Chapter 17 Analysis of Financial Statements

MULTIPLE CHOICE QUESTIONS

1. Financial statement analysis applies analytical tools to financial statements and related data for making business decisions.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

External users of accounting information manage and operate the company.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The evaluation of company performance and financial condition focuses solely on past performance.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

External users of accounting information make the strategic and operating decisions of a company.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Internal users of accounting information make the strategic and operating decisions of a company.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. One purpose of financial statement analysis for internal users is to provide strategic information to improve company efficiency and effectiveness in providing products and services.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Evaluation of company performance does not include analysis of (1) past and current performance,
2. current financial position, and (3) future performance and risk.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A company's board of directors analyzes financial statements to assess future company prospects for making operating decisions.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Suppliers use financial statement information in establishing credit terms.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Financial analysis only refers to the communication of relevant financial information to decision makers.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Profitability is the ability to generate future revenues and meet long-term obligations.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Liquidity and efficiency are the ability to meet short-term obligations and to efficiently generate revenue.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Market prospects are the ability to generate positive market expectations.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Profitability is the ability to generate positive market expectations.

• 1. True
  2. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Financial reporting includes not only general purpose financial statements, but also information from SEC filings, press releases, shareholders' meetings, forecasts, management letters, auditor's reports, and Webcasts.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The building blocks of financial statement analysis include (1) liquidity, (2) solvency, (3) profitability, and (4) market prospects.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. General-purpose financial statements include the (1) income statement, (2) balance sheet, (3) statement of stockholders' equity (or statement of retained earnings), (4) statement of cash flows, and (5) notes to these statements.

True

• 1. False

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Standards for comparison are not generally necessary when making judgments about a company's performance.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Standards for comparison when interpreting financial statement analysis include competitor and industry performance data.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Intra-company analysis is based on comparisons with competitors.

• 1. True
  2. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Intra-company analysis compares a company's current performance to its own prior performance.

• 1. True
  2. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. General standards of comparisons, developed from experience, include the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Vertical analysis is the comparison of a company's financial condition and performance across time.

True

• 1. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Horizontal analysis is the comparison of a company's financial condition and performance across time.

True

• 1. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. If a company is comparing its financial condition or performance to a base amount, it is using vertical analysis.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P2 Describe and apply methods of vertical analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. If a company is comparing this year's financial performance to last year's financial performance, it is using horizontal analysis.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. When a negative amount is in the base period and a positive amount is in the analysis period (or vice versa), a meaningful percent change cannot be calculated.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

When no value is in the base period, no percent change is computable.

• 1. True
  2. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. When an item has a value in the base period and zero in the analysis period, the decrease is 100 percent.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. When an item has a value in the base period and zero in the analysis period, the decrease is 0 percent.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Three of the most common tools of financial analysis include horizontal analysis, vertical analysis, and ratio analysis.

True

• 1. False

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

True

• 1. False

Learning Objective: 17-A1 Summarize and report results of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. A good financial report does not link interpretations and conclusions of analysis with the underlying information.

True

• 1. False

Learning Objective: 17-A1 Summarize and report results of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. A good financial statement analysis report often includes the following sections: executive summary, analysis overview, evidential matter, assumptions, key factors, and inferences.

True

• 1. False

Learning Objective: 17-A1 Summarize and report results of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Earnings per share are calculated only on income from continuing operations.

• 1. True
  2. False

Learning Objective: 17-A2 Appendix 17A-Explain the form and assess the content of a complete income statement. Bloom's: Remember

AACSB: Communication

AICPA: BB Resource Management; FN Measurement

Analysis of a single financial number is often of limited value.

• 1. True
  2. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Comparative financial statements are reports that show financial amounts in side by side columns on a single statement for analysis purposes.

True

• 1. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Vertical analysis is used to reveal patterns in data covering two or more successive periods.

• 1. True
  2. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Horizontal analysis is used to reveal patterns in data covering two or more successive periods.

• 1. True
  2. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

True

• 1. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

True

• 1. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Horizontal analysis is used to reveal patterns in data covering successive periods.

• 1. True
  2. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

True

• 1. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The percent change of a comparative financial statement item is computed by subtracting the analysis period amount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

True

• 1. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The percent change of a comparative financial statement item is computed by subtracting the base period amount from the analysis period amount, dividing the result by the base period amount and multiplying that result by 100.

True

• 1. False

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

True

• 1. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

True

• 1. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The base amount for a common-size balance sheet is usually total assets.

• 1. True
  2. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. An advantage of common-size statements is that they reflect the dollar magnitude (size) of the different companies under analysis.

True

• 1. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

• 1. True
  2. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals 7.85%.

True

• 1. False

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Ratios must refer to economically important relationships, such as a sale price compared to its cost.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Liquidity refers to the availability of resources to meet short-term cash requirements.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Working capital is computed as current liabilities minus current assets.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The current ratio is calculated as current liabilities divided by current assets.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Capital structure refers to a company's long-run financial viability and its ability to cover long-term obligations.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Risk Analysis

The greater the times interest earned ratio, the greater the risk a company is exposed to.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Risk Analysis

1. Efficiency refers to how productive a company is in using its assets, and is usually measured relative to how much revenue is generated from a certain level of assets.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company that has days' sales uncollected of 30 days and days' sales in inventory of 18 days implies that inventory will be converted to cash in about 12 days.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

The return on total assets can be calculated as profit margin times total asset turnover.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. The return on common stockholder's equity measures a company's success in earning net income for its owners.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

A high level of expected risk suggests a low price-earnings (PE) ratio.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The return on total assets ratio is a profitability measure.

• 1. True
  2. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and a market price per share of $64.75. The company's dividend yield equals 21.4%.

True

• 1. False

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

Financial statement analysis involves all of the following except:

• 1. Assuring that the company will be more profitable in the future.
  2. Helping to reduce uncertainty in decision-making.
  3. Helping users to make better decisions.
  4. The application of analytical tools to general-purpose financial statements and related data for making business decisions.

Transforming accounting data into useful information for decision-making.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Evaluation of company performance can include comparison and/or assessment of all but which of the following:

External user needs and demands.

• 1. Current financial position.
  2. Future performance and risk.
  3. Current performance.
  4. Past performance.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

External users of financial information:

• 1. Make operating decisions for a company.
  2. Are not directly involved in operating the company.
  3. Make strategic decisions for a company.
  4. Include internal auditors and consultants.
  5. Are those individuals involved in managing and operating the company.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Internal users of financial information:

• 1. Are those individuals involved in managing and operating the company.
  2. Are not directly involved in operating a company.
  3. Include directors and customers.
  4. Include suppliers, regulators, and the press.
  5. Include shareholders and lenders.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The building blocks of financial statement analysis do not include:

• 1. Profitability.
  2. Solvency.
  3. External analyst services.
  4. Market prospects.
  5. Liquidity and efficiency.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Financial reporting refers to:

• 1. Profitability.
  2. Ratio analysis only.
  3. The application of analytical tools to general-purpose financial statements.
  4. General-purpose financial statements only.
  5. The communication of financial information useful for decision making.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The ability to meet short-term obligations and to efficiently generate revenues is called:

• 1. Creditworthiness.
  2. Solvency.
  3. Profitability.
  4. Liquidity and efficiency.
  5. Market prospects.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis.; 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The ability to generate future revenues and meet long-term obligations is referred to as:

• 1. Liquidity and efficiency.
  2. Profitability.
  3. Solvency.
  4. Market prospects.
  5. Creditworthiness.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis.; 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The ability to provide financial rewards sufficient to attract and retain financing is called:

• 1. Profitability.
  2. Market prospects.
  3. Solvency.
  4. Liquidity and efficiency.
  5. Creditworthiness.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis.; 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The ability to generate positive market expectations is called:

• 1. Profitability.
  2. Market prospects.
  3. Creditworthiness.
  4. Liquidity and solvency.
  5. Liquidity and efficiency.

Learning Objective: 17-C1 Explain the purpose and identify the building blocks of analysis.; 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Standards for comparisons in financial statement analysis do not include:

• 1. Management standards.
  2. Guidelines (rules of thumb).
  3. Competitors' standards.
  4. Intra-company standards.
  5. Industry standards.

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Intra-company standards for financial statement analysis:

• 1. Are set by the company's industry through published statistics.
  2. Are often set by competitors.
  3. Are published by analyst services such as Standard & Poor's.
  4. Are based on a company's prior performance and relations between its financial items.
  5. Are based on rules of thumb.

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Industry standards for financial statement analysis:

• 1. Are based on a single competitor's financial performance.
  2. Are set by the government.
  3. Are based on rules of thumb.
  4. Are available for the financial performance and condition of the company's industry.
  5. Compare a company's income with its prior year's income.

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

Guidelines (rules-of-thumb) are general standards of comparison developed from:

• 1. Industry statistics from the government.
  2. Relations between financial items.
  3. Analysis of competitors.
  4. Past experience.
  5. Dun and Bradstreet.

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Three of the most common tools of financial analysis are:

• 1. Financial reporting, ratio analysis, vertical analysis.
  2. Horizontal analysis, vertical analysis, ratio analysis.
  3. Trend analysis, financial reporting, ratio analysis.
  4. Ratio analysis, horizontal analysis, financial reporting.
  5. Vertical analysis, political analysis, horizontal analysis.

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The comparison of a company's financial condition and performance across time is known as:

• 1. Political analysis.
  2. Investment analysis.
  3. Financial reporting.
  4. Horizontal analysis.
  5. Vertical analysis.

Learning Objective: 17-C2 Describe standards for comparisons in analysis.; 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The measurement of key relations among financial statement items is known as:

• 1. Horizontal analysis.
  2. Financial reporting.
  3. Investment analysis.
  4. Ratio analysis.
  5. Risk analysis.

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

The comparison of a company's financial condition and performance to a base amount is known as:

• 1. Vertical analysis.
  2. Investment analysis.
  3. Risk analysis.
  4. Financial reporting.
  5. Horizontal ratios.

Learning Objective: 17-C2 Describe standards for comparisons in analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

A financial statement analysis report does not include:

• 1. Evidential matter.
  2. Qualitative and quantitative key factors.
  3. An analysis overview.
  4. Inferences such as forecasts.
  5. An auditor statement.

Learning Objective: 17-A1 Summarize and report results of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. The background on a company, its industry, and its economic setting is usually included in which of the following sections of a financial statement analysis report?

Inferences.

• 1. Factor analysis.
  2. Executive summary.
  3. Analysis overview.
  4. Evidential conclusions.

Learning Objective: 17-A1 Summarize and report results of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. A brief focus on important analysis results and conclusions is usually included in which of the following sections of a financial statement analysis report:

Executive summary.

• 1. Evidential conclusions.
  2. Factor analysis.
  3. Analysis overview.
  4. Inferences.

Learning Objective: 17-A1 Summarize and report results of analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

All of the following are true of a financial statement analysis report, except:

• 1. Forces preparers to organize their reasoning and to verify the logic of analysis.
  2. Helps users and preparers to refine conclusions based on evidence from key building blocks.
  3. Serves as a method of communication to users.
  4. Contains ambiguities and qualifications.
  5. Enables readers to see the process and rationale of analysis.

Learning Objective: 17-A1 Summarize and report results of analysis. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

Gains and losses that are neither unusual nor infrequent are reported as:

• 1. A prior period adjustment on the statement of retained earnings.
  2. A gain or loss from disposing of the discontinued segment's net assets.
  3. Part of continuing operations in before tax dollars.
  4. A gain or loss from operation of a discontinued segment.
  5. Part of continuing operations in after-tax dollars.

