Question 1

Ratio analysis only involves relationships within a single accounting period.

Accepted Answer

Ratio analysis may involve comparing financial data from different accounting periods, such as comparing a company's current ratio this year to the same ratio from last year. This type of analysis is known as trend analysis.

Question 2

The current ratio is one indicator of the liquidity of a company.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay off its short-term liabilities with its current assets. Therefore, a higher current ratio indicates better liquidity, while a lower current ratio may indicate difficulty meeting short-term obligations.

Question 3

The debt to equity ratio is a test of liquidity of the company.

Accepted Answer

The debt to equity ratio is actually a measure of a company's leverage or financial leverage, which indicates how much debt the company is using to finance its operations compared to how much equity it has. It does not directly measure liquidity.

Question 4

A primary objective of financial statements is to provide information to current and potential investors and creditors.

Accepted Answer

Financial statements are primarily used to provide information to investors and creditors to help them make informed decisions about whether to invest or lend money to a company.

Question 5

To compute component percentages for the income statement,the base amount is profit.

Accepted Answer

The base amount for computing component percentages for the income statement is usually total revenue, not profit. Component percentages represent the proportion of each expense or revenue item in relation to the total revenue.

Question 6

In 2012,C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9 days.In 2012,P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and 37.6 days.Which of the following statements is false?
A)The higher turnover ratio for C Co hurts their liquidity.
B)P Co's lower turnover ratio has an inverse relationship to its days' sales tied up in receivables.
C)P Co's management has done a better job of managing their receivables.
D)C Co appears to be more profitable than P Co.

Accepted Answer

The answer of In 2012,C Co's receivables turnover ratio and...

Question 7

Management's success at containing the effects of uncontrollable risks and managing in the face of uncertainties plays a role in analysts' predictions of the future economic health of a specific company.

Accepted Answer

Management's ability to manage risks and uncertainties can impact the future economic health of a company, which is taken into account by analysts when making predictions.

Question 8

Financial statements provide important information to help users understand and evaluate corporate strategy.

Accepted Answer

Financial statements contain important information such as revenue, expenses, assets, and liabilities that are essential for stakeholders to assess a company's financial performance, position, and prospects. By analyzing financial statements, users can gain insights into the company's profitability, liquidity, solvency, efficiency, and risk management. This information can be used to evaluate the effectiveness of corporate strategies such as investments, acquisitions, divestitures, cost-cutting measures, R&D, marketing, and expansion plans. Therefore, financial statements are a vital source of information for investors, creditors, analysts, regulators, employees, customers, and other stakeholders who need to make informed decisions about a company's future.

Question 9

In 2012,C Co's total liabilities were $10,742 million and shareholders' equity was $8,403 million.In 2012,P Co's total liabilities were $16,259 million and their shareholders' equity was $6,401 million.Which of the following statements is false?
A)C Co's debt to equity ratio was 1.28 and P Co's was 2.54.
B)C Co has only about 56.1% of its assets financed by debt while P Co has about 71.8% of assets financed by debt.
C)P Co is a much higher leveraged company providing greater financial risk for investors but potential higher return on owners' investment to its shareholders.
D)C Co is more profitable than P Co.

Accepted Answer

There is no information about the profitability of C Co and P Co given in the statement. Hence, statement D is false. Statements A, B, and C are true as they can be calculated using the provided information.

Question 10

A weakness of the current ratio is
A)the difficulty of the calculation.
B)that it doesn't take into account the composition of the current assets.
C)that it is rarely used by sophisticated analysts.
D)that it can be expressed as a percentage,as a rate,or as a proportion.

Accepted Answer

The current ratio only considers the total amount of current assets and current liabilities, without taking into account the specific composition of each. This can lead to a misleading representation of a company's liquidity position. For example, a company with a high amount of inventory might have a high current ratio but might struggle to convert that inventory to cash in a timely manner. sophisticated analysts consider other liquidity ratios such as the quick ratio or cash ratio for a more accurate picture of a company's liquidity.

Question 11

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability.As a result of this transaction,the current ratio and working capital will
A)both decrease.
B)both increase.
C)remain the same and decrease,respectively.
D)increase and remain the same,respectively.

Accepted Answer

The current ratio increases because the reduction in current liabilities is proportionally greater than the reduction in current assets. Working capital remains the same because both current assets and current liabilities decrease by the same amount ($1,000).

Question 12

An aircraft company would most likely have
A)a high inventory turnover.
B)a low profit margin.
C)high volume.
D)a low inventory turnover.

Accepted Answer

Aircraft companies typically have a low inventory turnover due to the high cost and long production times of aircraft, meaning they do not sell their inventory as quickly as companies in other industries.

Question 13

A new company with a high property,plant,and equipment balance would most likely be which of the following?
A)A tee shirt company.
B)A hotel.
C)A pizza take-out company.
D)A hot dog vendor on an airport concourse.

Accepted Answer

A hotel requires a significant investment in property, plant, and equipment including land, buildings, furniture, fixtures, and other assets needed to provide lodging services. The other options listed generally require lower levels of capital investment in these types of assets.

