Question 1

All of the following are considered to be 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 a measure of a company's profitability, not its ability to pay short-term debt. The other choices (current ratio, inventory turnover, and average collection period) are all measures of a company's short-term debt-paying ability.

Question 2

Factor(s) involved in communicating useful information is (are):
A)Attributes of the users
B)Purpose for which the information will be used
C)Process by which the information is analyzed
D)All of these answers are correct.

Accepted Answer

All of these factors are important in communicating useful information. The attributes of the users will determine how the information should be presented and tailored to their needs. The purpose for which the information will be used will dictate what specific information should be provided and in what format. The process by which the information is analyzed will impact the accuracy and reliability of the information being communicated. Therefore, all of these factors are important to consider when communicating useful information.

Question 3

Which of the following statements regarding horizontal analysis is incorrect?
A)Percentage analysis involves establishing the relationship of one amount to another.
B)A horizontal analysis of cost of goods sold on the income statement includes dividing net income by total revenue.
C)Percentage analysis attempts to eliminate the materiality problem of comparing firms of different sizes.
D)In doing horizontal analysis, an account is expressed as a percentage of the previous balance of the same account.

Accepted Answer

A horizontal analysis of cost of goods sold on the income statement involves comparing the cost of goods sold for a specific period (e.g. current year) to the cost of goods sold for a previous period (e.g. prior year), not dividing net income by total revenue.

Question 4

Which of the following statements regarding ratio analysis is incorrect?
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, rather it is a method of analyzing financial information by using ratios and comparing them to benchmarks or industry averages. Horizontal analysis involves comparing financial information from different time periods to identify trends or changes.

Question 5

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 answers are correct.

Accepted Answer

All the statements mentioned in options A, B, and C are correct. Therefore, option D is the correct answer.

Question 6

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

The quick ratio equals quick assets divided by current liabilities, not total liabilities.

Question 7

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 is a procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements. This helps to evaluate the relative importance of each line item in a financial statement and identify trends over time. Ratio analysis compares two or more financial variables to evaluate the financial performance of a company, whereas contribution analysis is a method of determining the profitability of different products, customers, or segments. Horizontal analysis involves comparing financial data from different periods to identify changes in performance.

Question 8

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 9

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?
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 because what may be material for one company may not be for another. Therefore, materiality should always be considered when analyzing absolute amounts reported on financial statements.

Question 10

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. The common methods include horizontal analysis, vertical analysis, and ratio analysis. Incremental analysis is mainly used in managerial accounting to make decisions about whether to continue or discontinue a particular project or business line.

Question 11

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. However, this assumption may not be true for all users of financial information, and there may be a need for different types of disclosures to meet the varying needs of users with different levels of knowledge about business.

Question 12

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 answers are correct.

Accepted Answer

Ratio analysis is used to assess past performance, to make informed decisions about the prospects for future performance, and to analyze how a company finances its operations. Therefore, all of the choices listed are correct objectives of ratio analysis.

Question 13

Knoell 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

Paying sales commissions will cause a decrease in working capital, as the company's cash balance is reduced.

Question 14

Which of the following statements regarding the information disclosed in financial statements is incorrect?
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 enough information for users to make informed decisions, it is not feasible or necessary to include every piece of information that an investor might want. Financial statements are not intended to answer every possible question, but rather to provide relevant and reliable information that can be used to evaluate a company's financial position and performance.

Question 15

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

Accepted Answer

Working capital is calculated by subtracting current liabilities from current assets. This gives an indication of a company's ability to meet its short-term obligations. Option A is the formula for the current ratio, option B is the formula for total equity or net worth, and option D is not a relevant formula.

Question 16

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, also known as trend analysis, involves the study of an individual financial statement item over several accounting periods to determine the increase or decrease in percentage terms. This analysis helps in understanding the trend and pattern of the item over time. Vertical analysis involves the study of each item as a percentage of a base item, while ratio analysis involves the calculation and comparison of different financial ratios to assess the company's financial performance. Time and motion analysis is not related to financial statement analysis.

Question 17

Milton Company has total current assets of $46,000, including inventory of $10,000, and current liabilities of $20,000. The company's current ratio is:
A)0.4.
B)1.8.
C)2.8.
D)2.3.

Accepted Answer

Current ratio = Current assets ÷ Current liabilities
Current ratio = $46,000 ÷ $20,000 = 2.3

Question 18

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 19

Financial ratios can be used to assess which of the following aspects of a firm's performance?
A)Liquidity
B)Solvency This term does not even appear in chapter until LO 3 so had to include the LO and topics below
Agree. JMF
C)Profitability
D)All of these answers are correct. This term does not even appear in chapter until LO 3 so had to include the LO and topics below
Agree. JMF

Accepted Answer

Financial ratios can be used to assess a firm's liquidity, solvency, and profitability. Therefore, all answer choices are correct.

Question 20

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 answers are correct.

Accepted Answer

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. All of these comparisons are important in understanding a company's financial performance and position.

Quiz 13: Financial Statement Analysis

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

Factor(s) involved in communicating useful information is (are) :

Which of the following statements regarding horizontal analysis is incorrect?

Which of the following statements regarding ratio analysis is incorrect?

Select the correct statement regarding vertical analysis.

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

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:

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

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

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

Current financial reporting standards assume that users of accounting information:

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

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

Which of the following statements regarding the information disclosed in financial statements is incorrect?

Working capital is defined as:

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

Milton Company has total current assets of $46,000, including inventory of $10,000, and current liabilities of $20,000. The company's current ratio is:

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:

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

Financial statement analysis involves forms of comparison including: