Question 1

Lilly Corporation has working capital of $620,000, and Harmon Corporation has working capital of $840,000. Which of the following statements is not true?
A)The current assets of both corporations are greater than the current liabilities.
B)Since working capital is an absolute amount, other factors such as size of the company and materiality will help to determine liquidity of these two companies.
C)Since Harmon's working capital exceeds Lilly's working capital, it is safe to conclude that Harmon is more liquid than Lilly.
D)If Lilly Corporation is smaller than Harmon or has lower current liabilities; Lilly could be more liquid than Harmon.

Accepted Answer

Just because Harmon's working capital exceeds Lilly's working capital, it does not automatically mean that Harmon is more liquid. Other factors such as size of the company and materiality will help to determine liquidity. It is possible that if Lilly Corporation is smaller than Harmon or has lower current liabilities, Lilly could be more liquid than Harmon. Option A is true for both corporations, and option B is also correct as other factors such as size and materiality would determine liquidity. Option D is also a possibility, making option C the only statement that is not necessarily true.

Question 2

Cost of goods sold divided by average inventory is the formula for which of these analytical measures?
A)Number of day's sales in inventory
B)Return on investment
C)Inventory turnover
D)Debt to assets ratio

Accepted Answer

The formula for inventory turnover is Cost of goods sold divided by average inventory. The formula given is used to calculate inventory turnover, which measures how quickly a company is able to sell its inventory and replace it with new inventory.

Question 3

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?
A)Debt to assets ratio
B)Earnings per share
C)Return on investment
D)Number of times interest is earned

Accepted Answer

The formula for earnings before interest and taxes divided by interest expense is commonly known as the number of times interest is earned. This is a measure of a company's ability to pay its interest expenses, and a higher number indicates a company has more earnings available to cover its interest obligations. The formula mentioned in the question is commonly used to calculate the number of times interest is earned, which measures a company's ability to cover its interest payments with its earnings before interest and taxes (EBIT).

Question 4

Short-term creditors are usually most interested in assessing:
A)Liquidity.
B)Solvency.
C)Managerial effectiveness.
D)Profitability.

Accepted Answer

Short-term creditors are primarily concerned with whether or not a company has enough current assets to cover its current liabilities, which is a measure of liquidity. This ensures that the company has enough cash and other liquid assets to cover its short-term obligations. Solvency, profitability, and managerial effectiveness are important but are typically of more concern to long-term creditors, shareholders, and management, respectively. Short-term creditors, such as suppliers and lenders, are most concerned with the ability of a company to meet its current obligations. This is reflected in the company's liquidity, which refers to its ability to generate enough cash to pay its bills as they come due. Short-term creditors are less concerned with profitability or long-term solvency, as their focus is on the immediate ability of the company to pay its debts. Managerial effectiveness may be important in the long run, but short-term creditors are primarily concerned with the company's ability to meet short-term obligations.

Question 5

If a company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank. Immediately after this transaction what is the expected impact on the components of the current ratio?
A)Current assets decrease and current liabilities increase by the same amount.
B)Current liabilities decrease.
C)Current assets and current liabilities decrease by the same amount.
D)Current assets increase.

Accepted Answer

The current asset component of the current ratio will decrease by the amount of cash used to purchase the equipment ($30,000) while the current liability component will increase by the same amount with the addition of the short-term note from the bank. Therefore, both components decrease and increase by the same amount, leading to no overall impact on the current ratio.

Question 6

Two ratios that provide insight on the relationship between credit sales and receivables are:
A)Current ratio and inventory turnover ratio.
B)Accounts receivable turnover and average days to collect receivables.
C)Average days to collect receivables and asset turnover.
D)Accounts receivable turnover and current ratio.

Accepted Answer

The accounts receivable turnover ratio measures how quickly a company collects its outstanding credit sales, while the average days to collect receivables measures the average number of days it takes for a company to collect its credit sales. Together, these ratios provide insight into how efficiently a company is managing its receivables and collecting its credit sales. The other choices are not directly related to receivables and credit sales. The accounts receivable turnover ratio measures how many times a company collects its average accounts receivable balance during a period, while the average days to collect receivables ratio measures the average number of days it takes to collect receivables from customers. Together, these ratios provide insight into how efficiently a company is managing its accounts receivable and collecting credit sales.

Question 7

Net income divided by net sales is the formula for which of these analytical measures?
A)Return on assets
B)Return on equity
C)Earnings per share
D)Net margin

Accepted Answer

Net margin is the analytical measure that is calculated by dividing net income by net sales. It represents the percentage of revenue that is left over after deducting all the expenses. Return on assets (ROA) is calculated by dividing net income by total assets, while return on equity (ROE) is calculated by dividing net income by shareholder's equity. Earnings per share (EPS) is calculated by dividing net income by the number of outstanding shares of common stock. Net income divided by net sales is the formula for net margin, also known as profit margin, which measures a company’s profitability by indicating how much profit is generated from each dollar of revenue.

Question 8

Assume that you are considering purchasing some of a company's long-term bonds as an investment. Which of the company's financial statement ratios would you probably be most interested in?
A)Debt to assets ratio
B)Debt to equity
C)Plant assets to long-term liabilities
D)All of these answers choices are correct.

Accepted Answer

All of these ratios are important for assessing the company's financial health and ability to meet long-term obligations, which is crucial for bond investors.

Question 9

In vertical analysis of a balance sheet, each item is expressed as a percentage of:
A)Total assets.
B)Total cash.
C)Total current assets.
D)None of these answers choices are correct.

Accepted Answer

In vertical analysis of a balance sheet, each item is expressed as a percentage of total assets, which helps to assess the relative importance of different items in the balance sheet.

Question 10

Which of the following statements is correct regarding the quick ratio?
A)The numerator for the quick ratio is current assets minus inventory minus accounts receivable.
B)The numerator for the quick ratio is current assets.
C)The quick ratio is also called the working capital ratio.
D)The quick ratio is a more conservative variation of the current ratio.

Accepted Answer

The quick ratio, unlike the current ratio, excludes inventory and other less liquid current assets from the numerator, making it a more conservative measure of a company's liquidity. It focuses on the most liquid assets, providing a stricter view of a company's ability to meet short-term obligations.

Question 11

The study of an individual item or account over several periods in the same financial year or over many years is known as:
A)Liquidity analysis
B)Ratio analysis
C)Vertical analysis
D)Horizontal analysis

Accepted Answer

Horizontal analysis involves studying the trend of an individual item or account over several periods in the same financial year or over many years. It allows for the analysis of changes in financial statements over time, including changes in revenues, expenses, assets, liabilities, and equity. The study of an individual item or account over several periods in the same financial year or over many years is known as horizontal analysis. Liquidity analysis refers to the ability of a company to meet its short-term debt obligations. Ratio analysis is the comparison of different financial ratios to draw conclusions about the company's financial health. Vertical analysis is the analysis of financial statements in which each item is shown as a percentage of a base figure within the same period.

Question 12

Which ratio measures the percentage of a company's assets that are financed by debt?
A)Debt to assets ratio
B)Asset turnover
C)Debt to equity
D)Return on investment

Accepted Answer

The debt to assets ratio measures the percentage of a company's assets that are financed by debt. It is calculated by dividing total debt by total assets. The ratio is an indicator of a company's leverage and financial risk. A high debt to assets ratio indicates that a company relies heavily on debt to finance its operations, which can increase financial risk. The Debt to assets ratio specifically measures the percentage of a company's assets that are financed by debt. The formula for this ratio is total liabilities divided by total assets.

Question 13

Which type of ratios measure a company's long-term debt paying ability and its financing structure?
A)Solvency
B)Liquidity
C)Profitability
D)None of these answers choices are correct.

Accepted Answer

Solvency ratios measure a company's ability to pay off its long-term debt and also provide insight into its financing structure. Examples of solvency ratios include debt-to-equity ratio, interest coverage ratio, and debt-to-assets ratio.

Question 14

Which ratio would you use to examine a company's ability to pay its debts in the short-term?
A)Earnings per share
B)Acid-test ratio
C)Debt to assets ratio
D)Return on equity

Accepted Answer

The acid-test ratio (also known as quick ratio) measures a company's ability to pay its short-term debts using its most liquid assets (such as cash, marketable securities, and accounts receivable). It excludes inventory because it may take longer to convert into cash. A higher acid-test ratio indicates a better ability to cover short-term obligations. The acid-test ratio measures a company's ability to pay its short-term debts with its most liquid assets. It excludes inventory and other less liquid assets from the calculation, providing a more conservative view of a company's liquidity.

Question 15

Starwood Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $1,300,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starwood's accounts receivable turnover?
A)21.8 times
B)19.4 times
C)22.4 times
D)5.8 times

Accepted Answer

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Average Accounts Receivable = ($65,000 + $69,000) / 2 = $67,000

Accounts Receivable Turnover = $1,300,000 / $67,000
Accounts Receivable Turnover = 19.4 times Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Average Accounts Receivable = ($65,000 + $69,000) / 2 = $67,000
Accounts Receivable Turnover = $1,300,000 / $67,000 = 19.4 times

Question 16

In vertical analysis of an income statement, each item is expressed as a percentage of:
A)Total expenses.
B)Net income.
C)Sales.
D)None of these answers choices are correct.

