this case, the current ratio is $50,000/$26,000 = 1.92.

Question 3

The study of an individual financial statement item over several accounting periods is called:
A)Horizontal analysis.
B)Vertical analysis.
C)Ratio analysis.
D)Time and motion analysis.

Accepted Answer

Horizontal analysis involves the comparison of a specific financial statement item over several accounting periods. It is also known as trend analysis. Vertical analysis involves the comparison of individual items to a base amount or total within the same accounting period. Ratio analysis involves the calculation and evaluation of financial ratios to assess a company's performance and financial health. Time and motion analysis is not related to financial statement analysis. Horizontal analysis involves the comparison of financial statement items over several accounting periods to identify trends or changes in performance. Vertical analysis involves the comparison of different items within the same accounting period, while ratio analysis involves the calculation of various financial ratios to evaluate an entity's financial performance. Time and motion analysis is not related to financial statement analysis.

Question 4

Knell Company paid its sales employees $15,000 in sales commissions. What impact will this transaction have on the firm's working capital?
A)No impact
B)Increase it
C)Decrease it
D)Not enough information is provided to answer the question.

Accepted Answer

When the company pays sales commissions, it is decreasing its cash balance, which in turn decreases its working capital. Therefore, this transaction will decrease the firm's working capital. Paying sales commissions results in a decrease in cash and therefore a decrease in working capital.

Question 5

Working capital is defined as:
A)Current assets divided by current liabilities.
B)Total assets minus total liabilities.
C)Current assets minus current liabilities.
D)Current liabilities divided by total liabilities.

Accepted Answer

Working capital is the difference between current assets (such as cash, inventory, and accounts receivable) and current liabilities (such as accounts payable and short-term debt). Therefore, the correct formula is C) Current assets minus current liabilities.

Question 6

Which of the following statements regarding ratio analysis is not true?
A)Ratio analysis is a specific form of horizontal analysis.
B)There are many different ratios available for evaluating a firm's performance.
C)Some ratios involve an account from the balance sheet and one from the income statement.
D)Ratio analysis involves making comparisons between different accounts in the same set of financial statements.

Accepted Answer

Ratio analysis is not a specific form of horizontal analysis. Horizontal analysis involves comparing financial data over a period of time, while ratio analysis involves comparing different accounts within the same set of financial statements. Ratio analysis is a form of financial analysis that involves making comparisons between different accounts in the same set of financial statements. It is not a specific form of horizontal analysis, which involves analyzing changes in financial data over time.

Question 7

Which of the following statements regarding the information disclosed in financial statements is not true?
A)The costs of providing all possible information about a firm would be prohibitively high for the business.
B)Some information disclosed in financial statements may be irrelevant to some users.
C)Financial statements should be detailed enough to answer any financial-related question an investor might have.
D)When too much information is presented users may suffer from information overload.

Accepted Answer

While financial statements should provide sufficient information to make informed decisions, it is not feasible or necessary to include every single detail. Providing all possible information would be costly and inefficient, and some information may not be relevant to all users. However, financial statements should still provide enough detail to give a clear representation of a company's financial position and performance. Financial statements should provide relevant and necessary information for users to make informed decisions. However, it is not necessary or feasible for financial statements to answer every possible financial-related question an investor might have. Providing too much irrelevant information can actually hinder users' ability to make decisions and lead to information overload. Therefore, financial statements should strike a balance between providing enough relevant information and avoiding presenting unnecessary details.

Question 8

Darden Company has cash of $37,000, accounts receivable of $47,000, inventory of $24,500, and equipment of $67,000. Assuming current liabilities of $32,500, this company's working capital is:
A)$51,500.
B)$76,000.
C)$106,000.
D)$14,500.

Accepted Answer

The answer of Darden Company has cash of $37,000, accounts...

Question 9

Financial ratios can be used to assess which of the following aspects of a firm's performance?
A)Liquidity
B)Solvency
C)Profitability
D)All of these answer choices are correct.

Accepted Answer

Financial ratios can be used to assess a firm's liquidity, solvency, and profitability. Assessing all three aspects is important for a comprehensive understanding of a firm's financial performance. Financial ratios can be used to assess a company's liquidity, solvency, and profitability. Looking at multiples ratios gives a comprehensive picture of a company's overall financial health. Therefore, all the answer choices are correct.

Question 10

Which of the following statements regarding the quick ratio is not true?
A)The quick ratio is also known as the acid-test ratio.
B)The quick ratio ignores some current assets that are less liquid than others.
C)The quick ratio is a conservative variation of the current ratio.
D)The quick ratio equals quick assets divided by total liabilities.

Accepted Answer

This statement is incorrect because the quick ratio equals quick assets divided by current liabilities, not total liabilities. The statement "The quick ratio equals quick assets divided by total liabilities" is not true. The quick ratio is calculated by dividing quick assets (cash, marketable securities, and accounts receivable) by current liabilities.

Question 11

Financial statement analysis involves forms of comparison including:
A)Comparing changes in the same item over a number of periods.
B)Comparing key relationships within the same year.
C)Comparing key items to industry averages.
D)All of these answer choices are correct.

Accepted Answer

Financial statement analysis involves all of these forms of comparison, including comparing changes in the same item over a number of periods, comparing key relationships within the same year, and comparing key items to industry averages. Each of these forms of comparison provides valuable insights into a company's financial performance and financial health. Financial statement analysis involves all forms of comparison including comparing changes in the same item over a number of periods, comparing key relationships within the same year, and comparing key items to industry averages. Therefore, all answer choices are correct.

Question 12

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:
A)$12,000.
B)$52,000.
C)$144,000.
D)$84,000.

Accepted Answer

Working capital = Current assets- Current liabilities
Working capital = ($40,000 + $60,000 + $32,000)- $48,000 = $84,000

Question 13

Select the correct statement regarding vertical analysis.
A)Vertical analysis of the income statement involves showing each item as a percentage of sales.
B)Vertical analysis of the balance sheet involves showing each asset as a percentage of total assets.
C)Vertical analysis examines two or more items from the financial statements of one accounting period.
D)All of these answer choices are correct.

Accepted Answer

Vertical analysis involves presenting a financial statement item as a percentage of a base amount within the same statement. The base amount differs for the balance sheet and income statement. In the balance sheet, the base amount is total assets, while in the income statement, it is sales or revenue. Therefore, statement A and B are correct. Additionally, vertical analysis can examine two or more items from the financial statements of one accounting period. Therefore, statement C is also correct. Hence, the correct answer is D- All of these answer choices are correct. All of the answer choices are correct. Vertical analysis involves showing each item on a financial statement as a percentage of a relevant base, such as sales for the income statement or total assets for the balance sheet. It can also examine multiple items within a single accounting period.

Question 14

All of the following are measures of a company's short-term debt-paying ability except:
A)Current ratio.
B)Earnings per share.
C)Inventory turnover.
D)Average collection period.

Accepted Answer

Earnings per share is not a measure of a company's short-term debt-paying ability. It is a measure of a company's profitability and represents the amount of earnings that can be attributed to each share of common stock. The other three choices, current ratio, inventory turnover, and average collection period, are all measures of a company's ability to pay off short-term debts.

Question 15

Which of the following is (are)objective(s)of ratio analysis?
A)Assessing past performance.
B)Assessing the prospects for future performance.
C)Analyzing how a company finances its operations.
D)All of these answer choices are correct.

Accepted Answer

All of the given answer choices are correct objectives of ratio analysis. Ratio analysis allows for an assessment of past performance, an evaluation of future prospects by analyzing trends, and an understanding of a company's financing strategies. Therefore, option D is the best choice.

Question 16

Which of the following statements regarding horizontal analysis is not true?
A)Percentage analysis involves computing the percentage relationship between two amounts.
B)A horizontal analysis of cost of goods sold on the income statement includes dividing gross margin by total revenue.
C)Horizontal analysis attempts to eliminate the materiality problem of comparing firms of different sizes.
D)In horizontal percentage analysis, a financial statement line item is expressed as a percentage of the previous balance of the same item.

Accepted Answer

The statement "A horizontal analysis of cost of goods sold on the income statement includes dividing gross margin by total revenue" is not true. In horizontal analysis, cost of goods sold would be analyzed by comparing the current year's cost of goods sold to the previous year's cost of goods sold, not by dividing gross margin by total revenue.

