Deck 13: Analyzing Financial Statements

Question 1

The fixed asset turnover ratio increases when net income increases.

Answer 1

False

Question 2

The cash ratio measures how much cash is on hand to cover current liabilities.

Answer 2

True

Question 3

Both the gross profit percentage and the net profit margin use net sales revenue in the denominator.

Answer 3

True

Question 4

Earnings per share (EPS)is affected by treasury stock transactions.

Question 5

The net profit margin ratio considers the asset base utilized to earn income.

Question 6

Financial analysis is a mechanical and mathematical process of evaluating information reported in financial statements.

Question 7

Time-series analysis is a comparison of information for a specific company over a period of time to determine changes in operations.

Question 8

Return on equity (ROE)by the Du Pont model provides insight with respect to a company's use of its assets.

Question 9

Return on equity (ROE)by the DuPont model is a function of three ratios: net profit margin,return on assets,and financial leverage.

Question 10

When comparing a fixed asset turnover ratio to a total asset turnover ratio,a company with a high amount of inventory will have a much lower fixed asset turnover ratio than total asset turnover ratio.

Question 11

The quality of income ratio increases when net income increases.

Question 12

With component percentages,the numerator comes from the income statement and the denominator comes from the balance sheet.

Question 13

Finding comparable companies in order to compare performance is often difficult since no two companies have identical products,markets,and operating strategies.

Question 14

The fixed asset turnover ratio measures a company's ability to use its property,plant,and equipment to generate revenues.

Question 15

Component percentages are used to express items on financial statements as a percentage of a single base amount.

Question 16

A higher current ratio is preferable for companies that do not have predictable cash flows.

Question 17

Finding comparable companies in order to compare performance is important because ratios in isolation are difficult to evaluate.

Question 18

Purchasing treasury stock increases the return on equity ratio.

Question 19

The return on assets ratio is influenced significantly by a company's relative debt and equity financing of its assets.

Question 20

The extent to which a company uses its liabilities to leverage up its return to stockholders is measured by the difference between ROE and ROA.

Question 21

Which of the following ratios will not increase when net income increases?

A)Gross profit percentage.
B)Return on assets.
C)Return on equity.
D)Net profit margin.

Question 22

A high price/earnings ratio usually indicates the market is optimistic about the company's future earnings potential.

Question 23

The quick ratio decreases when the adjusting entry to record bad debt expense is recorded.

Question 24

Which of the following ratios is not part of the DuPont model?

A)Total asset turnover.
B)Debt-to-equity.
C)Net profit margin.
D)Return on equity.

Question 25

The base amount in preparing component percentages for an income statement is usually which of the following?

A)Income from operations.
B)Gross profit.
C)Net income.
D)Net sales.

Question 26

Which of the following statements is incorrect?

A)Purchasing fixed assets through equity financing decreases total asset turnover.
B)Accruing an expense decreases earnings per share.
C)The return on equity ratio increases when treasury stock is purchased.
D)The purchase of fixed assets will cause the total asset turnover to increase.

Question 27

Equity capital is considered less risky because dividend payments are always at the company's discretion and are not legally enforceable until declared.

Question 28

The dividend yield ratio decreases when earnings per share increases.

Question 29

Dividend yield is calculated by dividing dividends per share by earnings per share and measures the current dividend return to investors.

Question 30

Which of the following statements is correct?

A)Selling inventory at its cost does not affect the net profit margin ratio.
B)Accruing sales revenue does not affect the net profit margin ratio.
C)The total asset turnover ratio increases when fixed assets are sold at a loss.
D)The net profit margin ratio decreases when common stock is issued.

Question 31

A very high current ratio and a low quick ratio may indicate the company is not collecting its accounts receivable in a timely manner.

Question 32

Which of the following statements is false?

A)When computing the component percentages for the income statement,net income is the base figure.
B)Time-series analysis examines a company's performance over time.
C)It is often useful to compare a company's performance with that of a competitor.
D)The North American Industry Classification System assigns industry codes based on business operations.

Question 33

Home Depot's operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using highly knowledgeable service-oriented personnel and aggressive advertising.Which of the following is not as critical to achieving Home Depot's strategy?

A)Cost control
B)Product differentiation
C)High level of customer service
D)High sales volume

Question 34

Which of the following statements is incorrect about fundamental business strategies?

A)A company implementing a cost differentiation strategy is attempting to increase operating efficiency of assets and improve the inventory turnover ratio.
B)A company implementing a product differentiation strategy is attempting to improve its net profit margin through charging higher prices.
C)A company will be more profitable because it will attract a higher volume of customers and sales revenue when it follows a product differentiation strategy versus a cost differentiation strategy.
D)In general,a cost differentiation strategy results in lower profit margins whereas a product differentiation strategy results in higher profit margins.

Question 35

The cash coverage ratio measures a firm's ability to pay its current liabilities with its cash flows from operating activities.

Question 36

The price/earnings ratio is affected by the amount of risk that investors are willing to take.

Question 37

When considering an investment,which of the following is not one of the three critical factors used to evaluate future earnings potential of that investment?

A)Global event factors.
B)Economy-wide factors.
C)Industry factors.
D)Individual company factors.

Question 38

If an investor is considering two different companies as an investment,the investor should choose to invest with the company that has the highest net profit margin.

Question 39

Which of the following statements is correct?

A)A ratio calculation is most relevant in isolation.
B)One of the advantages of ratio analysis is that it allows companies of different sizes to be compared.
C)Finding benchmarks for comparison is a straightforward task.
D)It is always preferable to compare a company's performance to industry-wide ratios rather than to use a competitor's ratios.

Question 40

The inventory turnover ratio is significantly affected by the choice of inventory accounting method.

Question 41

Agnes Company reported the following data:

- What was the current ratio?

A)0.5
B)1.5
C)2.5
D)0.75

Question 42

Which of the following transactions will increase a current ratio,which is currently 2.5?

A)Receiving cash from signing a 6-month note payable.
B)Accruing an expense.
C)Using cash to pay an account payable.
D)Collecting an account receivable.

Question 43

Cecilia Company reported net income of $1,200,000.The average total liabilities were $4,300,000 and average total stockholders' equity was $5,200,000.Interest expense was $100,000 and the tax rate was 40%.Cecilia's return on assets ratio (calculated using the modified method discussed in the text)is closest to:

A)13.7%
B)12.6%
C)11.6%
D)13.3%

Question 44

The records of Marshall Company include the following:

-The return on assets (calculated using the modified method discussed in the text)is closest to:

A)14.9%
B)18.3%
C)15.3%
D)18.7%

Question 45

Trenton Company has provided the following information: • Net income,$240,000
• Preferred shares issued,6,000
• Weighted average number of shares of common stock issued,24,000
• Cash dividends declared and paid on common stock,$30,000
• Market price per share,$36
• Weighted average number of treasury shares of common stock,4,000

-
What is Trenton's earnings per share?

A)$8.00.
B)$7.00.
C)$10.50.
D)$12.00.

Question 46

During 2019,Home Style's cost of goods sold percentage was 68.2%,and selling and store operating costs were 19.3% of sales.During 2018,Home Style's cost of goods sold percentage was 70.1% while selling and store operating costs were 19.0% of sales.What effect would the change in these percentages have on 2019's gross profit percentage and net profit margin percentage?

A)The decrease in the cost of goods sold percentage would increase both the gross profit and net profit margin percentages,but the increase in the selling and store operating costs percentage would decrease both the gross profit and net profit margin percentages.
B)The decrease in the cost of goods sold percentage would decrease both the gross profit and net profit margin percentages,but the increase in the selling and store operating costs percentage would increase both the gross profit and net profit margin percentages.
C)The decrease in the cost of goods sold percentage would increase both the gross profit and net profit margin percentages,but the increase in the selling and store operating costs percentage would decrease only the net profit margin percentage.
D)The decrease in the cost of goods sold percentage would decrease both the gross profit and net profit margin percentages,but the increase in the selling and store operating costs percentage would increase only the net profit margin percentage.

Question 47

Which of the following is used to measure how efficiently a company uses the resources at its disposal?

A)Solvency ratios.
B)Asset turnover ratios
C)Market ratios.
D)Liquidity ratios.

Question 48

Which of the following transactions decreases earnings per share?

A)Collection of an account receivable.
B)Selling treasury stock for an amount less than its cost.
C)A decrease in the market value per share.
D)Paying cash in advance for rent.

Question 49

The records of Marshall Company include the following:

-The return on assets (calculated using the modified method discussed in the text)is closest to:

A)14.9%.
B)18.3%.
C)15.3%.
D)14.7%.

Question 50

Trenton Company has provided the following information: • Net income,$240,000
• Preferred shares issued,6,000
• Weighted average number of shares of common stock issued,24,000
• Cash dividends declared and paid on common stock,$30,000
• Market price per share,$36
• Weighted average number of treasury shares of common stock,4,000

-
What is Trenton's price/earnings ratio?

A)3.0
B)5.1
C)3.4
D)4.5

Question 51

Teague Company's working capital was $40,000 and total current liabilities were one-fourth of that amount.What was the current ratio?

A)1.00
B)1.25
C)3.00
D)5.00

Question 52

Which of the following ratios is not considered to be a test of profitability?

A)Current ratio.
B)Net profit margin.
C)Return on assets.
D)Earnings per share.

Question 53

Which of the following ratios is not an indicator of a company's short-term financial strength?

A)Quality of income.
B)Current ratio.
C)Cash ratio.
D)Quick ratio.

Question 54

Which of the following statements is correct?

A)When cost of goods sold as a percentage of sales increases,the gross profit percentage will increase.
B)It is possible that when cost of goods sold in dollars increases,cost of goods sold as a percentage of sales decreases.
C)If gross profit percentage is the same for the current and past year,then sales and cost of goods sold in dollars did not change.
D)If gross profit percentage increases from one year to the next,then the net income percentage will also increase from one year to the next.

Question 55

The records of Everyday Electronics Corporation for a particular period include the following: The return on equity ratio is closest to:

A)13.2%
B)23.8%
C)24.0%
D)8.4%

Question 56

Which of the following transactions will increase the quality of income ratio?

A)Paying cash to suppliers.
B)Accruing sales revenue.
C)Selling treasury stock for more than its cost.
D)Collecting an account receivable.

Question 57

Which of the following transactions will not increase the cash ratio?

A)Receiving cash from a common stock issue.
B)Refinancing a current liability with long-term debt.
C)Using cash to purchase a two-month treasury bill.
D)Collecting an account receivable.

Question 58

Which of the following transactions decreases earnings per share?

A)Declaring cash dividends payable to the common stockholders.
B)Purchasing treasury stock.
C)The accrual of revenue.
D)Declaring and distributing a 10% common stock dividend.

Question 59

The records of Marshall Company include the following:

- The return on equity is closest to:

A)21.1%
B)10.2%
C)16.4%
D)17.1%

Question 60

Which of the following statements is incorrect?

A)If selling and administrative expenses as a percentage of sales increases,then gross profit percentage will decrease.
B)If the cost of goods sold percentage decreases and other expenses do not change,then net profit margin will increase as a percentage of sales.
C)If sales dollars decrease,a company might still report a higher gross profit percentage if cost of goods sold decreases at a faster rate than the decrease in sales.
D)It is possible that when selling and administrative expense in dollars decrease,selling and administrative expenses as a percentage of sales will increase.

Question 61

Which of the following transactions would increase the current ratio of a company if the ratio is currently greater than 1?

A)Paid the principal on a long-term note payable.
B)Borrowed cash on a short-term note.
C)Sold inventory for more than cost.
D)Purchased supplies with cash.

Question 62

The operating cycle includes the number of days it takes to:

A)Purchase goods,sell goods,pay cash to suppliers.
B)Purchase goods,pay cash,collect cash from customers.
C)Borrow money,collect cash from customers,repay cash borrowed.
D)Pay cash for goods,sell goods,collect cash from customers.

Question 63

Baron Company reported the following data:

-The current ratio is closest to:

A)5.0
B)4.92
C)4.86
D)1.67

Question 64

Agnes Company reported the following data:

- What was the inventory turnover ratio?

A)2.2
B)1.8
C)2.0
D)3.0

Question 65

Which of the following is false?

A)The major difference between the quick and current ratios is inventory.
B)Current liabilities are the denominator in the cash,quick,and current ratios.
C)Companies that sell expensive merchandise tend to have high inventory turnover ratios.
D)Some analysts do not use the cash ratio because it is very sensitive to individual events.

Question 66

Agnes Company reported the following data:

- What was the average number of days to sell inventory? (Assume 365 days in a year. )

A)165.9
B)202.7
C)182.5
D)121.7

Question 67

Wildlife Co.reported net income of $8.3 million,interest expense of $0.5 million and $0.2 million of income tax expense.Wildlife's average total assets are $65.8 million and average stockholders' equity is $48.6 million.Wildlife's times interest earned ratio is closest to:

A)41.5 times
B)6 times
C)18 times
D)45 times

Question 68

Cromwell Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.The net sales for the year were $983,000 with a gross profit on sales of $295,000.The inventory turnover ratio is closest to:

A)2.78
B)9.27
C)6.49
D)2.89

Question 69

Thomas Company had income before interest and taxes of $120,000.Interest expense for the period was $17,000 and income taxes amounted to $28,500.The average stockholders' equity was $680,000.Thomas' return on equity (ROE)is closest to:

A)17.65%
B)15.15%
C)13.46%
D)10.96%

Question 70

Bailey Corporation reported the following information for 2019: What is Bailey's debt-to-equity ratio?

A)2
B)1.25
C)1.0
D)3.0

Question 71

Liquidity ratios concentrate on:

A)The operating cycle.
B)Profitability.
C)Short-term financial strength.
D)Ability to pay interest on loans.

Question 72

Which of the following is not a measure of solvency?

A)Debt-to-equity ratio.
B)Cash coverage ratio.
C)Times interest earned ratio.
D)Earnings per share.

Question 73

The debt-to-equity ratio measures which of the following?

A)Liquidity.
B)Solvency.
C)Profitability.
D)Market strength.

Question 74

Baron Company reported the following data:

- The cash ratio is closest to:

A)1.14
B)0.95
C)0.38
D)0.36

Question 75

Potaw Company reported the following data at the end of 2019:

- The average number of days to collect receivables during 2019 is closest to: (Assume 365 days in a year. )

A)16.2.
B)14.3.
C)36.5.
D)21.9.

Question 76

Baron Company reported the following data:

- The quick ratio is closest to:

A)3.57
B)1.67
C)1.19
D)1.14

Question 77

Which of the following is not a ratio included in analysis of the operating cycle?

A)Days to collect receivables.
B)Days to sell inventory.
C)Days to pay payables.
D)Days sales in inventory.

Question 78

Which of the following is false?

A)The cash ratio is the least stringent but most reliable test of liquidity.
B)A company with a high level of inventory will have a quick ratio significantly lower than its current ratio.
C)A current ratio that is too high could indicate funds tied up in inventory and other working capital assets.
D)Analysts consider a current ratio of 2 to be financially conservative.

Question 79

Potaw Company reported the following data at the end of 2019:

- What was the accounts receivable turnover ratio?

A)30.0
B)37.5
C)36.5
D)22.5

Question 80

If the current ratio is 2,what will be the effect of the payment of a cash dividend,which was recorded as a liability on the date of declaration?

A)An increase in the current ratio.
B)A decrease in the current ratio.
C)No effect on the current ratio.
D)A decrease in the cash coverage ratio.