CHAPTER 13

FINANCIAL ANALYSIS: THE BIG PICTURE

CHAPTER LEARNING OBJECTIVES

1. Apply the concept of sustainable income and quality of earnings. Sustainable income analysis is useful in evaluating a company’s performance. Sustainable income is the most likely level of income to be obtained by the company in the future. Discontinued operations and other comprehensive income are presented on the statement of comprehensive to highlight their unusual nature. Items below income from continuing operations must be presented net of tax.

A high quality of earnings provides full and transparent information that will not confuse or mislead users of the financial statements. Issues related to quality of earnings are (1) alternative accounting methods, (2) pro forma income, and (3) improper recognition.

2. Apply horizontal analysis and vertical analysis. Horizontal analysis is a technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage.

Vertical analysis is a technique that expresses each item in a financial statement as a percentage of a relevant total or a base amount.

3. Analyze a company's performance using ratio analysis. The price-earnings (P-E) ratio reflects investors' assessment of a company's future earnings potential. Financial ratios are provided in Illustration 13.14 (liquidity), Illustration 13.15 (solvency) and Illustration 13.16 (profitability). Analysis is enhanced by intracompany, intercompany, and industry comparisons of these three classes of ratios.

Difficulties:

Easy: 148

Medium: 114

Hard: 18

Question List by Section

Apply the concepts of sustainable income and quality of earnings: 59, 227, 276, 280

Sustainable income: 1, 47, 48, 51, 53, 60, 78, 81, 82, 83, 84, 275

Discontinued Operations: 2, 3, 6, 50, 54, 58, 61, 64, 65, 66, 261

Comprehensive Income: 4, 8, 9, 62, 63, 67, 68, 69, 76, 77

Illustration of Comprehensive Income: 70, 71, 85

Format: 49, 56, 57, 80, 228, 229

Changes in Accounting Principle: 5, 7, 52, 55, 262

Quality of Earnings: 74, 75, 279

Alternative Accounting Methods: 10, 73

Pro Forma Income: 12

Improper Recognition: 11, 72, 79

Apply horizontal analysis and vertical analysis: 30, 86, 87, 88, 89, 90, 91, 92, 93, 94, 130, 236, 251, 252, 253, 277

Horizontal analysis: 13, 14, 15, 16, 17, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 230, 231, 235, 250, 263

Vertical analysis: 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 131, 132, 232, 233, 234, 237, 238, 248, 249, 254, 264

Analyze a company’s performance using ratio analysis: 133, 134, 144, 148, 151, 182, 265, 273, 274, 278

Liquidity Ratios: 31, 32, 33, 40, 45, 135, 136, 145, 146, 149, 150, 152, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 178, 179, 180, 181, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 203, 204, 205, 210, 211, 217, 218, 219, 220, 224, 225, 226, 243, 244, 247, 267, 268, 269, 270

Solvency Ratios: 36, 39, 41, 42, 43, 44, 138, 141, 142, 143, 153, 173, 174, 175, 176, 177, 212, 213, 216, 245, 246, 266, 272

Profitability Ratios: 34, 35, 37, 38, 137, 139, 140, 147, 168, 169, 170, 171, 172, 198, 199, 200, 201, 202, 206, 207, 208, 209, 214, 215, 221, 222, 223, 241, 245, 246, 271

Financial Analysis and Data Analytics: 46

Comprehensive Example of Ratio Analysis: 239, 240, 242, 255, 256, 257, 258, 259, 260

TRUE-FALSE STATEMENTS

1. Analysts are interested in sustainable income, which is equal to the past year’s net income.

2. One objective of the income statement is to separate the results of continuing operations from those of discontinued operations.

3. When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

4. Other comprehensive income includes all changes in stockholder's equity during a period including those changes resulting from investments by stockholders.

5. Companies report the effects of most changes in accounting principle in the current period.

6. The loss on the disposal of a significant component of a business is disclosed in the statement of retained earnings.

7. A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.

8. Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders.

9. Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

10. The use of alternative accounting methods can affect the quality of a company’s earnings.

11. Improper recognition of income is not one of the factors affecting the quality of earnings.

12. Because pro forma earnings are based on specific rules, these amounts are highly reliable.

13. In horizontal analysis, the base year is the most current year being examined.

14. Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

15. Another name for horizontal analysis is trend analysis.

16. If a company has sales of $130 in 2025 and $182 in 2024, the percentage decrease in sales from 2024 to 2025 is 40%.

17. In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, a percentage change for that item can be computed but the result can be misleading.

18. A primary purpose of vertical analysis is to observe trends over a three-year period.

19. Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place.

20. Common size analysis expresses each item in a financial statement as a percent of a base amount.

21. In a common-size income statement, net sales are represented by 100%.

22. In a common-size income statement, each item is expressed as a percentage of net income.

23. In a common-size balance sheet, total assets are represented by 100%.

24. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

25. Vertical analysis is useful in making comparisons of companies of different sizes.

26. Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.

27. In the vertical analysis of an income statement, each item is generally stated as a percentage of net income.

28. Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends.

29. Comparisons of company data with industry averages provide information about a company's relative position within the industry.

30. Horizontal, vertical, and circular analyses are the basic tools of financial statement analysis.

31. Accounts receivable turnover is useful in assessing the profitability of receivables.

32. Inventory turnover measures the number of times on average the inventory was sold during the period.

33. Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

34. Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

35. Both profit margin and asset turnover affect a company’s return on assets.

36. Leverage and return on equity are closely related.

37. The return on assets will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.

38. The current ratio is one of the most utilized measures of profitability.

39. From a creditor's point of view, the higher the debt to assets ratio, the lower the risk that the company may be unable to pay its obligations.

40. A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

41. Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."

42. Declining profitability and liquidity ratios are indications that a company may not survive.

43. Liquidity ratios measure the ability of the company to survive over a long period of time.

44. A solvency ratio measures the income or operating success of a company for a given period of time.

45. The current ratio is a measure of all the ratios calculated for the current year.

46. Opportunities for investors to apply data analytics to financial data are limited.

MULTIPLE CHOICE QUESTIONS

47. Which of the following income statement figures would probably be the best indicator of a company’s future performance?

a. Total revenues

b. Income from operations

c. Net income

d. Gross profit

48. Which of the following is the best definition of sustainable income?

a. Sustainable income is a measure of solvency that does not include capital expenditure.

b. Sustainable income is the same as net income.

c. Sustainable income is income that is unusual in nature and infrequent in occurrence.

d. Sustainable income is the most likely level of income to be obtained in the future.

49. When preparing an income statement, which of the following is the proper order for income statement components?

a. Comprehensive income, Other comprehensive income items, Net income

b. Net income, Comprehensive income, Other comprehensive income items

c. Net income, Other comprehensive income items, Comprehensive income

d. Other comprehensive income items Net income, Comprehensive income

50. If a company has a discontinued operations gain of $30,000 and a 32% tax rate, what is the effect on net income?

a. Increase of $30,000

b. Increase of $20,400

c. Increase of $9,600

d. No effect

51. All of the following are reported on the income statement net of tax except

a. loss on operations from a discontinued division.

b. other comprehensive income items.

c. income from operations.

d. loss on disposal of a division.

52. Which of the following statements regarding changes in accounting principles is not true?

a. Most changes in accounting principles are only reported in current periods when the principle change takes place.

b. Changes in accounting principles are allowed when new principles are preferable to old ones.

c. Most changes in accounting principles are retroactively reported.

d. Consistency is one of the biggest concerns when a change in accounting principle is undertaken.

53. An income statement would not include

a. other revenue and gains.

b. income from operations.

c. discontinued operations.

d. dividends paid.

54. The discontinued operations section of the income statement refers to

a. discontinuance of a product line.

b. the income or loss on products that have been completed and sold.

c. obsolete equipment and discontinued inventory items.

d. the disposal of a significant component of a business.

55. When a change in depreciation method occurs

a. prior years' financial statements should be changed to reflect the newly adopted method.

b. the change should be reported in current and future years.

c. the cumulative effect of the change should be reflected on the income statement as of the beginning of the next year.

d. the cumulative effect of the change in accounting principle should be classified as discontinued operations on the income statement.

56. The order of presentation of items that may appear on the statement of comprehensive income is

a. Other comprehensive income, Discontinued operations, Income before income taxes.

b. Discontinued operations, Other comprehensive income, Income before income taxes.

c. Income before income taxes, Discontinued operations, Other comprehensive income.

d. Income before income taxes, Other comprehensive income, Discontinued operations.

57. Which of the following items appears on the income statement before income before income taxes?

a. Other comprehensive income.

b. Comprehensive income.

c. Other revenues and gains.

d. Discontinued operations.

58. Which of the following statements is true with respect to a financial statement reporting a change in accounting principle?

a. Comparability across periods is impaired.

b. Only a footnote is required to report the change.

c. Changes in both depreciation methods and inventory methods are reported retroactively.

d. Management must show that the new accounting principle is preferable to the old method.

59. Acme Candy Company sold its toffee division resulting in a loss of $80,000. Assuming a tax rate of 25%, the loss on this disposal will be reported on the income statement at what amount?

a. $100,000

b. $20,000

c. $80,000

d. $60,000

60. Which of the following is not reported net of tax on the statement of comprehensive income?

a. Discontinued operations

b. Other comprehensive income

c. Other revenues and expenses

d. Income from continuing operations

61. Which of the following would not be considered an example of a discontinued operation?

a. Shifting production processes within an operation

b. Elimination of a major class of customers

c. Elimination of an entire activity

d. Disposal of a significant component of a business

62. Other comprehensive income is reported on the statement of comprehensive income immediately

a. before income from continuing operations.

b. after comprehensive income.

c. before income before income taxes.

d. after discontinued operations.

63. In reporting discontinued operations, the income statement should show in a special section

1. gains on the disposal of a discontinued component.

2. losses on the disposal of a discontinued component.

a. 1 only.

b. 2 only.

c. neither 1 nor 2.

d. both 1 and 2.

64. The disposal of a significant component of a business is called

a. a change in accounting principle.

b. comprehensive income.

c. an other expense.

d. discontinued operations.

65. Ace Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $200,000 loss in the year of disposal. The loss on disposal of the segment was $100,000. If the tax rate is 30%, and income before income taxes was $1,600,000,

a. the income tax expense on the income before discontinued operations is $390,000.

b. the income from continuing operations is $1,120,000.

c. net income is $1,300,000.

d. the losses from discontinued operations are reported net of income taxes at $300,000.

66. Acme Sky, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $1,260,000 are sold for $900,000. Operating income from January 1 to June 30 for the division amounted to $195,000. Ignoring income taxes, what total amount should be reported on Acme’s income statement for the current year under the caption, Discontinued Operations?

a. $195,000

b. $165,000 loss

c. $360,000 loss

d. $555,000

67. Comprehensive income would not include

a. dividends declared.

b. unrealized gains on available-for-sale securities.

c. discontinued operations.

d. other expenses and losses.

68. Which of the following would be considered an “Other Comprehensive Income” item?

a. Net income

b. Gain on disposal of discontinued operations

c. Other revenues and gains

d. Unrealized loss on available-for-sale securities

69. Acme Café has the following partial balance sheet for its first period of operations:

ACME CAFÉ

Balance Sheet (partial)

Stockholders’ equity:

Common stock $6,000,000

Retained earnings 2,000,000

Total paid-in capital and retained earnings 8,000,000

Accumulated other comprehensive income 800,000

Total stockholders’ equity: $8,800,000

What effect will other comprehensive income have on comprehensive income?

a. No effect on comprehensive income

b. Increase of $800,000 in comprehensive income

c. Increase of $8,800,000 in comprehensive income

d. Decrease of $800,000 in comprehensive income

70. A company has an investment in trading securities of $140,000. The fair value of the investment declined during the current year resulting in an unrealized loss of $7,000. Assuming a 35% tax rate, the effect of this loss on other comprehensive income will be

a. no effect.

b. $140,000 increase.

c. $49,000 decrease.

d. $91,000 decrease.

71. Which of the following would be considered an “Other comprehensive income” item?

a. Loss on disposal of discontinued operations

b. Unrealized loss on available-for-sale debt securities

c. Discontinued operations gain

d. Net income

72. All of the following may be indicators of channel stuffing except

a. deep discounts to customers.

b. customers incentives for buying early.

c. an extremely good earnings period followed by several subsequent bad periods.

d. inventory levels that reflect seasonal demand levels.

73. The use of alternative accounting methods

a. is not a problem in ratio analysis because the footnotes disclose the method used.

b. may be a problem in ratio analysis even if disclosed.

c. is not a problem in ratio analysis since eventually all methods will lead to the same end.

d. is only a problem in ratio analysis with respect to inventory.

74. Which situation below might indicate a company has a low quality of earnings?

a. Revenue is recorded when recognized.

b. Repair costs that do not prolong the useful life of the asset are capitalized and then depreciated.

c. The financial statements are prepared in accordance with generally accepted accounting principles.

d. The same accounting principles are used each year.

75. All of the following situations below might indicate a company has a low quality of earnings except

a. a lack of disclosure about guaranteed payments that were mentioned in the MD&A of the annual report.

b. maintenance costs that do not prolong the useful life of the asset are capitalized and then depreciated.

c. revenue is recognized when the performance obligation is satisfied.

d. adoption of a different inventory method for each of the last three years.

76. Which of the following will be considered an “Other Comprehensive Income” item?

a. Realized loss on available-for-sale securities

b. Gain on disposal of discontinued operations

c. Gain related to winning a lawsuit

d. Unrealized gain on available-for-sale debt securities

77. All of the following statements are true regarding comprehensive income except

a. companies are required to report comprehensive income.

b. comprehensive income is always greater than net income.

c. comprehensive income does not include changes resulting from investments by stockholders.

d. comprehensive income does not include dividends to stockholders.

78. Which of the following is considered to be a financial statement item that is viewed as part of sustainable income?

a. Income from continuing operations

b. Loss due to hurricane damage

c. Gross profit

d. Net income

79. What is the most common abuse by managers in achieving increased earnings to cope with pressure from Wall Street?

1. Selling more shares of stock than authorized
2. Capitalizing expenses that should be expensed
3. Under reporting liabilities
4. Improper recognition of revenue

80. Which of the following is considered to be an acceptable format for reporting a company’ income’?

1. As note disclose to the financial statements
2. As a combined statement of income and comprehensive income
3. As a separate component of operating expenses on the income statement
4. As a component on the statement of retained earnings

81. Several investors are anticipating an investment in a company that has performed well over the past few years. Which of the following income statement amounts will likely be the best indicator of the company’s future performance?

1. Gross profit
2. Operating income
3. Net income
4. Comprehensive income

82. What is sustainable income?

1. The most likely level of income to be obtained in the future
2. The net cash generated from operating activities
3. Income from operations
4. Comprehensive income

83. Which of the following items is an item considered to be part of comprehensive income, but is not reported as part of net income?

a. A gain from the disposal of plant assets

b. A realized loss from the sale of a trading security

c. An unrealized gain on an available-for-sale debt security

d. An impairment loss on a plant asset

84. Which of the following should be classified as a discontinued operation?

a. Write-off of a significant amount of inventory

b. Write-off of a significant amount of receivables

c. Loss from the expropriation of facilities by a foreign government

d. Loss from the disposal of the service division

85. On January 1, 2025, A1 Industries had cash and common stock of $180,000. At that date, the company had no other asset, liability, or equity balances. On January 2, 2025, it purchased $160,000 of equity securities for cash that it classified as available-for-sale. It received cash dividends of $12,000 during the year on these securities. In addition, it had an unrealized holding gain on these securities of $32,000 net of tax. If the company had operating income of $100,000 and a 20% tax rate, what is the amount of comprehensive income in 2025?

a. $121,600

b. $89,600

c. $115,200

d. $144,000

86. A comparison with other companies that provides insight into a company's competitive position is most commonly known as which of the following types of comparisons?

a. Industry average comparison

b. Intracompany comparison

c. Intercompany comparison

d. Comprehensive income comparison

87. In performing a comparative analysis of a company, which one of the following is not one of the three types of comparisons?

a. Intracompany basis

b. Industry averages

c. Trend basis

d. Intercompany basis

88. The best way to evaluate a series of financial statement data over a period of time is by

using

1. common-size statements.
2. trend analysis.
3. vertical analysis.
4. ratio analysis.

89. Which of the following pairs of terms related to financial statement analysis expresses each item in a financial statement as a percent of a base amount?

1. Vertical — Trend
2. Horizontal — Trend
3. Vertical — Common Size
4. Horizontal — Common Size

90. Which of the following is the best way to evaluate a series of financial statement data over time?

1. Perform ratio analysis
2. Perform horizontal analysis
3. Perform a vertical analysis
4. Perform an industry average analysis

91. In performing a vertical analysis, what is the base for accounts payable?

a. Total current liabilities

b. Total assets

c. Total liabilities

d. Sales revenue

92. Comparisons of financial data made within a company are called

a. intracompany comparisons.

b. interior comparisons.

c. intercompany comparisons.

d. industry comparisons.

93. Which one of the following is not a tool in financial statement analysis?

a. Horizontal analysis

b. Circular analysis

c. Vertical analysis

d. Ratio analysis

94. Which of the following is not a common types of comparison used to evaluate financial information?

a. Industry averages

b. Intracompany basis

c. Intercompany basis

d. Sustainable basis

95. When a horizontal analysis is performed and a zero is reported in the base year, then

a. no percentage change can be computed.

b. the percent change will be negative.

c. the accountant has made a mistake.

d. the percentage change will be 100% or greater.

96. Acme Corporation reported net sales of $650,000, $720,000, and $780,000 in the years 2024, 2025, and 2026, respectively. If 2024 is the base year, what percentage do 2026 sales represent of the base?

a. 108%

b. 120%

c. 83%

d. 20%

97. In analyzing financial statements, horizontal analysis is a

a. requirement.

b. tool.

c. principle.

d. theory.

98. Horizontal analysis is also known as

a. linear analysis.

b. vertical analysis.

c. trend analysis.

d. common-size analysis.

99. Under which of the following cases may a percentage change be computed that is not misleading?

a. The trend of the amounts is decreasing but all amounts are positive.

b. There is no amount in the base year.

c. There is a negative amount in the base year and a negative amount in the subsequent year.

d. There is a negative amount in the base year and a positive amount in the subsequent year.

100. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time

a. that has been arranged from the highest number to the lowest number.

b. that has been arranged from the lowest number to the highest number.

c. to determine which items are in error.

d. to determine the amount and/or percentage increase or decrease that has taken place.

101. Horizontal analysis of comparative financial statements includes the

a. development of common-size statements.

b. calculation of liquidity ratios.

c. calculation of dollar amount and percentage changes from financial statements over a period of time, as compared to a base year.

d. evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount.

102. Horizontal analysis is a technique for evaluating financial statement data

a. within a period of time.

b. over a period of time.

c. on a certain date.

d. as it may appear in the future.

103. If Year 1 sales equal $750, Year 2 sales equal $840, and Year 3 sales equal $900, the percentage to be assigned for Year 3 in a trend analysis, assuming that Year 1 is the base year, is

a. 120%.

b. 112%.

c. 83%.

d. 107%.

104. If Year 1 sales equal $780, Year 2 sales equal $819, and Year 3 sales equal $896, the percentage to be assigned for Year 2 in a trend analysis, assuming that Year 1 is the base year, is

a. 95%.

b. 115%.

c. 105%.

d. 109%.

105. Assume the following sales data for a company:

2026 $980,000

2025 875,000

2024 700,000

If 2024 is the base year, what is the percentage increase in sales from 2024 to 2025?

a. 140%

b. 125%

c. 40%

d. 25%

106. If Year 1 cost of goods sold equals $700, Year 2 cost of goods sold equals $840, and Year 3 cost of goods sold equals $630, the percentage to be assigned for Year 1 in a trend analysis, assuming that Year 1 is the base year, is

a. 100%.

b. 90%.

c. 111%.

d. 120%.

107. In horizontal or trend analysis, each item is expressed as a(n)

a. amount.

b. percentage.

c. rate.

d. amount or a percentage.

108. Assume the following sales data for a company:

2026 $960,000

2025 750,000

2024 600,000

If 2024 is the base year, what is the percentage increase in sales from 2024 to 2025?

a. 60%

b. 25%

c. 125%

d. 160%

109. Comparative balance sheets

a. are usually prepared for at least one year.

b. are usually prepared for at least two years.

c. do not show both dollar amount and percentage changes.

d. do not show a comparison of total stockholders’ equity.

110. Assume the following cost of goods sold data for a company:

2026 $1,400,000

2025 1,200,000

2024 1,000,000

If 2024 is the base year, what is the percentage increase in cost of goods sold from 2024 to 2026?

a. 140%

b. 40%

c. 20%

d. 17%

111. In horizontal analysis, each item is expressed as a percentage of the

a. net income amount.

b. stockholders’ equity amount.

c. total assets amount.

d. base-year amount.

112. Ace Trading Company reported net sales of $400,000, $440,000, and $560,000 in the years 2024, 2025, and 2026, respectively. If 2024 is the base year, what is the trend percentage for 2026?

a. 71%

b. 127%

c. 140%

d. 110%

113. Comparisons of data within a company are an example of the following comparative basis

a. industry averages.

b. intercompany.

c. intracompany.

d. interregional.

114. Vertical analysis is also known as

a. perpendicular analysis.

b. common-size analysis.

c. trend analysis.

d. straight-line analysis.

115. In a common-size balance sheet, the 100 percent figure is

a. total current assets.

b. total property, plant, and equipment.

c. total liabilities.

d. total assets.

116. In a common-size financial statement, which of the following is given a percentage of 100 percent?

a. Total liabilities

b. Net income

c. Total assets

d. Cost of goods sold

117. In a common-size income statement, the 100% figure is

a. net income.

b. cost of goods sold.

c. gross profit.

d. net sales.

118. A balance sheet that displays only component percentages is called a ________ balance sheet.

a. condensed

b. common-size

c. comparative

d. trendy

119. Vertical analysis is a technique that expresses each item in a financial statement

a. in dollars and cents.

b. as a percent of the item in the previous year.

c. as a percent of a base amount.

d. starting with the highest value down to the lowest value.

120. In vertical analysis,

a. a base amount is required.

b. a base amount is optional.

c. the same base is used across all financial statements analyzed.

d. the results of the horizontal analysis are necessary inputs for performing the analysis.

121. The best way to study the relationship of the components within a financial statement is to prepare

a. common-size statements.

b. a trend analysis.

c. profitability analysis.

d. ratio analysis.

122. In performing a vertical analysis, the base for prepaid expenses is

a. total current assets.

b. total assets.

c. total liabilities.

d. prepaid expenses in a previous year.

123. In performing a vertical analysis, the base for sales revenues on the income statement is

a. net sales.

b. sales revenue.

c. net income.

d. cost of goods available for sale.

124. In performing a vertical analysis, the base for sales returns and allowances is

a. sales revenue.

b. sales discounts.

c. net sales.

d. total revenues.

125. In performing a vertical analysis, the base for cost of goods sold is

a. total selling expenses.

b. net sales.

c. total revenues.

d. total expenses.

126. Acme, Inc. has the following Income Statement (in millions):

ACME, INC.

Income Statement

For the Year Ended December 31, 2026

Net Sales $160

Cost of Goods Sold 100

Gross Profit 60

Operating Expenses 40

Net Income $ 20

Using vertical analysis, what percentage is assigned to net sales?

a. 160%

b. Can’t be computed.

c. 60%

d. 100%

127. Acme, Inc. has the following Income Statement (in millions):

ACME, INC.

Income Statement

For the Year Ended December 31, 2026

Net Sales $160

Cost of Goods Sold 100

Gross Profit 60

Operating Expenses 40

Net Income $ 20

Using vertical analysis, what percentage is assigned to gross profit?

a. 37.5%

b. 100%

c. 60%

d. 62.5%

128. A1 Corporation, Inc. has the following income statement (in millions):

A1 CORPORATION, INC.

Income Statement

For the Year Ended December 31, 2026

Net Sales $240

Cost of Goods Sold 150

Gross Profit 90

Operating Expenses 65

Net Income $ 25

Using vertical analysis, what percentage is assigned to cost of goods sold?

a. 37.5%

b. 62.5%

c. 100%

d. 50%

129. A1 Corporation, Inc. has the following income statement (in millions):

A1 CORPORATION, INC.

Income Statement

For the Year Ended December 31, 2026

Net Sales $240

Cost of Goods Sold 150

Gross Profit 90

Operating Expenses 65

Net Income $ 25

Using vertical analysis, what percentage is assigned to net income?

a. 100%

b. 90%

c. 10%

d. 17%

130. Given the following data for the Ace Company:

Current liabilities $ 400

Long-term debt 480

Common stock 700

Retained earnings 920

Total liabilities & stockholders’ equity $2,500

How would common stock appear on a common-size balance sheet?

a. 20%

b. 70%

c. 28%

d. 30%

131. The following schedule is a display of what type of analysis?

Amount Percent

Current assets $100,000 25%

Property, plant, and equipment 300,000 75%

Total assets $400,000 100%

a. Horizontal analysis

b. Differential analysis

c. Vertical analysis

d. Ratio analysis

132. In vertical analysis, the base amount for salaries and wages expense is generally

a. net sales.

b. salaries and wages expense in a previous year.

c. gross profit.

d. net income.

133. Which one of the following is not a characteristic generally evaluated in ratio analysis?

a. Liquidity

b. Profitability

c. Marketability

d. Solvency

134. Ratios are most useful in identifying

a. trends.

b. differences.

c. causes.

d. relationships.

135. Short-term creditors are usually most interested in assessing

a. solvency.

b. liquidity.

c. marketability.

d. profitability.

136. A common measure of liquidity is

a. return on assets.

b. accounts receivable turnover.

c. profit margin.

d. debt to equity.

137. A common measure of profitability is the

a. current ratio.

b. times interest earned.

c. return on common stockholders’ equity.

d. debt to assets.

138. A common measure of long-term solvency is

a. the debt to assets ratio.

b. the current ratio.

c. the asset turnover.

d. inventory turnover.

139. Return on assets is most closely related to

a. profit margin and debt to assets ratio.

b. profit margin and asset turnover.

c. times interest earned and debt to stockholders’ equity.

d. profit margin and free cash flow.

140. Return on common stockholders’ equity is most closely related to

a. gross profit rate and operating expenses to sales ratio.

b. profit margin and free cash flow.

c. times interest earned and debt to stockholders’ equity ratio.

d. return on assets and leverage (debt to assets ratio).

141. Long-term creditors are usually most interested in evaluating

a. liquidity.

b. marketability.

c. profitability.

d. solvency.

142. Which one of the following would be considered a long-term solvency ratio?

a. Accounts receivable turnover

b. Return on assets

c. Current ratio

d. Debt to assets ratio

143. Present and potential stockholders are most interested in evaluating

a. liquidity.

b. solvency.

c. profitability.

d. marketability.

144. In ratio analysis, the ratios are never expressed as a

a. rate.

b. logarithm.

c. percentage.

d. simple proportion.

145. The current ratio is

a. calculated by dividing current liabilities by current assets.

b. used to evaluate a company's liquidity and short-term debt-paying ability.

c. used to evaluate a company's solvency and long-term debt-paying ability.

d. calculated by subtracting current liabilities from current assets.

146. What does the price-earnings ratio indicate?

a. Investors’ assessments of a company’s future earnings

b. The profit earned on each share of stock outstanding

c. The percentage of earnings distributed to shareholders

d. The profit generated on each sales dollar

147. A company determined its return on assets was 1.5%. Which statement is true?

1. The company earned a profit equal to 1.5% of its total revenue for the period.
2. The company earned a profit equal to 1.5 times the amount of its assets.
3. The company generated $1.50 of net income for each dollar of sales earned by the company.
4. The company generated $.015 of net income for each dollar of assets held by the company.

148. Which of the following combinations presents correct examples of liquidity, profitability, and solvency ratios, respectively?

Liquidity Profitability Solvency

1. Days in inventory Price-earnings ratio Earnings per share
2. Current ratio Free cash flow Debt to assets ratio
3. Times interest earned Return on assets Free cash flow
4. Average collection period Payout ratio Cash debt coverage

149. The current ratio is a

a. liquidity ratio.

b. profitability ratio.

c. long-term solvency ratio.

d. cash flow ratio.

150. A company with $60,000 in current assets and $35,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will

a. both decrease.

b. both increase.

c. increase and remain the same, respectively.

d. remain the same and decrease, respectively.

