Question 1

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

Accepted Answer

The formula for number of times interest is earned (also known as interest coverage ratio) is Earnings before interest and taxes (EBIT) divided by interest expense. Therefore, option A is the correct answer. Option B refers to another formula, option C refers to return on investment (ROI) and option D refers to debt to assets ratio which have different formulas.

Question 2

Which of the following statements about specific ratios is incorrect?

Accepted Answer

The debt to assets ratio is actually a solvency ratio, as it measures the amount of debt a company has in relation to its total assets and indicates the company's ability to meet its long-term debt obligations.

Question 3

Which of the following statements about financial statement analysis is incorrect?

Accepted Answer

The statement that the reason behind a financial statement ratio or percentage analysis result is usually self-evident and does not require further study or analysis is incorrect. Often, further analysis and interpretation are necessary to understand the underlying factors affecting the financial ratios or percentages.

Question 4

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

Accepted Answer

Net margin is the ratio of net income to sales, also known as the profit margin. It indicates how much profit is earned per dollar of sales.

Question 5

Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a)Ratio analysis may involve studying relationships between an item reported on the balance sheet and another reported on the income statement.
_____ b)Comparing sales in 2015 with sales for 2014 is a form of horizontal analysis.
_____ c)Comparing net income in 2015 with sales for 2015 is a form of vertical analysis.
_____ d)Liquidity ratios measure a company's ability to generate profits in the short term.
_____ e)Working capital is calculated by using the following formula: quick assets - current liabilities.

Accepted Answer

The answer of Indicate whether each of the following statements...

Question 6

Indicate whether each of the following statements is true or false.
_____ a)Some forms of financial statement analysis involve identifying changes in the same item for the same company over a period of time.
_____ b)Some forms of financial statement analysis involve comparing operations of different companies in the same industry.
_____ c)Vertical analysis is also called trend analysis.
_____ d)Horizontal analysis refers to studying the behavior of individual financial statement items over several periods.
_____ e)Horizontal analysis could be done using changes in the absolute dollar amount of an item or trends in percentages.

Accepted Answer

The answer of Indicate whether each of the following statements...

Question 7

Garrett Corporation had sales of $6,000,000,cost of sales of $4,200,000,and average inventory of $900,000.Garrett's inventory turnover ratio for the period is closest to:

Accepted Answer

The inventory turnover ratio is calculated as Cost of Sales divided by Average Inventory. For Garrett Corporation, it is $4,200,000 / $900,000 = 4.67, which is closest to 4.7 times.

Question 8

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

Accepted Answer

The debt to assets ratio measures the percentage of a company's assets that are financed by debt, providing insight into the level of risk associated with a company's debt load. This ratio is calculated by dividing total debt by total assets.

Question 9

Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a)Comparing percentages derived from financial statement analysis has the drawback of varying materiality levels.
_____ b)The materiality of accounting information refers to whether it is viewed as favorable (good news)or unfavorable (bad news).
_____ c)Companies are exempt from accounting for immaterial items in compliance with generally accepted accounting principles.
_____ d)To judge the materiality of an absolute financial statement amount,one must consider the size of the company reporting it.
_____ e)Meaningful comparisons between two companies generally should be made using percentage analysis or ratio analysis,not absolute amounts.

Accepted Answer

The answer of Indicate whether each of the following statements...

Question 10

Which ratio compares the earnings per share of a company to the market price for a share of the company's stock?

Accepted Answer

The ratio that compares earnings per share (EPS) to the market price for a share of the company's stock is called the price-earnings (P/E) ratio. This ratio is used to determine the relative value of a company's shares compared to its earnings. A high P/E ratio could suggest that the market has high expectations for the company's future earnings growth, while a low P/E ratio could indicate that the company is undervalued or has lower growth projections.

Question 11

Indicate whether each of the following statements is true or false.
_____ a)Financial statement ratios permit comparisons over time and among different companies.
_____ b)Knowledge of financial statement analysis techniques is useful to stockholders and creditors but not to the managers of a business.
_____ c)The primary objective of accounting is to provide information that is stable over time.
_____ d)Current accounting principles indicate that financial statements should be prepared to meet information needs of those who have a reasonably informed knowledge of business.
_____ e)Financial statements are aimed at the information needs of stockholders only.

