Measuring And Evaluating Financial – Test Bank – Chapter 13

Managerial Accounting, 4e (Whitecotton)

Chapter 13 Measuring and Evaluating Financial Performance

1) The general goal of horizontal analyses is to identify significant trends.

2) Trend data can be measured in dollar amounts or percentages.

3) Horizontal analysis is the comparison of each financial statement amount to another amount on the same financial statement.

4) Vertical analysis is the comparison of a company's financial information over time.

5) Liquidity measures the ability of a company to meet its long-term financial obligations.

6) The fixed asset turnover ratio is a profitability ratio.

7) If earnings per share (EPS) increases, it must mean that the company's net income has increased.

8) The lower the receivables turnover, the slower accounts receivable are being collected.

9) A company with a high inventory turnover requires a larger investment in inventory than another company of similar sales with a lower inventory turnover.

10) If the debt-to-assets ratio is 0.73, it means that 73% of the company's financing has been provided by stockholders' equity.

11) The higher the times interest earned ratio, the greater the risk of nonpayment of interest.

12) Benchmarks are useful when evaluating a company's performance.

13) The primary objective of external financial reporting is to:

A) enhance the ability of the company to acquire financial capital from external sources.

B) accurately provide financial results for tax purposes.

C) comply with external regulations and requirements of government and professional associations.

D) provide useful information to decision makers, especially investors and creditors.

14) Which of the following analysis techniques does not pertain to changes over time?

A) Trend analysis

B) Horizontal analysis

C) Time-series analysis

D) Vertical analysis

15) Horizontal analysis involves:

A) Comparing individual financial statement line items with each other to understand the relationships between line items.

B) Comparing individual financial statement line items to some benchmark, typically similar competitors' financial statement line items.

C) Comparing individual financial statement line items over time.

D) Comparing individual financial statement line items that have been arranged horizontally from highest to lowest dollar amounts.

16) Which of the following statements is not true?

A) Horizontal analyses help financial statement users recognize changes that unfold over time.

B) Vertical analyses focus on relationships between items on the same financial statement.

C) Ratio analyses focus on relationships between items on one or more of the financial statements.

D) Horizontal analyses help financial statement users recognize changes that occur between companies.

17) Financial statement analysis is useful for:

A) evaluating a company's success in meeting the challenges that it faces.

B) selecting the most appropriate accounting rules to follow.

C) determining the market price of a company's stock.

D) comparing US companies with foreign companies.

18) Often loan agreements require the borrower to comply with certain requirements, such as maintaining a particular current ratio or limiting future borrowing. To decide if a company has complied with its loan covenants, a creditor would look at the company's:

A) financial statements.

B) chart of accounts.

C) bank statements.

D) charter.

19) Vertical analysis:

A) identifies the relative contribution made by each financial statement line item.

B) identifies trends over time.

C) provides an understanding of the relationships among various items on financial statements by expressing the differences in terms of dollars.

D) involves comparing amounts across different financial statements.

20) Horizontal analysis:

A) is used to identify trends over time.

B) identifies the relative contribution made by each financial statement line item.

C) provides an understanding of the relationships among various items on financial statements.

D) involves comparing amounts across different financial statements.

21) To analyze changes in a company's sales over the last five years, you should perform:

A) vertical analysis.

B) ratio analysis.

C) horizontal analysis.

D) cross-sectional analysis.

22) To analyze changes in a company's net income over the last ten years, you should perform:

A) horizontal analysis.

B) vertical analysis.

C) cross-section analysis.

D) ratio analysis.

23) Ratio analysis:

A) is required by GAAP as part of every company's income statement and balance sheet.

B) will always identify the best investment decision.

C) will tell you how a company will perform in the future.

D) allows you to evaluate how well a company has performed relative to other different-sized companies within the same industry.

24) Which of the following statements about trend analysis is correct?

A) Time-series analysis is an example of trend analysis.

B) Trend data are always in dollars.

C) Trend analysis is also known as vertical analysis.

D) Common-size analysis is an example of trend analysis.

25) A trend analysis to determine a year-to-year dollar amount change is calculated by subtracting the:

A) previous period amount from the current amount.

B) current period amount from the previous period amount.

C) current period amount from the previous period amount and then dividing the result by the previous period amount.

D) previous period amount from the current period amount and then dividing the result by the current period amount.

26) Net income was $753,480 in the current year and $655,200 in the prior year. The year-to-year percentage change in net income is an increase of:

A) 15%.

B) 55%.

C) 87%.

D) 13%.

27) Assume the following sales data for a company:

By what percentage did sales differ between Years 1 and 2 and Years 2 and 3, respectively?

A) 40.0% and (10.7%)

B) 28.6% and (12.0%)

C) 40.0% and (15.0%)

D) 32.0% and (10.7%)

28) Roscoe Company's comparative balance sheet show total assets of $693,000 and $630,000, for the current and prior years, respectively. The percentage change to be reported in the horizontal analysis is an increase of:

A) 10%.

B) 9%.

C) 5%.

D) 4%.

29) Lyndale, Inc.'s sales are $513,000 and $360,000 during the current and prior years, respectively. The percentage change is:

A) 42.5%.

B) 70%.

C) 29.8%.

D) 130%.

30) Which balance sheet line item has the highest percentage increase from the prior year to the current year?

A) Inventory

B) Cash

C) Accounts receivable

D) Prepaid insurance

31) Which income statement line item had the largest percentage increase from the prior year to the current year?

A) Depreciation Expense

B) Cost of Goods Sold

C) Interest Expense

D) Sales

32) In a common size balance sheet, each item on the balance sheet is expressed as a percentage of:

A) total assets.

B) total liabilities.

C) net income.

D) total stockholders' equity.

33) In a common size income statement, each item on the income statement is expressed as a percentage of:

A) net income.

B) gross profit.

C) total expenses.

D) sales revenue.

34) The following information is taken from the financial statements of Clybourn Company for the current year: 

On a common size income statement for the year, what is the percentage that would be shown next to the dollar amount of sales revenue?

A) 100%

B) 14%

C) 60%

D) Cannot be determined

35) The following information is taken from the financial statements of Clybourn Company for the current year:

 The gross profit percentage for the current year rounded to the nearest whole percent is closest to:

A) 24%.

B) 76%.

C) 60%.

D) 31%.

36) The following information is taken from the financial statements of Clybourn Company for the current year:

On a common size income statement for this year, what is the percentage that would be shown next to the dollar amount of cost of goods sold?

A) 76%

B) 24%

C) 31%

D) 18%

37) The following information is taken from the financial statements of Clybourn Company for the current year:

On a common size balance sheet what is the percentage that would be shown next to the dollar amount of current assets?

A) 100%

B) 44%

C) 30%

D) 33%

38) The following information pertains to Chestnut, Inc.:

What would be reported next to Interest Expense on a common sized income statement?

A) 12.7%

B) 1.7%

C) 0.6%

D) 0.9%

39) Stockton Co. prepared its income statement containing the information below. Using vertical analysis, what percentages would apply to cost of sales, gross profit, and interest expense, respectively?

A) Option A

B) Option B

C) Option C

D) Option D

40) To perform a vertical analysis of an income statement, you would divide each line item on the statement by:

A) sales.

B) cost of goods sold.

C) operating expenses.

D) net income.

41) If you wish to examine how one aspect of a business is doing relative to other aspects of the business at the current time, you are most likely to use:

A) time-series analysis.

B) ratio analysis.

C) horizontal analysis.

D) cross-sectional analysis.

42) If an analyst wants to examine a company's current ability to generate income, which of the following would best be considered?

A) Liquidity

B) Market share

C) Profitability

D) Solvency

43) If an analyst wants to examine a company's short-run ability to survive, which of the following would best be considered?

A) Liquidity

B) Market share

C) Profitability

D) Solvency

44) Solvency ratio data are primarily concerned with the ability of a company to:

A) produce profits.

B) maintain long-term survival and repay its debt.

C) manage its cash flow.

D) provide income for stockholders.

45) If an analyst wanted to assess a company's long-run survival, which of the following categories of ratios would most likely be used?

A) Liquidity

B) Market share

C) Profitability

D) Solvency

46) Which of the following statements about liquidity and solvency ratios is correct?

A) Unlike solvency ratios, liquidity ratios relate to the company's long-run survival.

B) Both liquidity ratios and solvency ratios measure a company's ability to meet its financial obligations.

C) Liquidity ratios include the return on equity ratio and the times interest earned ratio.

D) Solvency ratios include the current ratio and the net profit margin ratio.

47) Which of the following measures would assist in assessing the profitability of a company?

A) Debt-to-assets ratio

B) Fixed asset turnover ratio

C) Receivables turnover ratio

D) Current ratio

48) Which of the following measures would assist in assessing the profitability of a company?

A) Earnings per share

B) Times interest earned ratio

C) Inventory turnover ratio

D) Debt-to-assets ratio

49) Which of the following is a profitability measure?

A) Net income ÷ Revenues

B) Total assets ÷ Total stockholders' equity

C) Total liabilities ÷ Total stockholders' equity

D) Cost of goods sold ÷ Average inventory

50) Which of the following is not a profitability ratio?

A) Return on equity (ROE)

B) Earnings per share

C) Fixed asset turnover

D) Days to sell

51) Which of the following is a liquidity ratio?