Question 17

Current financial reporting standards assume that users of accounting information:
A)Have an expert's understanding of economic and financial events and conditions.
B)Have a reasonably informed knowledge of business.
C)Have widely differing levels of knowledge about business, and that financial reporting must meet these differing needs.
D)Have only minimal knowledge of business.

Accepted Answer

Current financial reporting standards assume that users of accounting information have a reasonably informed knowledge of business. This means that users are expected to have a basic understanding of economic and financial events and conditions to interpret financial reports accurately. However, this does not assume an expert-level understanding of business or financial reporting. Current financial reporting standards assume that users of accounting information have a reasonably informed knowledge of business. This means that they are not expected to have an expert's understanding of economic and financial events and conditions, but they are expected to have a basic understanding of business operations and financial terminology.

Question 18

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:
A)Ratio analysis.
B)Contribution analysis.
C)Horizontal analysis.
D)Vertical analysis.

Accepted Answer

Vertical analysis uses percentages to compare each part of an individual statement to a key dollar amount from the financial statements. Ratio analysis compares relevant financial statement items to one another, contribution analysis focuses on the contribution margin of a product or service, and horizontal analysis compares financial statement items over time. Therefore, the best choice is D. Vertical analysis compares each part of a financial statement to a key dollar amount, typically the total for that statement. The results are presented as percentages, allowing for easy comparison across time periods or among different companies. Ratio analysis compares two or more financial quantities on a statement, while contribution analysis breaks down costs and revenues to determine the impact of each individual component on profitability. Horizontal analysis compares financial data from multiple time periods to track changes over time.

Question 19

Common methods of financial statement analysis include all of the following except:
A)Incremental analysis.
B)Horizontal analysis.
C)Vertical analysis.
D)Ratio analysis.

Accepted Answer

Incremental analysis is not a common method of financial statement analysis. It is a decision-making tool that helps managers determine whether or not to proceed with a specific course of action, such as accepting a new project or expanding operations. The common methods of financial statement analysis are horizontal analysis, vertical analysis, and ratio analysis. Incremental analysis is not a common method of financial statement analysis. It is a technique used to assess the financial impact of a specific decision or event. The other three options, horizontal analysis, vertical analysis, and ratio analysis are all common methods of financial statement analysis.

Question 20

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is not true?
A)Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area.
B)To correctly evaluate an absolute amount, the analyst must consider its relative importance.
C)Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses.
D)Using absolute amounts eliminates the problem of varying materiality levels.

Accepted Answer

Using absolute amounts does not eliminate the problem of varying materiality levels as what may be significant for one company may not be significant for another. Therefore, analysts must consider the relative importance of an absolute amount when evaluating a company's financial performance. Using absolute amounts does not eliminate the problem of varying materiality levels. Materiality is a subjective concept and varies depending on the context and user of financial statements. Therefore, analysts must still consider the relative importance of the absolute amounts reported.

Quiz 14: Financial Statement Analysis Available Online in Connect

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?

Milton Company has total current assets of $50,000, including inventory of $12,500, and current liabilities of $26,000. The company's current ratio is:

The study of an individual financial statement item over several accounting periods is called:

Knell Company paid its sales employees $15,000 in sales commissions. What impact will this transaction have on the firm's working capital?

Working capital is defined as:

Which of the following statements regarding ratio analysis is not true?

Which of the following statements regarding the information disclosed in financial statements is not true?

Darden Company has cash of $37,000, accounts receivable of $47,000, inventory of $24,500, and equipment of $67,000. Assuming current liabilities of $32,500, this company's working capital is:

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Which of the following statements regarding the quick ratio is not true?

Financial statement analysis involves forms of comparison including:

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

Select the correct statement regarding vertical analysis.

All of the following are measures of a company's short-term debt-paying ability except:

Which of the following is (are) objective(s) of ratio analysis?

Which of the following statements regarding horizontal analysis is not true?

Current financial reporting standards assume that users of accounting information:

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

Common methods of financial statement analysis include all of the following except:

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is not true?