Accepted Answer

In vertical analysis of an income statement, each item is expressed as a percentage of sales. This helps in determining the proportion of revenue that is being consumed by each expense item, and allows for better comparison across periods and with industry benchmarks.

Question 17

Horizontal analysis is also known as:
A)Liquidity analysis.
B)Trend analysis.
C)Revenue analysis.
D)Variance analysis.

Accepted Answer

Horizontal analysis compares financial data over a series of time periods to identify trends and changes. It is also known as trend analysis. Options A, C, and D are incorrect as they refer to different forms of financial analysis. Horizontal analysis is also known as trend analysis as it involves analyzing the trends and changes in financial statements over a period of time. It is used to evaluate the performance and progress of a company over the years. Option A is incorrect as liquidity analysis involves measuring a company's ability to meet short-term obligations. Option C is incorrect as revenue analysis is a type of vertical analysis that analyzes the revenue of the company in relation to its total assets or equity. Option D is incorrect as variance analysis is a tool used in management accounting to analyze the difference between actual and expected results.

Question 18

Which ratio measures how effectively a company is using assets to generate revenue?
A)Net margin
B)Plant assets to long-term liabilities
C)Asset turnover
D)Inventory turnover

Accepted Answer

Asset turnover is the ratio that measures how efficiently a company is using its assets to generate revenue. It is calculated by dividing revenue by total assets. A higher asset turnover ratio indicates that a company is generating more revenue per dollar of assets, which is a positive sign of effective asset utilization. Options A, B, and D may also provide information about a company's performance, but they do not directly measure asset utilization. Asset turnover measures how effectively a company is using its assets to generate revenue. It is calculated by dividing the revenue by the total assets. A higher asset turnover ratio suggests that the company is using its assets efficiently to generate revenue.

Question 19

Long-term creditors are usually most interested in evaluating:
A)Liquidity.
B)Managerial effectiveness.
C)Solvency.
D)Profitability.

Accepted Answer

Long-term creditors primarily concern themselves with the company's ability to repay the debt over the long term, which is evaluated through solvency analysis. This involves examining the company's debt to equity ratio, interest coverage ratio, and other financial ratios that indicate whether the company has enough assets to cover its liabilities. Liquidity is more relevant to short-term creditors, while profitability and managerial effectiveness are important to shareholders or investors. Long-term creditors are primarily concerned about a company's ability to meet its long-term obligations, which is measured by solvency ratios such as debt-to-equity, interest coverage, and debt service coverage ratios. They are less interested in short-term liquidity or profitability, as these factors do not directly impact a company's ability to repay its long-term debt. Managerial effectiveness may be important in the long-term success of a company, but it is not a primary concern for creditors evaluating a company's creditworthiness.

Question 20

Which type of approach may be used when evaluating corporate results using horizontal analysis?
A)Study of absolute amounts
B)Percentages
C)Trends
D)All of these answers choices are correct.

Accepted Answer

Horizontal analysis involves comparing financial data over multiple periods, which can include studying absolute amounts, percentages, and trends to evaluate corporate results comprehensively.

Quiz 14: Financial Statement Analysis Available Online in Connect

Lilly Corporation has working capital of $620,000, and Harmon Corporation has working capital of $840,000. Which of the following statements is not true?

Cost of goods sold divided by average inventory is the formula for which of these analytical measures?

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

Short-term creditors are usually most interested in assessing:

If a company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank. Immediately after this transaction what is the expected impact on the components of the current ratio?

Two ratios that provide insight on the relationship between credit sales and receivables are:

Net income divided by net sales is the formula for which of these analytical measures?

Assume that you are considering purchasing some of a company's long-term bonds as an investment. Which of the company's financial statement ratios would you probably be most interested in?

In vertical analysis of a balance sheet, each item is expressed as a percentage of:

Which of the following statements is correct regarding the quick ratio?

The study of an individual item or account over several periods in the same financial year or over many years is known as:

Which ratio measures the percentage of a company's assets that are financed by debt?

Which type of ratios measure a company's long-term debt paying ability and its financing structure?

Which ratio would you use to examine a company's ability to pay its debts in the short-term?

Starwood Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $1,300,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starwood's accounts receivable turnover?

In vertical analysis of an income statement, each item is expressed as a percentage of:

Horizontal analysis is also known as:

Which ratio measures how effectively a company is using assets to generate revenue?

Long-term creditors are usually most interested in evaluating:

Which type of approach may be used when evaluating corporate results using horizontal analysis?