A) Inventory turnover

B) Price/Earnings ratio

C) Net profit margin

D) Times interest earned

52) Which of the following measures would assist in assessing the liquidity of a company?

A) Return on equity

B) Fixed asset turnover ratio

C) Receivables turnover ratio

D) Times interest earned

53) Which of the following ratios is used to evaluate a company's liquidity?

A) Debt-to-assets ratio

B) Fixed asset turnover ratio

C) Return on equity ratio

D) Current ratio

54) Which of the following ratios is used to evaluate solvency?

A) Earnings per share (EPS)

B) Fixed asset turnover

C) Debt-to-assets

D) Current ratio

55) Which of the following measures would assist in assessing the solvency of a company?

A) Debt-to-assets and times interest earned

B) Fixed asset turnover and EPS

C) Return on equity and debt-to-assets

D) Current ratio and times interest earned

56) Which of the following ratios is used to evaluate solvency?

A) Fixed asset turnover ratio

B) Days to sell ratio

C) Current ratio

D) Times interest earned

57) Which of the following ratios is a solvency ratio?

A) Net profit margin ratio

B) Current ratio

C) Fixed asset turnover ratio

D) Debt-to-assets ratio

58) Which of the measures below is used to assess profitability?

A) Current ratio

B) Debt-to-assets ratio

C) Asset turnover

D) Receivables turnover

59) Which ratio is a test of liquidity?

A) Net profit margin

B) Inventory turnover

C) Times interest earned

D) Debt-to-assets

60) Which of the measures below is used to measure liquidity?

A) Current ratio

B) Debt-to-assets ratio

C) Price ÷ Earnings ratio

D) Times interest earned

61) In which of the following company attributes would a long-term bond holder be most interested?

A) Quality of earnings

B) Solvency

C) Profitability

D) Liquidity

62) Which of the following is calculated by dividing net income by revenues?

A) Gross profit margin

B) Current ratio

C) Net profit margin

D) Asset turnover

63) Kingsbury Manufacturing has net sales revenue of $624,000, cost of goods sold of $274,560, and all other expenses of $262,080. The net profit margin is:

A) 0.32.

B) 0.56.

C) 0.86.

D) 0.14.

64) Which of the following ratios is calculated by dividing current assets by current liabilities?

A) Return on equity ratio

B) Current ratio

C) Net profit margin ratio

D) Fixed asset turnover ratio

65) Kingsbury Manufacturing has net sales revenue of $624,000, cost of goods sold of $274,560, and all other expenses of $262,080. The gross profit percentage is closest to:

A) 32%.

B) 56%.

C) 86%.

D) 14%.

66) Net revenue divided by average net fixed assets is the calculation for which of the following ratios?

A) Net profit margin

B) Fixed asset turnover

C) Current ratio

D) Return on assets

67) Which of the following is calculated by dividing net revenue by average net fixed assets?

A) Net profit margin

B) Fixed asset turnover

C) Total asset turnover

D) Current ratio

68) Campbell Co. has net sales revenue of $1,000,000, cost of goods sold of $680,000, and all other expenses of $232,000. The beginning balance of stockholders' equity is $320,000 and the beginning balance of fixed assets is $288,800. The ending balance of stockholders' equity is $480,000 and the ending balance of fixed assets is $311,200. The fixed asset turnover ratio is closest to:

A) 0.53.

B) 2.50.

C) 3.33.

D) 0.80.

69) Which of the following is calculated by dividing (net income less preferred dividends) by average common stockholders' equity?

A) Return on assets ratio

B) Return on equity ratio

C) Earnings per share

D) Net profit margin ratio

70) Which of the following actions would likely increase the Return on Equity (ROE)?

A) An increase in the cost of goods sold

B) The purchase of treasury stock

C) Issuing shares of preferred stock

D) An increase in the income tax rate

71) Melrose Manufacturing has net sales revenue of $624,000, cost of goods sold of $274,560, net income of $95,360, and preferred dividends of $8,000 during the current year. At the beginning of the year, 402,400 shares of common stock were outstanding, and, at the end of the year, 429,600 shares of common stock were outstanding. A total of 1,000 preferred shares were outstanding throughout the year. The company's earnings per share for the current year is closest to:

A) $1.50.

B) $0.84.

C) $0.21.

D) $0.87.

72) Which of the following will increase earnings per share?

A) A ten percent increase in net income and a ten percent increase in the average number of shares of common stock outstanding

B) A ten percent decrease in net income and a ten percent increase in the average number of shares of common stock outstanding

C) A ten percent increase in net income and a ten percent decrease in the average number of shares of common stock outstanding

D) A ten percent decrease in net income and a ten percent decrease in the average number of shares of common stock outstanding

73) Dearborn Company has earnings per share of $2.40, it paid a dividend of $1.00 per share, and the market price of the company's stock is $90 per share. The price/earnings ratio is closest to:

A) 37.50.