Question 14

In 2012,C Co's gross profit ratio was 70.4% and their profit margin was 18.8%.In 2012,P Co's gross profit ratio was 58.3% and their profit margin was 8.9%.Which of the following is false?
A)C Co's cost of goods sold was a lower percentage of sales than P Co's.
B)In 2012,C Co's profit margin was 111.2% greater than P Co's which would contribute to a higher return on total investment.
C)The major reason for P Co's lower profit margin is that their selling,general and administrative expenses were double the percentage of sales compared to C Co's percentage.
D)C Co looks to be a better investment than P Co.

Accepted Answer

The major reason for P Co's lower profit margin is not necessarily due to higher selling, general, and administrative expenses being double the percentage of sales compared to C Co's. Other factors could contribute to the lower profit margin.

Question 15

The inventory turnover ratio is calculated by dividing
A)cost of goods sold by the ending inventory.
B)cost of goods sold by the beginning inventory.
C)cost of goods sold by the average inventory.
D)average inventory by cost of goods sold.

Accepted Answer

The inventory turnover ratio is computed by dividing the cost of goods sold by the average inventory. This measures the efficiency of the company's inventory management by determining how many times the average inventory is sold and restocked over a given period. Option A and B are incorrect because they use only the ending or beginning inventory, which may not reflect the inventory fluctuations throughout the year. Option D is also incorrect because it reverses the numerator and denominator, which does not yield the inventory turnover ratio.

Question 16

The only way an investor will get a return on shares while they own the shares is for the corporation to distribute a dividend.

Accepted Answer

The answer of The only way an investor will get...

Question 17

A general rule to use in assessing the average collection period is that it
A)should not greatly exceed the credit term period.
B)should not exceed 30 days.
C)can be any length as long as the customer continues to buy merchandise.
D)should not greatly exceed the discount period.

Accepted Answer

The average collection period is the time it takes for a business to receive payment for its accounts receivable. Ideally, the average collection period should not greatly exceed the credit term period, which is the time allowed for customers to pay their invoices. This ensures that the business is receiving payments on time and is not facing cash flow problems. A longer average collection period can indicate that customers are not paying on time, which can lead to bad debts and financial difficulties for the business.

Question 18

In 2012,C Co's return on owners' equity (ROE)was 45.1%,and return on assets (ROA)was 19.6%.In 2012,P Co's return on owners' equity (ROE)was 29.9% while return on assets was 9.3%.Which of the following statements is false?
A)P Co's return on assets (ROA)was less than half of C Co's ROA.
B)P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA.This difference is caused by P Co's higher use of debt financing to leverage their assets.
C)C Co provided higher positive financial leverage for their shareholders compared to P Co.
D)C Co.is considerably more liquid than P Co.

Accepted Answer

The statement "C Co. is considerably more liquid than P Co." is false as the information about the liquidity of both companies is not given. Therefore, options A, B, and C may be true, but without information about liquidity, D cannot be determined.

Question 19

In simple terms,a business strategy establishes the objectives a business is trying to achieve.

Accepted Answer

A business strategy sets the goals and objectives a business wants to achieve, as well as the methods and resources it will use to accomplish them.

Question 20

The quality of earnings computation is a test of the solvency of the company.

Accepted Answer

The quality of earnings computation is not a test of solvency, but rather a measure of the sustainability and reliability of a company's earnings. Solvency is determined by the company's ability to meet long-term obligations and debt repayments.

Quiz 13: Analyzing Financial Statements

Ratio analysis only involves relationships within a single accounting period.

The current ratio is one indicator of the liquidity of a company.

The debt to equity ratio is a test of liquidity of the company.

A primary objective of financial statements is to provide information to current and potential investors and creditors.

To compute component percentages for the income statement,the base amount is profit.

In 2012,C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9 days.In 2012,P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and 37.6 days.Which of the following statements is false?

Management's success at containing the effects of uncontrollable risks and managing in the face of uncertainties plays a role in analysts' predictions of the future economic health of a specific company.

Financial statements provide important information to help users understand and evaluate corporate strategy.

In 2012,C Co's total liabilities were $10,742 million and shareholders' equity was $8,403 million.In 2012,P Co's total liabilities were $16,259 million and their shareholders' equity was $6,401 million.Which of the following statements is false?

A weakness of the current ratio is

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability.As a result of this transaction,the current ratio and working capital will

An aircraft company would most likely have

A new company with a high property,plant,and equipment balance would most likely be which of the following?

In 2012,C Co's gross profit ratio was 70.4% and their profit margin was 18.8%.In 2012,P Co's gross profit ratio was 58.3% and their profit margin was 8.9%.Which of the following is false?

The inventory turnover ratio is calculated by dividing

The only way an investor will get a return on shares while they own the shares is for the corporation to distribute a dividend.

A general rule to use in assessing the average collection period is that it

In 2012,C Co's return on owners' equity (ROE) was 45.1%,and return on assets (ROA) was 19.6%.In 2012,P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%.Which of the following statements is false?

In simple terms,a business strategy establishes the objectives a business is trying to achieve.

The quality of earnings computation is a test of the solvency of the company.