Question 1

You are considering an investment in General Motors stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:
A)Number of times interest is earned.
B)Net margin.
C)Debt to equity ratio.
D)Debt to assets ratio.

Accepted Answer

Solvency ratios include: debt to assets, debt to equity, number of times interest earned and plant assets to long-term liabilities. Net margin is a profitability ratio.

Question 2

You are considering an investment in Microsoft stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:
A)Quick ratio.
B)Inventory turnover.
C)Debt to equity ratio.
D)Accounts receivable turnover.

Accepted Answer

Liquidity ratios include: working capital, current ratio, acid test (quick) ratio, accounts receivable turnover, average days to collect ratio, inventory turnover and average days to sell inventory. Debt to equity is a solvency ratio.

Question 3

Which of the following is a potential limitation of financial statement analysis?
A)Lack of comparability of firms in different industries
B)The impact of changing economic conditions
C)The impact of having more than one acceptable alternative accounting principle for accounting for a given transaction or economic event
D)All of the other answers are correct.

Accepted Answer

All of the other options can be potential limitations of financial statement analysis. Lack of comparability of firms in different industries can make it difficult to make meaningful comparisons. Economic conditions can have a significant impact on a company's financial performance and make it challenging to predict future performance based on historic data. Having more than one acceptable accounting principle can lead to inconsistencies between companies and make it challenging to accurately compare financial statements.

Question 4

Select the incorrect statement regarding net margin.
A)Net margin refers to the average amount of each sales dollar remaining after all expenses are subtracted.
B)Net margin may be calculated in several ways.
C)The smaller the net margin the better.
D)The amount of net margin is affected by a company's choices of accounting principles.

Accepted Answer

A larger net margin is better.

Question 5

The Phillips Company paid total cash dividends of $100,000 on 25,000 outstanding common shares. On the most recent trading day, the common shares sold at $80. What is this company's dividend yield?
A)25%
B)3.2%
C)5%
D)16.9%

Accepted Answer

The dividend yield is: Dividend per share/market price per share. ($100,000/25,000)/80 = .05.

Question 6

The Crestar Company reported net income of $100,000 on 20,000 outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $80. What is this company's current price-earnings ratio? (rounded)
A)16
B)18
C)20
D)None of the other answers are correct.

Accepted Answer

The price-earnings ratio is: market price per share/earnings per share; earnings per share: (Net income - preferred dividend)/average common shares outstanding. EPS: ($100,000 - $12,000)/20,000 = $4.40 PE ratio: $80/$4.40 = 18.18

Question 7

The return on investment measure is also referred to as:
A)Net margin.
B)Return on equity.
C)Return on assets.
D)Return on debt.

Accepted Answer

Return on investment is calculated as net income/average assets so it is also referred to return on assets.

Question 8

The following balance sheet information is provided for Paris Company:  Assuming 2012 cost of goods sold is $365,000, what is the company's average days to sell inventory?
A)25 days
B)15 days
C)100 days
D)None of the other answers are correct.

Accepted Answer

Average days to sell inventory is: 365/inventory turnover. Inventory turnover is: cost of goods sold/average inventory. Cost of goods sold ($365,000/average inventory (($21,500 + 28,500)/2) = 14.6. 365/4.6 = 25 days.

Question 9

The Mount Vernon Company reported gross sales of $850,000, sales returns and allowances of $5,000 and sales discounts of $5,000. The company has total average assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?
A)1.68 times
B)1.72 times
C)0.59 times
D)1.7 times

Accepted Answer

The asset turnover ratio is: net sales/average assets. Net sales equals gross sales ($850,000) minus sales returns and allowances ($5,000); $845,000/$500,000 = 1.68 times.

Question 10

The Destin Company reported net income of $50,000 on sales of $300,000. The company has total assets of $500,000 and total liabilities of $100,000. What is the company's return on equity ratio?
A)10.0%
B)12.5%
C)16.7%
D)50.0%

Accepted Answer

The return on equity ratio is: net income/average stockholders' equity. Assets ($500,000) - liabilities ($100,000) = stockholders' equity ($400,000). $50,000/$400,000 = .125.

Question 11

The Best Company provided the following information from its financial records:  What is the company's book value per share?
A)$1.67
B)$6.67
C)$5.42
D)$1.58

Accepted Answer

Book value per share is: (stockholders' equity - preferred rights)/outstanding common shares. ($800,000-$150,000)/$120,000 = 5.416.

Question 12

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:
A)Matching principle.
B)Historical cost concept.
C)Conservatism principle.
D)Time value of money concept.

Accepted Answer

The pervasive use of the historical cost concept is probably the greatest single cause of distorted financial statement analysis results. Historical cost produces financial statements that report dollars with differing purchasing power in the same statement For example, historical cost can cause assets such as land to be understated which would impact ratios using long-term assets.

