Question 1

A solvency ratio measures the income or operating success of a company for a given period of time.

Accepted Answer

A solvency ratio measures a company's ability to meet its long-term financial obligations, not its income or operating success.

Question 2

Which of the following would not be considered an example of a discontinued operation?

Accepted Answer

Shifting production processes within an operation would not be considered a discontinued operation as it is a change in the normal course of business, not a complete elimination of an activity or component of the business. Discontinued operations involve the complete elimination or disposal of a significant component of the business. B, C, and D all describe actions that could be considered discontinued operations.

Question 3

Danner Corporation reported net sales of $650,000, $720,000, and $780,000 in the years 2019, 2020, and 2021, respectively.If 2019 is the base year, what percentage do 2021 sales represent of the base?

Accepted Answer

To calculate the percentage that 2021 sales represent of the base year, we need to use the formula:

Percentage change = ((New value - Old value)/Old value) x 100

Using 2019 as the base year, the calculation is:

Percentage change = ((780,000 - 650,000)/650,000) x 100
Percentage change = (130,000/650,000) x 100
Percentage change = 0.2 x 100
Percentage change = 20%

Therefore, 2021 sales represent 120% of the base year (100% + 20%), which is equivalent to choice B.

Question 4

Boone Trading Company reported net sales of $400,000, $440,000, and $560,000 in the years 2019, 2020, and 2021, respectively.If 2019 is the base year, what is the trend percentage for 2021?

Accepted Answer

To calculate the trend percentage for 2021, we need to use the formula:

(Trend in 2021 / Base year amount) x 100

Where the trend in 2021 is the difference between the net sales in 2021 and the base year amount (2019).

Trend in 2021 = $560,000 - $400,000 = $160,000

Using the formula, we get:

(Trend in 2021 / Base year amount) x 100 = ($160,000 / $400,000) x 100 = 40%

Therefore, the trend percentage for 2021 is 40%.

To get the percentage increase from the base year to 2021, we add the trend percentage to 100%:

100% + 40% = 140%

Therefore, the net sales in 2021 increased by 140% from the base year (2019), which is the answer choice C.

Question 5

Cochran Corporation, Inc.has the following income statement (in millions):  Using vertical analysis, what percentage is assigned to Cost of goods sold?

Accepted Answer

Vertical analysis involves dividing each item on the income statement by total revenue. Cost of goods sold is the largest item on this income statement, which means it will have the highest percentage when using vertical analysis. To find the percentage assigned to Cost of goods sold, we divide $2,525 million (COGS) by $4,025 million (total revenue) and multiply by 100 to get 62.71%, which we can round up to 63%. Therefore, the best choice is B, with Cost of goods sold assigned 63% of the total revenue.

Question 6

In ratio analysis, the ratios are never expressed as a

Accepted Answer

Ratios in financial analysis are typically expressed as rates, percentages, or simple proportions to provide insights into the financial health of a company, but not as logarithms, which are a mathematical way to represent exponential relationships and are not used in expressing financial ratios.

Question 7

Which one of the following would not be considered a liquidity ratio?

Accepted Answer

Return on assets is a profitability ratio and not a liquidity ratio. A liquidity ratio measures a company's ability to meet short-term obligations by analyzing its current assets and liabilities. Examples of liquidity ratios include the current ratio, quick ratio, and cash ratio. Inventory turnover and average collection period are also examples of liquidity ratios as they analyze the company's ability to turn inventory into cash and collect outstanding debts, respectively.

Question 8

Which one of the following ratios would not likely 1.evaluating whether to sell on credit to a company?

Accepted Answer

Asset turnover is more related to how efficiently a company uses its assets to generate sales, rather than its ability to manage credit sales or collect receivables.

Question 9

The following information pertains to Unique Company.Assume that all balance sheet amounts represent both average and ending balance figures.Assume that all sales were on credit.  What is the return on assets for this company?

Accepted Answer

The answer of The following information pertains to Unique Company.Assume...

Question 10

The following items were taken from the financial statements of Kramer Manufacturing, Inc., over a 3-year period:  Instructions
Using horizontal analysis and 2019 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit.Explain whether the trends are favorable or unfavorable for each item.

Accepted Answer

The answer of The following items were taken from the...

Question 11

Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Accepted Answer

Pro forma earnings are not based on specific rules and can be manipulated or adjusted in various ways, making them less reliable than GAAP earnings.

Question 12

Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends.

Accepted Answer

Intracompany comparisons allow for the analysis of financial performance over time and can reveal shifts in financial patterns and trends. By comparing financial statement items such as revenues, expenses, and net income over multiple periods, companies can identify areas of strength and weakness and take action to improve their financial health.

Question 13

The current ratio is a measure of all the ratios calculated for the current year.

Accepted Answer

The current ratio specifically measures a company's ability to pay short-term and long-term obligations, not all types of financial ratios.

Question 14

Other comprehensive income is reported on the statement of comprehensive income immediately

Accepted Answer

Other comprehensive income is reported on the statement of comprehensive income after discontinued operations, as it includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, which are not part of the net income.

Question 15

In analyzing financial statements, horizontal analysis is a

Accepted Answer

Horizontal analysis is a tool used to exhibit changes in financial statement items over a period of time, often as a percentage change.

Question 16

Comparisons of data within a company are an example of the following comparative basis

Accepted Answer

Intracompany comparisons involve the analysis of data within the same company over different periods of time. This type of comparison can help identify trends and changes in performance within the company.

Question 17

Cochran Corporation, Inc.has the following income statement (in millions):  Using vertical analysis, what percentage is assigned to Net income?

Accepted Answer

The answer of Cochran Corporation, Inc.has the following income statement...

Question 18

The current ratio is

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities. A ratio above 1 indicates that a company has enough current assets to cover its current liabilities, while a ratio below 1 indicates that a company may have difficulty meeting its short-term obligations.

Question 19

The asset turnover is

Accepted Answer

The asset turnover ratio measures a company's ability to generate revenue from its assets. It is calculated by dividing net sales by average total assets. Therefore, choice C is the correct answer.

Question 20

Ratios are used as tools in financial analysis

Accepted Answer

Ratios are useful because they can provide insights and reveal trends that may not be visible just by looking at the individual components of financial statements. They allow for comparisons across time periods and among different companies. While single ratios may be meaningful on their own, more comprehensive analysis usually requires examining multiple ratios together. GAAP does not prescribe specific ratios to be used in analyzing financial statements.

Quiz 13: Financial Analysis: the Big Picture