B) 64.29.

C) 2.40.

D) 2.00.

74) Larabee Company's stock sells for $20 per share. The company has $160 million in earnings and 500 million outstanding shares. The Price/Earnings ratio for the company is closest to:

A) 62.5.

B) 200.

C) 0.31.

D) 6.4.

75) Webster, Inc. has the following information:

What is the Price/Earnings ratio?

A) 2.2

B) 4.0

C) 6.7

D) 20.0

76) Which of the following is calculated by dividing net sales revenue by average net receivables?

A) Days to sell ratio

B) Current ratio

C) Profit margin

D) Receivables turnover ratio

77) During the current accounting period, revenue from credit sales is $536,800. The Accounts Receivable balance is $41,184 at the beginning of the period and $41,760 at the end of the period. Which of the following statements is correct?

A) The receivables turnover ratio is 12.9.

B) On average, it takes 12.9 days to collect payment from credit customers.

C) The receivables turnover ratio is 28.3.

D) On average, the company sells its inventory every 28.3 days.

78) Cost of goods sold divided by average inventory is the calculation for which of the following ratios?

A) Net profit margin ratio

B) Current ratio

C) Inventory turnover ratio

D) Fixed asset turnover ratio

79) Sheffield Company has $145,000 of inventory at the beginning of the year and $131,000 at the end of the year. Sales revenue is $1,972,800, cost of goods sold is $1,145,400, and net income is $248,400 for the year. The inventory turnover ratio is:

A) 1.8.

B) 8.3.

C) 6.0.

D) 14.3.

80) Sheffield Company has $145,000 of inventory at the beginning of the year and $131,000 at the end of the year. Sales revenue is $1,972,800, cost of goods sold is $1,145,400, and net income is $248,400 for the year. On average, the number of days to sell inventory is approximately:

A) 203 days.

B) 44 days.

C) 61 days.

D) 26 days.

81) Which of the following is calculated by dividing cost of goods sold by average inventory and then dividing this result into 365 days?

A) Inventory turnover

B) Current ratio

C) Days to collect ratio

D) Days to sell ratio

82) Which of the following ratios is calculated by dividing current assets by current liabilities?

A) Quick ratio

B) Solvency ratio

C) Debt ratio

D) Current ratio

83) Southport Industries has current assets of $900,000 and a current ratio is 2.50. Assume that the company prepays rent for 9 months in the amount of $40,000. The current ratio after this transaction is closest to:

A) 2.39.

B) 2.61.

C) 2.50.

D) 2.81.

84) A company has a debt-to-assets ratio of 0.45. If the company then borrows cash from the bank to finance a building acquisition, which of the following is a correct statement?

A) The debt-to-assets ratio will be unchanged.

B) The debt-to-assets ratio will increase.

C) The debt-to-assets ratio will decrease.

D) The debt-to-assets ratio will increase as a result of the cash received and then decrease as a result of the building acquisition.

85) Fullerton Co. has the following information from its accounting records:

 If Fullerton uses cash of $10,000 to pay a current liability, its:

A) current ratio increases and its debt-to-assets ratio increases.

B) current ratio increases and its debt-to-assets ratio decreases.

C) current ratio decreases and its debt-to-assets ratio increases.

D) current ratio decreases and its debt-to-assets ratio decreases.

86) Wayne, Inc. has net sales revenue of $348,800, cost of goods sold of $274,400, and net income of $2,400. If interest expense is $8,000 and income tax expense is $800, the times interest earned ratio is:

A) 1.4.

B) 0.33.

C) 1.3.

D) 0.40.

87) The following information is taken from the financial statements of Burton Industries:

The company's times interest earned ratio is:

A) 19.2.

B) 4.7.

C) 15.0.

D) 18.2.

88) The following information comes from the balance sheets and income statements of Crosby Co.:

What is the times interest earned ratio for the current year? 

A) 2.2

B) 5.2

C) 6.2

D) 8.0

89) Which of the following ratios does not use net income in its calculation?

A) Net profit margin

B) Earnings per share

C) Return on equity

D) Fixed asset turnover

90) If a company increases the selling price of the product it sells and all other data on the financial statements remains the same, which of the following ratios will be unaffected?

A) Fixed asset turnover

B) Net profit margin

C) Inventory turnover

D) Earnings per share

91) At the end of last year, Ace Company had total assets in the amount of $6,000,000 and total liabilities in the amount of $4,000,000. The company issued shares to new stockholders at the beginning of the current year for $1,000,000. As a direct result of this transaction, the:

A) debt-to-assets ratio will increase.

B) debt-to-assets ratio will decrease.

C) net profit margin ratio will increase.

D) net profit margin ratio will decrease.

92) Which of these is not one of the categories of ratio analysis?

A) Profitability

B) Liquidity

C) Solvency

D) Probability

93) Which type of ratio indicates a company's ability to generate income in the current period?

A) Profitability ratios

B) Liquidity ratios

C) Solvency ratios

D) Current ratios

94) Which of the following is a profitability ratio?

A) Return on equity

B) Times interest earned

C) Inventory turnover 

D) Receivables turnover

95) Which of these are liquidity ratios?

A) Net profit margin

B) Receivables turnover

C) Fixed asset turnover

D) Times interest earned

96) Which of these ratios measure liquidity?

A) Receivables turnover

B) Net profit margin

C) Debt-to-assets ratio

D) Fixed asset turnover

97) Which of these are solvency ratios?

A) Debt-to-assets

B) Current ratio

C) Return on equity

D) Net profit margin

98) The comparative financial statements of Seward, Inc. include the following data:

The gross profit percentage for the current year is closest to:

A) 42%.

B) 13.5%.

C) 57.7%.

D) 21.15%.

99) The comparative financial statements of Seward, Inc. include the following data:

Which of the following would be shown on Seward's horizontal analysis when calculating percentage changes from the prior year to the current year?

A) An increase in sales revenue of 23%

B) An increase in gross profit of 41.5%

C) An increase in interest expense of 100%

D) An increase in net income of 57%

100) The comparative financial statements of Seward, Inc. include the following data:

The fixed asset turnover ratio for the current year is closest to:

A) 1.28.

B) 1.24.

C) 0.75.

D) 1.64.

101) Which type of analysis could reveal that a company is relying heavily on debt financing?

A) Common size statements

B) Horizontal analysis

C) The fixed asset turnover ratio

D) Trend analysis

102) When evaluating its net profit margin for the current year, Coca Cola would most likely use all of the following benchmarks except:

A) Anheuser Busch's net profit margin.

B) the Fortune 500's net profit margin.

C) Pepsico's net profit margin.

D) the average net profit margin for the soft drink manufacturing industry.

103) If net income is rising, but net sales revenue and the gross profit percentage remain the same, then:

A) operating expenses are falling.

B) operating expenses are rising.

C) cost of goods sold is falling.

D) cost of goods sold is rising.

104) An increase in the gross profit percentage indicates that:

A) cost of goods sold as a percentage of sales has decreased.

B) cost of goods sold as a percentage of sales has increased.

C) operating expenses as a percentage of sales have increased.

D) operating expenses as a percentage of sales have decreased.

105) Which of the following ratios is used to evaluate how efficient a company is in using its fixed assets to generate revenues?

A) Current ratio

B) Debt-to-assets ratio

C) Return on fixed assets ratio

D) Fixed asset turnover ratio

106) Which ratio is used to evaluate how well a company is managing its property, plant, and equipment?

A) Receivables turnover

B) Inventory turnover

C) Fixed asset turnover

D) Debt-to-assets ratio

107) If net sales revenue for a retail chain has been relatively constant for the last four years, but the fixed asset turnover has been decreasing, what would be the most likely cause?

A) The number of stores has expanded.

B) Cost of Goods sold has been increasing.

C) Employee wages have been increasing.

D) The company has closed some of its stores.

108) Which of the following statements about the Price/Earnings ratio is not correct?

A) The Price/Earnings ratio indicates how much investors are willing to pay for a share of a company's stock as a multiple of current earnings.

B) A high Price/Earnings ratio may mean that investors have pushed the price of the stock up in anticipation of higher future net income.

C) If EPS decreases and there is no change in the market price of the stock, the Price/Earnings ratio will decrease.

D) If the market price of the stock increases and there is no change in EPS, the Price/Earnings ratio will increase.

109) Cleveland Co.'s price/earnings ratio is 15.3. Its closest competitor, Walt, Inc. has a Price/Earnings ratio of 9.4. Which of the following would not be a valid conclusion to draw from a comparison of the two companies' Price/Earnings ratios?

A) Cleveland Co.'s stock is overpriced.

B) Investors believe Cleveland Co. has a brighter future than Walt, Inc.

C) Cleveland has been more profitable than Walt, Inc.

D) The stock price of Cleveland Co. has been bid up due to rumors of a merger.

110) A decrease in receivables turnover ratio is indicative of:

A) an increase in sales revenue.

B) slower-selling inventory.

C) an increase in accounts receivable.

D) a decline in cost of goods sold.

111) Willow Manufacturing had net Accounts Receivable of $600,000 at the beginning of the year and $740,000 at the end of the year. Net Sales Revenue for 2019 was $5,200,000. What is the days to collect from customers?

A) 60.00

B) 42.12

C) 51.94

D) 47.03

112) If cost of goods sold remains unchanged, an increase in the inventory turnover ratio is indicative of a(n):

A) reduction in the cost of goods sold.

B) decrease in inventory.

C) increase in inventory.

D) increase in sales revenue.

113) The ratio that measures how many times a company replenishes its inventory in a year is the:

A) days to sell ratio.

B) receivables turnover ratio.

C) inventory turnover ratio.

D) days to collect ratio.

114) Assume that Charmin and Barker are two retailers selling different goods. Charmin reports a days to sell ratio of 6 days and Barker reports a days to sell ratio of 64 days. What types of merchandise are Charmin and Barker likely to sell, given their measures of days to sell?

A) Charmin sells clothing and Barker sells wine.

B) Charmin sells consumer electronics and Barker sells gasoline.

C) Charmin sells footwear and Barker sells consumer electronics.

D) Charmin sells groceries and Barker sells autos.

115) Judging only from the ratios below, which of the following clothing wholesalers is least likely to be having cash flow problems?

A) Company A: Receivable turnover of 5; inventory turnover of 2

B) Company B: Receivable turnover of 2; inventory turnover of 5

C) Company C: Receivable turnover of 10; inventory turnover of 10

D) Company D: Receivable turnover of 1; inventory turnover of 1

116) A current ratio of 2.5 means that for every dollar of:

A) accounts payable, there is $2.50 of cash.

B) current liabilities, there is $2.50 of current assets.

C) current assets, there is $2.50 of current liabilities.

D) total liabilities, there is $2.50 of cash.

117) Listed below are the current ratios of four different companies. Based on these current ratios, which company is in the most liquid position?

A) 2.0

B) 1.8

C) 2.5

D) 2.1

118) A company that has a current ratio less than one cannot cover:

A) current liabilities with its current cash flow.

B) current expenses with its current sales revenue.

C) expenses with its current revenues.

D) current liabilities with its current assets.

119) A current ratio of less than one is not so much of a concern when the company has a:

A) low fixed asset turnover ratio.

B) high days to collect number.

C) high inventory turnover ratio.

D) high debt-to-equity ratio.

120) The debt-to-assets ratio is the:

A) ratio of current liabilities to current assets.

B) ratio of long term liabilities to fixed assets.

C) ratio of total liabilities to total assets.

D) proportion of short-term liabilities to total liabilities.

121) The ratio that measures the percentage of financing from creditors is the:

A) current ratio.

B) times interest earned ratio.

C) debt-to-assets ratio.

D) Price/Earnings ratio.

122) A debt-to-assets ratio of 0.50 indicates that the company has:

A) more liabilities than stockholders' equity.

B) equal amounts of liabilities and stockholders' equity.

C) more stockholders' equity than liabilities.

D) no liabilities.

123) Which of the following could indicate bad news?

A) An increase in fixed asset turnover ratio.

B) A decrease in days to sell.

C) A decrease in EPS.

D) A decrease in the debt-to-assets ratio.

124) A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%. If the company then issues additional shares of common stock for cash, which of the following is a correct statement?

A) The debt-to-assets ratio will decrease and the return on equity ratio will decrease.

B) The debt-to-assets ratio will increase and the return on equity ratio will increase.

C) The debt-to-assets ratio will not change and the return on equity ratio will not change.

D) The debt-to-assets ratio will decrease and the return on equity ratio will increase.

125) A times interest earned ratio of 11 means that the company's:

A) net income is large enough to pay interest and taxes 11 times.

B) net cash flow from operations before taxes and interest is large enough to pay interest and taxes 11 times.

C) net cash flow from operations is large enough to pay interest and taxes 11 times.

D) income before taxes and interest is large enough to pay interest 11 times.

126) The ratio that measures the company's ability to meet required interest payments is the:

A) Debt-to-equity ratio.

B) Current ratio.

C) Price/Earnings ratio.

D) Times interest earned ratio.

127) Which of the following will not improve a company's gross profit percentage?

A) An increase in the sales price.

B) A decrease in the cost of inventory.

C) A decrease in the shipping cost for merchandise purchased.

D) Collecting cash from customers in advance.

128) Puffin Turnovers, Inc.'s fixed asset turnover was 0.9 while Muffin Tops, Inc.'s fixed asset turnover was 0.6. Which of the following statements about Puffin compared with Muffin is correct?

A) Puffin generated more sales per dollar of fixed assets.

B) Puffin has greater depreciation expense.

C) Puffin has more fixed assets.

D) Puffin has greater sales.

129) Company A has a receivables turnover of 8.0. Company B has a receivables turnover of 10.0. Which of the following statements is correct?

A) Company A collects its receivables faster than Company B.

B) Company B collects its receivables faster than Company A.

C) Company A makes more sales on account than Company B.

D) Company B makes more sales on account than Company A.

130) Which of the following would improve a current ratio that is now 1.2?

A) Selling long-term assets for cash.

B) Purchasing land for cash.

C) Buying equipment in exchange for a two-year note.

D) Purchasing inventory on account.

131) The income statements for Urban Outfits, Inc. are presented below:

Required:

Part a. Prepare a horizontal analysis of the income statement above. Round to the nearest whole percent.

Part b. Interpret your analysis. Comment on significant changes.

132) A condensed balance sheet for Morningstar, Inc. is presented below:

Morningstar, Inc.

Balance Sheet

December 31(amounts in millions)

Current Assets Current Liabilities

Cash & Cash Equivalents $5,000 Accounts Payable $ 310

Accounts Receivable 510 Accrued Liabilities 1,950

Inventories 450 Total Current Liabilities 2,260

Total Current Assets 5,960 Long-Term Liabilities 900

Property & Equipment, Net 2,400 Total Liabilities 3,160

Long-Term Investments 2,200 Total Stockholders' Equity 7,400

Total Assets $10,560 Total Liabilities & Stockholders' Equity $10,560

Required:

Part a. Prepare a vertical analysis of the balance sheet above. Round to the nearest whole percent.

Part b. Interpret your analysis. Identify significant items. Comment on key relationships.

133) Company X has net sales revenue of $1,250,000, cost of goods sold of $760,000, and all other expenses of $290,000. The beginning balance of stockholders' equity is $400,000 and the beginning balance of fixed assets is $361,000. The ending balance of stockholders' equity is $600,000 and the ending balance of fixed assets is $389,000.

Required:

Compute the return on equity (ROE) ratio.

134) Choose the appropriate letter match each financial performance ratios with the appropriate category.

Ratio

1. ________ Debt-to-assets ratio

2. ________ Receivables turnover ratio

3. ________ Fixed asset turnover ratio

4. ________ Current ratio

5. ________ Return on equity

6. ________ Price/earnings ratio

7. ________ Times interest earned ratio

8. ________ Gross profit margin

9. ________ Inventory turnover ratio

10. ________ Earnings per share

Category

P — Profitability

L — Liquidity

S — Solvency

135) Consider the formula used to calculate each of the following financial performance ratios. From the list of financial statement items below, match its letter with the ratio it is used to calculate. Some financial statement items will be used more than once. Some ratios will use one letter from the list and some ratios will use two letters from the list.

Ratio

1. ________ Net Profit Margin

2. ________ Debt-to-assets ratio

3. ________ EPS

4. ________ ROE

5. ________ Days to collect

6. ________ Days to sell

7. ________ Price earnings ratio

8. ________ Current ratio

9. ________ Fixed asset turnover

10. ________ Gross profit percentage

Financial Statement Item

A) Net income

B) Interest paid

C) Cost of goods sold

D) Net sales revenue

E) Total liabilities

F) Total assets at year end

G) Average stockholders' equity

H) Current liabilities

136) A company provided the following information:

There was no change in contributed capital and there were no dividends declared in the current year.

Required:

Calculate the return on equity ratio.

137) Hubbard Company had 8,000 shares of common stock outstanding throughout the year. The following information is also available:

Required:

Calculate the Price/Earnings ratio at the end of the current year.

138) The following information is taken from the financial statements of B. Darin Company:

Net sales revenue $ 900,000

Expenses 600,000

Net income 300,000

Net cash from operations 290,000

Assets, end of current year 600,000

Liabilities, end of current year 100,000

Stockholders' equity, end of current year 500,000

Assets, end of previous year 590,000

Stockholders' equity, end of previous year 490,000

Expenses include interest of $10,000 and income tax of $90,000. There was an average of 40,000 shares of common stock outstanding during the year and the market price of the stock is $15 per share at the end of the year. There was no preferred stock outstanding during the year.

Required:

Calculate the following ratios for the current year:

Part a. Fixed asset turnover

Part b. Return on equity (ROE)

Part c. Earnings per share (EPS)

Part d. Times interest earned

Part e. Price/Earnings ratio

Part f. Debt-to-assets ratio

Part g. Net profit margin

139) Mercedes, Co. has the following quarterly financial information.

Required:

Part a. Calculate the gross profit percentage for each quarter.

Part b. Calculate the net profit margin for each quarter.

Part c. Calculate the EPS for each quarter.

Part d. Calculate the Price/Earnings ratio at the end of the year.