Accepted Answer

The answer of Indicate whether each of the following statements...

Question 12

Steger Corporation has current assets of $450,000,total current liabilities of $350,000,net credit sales of $1,350,000,beginning accounts receivable of $165,000 and ending accounts receivable of $135,000.What is Steger's accounts receivable turnover?

Accepted Answer

The answer of Steger Corporation has current assets of $450,000,total...

Question 13

Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a)A common size income statement is prepared by converting each component to a percentage of net income.
_____ b)Common size financial statements are a form of vertical analysis,but the common size statements for two or more years may usefully be compared.
_____ c)Vertical analysis of a balance sheet involves converting each component to a percentage of stockholders' equity.
_____ d)Small percentage changes resulting from vertical analysis may still represent large dollar amounts;therefore,changes in both absolute dollar amounts and percentages should be examined.
_____ e)Vertical analysis of a company's balance sheet is useful in assessing its liquidity.

Accepted Answer

The answer of Indicate whether each of the following statements...

Question 14

Which of the following statements is correct?

Accepted Answer

Investors need to be aware that the value of a company's earnings per share can be affected by its choices of accounting principles and assumptions. Option A is incorrect as return on equity is a measure of profitability, not earnings. Option B is incorrect as earnings per share is calculated for a company's common stock. Option D is incorrect as book value per share measures the net worth of a company's equity, not the market value of its stock.

Question 15

Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a)In vertical percentage analysis,an item from the financial statements is expressed as a percentage of the same item from a previous year's financial statements.
_____ b)The reason behind a financial statement ratio or percentage analysis result is usually self-evident and does not require further study or analysis.
_____ c)Horizontal analysis for several years can be done by choosing one year as a base year and calculating increases or decreases in relation to that year.
_____ d)Vertical analysis compares two or more financial statement items within the same time period.
_____ e)One form of horizontal analysis is the preparation of common size financial statements.

Accepted Answer

The answer of Indicate whether each of the following statements...

Question 16

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?

Accepted Answer

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

Question 17

If the company purchased a $50,000 piece of equipment by paying $20,000 and having the rest financed with a short-term note from the bank,then immediately after this transaction what is the expected impact on the current ratio?

Accepted Answer

The purchase of the equipment resulted in a decrease in current assets (since $20,000 was paid out) and an increase in current liabilities (since the rest was financed with a short-term note), both by the same amount. Therefore, the current ratio (current assets divided by current liabilities) decreases.

Question 18

Which of the following is not included in the computation of the quick ratio?

Accepted Answer

The quick ratio, also known as the acid-test ratio, is a measure of a company's ability to pay off its short-term liabilities with its most liquid assets. The assets included in the quick ratio calculation are cash, marketable securities, and accounts receivable. Prepaid expenses are not considered a liquid asset and therefore are not included in the computation.

Question 19

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

Accepted Answer

Asset turnover measures how effectively a company is using its assets to generate revenue. It is calculated by dividing revenue by total assets. A higher asset turnover indicates that a company is generating more revenue with its assets, which is generally considered desirable.

Question 20

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

Accepted Answer

Solvency ratios measure a company's ability to pay its long-term debts and reflect its financing structure. Examples of solvency ratios include debt-to-equity ratio, debt-to-assets ratio, and interest coverage ratio. Profitability ratios measure a company's ability to generate profits, and liquidity ratios measure its ability to meet short-term obligations.

Quiz 13: Financial Statement Analysis

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

Which of the following statements about specific ratios is incorrect?

Which of the following statements about financial statement analysis is incorrect?

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

Garrett Corporation had sales of $6,000,000,cost of sales of $4,200,000,and average inventory of $900,000.Garrett's inventory turnover ratio for the period is closest to:

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

Which ratio compares the earnings per share of a company to the market price for a share of the company's stock?

Steger Corporation has current assets of $450,000,total current liabilities of $350,000,net credit sales of $1,350,000,beginning accounts receivable of $165,000 and ending accounts receivable of $135,000.What is Steger's accounts receivable turnover?

Which of the following statements is correct?

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?

If the company purchased a $50,000 piece of equipment by paying $20,000 and having the rest financed with a short-term note from the bank,then immediately after this transaction what is the expected impact on the current ratio?

Which of the following is not included in the computation of the quick ratio?

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

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