Learning Objective: 17-A2 Appendix 17A-Explain the form and assess the content of a complete income statement. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Which of the following items is typically not included as a separate item after normal revenues and expenses?

Expropriation of property by a foreign government.

• 1. Loss of use of property due to a new and unexpected environmental regulation.
  2. Write down of inventories.
  3. Condemnation of property by the city government.
  4. Loss due to an unusual and infrequent calamity.

Learning Objective: 17-A2 Appendix 17A-Explain the form and assess the content of a complete income statement. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Financial statements with data for two or more successive accounting periods placed in columns side by side, sometimes with changes shown in both dollar amounts and percentages, are referred to as:

Comparative statements.

• 1. Successive statements.
  2. Controlling statements.
  3. Period-to-period statements.
  4. Serial statements.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Horizontal analysis:

• 1. Evaluates financial data across industries.
  2. Is the presentation of financial ratios.
  3. Is a tool used to evaluate financial statement items relative to industry statistics.
  4. Is a method used to evaluate changes in financial data across time.
  5. Is also called vertical analysis.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

The dollar change for a comparative financial statement item is calculated by:

• 1. Subtracting the base period amount from the analysis period amount.
  2. Subtracting the base period amount from the analysis period amount, dividing the result by the base period amount, then multiplying that amount by 100.

Subtracting the analysis period amount from the base period amount.

• 1. Subtracting the base period amount from the analysis amount, then dividing the result by the base amount.
  2. Subtracting the analysis period amount from the base period amount, dividing the result by the base period amount, then multiplying that amount by 100.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company's sales in Year 1 were $250,000 and in Year 2 were $287,500. Using Year 1 as the base year, the percent change for Year 2 compared to the base year is:

A) 100%. B) 13%. C) 15%. D) 87%. E) 115%.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Yeats Corporation's sales in Year 1 were $396,000 and in Year 2 were $380,000. Using Year 1 as the base year, the percent change for Year 2 compared to the base year is:

A) 4.2% B) -104% C) -4% D) 96% E) 100%

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Ash Company reported sales of $400,000 for Year 1, $450,000 for Year 2, and $500,000 for Year
2. Using Year 1 as the base year, what is the revenue trend percent for Years 2 and 3?

125% for Year 2 and 112.5% for Year 3.

• 1. 80% for Year 2 and 90% for Year 3.
  2. 88% for Year 2 and 80% for Year 3.
  3. 112.5% for Year 2 and 125% for Year 3.
  4. 88% for Year 2 and 90% for Year 3.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

In horizontal analysis the percent change is computed by:

• 1. Subtracting the base period amount from the analysis amount, then dividing the result by the analysis period amount.

Subtracting the analysis period amount from the base period amount.

• 1. Subtracting the base period amount from the analysis period amount.
  2. Subtracting the analysis period amount from the base period amount, dividing the result by the base period amount, then multiplying that amount by 100.
  3. Subtracting the base period amount from the analysis period amount, dividing the result by the base period amount, then multiplying that amount by 100.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

To compute trend percentages the analyst should:

• 1. Compare amounts to a competitor.
  2. Select a base period, assign each item in the base period statement a weight of 100%, and then express financial numbers from other periods as a percent of their base period number.

Subtract the analysis period number from the base period number.

• 1. Subtract the base period amount from the analysis period amount, divide the result by the analysis period amount, then multiply that amount by 100.

Compare amounts across industries using Dun and Bradstreet.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Comparative financial statements in which each individual financial statement amount is expressed as a percentage of a base amount are called:

General-purpose financial statements.

• 1. Asset comparative statements.
  2. Percentage comparative statements.
  3. Sales comparative statements.
  4. Common-size comparative statements.

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Common-size statements:

• 1. Compare financial statements over time.
  2. Show the dollar amount of change for financial statement items.
  3. Do not emphasize the relative importance of each item.
  4. Reveal patterns in data across successive periods.
  5. Reveal changes in the relative importance of each financial statement item to a base amount.

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

The common-size percent is computed by:

• 1. Dividing the analysis amount by the base amount.
  2. Subtracting the base amount from the analysis amount and multiplying the result by 100.
  3. Dividing the base amount by the analysis amount.
  4. Dividing the base amount by the analysis amount and multiplying the result by 1,000.
  5. Dividing the analysis amount by the base amount and multiplying the result by 100.

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reported cash of $14,000 and total assets of $178,300 on its balance sheet. Its common-size percent for cash equals:

A) 12.73%. B) 7.85%. C) .0785%. D) 7850%. E) 1273%.

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reported cash of $27,000 and total assets of $461,000 on its balance sheet. Its common-size percent for cash equals:

A) 5.86%. B) 1707%. C) 100%. D) 58.6%. E) 17.1%.

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Current assets minus current liabilities is:

• 1. Quick assets.
  2. Financial leverage.
  3. Profit margin.
  4. Working capital.
  5. Current ratio.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Jones Corp. reported current assets of $193,000 and current liabilities of $137,000 on its most recent balance sheet. The working capital is:

A) 71%. B) 41%. C) $56,000. D) 141%. E) ($56,000).

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Jones Corp. reported current assets of $193,000 and current liabilities of $137,000 on its most recent balance sheet. The current ratio is:

A) 0.7:1. B) 1:1. C) 0.4:1. D) 1.4:1. E) 0.3:1.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Jones Corp. reported current assets of $193,000 and current liabilities of $137,000 on its most recent balance sheet. The current assets consisted of $62,000 Cash; $43,000 Accounts Receivable; and $88,000 of Inventory. The acid-test (quick) ratio is:

A) 1.4:1. B) 0.77:1. C) 0.64:1. D) 0.54:1. E) 1:1.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Current assets divided by current liabilities is the:

• 1. Solvency ratio.
  2. Liquidity ratio.
  3. Quick ratio.
  4. Current ratio.
  5. Debt ratio.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Quick assets divided by current liabilities is the:

• 1. Working capital ratio.
  2. Acid-test ratio.
  3. Quick asset turnover ratio.
  4. Current ratio.
  5. Current liability turnover ratio.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Net sales divided by Average accounts receivable, net is the:

• 1. Profit margin.
  2. Average accounts receivable ratio.
  3. Current ratio.
  4. Days' sales uncollected.
  5. Accounts receivable turnover ratio.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Powers Company reported Net sales of $1,200,000 and average Accounts Receivable, net of

$78,500. The accounts receivable turnover ratio is:

15.3 times. B) 16.3 times. C) 14.3 times. D) 28.6 times. E) 0.65 times.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Powers Company reported Net sales of $1,200,000 and Accounts Receivable, net of $78,500. The Day's sales uncollected (rounded to whole days) is:

4 days. B) 56 days. C) 24 days. D) 48 days. E) 15 days.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Dividing Accounts receivable, net by Net sales and multiplying the result by 365 is the:

• 1. Accounts receivable turnover ratio.
  2. Profit margin.
  3. Days' sales uncollected.
  4. Average accounts receivable ratio.
  5. Current ratio.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Dividing ending inventory by cost of goods sold and multiplying the result by 365 is the:

• 1. Inventory turnover ratio.
  2. Days' sales in inventory.
  3. Current ratio.
  4. Profit margin.
  5. Total asset turnover.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Zhang Company reported Cost of goods sold of $835,000, beginning Inventory of $37,200 and ending Inventory of $46,300. The average Inventory amount is:

A) $83,500. B) $9,100. C) $41,750. D) $37,200. E) $46,300.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Zhang Company reported Cost of goods sold of $835,000 and average Inventory of $41,750. The Inventory turnover ratio is:

0.5 times. B) 20 times. C) 418 times. D) 56 times. E) 19 times.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Zhang Company reported Cost of goods sold of $835,000 and ending Inventory of $41,750. The Days' sales in inventory (rounded to whole days) is:

18 days. B) 20 days. C) 418 days. D) 10 days. E) 56 days.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Net sales divided by average total assets is the:

• 1. Sales return ratio.
  2. Total asset turnover.
  3. Profit margin.
  4. Return on total assets.
  5. Current ratio.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Carducci Corporation reported Net sales of $3.6 million and average Total assets of $1.1 million. The Total asset turnover is:

0.31 times. B) 0.77 times. C) 3.27 times. D) 2.27 times. E) 4.30 times.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Carducci Corporation reported Net sales of $3.6 million and beginning Total assets of $0.9 million and ending Total assets of $1.3 million. The average Total asset amount is:

$0.36 million.

• 1. $2.3 million.
  2. $0.25 million.
  3. $2.7 million.
  4. $1.1 million.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Net income divided by net sales is the:

• 1. Return on total assets.
  2. Days' sales in inventory.
  3. Total asset turnover.
  4. Current ratio.
  5. Profit margin.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Martinez Corporation reported Net sales of $765,000 and Net income of $142,000. The Profit margin is:

A) 81.4%. B) 1.86%. C) 18.56%. D) 5.39%. E) 539.0%.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Net income divided by average total assets is:

• 1. Days' income in assets.
  2. Profit margin.
  3. Total asset turnover.
  4. Current ratio.
  5. Return on total assets.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Clairmont Industries reported Net income of $283,000 and average Total assets of $637,000. The Return on total assets is:

A) 44.4%. B) 88.8%. C) 61.5%. D) 125.1%. E) 55.6%.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

Annual cash dividends per share divided by market price per share is the:

• 1. Profit margin.
  2. Price-dividends ratio.
  3. Price-earnings ratio.
  4. Dividend yield ratio.
  5. Earnings per share.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. The market price of Horokhiv Corporation's common stock at the start of 2016 was $47.50 and it declared and paid cash dividends of $3.28 per share. The Dividend yield ratio is:

A) 144.8%. B) 6.5%. C) 6.9%. D) 14.5%. E) 7.4%.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. How long a company holds inventory before selling it can be measured by dividing cost of goods sold by the average inventory balance to determine the:

Current ratio.

• 1. Price earnings ratio.
  2. Accounts receivable turnover.
  3. Inventory turnover.
  4. Days' sales uncollected.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A component of operating efficiency and profitability, calculated by expressing net income as a percent of net sales, is the:

Price earnings ratio.

• 1. Profit margin ratio.
  2. Accounts receivable turnover.
  3. Acid-test ratio.
  4. Merchandise turnover.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

One of several ratios that reflects solvency includes the:

• 1. Days' sales in inventory.
  2. Total asset turnover.
  3. Acid-test ratio.
  4. Current ratio.
  5. Times interest earned ratio.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company had a market price of $27.50 per share, earnings per share of $1.25, and dividends per share of $0.40. Its price-earnings ratio equals:

A) 32.0. B) 3.1. C) 93.8. D) 3.3. E) 22.0.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. A company reports basic earnings per share of $3.50, cash dividends per share of $1.25, and a market price per share of $64.75. The company's dividend yield equals:

A) 18.50%. B) 5.41%. C) 2.14%. D) 1.93%. E) 4.67%.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. Rajan Company's most recent balance sheet reported total assets of $1.9 million, total liabilities of

$0.8 million, and total equity of $1.1 million. Its Debt to equity ratio is:

A) 0.58 B) 1.38 C) 1.00 D) 0.73 E) 0.42

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Desjardin Landscaping's income statement reports net income of $75,300, which includes deductions for interest expense of $11,500 and income taxes of $34,900. Its times interest earned is:

0.15 times B) 7.5 times C) 10.6 times D) 4.0 times E) 6.5 times

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reports the following year-end balance sheet data. The company's working capital equals:

Cash $ 40,000 Current liabilities $ 75,000 Accounts receivable 55,000 Long-term liabilities 35,000

Inventory 60,000 Common stock 100,00

0

Equipment 145,00

0

Total assets $ 300,00 0

Retained earnings 90,000

Total liabilities and equity $ 300,00

0

A) $75,000 B) $155,000 C) $300,000 D) $80,000 E) $190,000

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reports the following year-end balance sheet data. The company's acid-test ratio equals:

Cash $ 40,000 Current liabilities $ 75,000 Accounts receivable 55,000 Long-term liabilities 35,000

Inventory 60,000 Common stock 100,00

0

Equipment 145,00

0

Total assets $ 300,00 0

Retained earnings 90,000

Total liabilities and equity $ 300,00

0

A) 2.07 B) 0.37 C) 0.58 D) 1.27 E) 0.63

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reports the following year-end balance sheet data. The company's current ratio equals:

Cash $ 40,000 Current liabilities $ 75,000 Accounts receivable 55,000 Long-term liabilities 35,000

Inventory 60,000 Common stock 100,00

0

Equipment 145,00

0

Total assets $ 300,00 0

Retained earnings 90,000

Total liabilities and equity $ 300,00

0

A) 0.37 B) 0.58 C) 0.63 D) 1.27 E) 2.07

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reports the following year-end balance sheet data. The company's debt ratio equals:

A) 0.37 B) 0.58 C) 0.63 D) 1.27 E) 2.07

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reports the following year-end balance sheet data. The company's equity ratio equals:

A) 0.58 B) 2.07 C) 0.63 D) 1.27 E) 0.37

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A corporation reports the following year-end balance sheet data. The company's debt-to-equity ratio equals:

A) 0.58 B) 1.27 C) 0.37 D) 0.63 E) 2.07

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Selected current year company information follows:

The total asset turnover is:

2.81 times B) 6.28 times C) 3.64 times D) 2.24 times E) 4.67 times

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Selected current year company information follows:

67

Total stockholders' equity, beginning-year…... 198,935 Total stockholders' equity, end-of-year 121,851

The return on total assets is:

A) 2.81% B) 3.64% C) 6.28% D) 4.67% E) 2.24%

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

All of the following statements regarding a business segment are true except:

• 1. A company's gain or loss from selling or closing down a segment is reported separately.
  2. A business segment is a part of a company's operations that serves a particular product line.
  3. A segment has assets, liabilities, and financial results of operations that can be distinguished from those of other parts of the company.
  4. A segment's income for the period prior to the disposal and the gain or loss resulting from disposing of the segment's assets are reported separately.
  5. The income tax effects of a discontinued segment are combined with income tax from continuing operations.

Learning Objective: 17-A2 Appendix 17A-Explain the form and assess the content of a complete income statement. Bloom's: Understand

AACSB: Analytical Thinking AICPA: BB Industry; FN Reporting

1. Use the following selected information from Wheeler, LLC to determine the 2017 and 2016 common size percentages for cost of goods sold using Net sales as the base.

A) 119.4% for 2017 and 100.0% for 2016.

B) 65.1% for 2017 and 56.0% for 2016.

C) 36.4% for 2017 and 41.1% for 2016.

D) 55.0% for 2017 and 56.0% for 2016.

E) 117.2% for 2017 and 100.0% for 2016.

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Use the following selected information from Wheeler, LLC to determine the 2017 and 2016 common size percentages for operating expenses using Net sales as the base.

A) 23.9% for 2017 and 23.0% for 2016.

B) 103.8% for 2017 and 100.0% for 2016.

C) 36.4% for 2017 and 41.1% for 2016.

D) 55.0% for 2017 and 56.0% for 2016.

E) 20.0% for 2017 and 23.0% for 2016.

Learning Objective: 17-P2 Describe and apply methods of vertical analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Use the following selected information from Wheeler, LLC to determine the 2017 and 2016 trend percentages for net sales using 2016 as the base.

A) 117.2% for 2017 and 100.0% for 2016.

B) 55.0% for 2017 and 56.0% for 2016.

C) 65.1% for 2017 and 64.6% for 2016.

D) 36.4% for 2017 and 41.1% for 2016.

E) 119.4% for 2017 and 100.0% for 2016.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Use the following selected information from Wheeler, LLC to determine the 2017 and 2016 trend percentages for cost of goods sold using 2016 as the base.

A) 117.2% for 2017 and 100.0% for 2016.

B) 119.4% for 2017 and 100.0% for 2016.

C) 55.0% for 2017 and 56.0% for 2016.

D) 36.4% for 2017 and 41.1% for 2016.

E) 65.1% for 2017 and 64.6% for 2016.

Learning Objective: 17-P1 Explain and apply methods of horizontal analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from McCormik, LLC. Compute the company's working capital for Year 2.

A) $111,700. B) $220,600. C) $147,200. D) $142,700. E) $232,700.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from McCormik, LLC. Compute the company's current ratio for Year 2.

A) 2.95. B) 2.26. C) 1.88. D) 3.05. E) 1.98.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from McCormik, LLC. Compute the company's acid-test ratio for Year 2.

A) 1.98. B) 3.05. C) 1.88. D) 2.26. E) 2.95.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from McCormik, LLC. Compute the company's accounts receivable turnover for Year 2.

A) 8.28. B) 8.94. C) 8.62. D) 7.90. E) 5.78.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from McCormik, LLC. Compute the company's inventory turnover for Year 2.

A) 3.86. B) 5.78. C) 3.28. D) 4.33. E) 4.72.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from McCormik, LLC. Compute the company's days' sales uncollected for Year 2. (Use 365 days a year.)

A) 43.9. B) 42.3. C) 80.0. D) 113.3. E) 46.2.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from McCormik, LLC. Compute the company's days' sales in inventory for Year 2. (Use 365 days a year.)

A) 113.2. B) 80.0. C) 42.3. D) 43.9. E) 46.2.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Frankle Corp. Compute the company's working capital.

A) $568,200. B) $198,650. C) $230,200. D) $536,650. E) $231,450.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Frankle Corp. Compute the company's current ratio.

A) 1.44. B) 3.60. C) 6.27. D) 6.44. E) 2.84.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Dodge Company. Compute the company's acid-test ratio.

A) 1.12. B) 0.92. C) 2.75. D) 1.63. E) 2.66.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Marston Company. Compute the company's accounts receivable turnover for Year 2.

A) 4.78. B) 8.54. C) 8.59. D) 8.36. E) 8.37.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Marston Company. Compute the company's days' sales uncollected for Year 2. (Use 365 days a year.)

A) 42.7. B) 46.2. C) 85.4. D) 43.9. E) 43.7.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Graceworks Corp. Compute the company's inventory turnover for Year 2.

A) 1.71. B) 1.75. C) 0.93. D) 1.79. E) 1.85.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Graceworks, Corp. Compute the company's days' sales in inventory for Year 2. (Use 365 days a year.)

A) 113.3. B) 228.4. C) 203.4. D) 179.5. E) 215.1.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Shakley's Incorporated. Compute the company's profit margin for Year 2.

A) 14.1%. B) 33.9%. C) 11.7%. D) 9.6%. E) 16.7%.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Shakley's Incorporated. Compute the company's return on total assets for Year 2.

A) 2.6%. B) 15.2%. C) 22.2%. D) 9.6%. E) 14.5%.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Shakley's Incorporated. Compute the company's debt-to-equity ratio for Year 2.

A) 0.75. B) 2.63. C) 2.34. D) 1.34. E) 1.75.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Shakley's Incorporated. Compute the company's times interest earned for Year 2.

A) 14.0. B) 7.9. C) 4.8. D) 5.8. E) 6.9.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Graphics, Inc. Compute the company's times interest earned.

A) 9.7. B) 8.7. C) 3.7. D) 2.5. E) 6.2.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. Refer to the following selected financial information from Keller Company. Compute the company's debt to equity for Year 2.

A) 1.9. B) 0.5. C) 1.1. D) 0.9. E) 2.1.

Learning Objective: 17-P3 Define and apply ratio analysis. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

SHORT ANSWER QUESTIONS

1. Match each of the following terms with the appropriate definitions.
2. Comparative financial statement
3. Horizontal analysis
4. Liquidity and efficiency
5. Vertical analysis
6. Financial statement analysis
7. Market prospects
8. Solvency
9. Debt to equity ratio
10. Profitability
11. Common-size financial statement

(1) A company's ability to generate positive market expectations.

________ (2) The application of analytical tools to general-purpose financial statements and related data for making business decisions.

________ (3) A measure of solvency presented as the ratio of total liabilities to total equity.

________ (4) A statement with data for two or more successive accounting periods placed in side-by-side columns, often with changes shown in dollar amounts and percentages.

________ (5) A company's ability to provide financial rewards sufficient to attract and retain capital.

(6)A statement where each amount is expressed as a percent of a base amount to reveal the relative importance of each financial statement item.

________ (7) The comparison of a company's financial condition and performance to a base amount.

(8) Examination of financial data across time.

________ (9) A company's ability to generate future revenues and meet long-term obligations.

________ (10) The availability of resources to meet short-term obligations and to efficiently generate revenues.

Learning Objective: 17-C1; 17-C2; 17-P1; 17-P2; 17-P3

Bloom's: Remember AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Match each of the following terms with the appropriate formulas.
2. Days' sales in inventory
3. Dividend yield
4. Total asset turnover
5. Inventory turnover
6. Return on common stockholders' equity
7. Gross margin ratio
8. Days' sales uncollected
9. Profit margin ratio
10. Times interest earned
11. Debt ratio

________ (1) Net income — Preferred dividends Average common stockholders' equity

________ (2) Accounts receivable * 365

Net sales

________ (3) Total liabilities

Total assets

________ (4) Income before interest expense and income taxes

Interest expense

________ (5) Annual cash dividends per share

Market price per share

________ (6) Net sales — Cost of goods sold

Net sales

________ (7) Cost of goods sold

Average inventory

________ (8) ______Net sales

Average total assets

________ (9) Net income

Net sales

________ (10) Ending inventory * 365

Cost of goods sold

Learning Objective: 17-P3 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Identify the financial analysis building block most appropriately associated with each ratio listed below by placing the letter of the building block a through d beside each ratio 1 through 10. Each building block may be used more than once.
2. Liquidity and Efficiency
3. Solvency
4. Profitability
5. Market Prospects

________ (1) Price Earnings Ratio

________ (2) Dividend Yield

(3) Accounts Receivable Turnover

(4) Days' Sales in Inventory

________ (5) Return on Total Assets

________ (6) Equity Ratio

________ (7) Debt Ratio

(8) Inventory Turnover

(9) Basic Earnings per Share

________ (10) Times Interest Earned

Learning Objective: 17-P3 Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

ESSAY QUESTIONS

Explain the purpose of financial statement analysis for both external and internal users.

Learning Objective: 17-C1 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

Identify and explain the four building blocks of financial statement analysis.

Learning Objective: 17-C1 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

What are the four standards for comparisons in financial analysis? Give an example of each.

Learning Objective: 17-C2 Bloom's: Understand

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

Identify and describe three common tools of financial statement analysis.

Learning Objective: 17-C2 Bloom's: Understand

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

What is the purpose of a good financial statement analysis report? What are the key components?

Learning Objective: 17-A1 Bloom's: Understand AACSB: Communication

AICPA: BB: Industry; FN: Reporting

Describe the purpose of horizontal financial statement analysis and how it is applied.

Learning Objective: 17-P1

Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

Describe the purpose of vertical financial statement analysis and how it is applied.

Learning Objective: 17-P2 Bloom's: Understand

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

Describe ratio analysis including its purpose, application, and interpretation.

Learning Objective: 17-P3 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

SHORT ANSWER QUESTIONS

1. A company's sales in Year 1 were $280,000, and its sales in Year 2 were $341,600. Using Year 1 as the base year, what is the sales trend percent for Year 2?

Learning Objective: 17-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

ESSAY QUESTIONS

1. Calculate the percent increase or decrease for each of the following financial statement items:

Learning Objective: 17-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Comparative statements for Warmer Corporation are shown below:

Warmer Corporation Comparative Income Statements For the years ended December 31

Calculate trend percentages for all income statement amounts shown and comment on the results. Use 2016 as the base year.Comment on the results.

Learning Objective: 17-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Calculate the percent increases for each of the following selected balance sheet items.

Learning Objective: 17-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. For the following financial statement items, calculate trend percentages using 2016 as the base year:

Learning Objective: 17-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

100

1. Express the following income statement information in common-size percentages and in trend percentages using 2016 as the base year.

Common-Size Trend Percentages Percentages

2017 2016 2017 2016 2017 2016

Sales $540,000 $460,000 ______

______

_____

______

__ __ __

Cost of goods sold. 290,000 240,000 ______

______

_____

______

__ __ __

Gross profit $250,000 $220,000 ______

______

_____

______

__ __ __

Learning Objective: 17-P1; 17-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The comparative balance sheet for Silverlight Co. is shown below. Express the balance sheet in common-size percentages.

Silverlight CompanyComparative Balance Sheets (in $000)December 31, 2016

—2018

Learning Objective: 17-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Express the following balance sheets for Safety Company in common-size percentages.

Safety Company Balance Sheets

December 31, 2017 and 2016

102

Learning Objective: 17-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Express the following income statement information in common-size percentages (round to nearest whole percent). Comment on the results.

Haans Corp.

Comparative Income Statements

For Years Ended December 31, 2018 and 2017

Learning Objective: 17-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Use the balance sheets of Glover shown below to calculate the following ratios for 2018 (round to the hundredths):
2. Current ratio.
3. Acid-test ratio.
4. Debt ratio.
5. Equity ratio.

Glover Company Balance Sheets

December 31, 2018 and 2017

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The following information is available for the Starr Corporation:

Calculate the company's inventory turnover and its days' sales in inventory.

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The following current year information is available from a manufacturing company:

Calculate the company's accounts receivable turnover and its days' sales uncollected.

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Information from a manufacturing company's current year income statement follows. Calculate the company's (a) profit margin ratio, (b) gross margin ratio, and (c) times interest earned.

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. A company reported net income of $78,000 and had 15,000 common shares outstanding throughout the current year. At year-end, the price per share of the company's stock was $49.40. What is the company's year-end price-earnings ratio?

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

SHORT ANSWER QUESTIONS

1. A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000. What is the company's return on common stockholders' equity?

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

ESSAY QUESTIONS

1. Use the financial data shown below to calculate the following ratios for the current year:
2. Current ratio.
3. Acid-test ratio.
4. Accounts receivable turnover.
5. Days' sales uncollected.
6. Inventory turnover.
7. Days' sales in inventory.

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. A company's calendar-year financial data are shown below. The company had total assets of

$339,000 and total equity of $144,400 for the prior year. No additional shares of common stock were issued during the year. The December 31 market price per share is $49.50. Cash dividends of

$19,500 were paid during the year. Calculate the following ratios for the company:

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. A company's calendar-year financial data are shown below. The company had total assets of

$339,000 and total equity of $144,400 for the prior year. No additional shares of common stock were issued during the year. The December 31 market price per share is $49.50. Cash dividends of

$19,500 were paid during the year. Calculate the following ratios for the company:

111

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Comparative calendar-year financial data for a company are shown below. Calculate the following ratios for the company for 2018:
2. accounts receivable turnover
3. day's sales uncollected
4. inventory turnover
5. days' sales in inventory

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Comparative calendar year financial data for a company are shown below. Calculate the following ratios for 2018:
2. return on total assets
3. return on common stockholders' equity.

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The current year-end balance sheet data for a company are shown below. Calculate the company's:
2. working capital
3. current ratio
4. acid-test ratio. Assets:

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The comparative income statements for Silverlight Company are shown below. Calculate the following ratios for 2018:
2. profit margin
3. gross margin
4. times interest earned.

Silverlight CompanyIncome StatementsFor Years Ended December 31,

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. A corporation reports the following year-end balance sheet data. Calculate the following ratios:
2. working capital
3. acid-test ratio
4. current ratio
5. debt ratio
6. equity ratio
7. debt-to-equity ratio

Cash……………………….. $ 50,000 Current liabilities $ 64,000 Accounts receivable………. 35,000 Long-term liabilities………. 72,000

Inventory………………….. 60,000 Common stock…………….. 100,000

Equipment………………… 140,000 Retained earnings…………. 49,000 Total assets……………….. $285,000 Total liabilities and equity $285,000

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Selected balances from a company's financial statements are shown below. Calculate the following ratios for 2018:
2. accounts receivable turnover
3. inventory turnover
4. days' sales uncollected
5. days' sales in inventory
6. profit margin.
7. return on total assets.

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The following selected financial information for a company was reported for the current year end. Calculate the following company ratios:
2. Accounts receivable turnover.
3. Inventory turnover.
4. Days' sales uncollected

Accounts receivable, beginning-year……………. $170,000

Credit sales………………………………………... 1,000,000

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Selected current year end financial information for a company is presented below. Calculate the following company ratios:
2. Profit margin.
3. Total asset turnover.
4. Return on total assets.
5. Return on common stockholders' equity (assume the company has no preferred stock). Net income……………………………….. $ 325,000

Net sales………………………………….. 4,700,000 Total liabilities, beginning-year………….. 550,000 Total liabilities, end-of-year……………… 530,000 Total stockholders' equity, beginning-year. 760,000 Total stockholders' equity, end-of-year….. 745,000

118

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Use the following information from the current year financial statements of a company to calculate the ratios below:
2. Current ratio.
3. Accounts receivable turnover. (Assume the prior year's accounts receivable balance was

$100,000.)

1. Days' sales uncollected.
2. Inventory turnover. (Assume the prior year's inventory was $50,200.)
3. Times interest earned ratio.
4. Return on common stockholders' equity. (Assume the prior year's common stock balance was

$480,000 and the retained earnings balance was $128,000.)

1. Earnings per share (assuming the corporation has a simple capital structure, with only common stock outstanding).
2. Price earnings ratio. (Assume the company's stock is selling for $26 per share.)
3. Divided yield ratio. (Assume that the company paid $1.25 per share in cash dividends.)

Income statement data:

Sales (all on credit) $1,075,000

Cost of goods sold 575,000

Gross profit on sales $

119

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. Financial information for Sigma Company is presented below. Calculate the following ratios for 2018:
2. Inventory turnover.
3. Accounts receivable turnover.
4. Return on total assets.
5. Times interest earned.
6. Total asset turnover.

121

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The following summaries from the income statements and balance sheets of Kouris Company and Brittania, Inc. are presented below.
2. For both companies for 2018, compute the:
   1. Current ratio
   2. Acid-test ratio
   3. Accounts receivable turnover
   4. Inventory turnover
   5. Days' sales in inventory
   6. Days' sales uncollected

Which company do you consider to be the better short-term credit risk? Explain.

1. For both companies for 2018, compute the:
   1. Profit margin ratio
   2. Return on total assets
   3. Return on common stockholders' equity

Which company do you consider to have better profitability ratios?

Kouris Company Consolidated Balance Sheets(in millions)

Assets

Liabilities and Stockholders' Equity

Kouris Company Consolidated Statement of Income

May 31, 2018

123

Brittania, Inc.

Consolidated Balance Sheets

Assets

Current assets:

Liabilities and Stockholders' Equity

Brittania, Inc.

Consolidated Statement of Income January 3, 2018

(in millions)

Revenues $133.5

Cost of sales 87.3

Gross profit 46.2

Operating expenses 37.3

Operating income 8.9

Interest expense (0.1)

Learning Objective: 17-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

SHORT ANSWER QUESTIONS

1. ________ applies analytical tools to general-purpose financial statements and related data for making business decisions.

Learning Objective: 17-C1 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. A common focus of financial statement users in evaluating a company's performance and financial condition includes evaluating its (1) ________, (2) ________, and (3) ________.

Learning Objective: 17-C1 Bloom's: Understand AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. General-purpose financial statements include the (1)________, (2) ________, (3) ________, (4)

________ and (5) ________.

Learning Objective: 17-C1 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Reporting

1. The four building blocks of financial analysis are (1)________, (2) ________, (3) ________ and (4) ________.

Learning Objective: 17-C1 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Measurement

1. The standards for comparisons when interpreting measures from financial statement analysis include (1) ________, (2) ________, (3) ________, and (4) ________.

Learning Objective: 17-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB: Industry; FN: Measurement

1. The comparison of a company's financial condition and performance across time is known as

________.

Learning Objective: 17-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB: Industry; FN: Measurement

1. The comparison of a company's financial condition and performance to a base amount is known as

________.

Learning Objective: 17-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB: Industry; FN: Measurement

The measurement of key relationships between financial statement items is known as ________.

Learning Objective: 17-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB: Industry; FN: Measurement

1. Three of the most common tools of financial analysis are (1) ________, (2) ________, and (3)

________.

Learning Objective: 17-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB: Industry; FN: Measurement

1. A good financial statement analysis report usually includes the following six sections: (1)

________, (2) ________, (3) ________, (4) ________ (5) ________, and (6) ________.

Learning Objective: 17-A1 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Reporting

1. financial statements are reports where financial amounts are placed side-by-side in columns on a single statement for analytical purposes.

Learning Objective: 17-P1 Bloom's: Remember

AACSB: Communication

AICPA: BB: Industry; FN: Reporting

1. Trend percentage is calculated by dividing ________ by ________ and multiplying the result by 100.

Learning Objective: 17-P1 Bloom's: Remember

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. ________ is a method of analysis used to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Learning Objective: 17-P2 Bloom's: Remember

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

The current ratio and acid-test ratio are used to reflect the ________ of a business.

Learning Objective: 17-P3 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

1. The debt ratio, the equity ratio, pledged assets to secured liabilities, and times interest earned are all ________ ratios.

Learning Objective: 17-P3 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

The gross margin ratio, return on total assets, and basic earnings per share are all ________ ratios.

Learning Objective: 17-P3 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

________ ratios include the price-earnings ratio and dividend yield.

Learning Objective: 17-P3 Bloom's: Understand AACSB: Analytic

AICPA: BB: Resource Management; FN: Measurement

234) Ratios may be expressed as (1) ________, (2) ________, or (3) ________.

Learning Objective: 17-P3 Bloom's: Remember AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. In order to be classified as an extraordinary gain or loss, the item must be both (1) _ and (2) ________.

Learning Objective: 17-A2 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Reporting

1. The income level most likely to continue into the future and is commonly used in PE ratios and other market-based measures of performance is the .

Learning Objective: 17-A2 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Reporting