151. Which one of the following is not one of the most common types of comparisons used to make ratio analysis of the financial statement data more meaningful?

a. Industry average comparisons

b. Intracompany comparisons

c. Intercompany comparisons

d. Sustainable income comparisons

152. The accounts receivable turnover and inventory turnover are used to analyze

a. long-term solvency.

b. profitability.

c. liquidity.

d. leverage.

153. What do solvency ratios measure?

a. The level of full and transparent financial information disclosed

b. The profitability of a company

c. The ability of a company to survive over a long period of time

d. The ability of a company to pay its debts as they come due

154. A1 Discount Retail Company had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $7,200,000. The average collection period of the accounts receivable in terms of days was

a. 30 days.

b. 81.1 days.

c. 42.4 days.

d. 40.6 days.

155. Ace’s Dollar Store had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $6,400,000. The accounts receivable turnover was

a. 7.6 times.

b. 8.4 times.

c. 8.0 times.

d. 4.0 times.

156. A high accounts receivable turnover indicates

a. customers are making payments quickly.

b. a large portion of the company’s sales are on credit.

c. many customers are not paying their receivables.

d. the company’s sales have increased.

157. A company had net credit sales of $5,005,000 and cost of goods sold of $3,500,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The accounts receivable turnover was

a. 8.4 times.

b. 7.7 times.

c. 3.9 times.

d. 7.1 times.

158. Ace Discount Supply Co. had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $8,040,000. The accounts receivable turnover was

a. 9.5 times.

b. 10.1 times.

c. 8.9 times.

d. 9.8 times.

159. Ace Discount Supply Co. had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $8,040,000. The average collection period of the receivables in terms of days was

a. 36.1 days.

b. 38.6 days.

c. 37.2 days.

d. 4 days.

160. Acme Corporation had net credit sales of $5,075,000 and cost of goods sold of $3,750,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $650,000 and $750,000, respectively. The accounts receivable turnover was

a. 7.8 times.

b. 6.8 times.

c. 7.3 times.

d. 5.4 times.

161. A1 Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The inventory turnover for the year is

a. 7.4 times.

b. 10.4 times.

c. 3.0 times.

d. 1.4 times.

162. A1 Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The average days in inventory during the year was approximately

a. 261 days.

b. 122 days.

c. 49 days.

d. 35 days.

163. Acme Wholesale, Inc. had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The inventory turnover for the year is

a. 7.2 times.

b. 5.6 times.

c. 5.2 times.

d. 4.2 times.

164. Acme Wholesale, Inc. had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The average days in inventory during the year was approximately

a. 51 days.

b. 65 days.

c. 70 days.

d. 87 days.

165. Which one of the following is not a liquidity ratio?

a. Current ratio

b. Inventory turnover

c. Average collection period

d. Return on assets

166. The asset turnover ratio is

a. net sales divided by net income.

b. average total assets divided by net income.

c. net sales divided by average total assets.

d. average total assets divided by net sales.

167. The asset turnover ratio measures

a. how often a company replaces its assets.

b. how efficiently a company uses its assets to generate sales.

c. the portion of the assets that have been financed by creditors.

d. the overall rate of return on assets.

168. The profit margin is calculated by dividing

a. sales by cost of goods sold.

b. gross profit by net sales.

c. net income by stockholders' equity.

d. net income by net sales.

169. Ace Marine Supply Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2025. The weighted average number of shares outstanding in 2025 was 400,000 shares. Ace Marine Supply Corporation's common stock is selling for $50 per share on the NASDAQ. Ace Marine Supply Corporation's price-earnings ratio is

a. 20 times.

b. 12 times.

c. 10 times.

d. 5 times.

170. Ace Marine Supply Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2025. The weighted average number of shares outstanding in 2025 was 400,000 shares. Ace Marine Supply Corporation's common stock is selling for $50 per share on the NASDAQ. Ace Marine Supply Corporation's payout ratio for 2025 is

a. $5 per share.

b. 12%.

c. 15%.

d. 7%.

171. A1 Corporation had net income of $1,600,000 and paid dividends to common stockholders of $400,000 in 2025. The weighted average number of shares outstanding in 2025 was 500,000 shares. A1 Corporation's common stock is selling for $40 per share on the NASDAQ. A1 Corporation's price-earnings ratio is

a. 3.2 times.

b. 12.5 times.

c. 8 times.

d. 4 times.

172. A1 Corporation had net income of $1,600,000 and paid dividends to common stockholders of $320,000 in 2025. The weighted average number of shares outstanding in 2025 was 500,000 shares. A1 Corporation's common stock is selling for $50 per share on the NASDAQ. A1 Corporation's payout ratio for 2025 is

a. $5 per share.

b. 20%.

c. 32%.

d. 5%.

173. The debt to assets ratio measures

a. the company's profitability.

b. whether interest can be paid on debt in the current year.

c. the proportion of interest paid relative to dividends paid.

d. the percentage of the total assets provided by creditors.

174. A company reported the following on its income statement:

Income before income taxes $420,000

Income tax expense 120,000

Net income $300,000

An analysis of the income statement revealed that interest expense was $60,000. The company's times interest earned was

a. 6 times.

b. 9 times.

c. 8 times.

d. 5 times.

175. Trading on the equity (leverage) refers to the

a. amount of working capital.

b. amount of capital provided by owners.

c. use of borrowed money to increase the return to owners.

d. number of times interest is earned.

176. Acme Company reported the following on its income statement:

Income before income taxes $500,000

Income tax expense 150,000

Net income $350,000

An analysis of the income statement revealed that interest expense was $80,000. Rama Company's times interest earned was

a. 5.4 times.

b. 7.3 times.

c. 6.3 times.

d. 4.4 times.

177. A company that is leveraged is one that

a. has a high earnings per share.

b. contains debt financing.

c. contains equity financing.

d. has a high current ratio.

178. The current assets of Ace Wholesale Company total $292,500. The current liabilities total $130,000. The current ratio expressed as a proportion is

a. 225%.

b. 2.25:1.

c. .44:1.

d. $130,000 ÷ $292,500.

179. A weakness of the current ratio is

a. the difficulty of the calculation.

b. it uses year-end balances of current asset and current liability accounts.

c. it is rarely used by sophisticated analysts.

d. it can be expressed as a percentage, as a rate, or as a proportion.

180. A supplier to a company would be most interested in the

a. asset turnover.

b. profit margin.

c. current ratio.

d. earnings per share.

181. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?

a. Current ratio

b. Inventory turnover

c. Asset turnover

d. Accounts receivable turnover

182. Ratios are used as tools in financial analysis

a. instead of horizontal and vertical analyses.

b. because they can provide information that may not be apparent from inspection of the individual components of the financial statements.

c. because even single ratios by themselves are quite meaningful.

d. because they are prescribed by GAAP.

183. The ratios that are used to determine a company's short-term debt paying ability are

a. asset turnover, times interest earned, current ratio, and accounts receivables turnover.

b. times interest earned, inventory turnover, current ratio, and receivables turnover.

c. times interest earned, accounts receivable turnover ratio, current ratio, and inventory turnover.

d. current ratio, account receivable turnover, and inventory turnover.

184. A company had $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the company’s current ratio?

a. The ratio remained unchanged.

b. The change in the current ratio cannot be determined.

c. The ratio decreased.

d. The ratio increased.

185. A liquidity ratio measures the

a. income or operating success of an enterprise over a period of time.

b. ability of the enterprise to survive over a long period of time.

c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.

d. number of times interest is earned.

186. If equal amounts are added to the numerator and the denominator of the current ratio and the ratio is over one, the ratio will always

a. increase.

b. decrease.

c. stay the same.

d. equal zero.

187. If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio?

Short-term Borrowing Collection of Receivable

a. Increase No effect

b. Increase Increase

c. Decrease No effect

d. Decrease Decrease

188. A company has an accounts receivable turnover of 10. The average net accounts receivable during the period are $900,000. What is the amount of net credit sales for the period?

a. $90,000

b. $9,000,000

c. $900,000

d. $990,000

189. If the average collection period is 73 days, what is the accounts receivable turnover?

a. 5 times

b. 20 times

c. 10 times

d. 6 times

190. A general rule to use in assessing the average collection period is that it

a. should not exceed 30 days.

b. can be any length as long as the customer continues to buy merchandise.

c. should not greatly exceed the return period.

d. should not greatly exceed the credit term period.

191. The inventory turnover is calculated by dividing

a. cost of goods sold by the ending inventory.

b. cost of goods sold by the beginning inventory.

c. cost of goods sold by the average inventory.

d. average inventory by cost of goods sold.

192. A company has an average inventory on hand of $90,000 and its average days in inventory is 36.5 days. What is the cost of goods sold?

a. $900,000

b. $2,102,400

c. $2,106,000

d. $1,051,200

193. A successful grocery store would probably have

a. a low inventory turnover.

b. a high inventory turnover.

c. zero profit margin.

d. low volume.

194. Net sales are $2,700,000, beginning total assets are $700,000, and the asset turnover is 3.0. What is the ending total asset balance?

a. $900,000

b. $1,100,000

c. $700,000

d. $800,000

195. The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant, and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 85,000

Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

Income Statement

Sales revenue $ 85,000

Cost of goods sold 45,000

Gross profit 40,000

Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock 0.90

Cash provided by operations $30,000

What is the current ratio for this company?

a. 1.42

b. 0.80

c. 1.16

d. 0.60

196. The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant, and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 85,000

Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

Income Statement

Sales revenue $ 85,000

Cost of goods sold 45,000

Gross margin 40,000

Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock 0.90

Cash provided by operations $30,000

What is the accounts receivable turnover for this company?

a. 2.8 times

b. 2 times

c. 3.4 times

d. 3 times

197. The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant, and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 85,000

Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

Income Statement

Sales revenue $ 85,000

Cost of goods sold 45,000

Gross margin 40,000

Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock 0.90

Cash provided by operations $30,000

What is the inventory turnover for this company?

a. 2 times

b. 2.25 times

c. 1 time

d. .44 times

198. The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant, and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 85,000

Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

Income Statement

Sales revenue $ 85,000

Cost of goods sold 45,000

Gross margin 40,000

Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock 0.90

Cash provided by operations $30,000

What is the return on assets for this company?

a. 6.8%

b. 10.0%

c. 11.7%

d. 26.7%

199. The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant, and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 85,000

Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

Income Statement

Sales revenue $ 85,000

Cost of goods sold 45,000

Gross margin 40,000

Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock 0.90

Cash provided by operations $30,000

What is the profit margin for this company?

a. 42.9%

b. 18.8%

c. 23.5%

d. 15.0%

200. The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant, and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 85,000

Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

Income Statement

Sales revenue $ 85,000

Cost of goods sold 45,000

Gross margin 40,000

Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock 0.90

Cash provided by operations $30,000

What is the return on common stockholders’ equity for this company?

a. 13.3%

b. 5.0%

c. 23.3%

d. 53.3%

201. The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant, and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 85,000

Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

Income Statement

Sales revenue $ 85,000

Cost of goods sold 45,000

Gross margin 40,000

Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock 0.90

Cash provided by operations $30,000

What is the price earnings ratio for this company?

a. 6.0 times

b. 2.5 times

c. 8.0 times

d. 4.0 times

202. Ace Supply Corporation reported net income $24,000; net sales $400,000; and average assets $600,000 for 2025. What is the 2025 profit margin?

a. 6%

b. 4%

c. 40%

d. 67%

203. The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant, and equipment 210,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 95,000

Stockholders’ equity—common 155,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales revenue $116,000

Cost of goods sold 66,000

Gross margin 50,000

Operating expenses 30,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock .50

Cash provided by operations $35,000

What is the current ratio for this company?

a. 1.17

b. 1.25

c. 1.67

d. 0.75

204. The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant, and equipment 210,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 95,000

Stockholders’ equity—common 155,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales revenue $116,000

Cost of goods sold 66,000

Gross margin 50,000

Operating expenses 30,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock .50

Cash provided by operations $35,000

What is the accounts receivable turnover for this company?

a. 2.2 times

b. 4.4 times

c. 7.7 times

d. 3.9 times

205. The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant, and equipment 210,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 95,000

Stockholders’ equity—common 155,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales revenue $116,000

Cost of goods sold 66,000

Gross margin 50,000

Operating expenses 30,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock .50

Cash provided by operations $35,000

What is the inventory turnover for this company?

a. 2.6 times

b. 4.6 times

c. 5.3 times

d. 0.38 time

206. The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant, and equipment 210,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 95,000

Stockholders’ equity—common 155,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales revenue $116,000

Cost of goods sold 66,000

Gross margin 50,000

Operating expenses 30,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock .50

Cash provided by operations $35,000

What is the return on assets for this company?

a. 16.1%

b. 11.3%

c. 6.5%

d. 12.9%

207. The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant, and equipment 210,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 95,000

Stockholders’ equity—common 155,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales revenue $116,000

Cost of goods sold 66,000

Gross margin 50,000

Operating expenses 30,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock .50

Cash provided by operations $35,000

What is the profit margin for this company?

a. 34.5%

b. 43.1%

c. 25.8%

d. 17.2%

208. The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant, and equipment 210,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 95,000

Stockholders’ equity—common 155,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales revenue $116,000

Cost of goods sold 66,000

Gross margin 50,000

Operating expenses 30,000

Net income $ 20,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock .50

Cash provided by operations $35,000

What is the return on common stockholders’ equity for this company?

a. 25.8%

b. 12.9%

c. 22.6%

d. 32.3%

209. How is the price-earnings ratio calculated?

a. Earnings per share divided by market price of stock

b. Market price of stock divided by annual dividend

c. Par value of stock divided by average shares outstanding

d. Market price of stock divided by earnings per share

210. The following information is available for Ace Pet Supply Company:

2025 2024

Accounts receivable $ 360,000 $ 340,000

Inventory 280,000 320,000

Net credit sales 3,150,000 2,600,000

Cost of goods sold 1,800,000 840,000

Net income 300,000 170,000

The accounts receivable turnover for 2025 is

a. 8.8 times.

b. 4.5 times.

c. 9.0 times.

d. 9.3 times.

211. The following information is available for Ace Pet Supply Company:

2025 2024

Accounts receivable $ 360,000 $ 340,000

Inventory 280,000 320,000

Net credit sales 3,000,000 1,400,000

Cost of goods sold 1,800,000 840,000

Net income 300,000 170,000

The inventory turnover for 2025 is

a. 6.4 times.

b. 6.0 times.

c. 5.6 times.

d. 3.0 times.

212. The following amounts were taken from the financial statements of Acme Electric Company:

2025 2024

Current liabilities $1,280,000 $1,220,000

Long-term liabilities 1,800,000 1,600,000

Interest expense 100,000 50,000

Income tax expense 50,000 30,000

Net income 300,000 170,000

Net cash provided by operating activity 325,000 270,000

The times interest earned for 2025 is

a. 3.0 times.

b. 3.5 times.

c. 4.0 times.

d. 4.5 times.

213. The following amounts were taken from the financial statements of A1 Supply Company:

2025 2024

Total assets $800,000 $1,000,000

Net sales 720,000 650,000

Gross profit 352,000 320,000

Net income 108,000 117,000

Weighted average number of

common shares outstanding 90,000 90,000

Market price of common stock $42 $39

The return on assets for 2025 is

a. 14%.

b. 12%.

c. 11%.

d. 6%.

214. The following amounts were taken from the financial statements of A1 Supply Company:

2025 2024

Total assets $800,000 $1,000,000

Net sales 720,000 650,000

Gross profit 352,000 320,000

Net income 108,000 117,000

Weighted average number of

common shares outstanding 90,000 90,000

Market price of common stock $42 $39

The profit margin ratio for 2025 is

a. 14%.

b. 16%.

c. 15%.

d. 18%.

215. The following amounts were taken from the financial statements of A1 Supply Company:

2025 2024

Total assets $800,000 $1,000,000

Net sales 720,000 650,000

Gross profit 352,000 320,000

Net income 108,000 117,000

Weighted average number of

common shares outstanding 90,000 90,000

Market price of common stock $42 $39

The price-earnings ratio for 2025 is

a. 35 times.

b. 30 times.

c. 42 times.

d. 3 times.

216. Solvency is of most interest to

a. short-term creditors.

b. stockholders.

c. competitors.

d. long-term creditors.

217. The current ratio would be of most interest to

a. short-term creditors.

b. long-term creditors.

c. stockholders.

d. customers.

218. Which measure(s) is(are) an evaluation of a company’s ability to pay current liabilities?

1. Current ratio.
2. Free cash flow

a. Both 1 and 2.

b. Neither 1 nor 2.

c. 1 only.

d. 2 only.

219. Which measure(s) is(are) useful in evaluating the efficiency in managing inventories?

1. Inventory turnover

2. Days in inventory

a. 1 only.

b. 2 only.

c. Both 1 and 2.

d. Neither 1 nor 2.

220. Which of the following is not a liquidity ratio?

a. Current ratio

b. Asset turnover

c. Inventory turnover

d. Accounts receivable turnover

221. A company reported net income $36,000; net sales $480,000; and average assets $800,000 for 2025. What is the company’s 2025 profit margin?

a. 4.5%

b. 7.5%

c. 13.3%

d. 60.0%

222. Ace Corporation had net income of $325,000 and paid dividends to common stockholders of $39,000 in 2025. The weighted average number of shares outstanding in 2025 was 50,000 shares. Beta Corporation's common stock is selling for $52 per share on the New York Stock Exchange. Beta Corporation's price-earnings ratio is

a. 12.5 times.

b. 8.0 times.

c. 6.5 times.

d. 9.1 times.

223. Acme Marine Supply Corporation had net income of $325,000 and paid dividends to common stockholders of $39,000 in 2025. The weighted average number of shares outstanding in 2025 was 50,000 shares. Acme Marine Supply Corporation's common stock is selling for $52 per share on the New York Stock Exchange. Acme Marine Supply Corporation's payout ratio for 2025 is

a. $6.5 per share.

b. 16%.

c. 12%.

d. 8.3%.

224. A successful discount retail store such as Walmart would probably have

a. a low inventory turnover.

b. a high inventory turnover.

c. zero profit margin.

d. low volume.

225. Net sales are $3,250,000, beginning total assets are $1,400,000, and the asset turnover is 2.5 times. What is the ending total asset balance?

a. $1,300,000

b. $1,200,000

c. $1,400,000

d. $1,500,000

226. If a company has current ratio greater than 1, all of the following are ways that a company's current ratio would decrease except

a. purchasing inventory on account.

b. adding equal amounts to the numerator and denominator.

c. paying off one-third of its accounts payable.

d. paying cash for new equipment.

BRIEF Exercises

Be. 227

Listed below are some selected items that may appear on a corporate income statement. Indicate the order in which these items would appear on an income statement. (The first one should be assigned the number “1”, the second “2,” etc.)

Income before income taxes

Discontinued operations

Net income

Income from continuing operations

Income tax expense

Ex. 248

Acme Corporation had net income of $3,000,000 in 2024. Using 2024 as the base year, net income decreased by 40% in 2025 and increased by 110% in 2026.

Instructions

Compute the net income reported by Acme Corporation for 2025 and 2026.

Ex. 249

The following items were taken from the financial statements of a company over a four-year period:

Item 2026 2025 2024 2023

Net Sales $655,000 $640,000 $575,000 $500,000

Cost of Goods Sold 520,000 480,000 435,000 400,000

Gross Profit $135,000 $160,000 $140,000 $100,000

Instructions

Using horizontal analysis and 2023 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item.

Ex. 250

Here is financial information for A1 Express Inc.

December 31, 2026 December 31, 2025

Current assets $114,000 $80,000

Plant assets (net) 414,000 360,000

Current liabilities 91,000 65,000

Long-term liabilities 134,500 90,000

Common stock, $1 par 149,500 115,000

Retained earnings 153,000 170,000

Instructions

Prepare a schedule showing a horizontal analysis with changes in dollars and percentages for 2026 using 2025 as the base year.

Ex. 251

Here are the comparative income statements of A1 Development Corporation.

A1 DEVELOPMENT CORPORATION

Comparative Income Statements

For the Years Ended December 31

December 31, 2025 December 31, 2024

Net sales $600,000 $500,000

Cost of goods sold 414,000 350,000

Gross profit 186,000 150,000

Operating expenses 150,000 120,000

Net income $ 36,000 $ 30,000

Instructions

(a) Prepare a horizontal analysis of the income statement data for A1 Development Corporation using 2024 as a base. (Show the amounts of increase or decrease.)

(b) Prepare a vertical analysis of the income statement data for the company for both years.

Ex. 252

The comparative balance sheet of Acme Service Company appears below:

ACME SERVICE COMPANY

Comparative Balance Sheet

December 31,

Assets 2025 2024

Current assets $ 450 $280

Plant assets 550 520

Total assets $1,000 $800

Liabilities and stockholders' equity

Current liabilities $ 180 $120

Long-term debt 250 160

Common stock 310 320

Retained earnings 260 200

Total liabilities and stockholders' equity $1,000 $800

Ex. 252 (Cont.)

Instructions

(a) Using horizontal analysis, show the percentage change for each balance sheet item using 2024 as a base year.

(b) Using vertical analysis, prepare a common-size comparative balance sheet.

Ex. 253

The following information was taken from the financial statements of Ace Company:

2025 2024

Gross profit on sales $600,000 $680,000

Income before income taxes 230,000 221,000

Net income 180,000 153,000

Net income as a percentage of net sales 10% 9%

Instructions

(a) Compute the net sales for each year.

(b) Compute the cost of goods sold in dollars and as a percentage of net sales for each year.

(c) Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses).

Ex. 254

Operating data for Acme Wholesale Corporation are presented below

2025 2024

Sales revenue $800,000 $600,000

Cost of goods sold 480,000 390,000

Selling expenses 120,000 78,000

Administrative expenses 80,000 54,000

Income tax expense 24,000 25,000

Net income 96,000 53,000

Instructions

Prepare a schedule showing a vertical analysis for 2025 and 2024.

Ex. 255

A1 Company has these comparative balance sheet data:

A1 COMPANY

Balance Sheets

December 31

2025 2024

Cash $ 40,000 $ 30,000

Accounts receivable (net) 65,000 60,000

Inventory 60,000 50,000

Plant assets (net) 185,000 180,000

$350,000 $320,000

Accounts payable $ 50,000 $ 60,000

Mortgage payable (15%, due in 15 years) 100,000 100,000

Common stock, $10 par 140,000 120,000

Retained earnings 60,000 40,000

$350,000 $320,000

Additional information for 2025:

1. Net income was $25,000.

2. Sales on account were $450,000. Sales returns and allowances amounted to $25,000.

3. Cost of goods sold was $275,000.

4. Net cash provided by operating activities was $49,000.

5. Capital expenditures were $23,000, and cash dividends were $18,000.

Ex. 255 (Cont.)

Instructions

Compute the following ratios at December 31, 2025.

(a) Current ratio. (e) Days in inventory

(b) Accounts receivable turnover. (f) Free cash flow.

(c) Average collection period.

(d) Inventory turnover.

Ex. 256

Here is the income statement for Ace Supply, Inc.

ACE SUPPLY, INC.

Income Statement

For the Year Ended December 31, 2025

Sales revenue $400,000

Cost of goods sold 250,000

Gross profit 150,000

Expenses (including $12,000 interest and $22,000 income taxes) 100,000

Net income $  50,000

Additional information:

1. Common stock outstanding January 1, 2025, was 30,000 shares, and 40,000 shares were outstanding at December 31, 2025.

2. The market price of Ace Supply, Inc. stock was $15.86 in 2025.

3. Cash dividends of $16,000 were paid, $4,500 of which were to preferred stockholders.

Instructions

Compute the following measures for 2025:

(a) Earnings per share.

(b) Price-earnings ratio.

(c) Payout ratio.

(d) Times interest earned.

Ex. 257

A1 Consulting Corporation experienced a fire on December 31, 2025, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances.

December 31, 2025 December 31, 2024

Cash $ 40,000 $ 15,000

Accounts receivable (net) 84,000 126,000

Inventory 200,000 180,000

Accounts payable 50,000 10,000

Notes payable 30,000 20,000

Common stock, $100 par 400,000 400,000

Retained earnings 170,000 101,000

Additional information:

1. The inventory turnover is 4.2 times

2. The return on common stockholders' equity is 14%. The company had no additional paid-in-capital.

3. The accounts receivable turnover is 10.2 times.

4. The return on assets is 12.5%.

5. Total assets, Dec. 31, 2024 = $604,750.

Instructions

Compute the following values for 2025:

(a) Cost of goods sold.

(b) Net credit sales.

(c) Net income.

(d) Total assets.

Ex. 258

The financial statements of Acme Office Supply Company appear below:

ACME OFFICE SUPPLY COMPANY

Comparative Balance Sheet

December 31

Assets 2025 2024

Cash $ 25,000 $ 40,000

Debt investments 20,000 60,000

Accounts receivable (net) 50,000 30,000

Inventory 140,000 170,000

Property, plant, and equipment (net) 170,000 200,000

Total assets $405,000 $500,000

Liabilities and stockholders' equity

Accounts payable $ 25,000 $ 30,000

Short-term notes payable 40,000 90,000

Bonds payable 75,000 160,000

Common stock 160,000 145,000

Retained earnings 105,000 75,000

Total liabilities and stockholders' equity $405,000 $500,000

ACME OFFICE SUPPLY COMPANY

Income Statement

For the Year Ended December 31, 2025

Net sales (all on credit) $360,000

Cost of goods sold 184,000

Gross profit 176,000

Expenses

Interest expense $11,000

Selling expenses 30,000

Administrative expenses 20,000

Total expenses 61,000

Income before income taxes 115,000

Income tax expense 35,000

Net income $ 80,000

Ex. 258 (Cont.)

Additional information:

a. Cash dividends of $50,000 were declared and paid on common stock in 2025.

b. Weighted-average number of shares of common stock outstanding during 2025 was 50,000 shares.

c. Market price of common stock on December 31, 2025, was $16 per share.

d. Net cash provided by operating activities for 2025 was $70,000.

Instructions

Using the financial statements and additional information, compute the following ratios for the company for 2025. Show all computations.

Computations

1. Current ratio _________.

2. Return on common stockholders' equity _________.

3. Price-earnings ratio _________.

4. Inventory turnover _________.

5. Accounts receivable turnover _________.

6. Times interest earned _________.

7. Profit margin _________.

8. Days in inventory _________.

9. Payout ratio _________.

10. Return on assets _________.

Ex. 259

The following ratios have been computed for Ace Company for 2025.

Profit margin ratio 20%

Times interest earned 12 times Current ratio 2.5:1

Accounts receivable turnover 5 times Debt to assets ratio 24%

The 2025 financial statements for Ace Company with missing information follows:

ACE COMPANY

Comparative Balance Sheet

December 31

——————————————————————————————————————————

Assets

2025 2024

Cash $ 25,000 $ 35,000

Debt Investments 15,000 15,000

Accounts receivable (net) ? (6) 50,000

Inventory ? (7) 50,000

Property, plant, and equipment (net) 200,000 160,000

Total assets $ ? (8) $310,000

Liabilities and stockholders' equity

Accounts payable $ 15,000 $ 25,000

Short-term notes payable 35,000 30,000

Bonds payable ? (9) 20,000

Common stock 200,000 200,000

Retained earnings 47,000 35,000

Total liabilities and stockholders' equity $ ? (10) $310,000

ACE COMPANY

Income Statement

For the Year Ended December 31, 2025

——————————————————————————————————————————

Net sales $200,000

Cost of goods sold 100,000

Gross profit 100,000

Expenses:

Depreciation expense $ ? (5)

Interest expense 5,000

Selling expenses 10,000

Administrative expenses 15,000

Total expenses ? (4)

Income before income taxes ? (2)

Income tax expense ? (3)

Net income $ ? (1)

Ex. 259 (Cont.)

Instructions

Use the above ratios and information from the Ace Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers.

Ex. 260

Acme Supply Corporation has issued common stock only. The company has a gross profit rate of 20%. The information shown below was taken from the company's financial statements:

Beginning inventory $ 482,000

Purchases 4,346,000

Ending inventory ?

Average accounts receivable 700,000

Average common stockholders' equity 3,100,000

Sales revenue (all on credit) 5,600,000

Net income 341,000

Instructions

Compute the following:

(a) Accounts receivable turnover and the average number of days required to collect the accounts receivable.

(b) The inventory turnover and the average days in inventory.

(c) Return on common stockholders' equity.