Part e. Evaluate the company's profitability.

Round all ratios to two decimal places.

140) The financial information below presents selected information from the financial statements of Pelican Company. Sales revenue during the current year was $13,700,300 and cost of goods sold was $8,905,195. All of Pelican's sales are made on account and are due within 30 days.

Required:

Part a. Current ratios as of the end of the current and prior year.

Part b. Calculate the receivables turnover ratio for the current year.

Part c. Calculate the days to collect for the current year.

Part d. Calculate the inventory turnover ratio for the current year.

Part d. Calculate the days to sell for the current year.

Part e. Evaluate the company's liquidity position at the end of the current year. Cite any additional information not given in the problem that would be helpful in evaluating the company's liquidity.

Round all ratios to two decimal places.

141) Tilden Industries reported net sales revenue of $1,700,000 and paid no dividends during the current year. The following information is also available at the end of the current and prior years:

Current Year Prior Year

Total Current Assets $1,000,000 $ 900,000

Property, Plant, and Equipment, Net 1,700,000 1,400,000

Total Current Liabilities 450,000 390,000

Total Long-Term Liabilities 600,000 500,000

Common Stock, $5 Par 1,000,000 1,000,000

Paid-In Capital in Excess of Par 200,000 200,000

Retained Earnings 450,000 210,000

There was no preferred stock outstanding during the current year.

Required:

Part a. Calculate the return on equity for the current year.

Part b. Calculate the debt-to-assets ratio for the current year.

Part c. Calculate the fixed asset turnover ratio for the current year.

Part d. Calculate the current ratio for the current year.

Round all ratios to two decimal points.

142) The following information is available for a company for the current year:

Net Sales Revenue $ 345,000

Cost of Goods Sold 205,000

Average Accounts Receivable 32,500

Average Inventory 9,450

Average Net Fixed Assets 81,250

Average Total Assets 130,000

Required:

Part a. Calculate the receivables turnover ratio for the current year.

Part b. Calculate the days to collect for the current year.

Part c. Calculate the inventory turnover ratio for the current year.

Part d. Calculate the days to sell for the current year.

Round all ratios to two decimal points.

143) Hussain, Inc.'s income statement and other financial information for the current year is presented below.

Required:

Part a. Perform vertical analysis of the income statement. (Round to the nearest whole percentage.)

Part b. Calculate the debt-to-assets ratio. (Round to two decimal places.)

Part c. Calculate the times interest earned ratio. (Round to two decimal places.)

Part d. Evaluate the company's solvency.

144) Choose the appropriate letter to match the term and the definition. Not all definitions will be used.

Term

1. _____ Full Disclosure Principle

2. _____ Ratio Analysis

3. _____ Liquidity

4. _____ Going-Concern Assumption

5. _____ Profitability

6. _____ Solvency

7. _____ Trend Analysis

8. _____ Vertical Analysis

Definition

A) The ability of a company to meet its short-run financial obligations.

B) A type of analysis that focuses on relationships within a single financial statement.

C) Also known as time-series analysis.

D) The standard that companies should present all relevant information needed to interpret a company's financial position and performance.

E) The standard that expenses should be recognized when incurred.

F) A measure of current earnings performance.

G) A result from comparing a company's results to other companies in the industry.

H) A measure of long-run survivability.

I) The standard that revenue should be recorded when earned, provided payment is reasonably expected.

J) Measures that relate financial variables reported in one or more of the financial statements from the same year.

K) The characteristic that financial information needs to be valuable to decision makers.

L) The standard that takes for granted a company's near term financial survival.

145) Choose the appropriate letter to match the term and the definition. Not all definitions will be used.

Term

1. _____ Time-Series Analysis

2. _____ Common-Size Financial Statements

3. _____ Management Discussion and Analysis

4. _____ Price/Earnings Ratio

5. _____ Earnings Per Share

6. _____ Comprehensive Income

7. _____ Discontinued Operations

8. _____ Net Income

Definition

A) The practice of reporting accounting data in the national monetary unit.

B) A nonrecurring item associated with abandoning or selling an operation.

C) The earnings of a company after taxes.

D) An increase in an asset or a decrease in a liability that results from peripheral activities.

E) After-tax earnings adjusted for gains and losses that may disappear before they are realized.

F) A section of the annual report that can be used in interpreting the results of financial statement analysis.

G) The ratio calculated by dividing the net income by the number of common shares outstanding.

H) The ratio calculated by dividing the price of a share of stock by the earnings per share.

I) Also known as ratio analysis.

J) A nonrecurring item on the income statement that reflects gains and losses associated with extraordinary events.

K) Another name for a trend analysis.

L) The practice of reporting information in percentages rather than monetary amounts.