Question 13

You are considering an investment in Jet Blue Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except:
A)Net margin.
B)Asset turnover.
C)Return on investment.
D)Average days to collect receivables.

Accepted Answer

Profitability ratios include: net margin (return on sales), asset turnover, return on investment and return on equity. Average days to collect receivables is a solvency ratio.

Question 14

The Monticello Company reported net income of $14,400 on gross sales of $80,000. The company has total average assets of $115,200, of which $100,000 is property, plant and equipment. What is the company's return on investment?
A)69.4%
B)18.0%
C)14.5%
D)12.5%

Accepted Answer

The Return on investment ratio is: net income/average assets. $14,400/115,200 = .125.

Question 15

Solvency ratios are used to assess a company's:
A)Short-term debt paying ability.
B)Profitability.
C)Long-term debt paying ability.
D)Efficiency in use of its assets.

Accepted Answer

Solvency ratios are used to assess a company's long-term debt paying ability. These ratios provide investors with an idea of a company's ability to meet its long-term obligations, including any outstanding debts or loans that are not due to be paid in the near future. Examples of solvency ratios include debt-to-assets ratio, debt-to-equity ratio and interest coverage ratio.

Question 16

Select the incorrect statement regarding the return on equity (ROE) measure.
A)ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
B)A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt.
C)ROE is affected by a company's use of leverage.
D)ROE equals net income divided by total stockholders' equity.

Accepted Answer

Return on equity ratio is: net income/average stockholders' equity; return on investment is net income/average assets. The ROE is higher than the ROI, because the denominator for ROE is smaller than for ROI.

Question 17

Morton Company has total current assets of $45,000, including inventory of $10,000, and current liabilities of $21,000. The company's current ratio is:
A)0.4.
B)1.7.
C)2.1.
D)2.6.

Accepted Answer

The current ratio is: current assets/current liabilities. $45,000/21,000 = 2.14.

Question 18

Accrual accounting requires the use of many estimates, including:
A)Uncollectible accounts expense.
B)Warranty costs.
C)Assets' useful lives.
D)All of the other answers are correct.

Accepted Answer

Accrual accounting requires estimates for uncollectible accounts expense, warranty costs, and assets' useful lives, among other things. Therefore, choice D, which is "All of the other answers are correct," is the best choice.

Question 19

Which of the following statements is generally incorrect?
A)A 2:1 current ratio is generally preferred over a 1:1 current ratio.
B)A 30-day average collection period for accounts receivable is generally preferred over a 20-day average collection period.
C)A 5% dividend yield is generally preferred over a 3% dividend yield.
D)A 10% net margin is generally preferred over an 8% net margin.

Accepted Answer

A shorter collection period is preferred over a longer period; the sooner cash is received, the sooner it can be use

Question 20

You are considering an investment in Google Company stock and wish to assess the company's position in the stock market. All of the following ratios can be used except:
A)Working capital.
B)Earnings per share.
C)Dividend yield.
D)Price-earnings ratio.

Accepted Answer

Stock market ratios include: earnings per share, book value per share, price earnings ratio, dividend yield ratio. Working capital is a liquidity ratio.

Quiz 13: Financial Statement Analysis Available Online in the Connect Library

You are considering an investment in General Motors stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:

You are considering an investment in Microsoft stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:

Which of the following is a potential limitation of financial statement analysis?

Select the incorrect statement regarding net margin.

The Phillips Company paid total cash dividends of $100,000 on 25,000 outstanding common shares. On the most recent trading day, the common shares sold at $80. What is this company's dividend yield?

The Crestar Company reported net income of $100,000 on 20,000 outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $80. What is this company's current price-earnings ratio? (rounded)

The return on investment measure is also referred to as:

The following balance sheet information is provided for Paris Company: Assuming 2012 cost of goods sold is $365,000, what is the company's average days to sell inventory?

The Mount Vernon Company reported gross sales of $850,000, sales returns and allowances of $5,000 and sales discounts of $5,000. The company has total average assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?

The Destin Company reported net income of $50,000 on sales of $300,000. The company has total assets of $500,000 and total liabilities of $100,000. What is the company's return on equity ratio?

The Best Company provided the following information from its financial records: What is the company's book value per share?

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

You are considering an investment in Jet Blue Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except:

The Monticello Company reported net income of $14,400 on gross sales of $80,000. The company has total average assets of $115,200, of which $100,000 is property, plant and equipment. What is the company's return on investment?

Solvency ratios are used to assess a company's:

Select the incorrect statement regarding the return on equity (ROE) measure.

Morton Company has total current assets of $45,000, including inventory of $10,000, and current liabilities of $21,000. The company's current ratio is:

Accrual accounting requires the use of many estimates, including:

Which of the following statements is generally incorrect?

You are considering an investment in Google Company stock and wish to assess the company's position in the stock market. All of the following ratios can be used except: