How To Read, Analyze, And Interpret | Exam Questions Ch.13

Chapter 13

How to Read, Analyze, and Interpret Financial Reports

True/False Questions
 

1. The computer is the only tool needed in monitoring a business's financial condition. 
True    False

2. A balance sheet shows the financial condition of a business at a particular date. 
True    False

3. The income statement shows the financial condition of a business over a period of time. 
True    False

4. Assets, liabilities, capital, and revenues are listed on the balance sheet. 
True    False

5. Assets represent things of value owed by the business. 
True    False

6. Assets that last longer than one year are called plant and equipment. 
True    False

7. Retained earnings is the same as cash. 
True    False

8. Land does not depreciate. 
True    False

9. A comparative statement contains data for less than two successive accounting periods. 
True    False

10. Vertical analysis cannot be done on a comparative statement. 
True    False

11. Vertical analysis need not be done only on comparative reports since calculations were within each period of time. 
True    False

12. Horizontal analysis can analyze balance sheets for two or more periods. 
True    False

13. Horizontal analysis need not be done using comparative reports. 
True    False

14. Cash is recorded on the income statement. 
True    False

15. Income statements are prepared only once a year. 
True    False

16. Reductions in the selling price for early payment are called sales returns and allowances. 
True    False

17. Net purchases are the cost of purchases minus purchase discounts minus purchase returns and allowances. 
True    False

18. Cost of merchandise sold is equal to beginning inventory minus net purchases minus ending inventory. 
True    False

19. Net income is equal to gross profit minus operating expenses. 
True    False

20. Cash is a liability. 
True    False

21. In horizontal analysis the old year is the base. 
True    False

22. Trend analysis expresses each number as a percent of the base year. 
True    False

23. A relationship of one number to another is a ratio. 
True    False

24. Debt management ratios show a company how well its assets are managed. 
True    False

25. A ratio of 4:5:2 means that out of 11 parts it is divided up as 4/11, 5/11, 2/11. 
True    False

26. A current ratio is calculated by current assets times current liabilities. 
True    False

27. In the acid test ratio, inventory and prepaid expenses are not excluded. 
True    False

28. Could we speed up our collections? could be one question raised about the average day's collection ratio. 
True    False

29. The return on equity ratio looks at how effectively assets are being utilized. 
True    False

30. The asset turnover is gross sales divided by total assets. 
True    False

Multiple Choice Questions
 

31. The balance sheet lists: 
A. Assets, liabilities, expenses
B. Assets, liabilities, equity
C. Assets, revenues, expenses
D. Assets, revenues, equity
E. None of these

32. Which of the following is not a current asset? 
A. Cash
B. Building
C. Prepaid expense
D. Accounts receivable
E. None of these

33. When each asset is analyzed as a percent of total assets for a single period, this is known as: 
A. Horizontal analysis
B. Comparative analysis
C. Ratio analysis
D. Vertical analysis
E. None of these

34. In using horizontal analysis, comparative reports are: 
A. Always used
B. Never used
C. Infrequently used
D. Often used
E. None of these

35. From 2013 to 2014, accounts receivable increased from $4,000 to $4,800. The percent increase is: 
A. 120%
B. 16 2/3%
C. 20%
D. 55%
E. None of these

36. Which one is not used to calculate net sales? 
A. Purchases
B. Sales discount
C. Sales returns and allowance
D. Gross sales
E. None of these

37. Cost of merchandise sold equals beginning inventory: 
A. Plus net purchases plus ending inventory
B. Plus net purchases minus ending inventory
C. Minus net purchases minus ending inventory
D. Minus net purchases plus ending inventory
E. None of these

38. Selecting a base year and expressing each amount as a percent of the base year amount is called: 
A. Trend analysis
B. Horizontal analysis
C. Vertical analysis
D. Ratio analysis
E. None of these

39. The acid test ratio does not include: 
A. Cash
B. Accounts receivable
C. Supplies
D. Inventory
E. None of these

40. A ratio of 2:2:1 means: 
A. There are six parts
B. 2/4, 2/4, 1/4
C. 2/5, 2/5, 1/5
D. 2/4, 2/5, 1/4
E. None of these

41. The total debt to total assets of Logan Company was .71. The total of Logan's assets was $270,000. The amount of total debt is: 
A. $146,700
B. $191,700
C. $119,700
D. $461,700
E. None of these

42. Lee Company has a current ratio of 2.65. The acid test ratio is 2.01. The current liabilities of Lee are $45,000. The dollar amount of merchandise inventory is (assume no prepaid expenses): 
A. $28,008
B. $28,800
C. $90,450
D. $90,540
E. None of these

43. The asset turnover of Ryan Company is 7.2. The total assets of Ryan are $88,000. Ryan's net sales were: 
A. $6,336
B. $63,360
C. $633,000
D. $633,600
E. None of these

44. Jay Corporation has earned $175,900 after tax. The accountant calculated the return on equity as 12.5%. Jay Corporation's stockholders' equity to the nearest dollar is: 
A. $140,720
B. $14,720
C. $1,407,200
D. $140,720,000
E. None of these

45. In analyzing the income statement of Bob Company, cost of goods sold decreased from 2013 to 2014 by 8.2%. The cost of goods sold was $19,000 in 2014. The cost of goods sold to nearest dollar in 2007 was: 
A. $20,697.17
B. $20,679.71
C. $20,769.71
D. $20,796.71
E. None of these

46. Given the following:
  
By trend analysis (base year is 2010), sales in 2012 to the nearest percent of the base year is: 
A. 117%
B. 116%
C. 118%
D. 119%
E. None of these

47. The asset turnover from the following is (round to nearest tenth):
   
A. 1.7
B. 1.5
C. 1.9
D. 1.6
E. None of these

48. The cost of merchandise sold from the following data is as follows: sales $80,000, beginning inventory $5,000, purchases $21,800, purchase discounts $790, ending inventory $5,100: 
A. $21,560
B. $20,190
C. $20,910
D. $21,650
E. None of these

49. The company's gross profit based on the following is sales $48,000, sales returns and allowances $6,000, operating expenses $6,200, beginning inventory $900, net purchases $9,100, ending inventory $2,300 :
A. $34,000
B. $43,000
C. $34,003
D. $34,300
E. None of these

50. Bill's Pizza has an asset turnover of 3.5. The total assets of Bill's were $95,000. The net sales of Bill's Pizza is: 
A. $27,142.85
B. $332,500.00
C. $271,428.50
D. $33,250.00
E. None of these

51. Complete the horizontal analysis below:

Year 2 Year 1 Amount + Percent Change

$88,338 $92,147 ____? ____ __?___

A. ($3,809), 4.1%

B. $3,809, 4.1%

C. $180,485, 51.1%

D. $8,300, 15%

E. None of these

52. Complete the following vertical analysis of a balance sheet:

Amount: Percent:

Current assets $15,751 ___A___

Accounts Rec. 10,888 ___B___

Inventory 97,125 ___C___

PPD expenses 11,448 ___D___

Total assets: $135,212 100%

(Round to nearest tenth percent.)

A. 11.6%, 8.1%, 71.8%, 8.5%

B. 11.5%, 8.0%, 72%, 11.7%

C. 13%,%, 8.6%, 80%, 12.7%

D. 15%, 10.2%, 66.1%, 12.5%

E. None of these

53. Complete the trend analysis for sales for year 3 *(Round to nearest tenth percent):

Year 4 Year 3 Year 2 Year Base year

$782,143 $655,211 $605,000 $646,133

A. 103.9%

B. 101.4%

C. 109.3%

D. 110.2%

E. None of these

54. Given gross sales of $40,000 and sales returns and allowances of $6,000, what are the net sales?

A. $50,000

B. $46,000

C. $34,500

D. $34,000

E. None of these

55. Complete the current ratio for the following:

Total current assets = $12,000; current liabilities = $10,000

A. 1.5

B. 1.7

C. .7

D. 1.2

E. None of these

Short Answer Questions
56. 1. Accounts payable
2. Acid test
3. Accounts receivable
4. Assets
5. Asset turnover
6. Balance sheet
7. Common size statement
8. Comparative statements
9. Cost of merchandise sold
10. Current assets
11. Current liabilities
12. Current ratio
13. Gross profit
14. Horizontal analysis
15. Income statement
16. Liabilities
17. Long-term liabilities
18. Merchandise inventory
19. Net income
20. Net purchases
21. Net sales
22. Prepaid expense
23. Retained Earnings
24. Trend analysis
25. Vertical analysis
A. A liability
B. Includes no plant and equipment assets
C. What we owe creditors
D. Inventory and prepaid expenses are subtracted
E. Revenues and expense for a specific period of time
F. Cash, supplies
G. Obligations that are not due for at least one year
H. Dollars not shown
I. Part of stockholders’ equity
J. Prepared as of a particular date
K. Current assets ÷ current liabilities
L. Profit
M. What customers owe
N. Total this period is compared by amount of percent to same total last period
O. Data placed side by side
P. Uses a base year
Q. Net sales ÷ total assets
R. Cost of goods for resale

S. Obligations due within one year
T. True cost of purchases
U. Paid in advance
V. Sales – cost of goods sold
W. Actual sale after returns on discounts
X. Each liability and equity is analyzed as a percent of the total
Y. Beginning inventory plus new purchases – ending inventory 

57. From the following, calculate (A) net sales, (B) gross profit, (C) total operating expenses, and (D) net income: sales returns $700, rent expense $1,288, sales discounts $950, depreciation expense $600, cost of merchandise sold $7,600, gross sales $20,900, advertising expense $1,650, salary expense $2,900, heat expense $900.
A. _______________
B. _______________
C. _______________
D. _______________ 

58. Calculate total of (A) current assets, (B) plant assets, and (C) stockholders' equity from these selected titles: Cash $7,500, Common Stock $30,000, Retained Earnings $51,000, Prepaid Rent $12,000, Accounts Payable $1,900, Accounts Receivable $6,000, Merchandise Inventory $19,000, Land $16,000, Building $11,000.
A. ________________
B. ________________
C. ________________ 

59. Complete:
  
A. _______________
B. _______________
C. _______________
D. _______________
E. _______________ 

60. Complete:
  
A. _______________
B. _______________ 

61. Solve for (A) current ratio, (B) acid test, (C) average day's collection, (D) asset turnover, (E) profit margin on sales. (Round to nearest hundredth or hundredth percent as needed.)
  
A. _______________
B. _______________
C. _______________
D. _______________
E. _______________ 

62. Complete using trend analysis for sales. (Round to nearest percent and use 2012 as the base year.)
  
A. _______________
B. _______________
C. _______________
D. _______________ 

63. The asset turnover of Jerry's Sleepshop is 3.2. The total assets of Jerry's are $32,000. What were Jerry's net sales? 

64. Moore Corporation has earned $205,500 after tax. The return on equity for Moore Corporation is 18%. What is Moore’s stockholders’ equity? 

65. The total debt to total assets of Mose Corporation was .22. Mose's total assets were $220,000. What was the amount of total debt to Mose Corporation? 

66. The cost of merchandise (goods) sold of Ryan Corporation decreased by 9.3% from 2012 to 2013. The cost of merchandise (goods) was $22,000 in 2013. What was the cost of merchandise (goods) sold in 2012? 

67. Given gross sales $75,000, sales returns and allowances $4,000, beginning inventory $5,000, net purchases $9,000, ending inventory $3,000, and operating expenses $13,900, calculate:
A. Net sales
B. Cost of merchandise (goods sold)
C. Gross profit from sales
D. Net income 

68. Complete the partial comparative balance sheet. Round to nearest hundredth percent.
   

69. Calculate the amount of increase or decrease and the percent change of each title (round to nearest hundredth percent):
   

70. Complete a trend analysis for sales (round to nearest whole percent and use 2010 as the base year):
   

71. From the following, prepare a balance sheet for Roe Co. as of December 31, 2015:
   

72. Solve the following facts. (Round to the nearest hundredth.)
A. Current ratio _______________ B. Acid test __________________ C. Average day's collection ___________ D. Asset turnover _____________ E. Profit margin on sales _____________
   

73. Calculate (A) net sales, (B) gross profit, (C) total operating expenses, and (D) net income.
Sales returns $850, rent expense $1,355, sales discounts $1,200, depreciation expense $510, cost of merchandise sold $6,500, gross sales $19,500, advertising expense $400, salary expense $2,100, heat expense $750. 

74. Calculate (A) net sales, (B) gross profit, (C) total operating expenses, and (D) net income.
Sales returns $600, rent expense $1,700, sales discounts $1,800, depreciation expense $490, cost of merchandise sold $7,200, gross sales $19,900, advertising expense $650, salary expense $2,500, heat expense $850. 

75. Calculate the total of (A) current assets, (B) plant assets, and (C) stockholders' equity.
Cash $7,000, common stock $21,000, retained earnings $41,000, prepaid rent $21,000, accounts payable $2,300, accounts receivable $4,000, merchandise inventory $18,000, total liabilities $10,800, land $25,000, building $1,900. 

76. Complete:
   

77. Complete:
   

78. Complete:
   

79. Complete:
   

80. Solve for (A) current ratio, (B) acid test (quick), (C) average day's collection, (D) asset turnover, and (E) profit margin on sales. Round to nearest hundredth or hundredth percent as needed.
   

81. Solve for (A) current ratio, (B) acid test (quick), (C) average day's collection, (D) asset turnover, and (E) profit margin on sales. Round to nearest hundredth or hundredth percent as needed.
   

82. Complete using trend analyses for sales. (Round to nearest percent and use 2010 as the base year.)
   

83. Complete using trend analyses for sales. (Round to nearest percent and use 2010 as the base year.)
   

84. For Monday, John recorded gross sales of $4,000. He also noticed sales returns and sales discounts totaling $800. What are net sales for John? 

85. From the following information, could you help Bill calculate his cost of merchandise sold?
   

86. Al Flynn has gathered the following information. Could you help Al calculate his gross profit?
   

87. As the accountant of Roe Hairdresser, you have been asked to prepare an income statement from the following data for the month ended June 2014:
   

88. Mel King has asked you to prepare a classified balance sheet for Pad Co. as of December 31, 2014. Ending merchandise inventory was $1,800:
   

89. The total debt to total assets ratio of Rese Co. was .29. The total of Rese's assets was $200,000. What is the total amount of total debt to Rese? 

90. Alice Co. has a current ratio of 2.7. The acid test ratio is 2.2. The current liabilities of Alice Co. are $46,000. Could you calculate the dollar amount of merchandise inventory? 

91. The asset turnover of Ready Corp. is 6.7; the total assets of Ready are $45,000. What were Ready's net sales? 

92. Sullivan Corp. earned $75,500 after taxes. The accountant calculated the return on equity as 12%. What was Sullivan's stockholders' equity? 

93. Al Ring received a memo requesting that he complete a trend analysis of the following, using 2010 as the base year. (Round each percent to nearest whole percent.) Can you help Al with this request?
  
*For simplicity, operating expenses have been omitted. 

94. Complete the following average day’s collection:

Account receivables = $66,000; net sales = $360,000 (assume 360 days)

95. Given gross sales of $50,000, sales returns and allowances of $6,000, beginning inventory of $4,000, net purchases of $8,000, ending inventory of $2,000, and operating expenses of $4,500, calculate net income.

96. Complete the following vertical analysis. With cash of $15,750, accounts receivables of $10,800, inventory of $97,000, and PPD expenses of $11,000, what percent of total assets is accounts receivable?

97. Complete the following ratios:

Current assets = $13,000

Inventory = $4,400

Current liabilities = $10,000

Net income = $7,700

Net sales = $24,400

A. Profit margin on sales (round to nearest tenth percent)

B. Acid test

98. Complete the following trend analysis for year 4:

Year 4 Year 3 Year 2 Year 1 (year 1 equals base year)

$48,200 $50,000 44,000 $17,560