Deck 13: Measuring and Evaluating Financial Performance

Question 1

The going-concern assumption is also known as the continuity assumption.

Answer 1

True

Question 2

The higher the accounts receivable turnover, the slower the accounts receivable are being collected.

Answer 2

False

Question 3

The fixed asset turnover ratio is a measure of the efficiency of a company.

Answer 3

True

Question 4

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

Question 5

Gains or losses from discontinued operations are reported on a separate line on the income statement net of income tax effects.

Question 6

Special items such as gains or losses relating to changes in the value of certain balance sheet accounts are reported below the net income line on the income statement.

Question 7

Liquidity measures the ability of a company to meet its current financial obligations.

Question 8

Horizontal analysis is the comparison of a company's financial information to a base amount.

Question 9

To evaluate a company's performance, standards of comparison are required.

Question 10

The capital acquisitions ratio is a measure of liquidity.

Question 11

In general, P/E ratios are fairly consistent across industries, regardless of the goods or services sold.

Question 12

Limits on the application of accounting principles include the cost-benefit constraint.

Question 13

If the debt-to-assets ratio is 0.63, it means that 37% of the company's financing has been provided by stockholders' equity.

Question 14

Trend data can be measured in dollar amounts or percentages.

Question 15

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

Question 16

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

Question 17

The asset turnover ratio is a profitability ratio.

Question 18

Common size financial statements are not useful in analyzing companies of different size.

Question 19

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

Question 20

Trend analysis is a form of horizontal analysis.

Question 21

Which of the following is not a profitability ratio?

A) Return on equity (ROE).
B) Earnings per share.
C) Asset turnover.
D) Days to sell.

Question 22

Which of the following statements regarding nonrecurring and other special items is true?

A) Some special items, such as changes in the value of certain balance sheet accounts, are excluded from the calculation of net income.
B) Nonrecurring items such as discontinued operations are presented above the income tax expense line on the income statement.
C) Discontinued Operations are reported net of tax as part of the income from continuing operations.
D) Cumulative effect of change in accounting principles is reported on the income statement as part of income from continuing operations.

Question 23

Which of the following is a liquidity ratio?

A) Inventory turnover.
B) Quality of income.
C) Net profit margin.
D) Times interest earned.

Question 24

Net income was $418,600 in 2011 and $364,000 in 2010. The year-to-year percentage change in net income is:

A) 15%.
B) 55%.
C) 87%.
D) 13%.

Question 25

Which of the following statements regarding liquidity and solvency ratios is true?

A) Unlike solvency ratios, liquidity ratios relate to the company's long-run survival.
B) Both liquidity ratios and solvency ratios measure a company's ability to meet its financial obligations.
C) Liquidity ratios include return on equity ratio and times interest earned ratio.
D) Solvency ratios include current ratio and net profit margin ratio.

Question 26

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

A) Liquidity
B) Market share
C) Profitability
D) Solvency

Question 27

Which of the following statements regarding trend analysis is true?

A) Time-series analysis is an example of trend analysis.
B) Trend data are always in dollars.
C) Trend analysis is also known as vertical analysis.
D) Common-size analysis is an example of trend analysis.

Question 28

If an analyst wanted to examine a company's long-run ability to survive, which of the following would best be considered?

A) Liquidity
B) Market share
C) Profitability
D) Solvency

Question 29

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

A) Quality of income ratio
B) Times interest earned ratio
C) Inventory turnover ratio
D) Capital acquisitions ratio

Question 30

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

A) produce profits.
B) handle its debt.
C) manage its cash flow.
D) provide income for stockholders.

Question 31

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

A) time-series analysis.
B) ratio analysis.
C) horizontal analysis.
D) cross-sectional analysis.

Question 32

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

A) 0.53
B) 2.50
C) 3.33
D) 0.40

Question 33

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

A) Liquidity
B) Market share
C) Profitability
D) Solvency

Question 34

Which of the following statements regarding the effects of a business decision on a financial ratio is true?

A) If a company is expanding its facilities, its fixed asset turnover ratio is likely to fall temporarily.
B) If a company extends its payment period for customers, its quality of income ratio is likely to rise.
C) If a company eases its credit granting policies, the accounts receivable turnover is likely to rise.
D) If a company builds up inventories, its days to sell ratio is likely to fall.

Question 35

Which of the following analysis techniques does not examine significant sustained changes over time?

A) Trend analysis
B) Horizontal analysis
C) Time-series analysis
D) Vertical analysis

Question 36

Which of the following statements regarding the P/E ratio is NOT true?

A) The P/E ratio indicates how much investors are willing to pay for a stock as a multiple of current earnings.
B) A high P/E ratio may mean that investors have pushed the price of the stock up in anticipation of higher future net income.
C) If EPS decreases and there is no change in the market price of the stock, the P/E ratio will decrease.
D) If the market price of the stock increases and there is no change in EPS, the P/E ratio will increase.

Question 37

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

A) Cash coverage ratio
B) Fixed asset turnover ratio
C) Receivables turnover ratio
D) Times interest earned ratio

Question 38

Net income was $418,600 in 2012 and $364,000 in 2011. The year-to-year dollar change in net income is:

A) $62,790.
B) $364,000.
C) $54,600.
D) $418,600.

Question 39

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

A) Debt-to-assets ratio
B) Fixed asset turnover ratio
C) Receivables turnover ratio
D) Current ratio

Question 40

Which of the following ratios is used to evaluate solvency?

A) Earnings per share.
B) Fixed asset turnover.
C) Debt-to-assets.
D) Quick ratio.

Question 41

Company X has a capital acquisitions ratio of 0.8. Company Y has a capital acquisitions ratio of 1.2. Which of the following statements is true?

A) Company X is more likely to have a higher quality of income ratio than Company Y.
B) Company Y is less likely to need external financing than Company X.
C) Company X is more likely to have a higher times interest earned ratio than Company Y.
D) Company X is less likely to need external financing than Company Y.

Question 42

A company has $72,500 of inventory at the beginning of the year and $65,500 at the end of the year. Sales revenue is $986,400, cost of goods sold is $572,700, and net income is $124,200 for the year. The inventory turnover ratio is:

A) 1.8.
B) 8.3.
C) 6.0.
D) 14.3.

Question 43

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

A) current liabilities with its current cash flow.
B) current expenses with its current sales revenue.
C) expenses with its current revenues.
D) current liabilities with its current assets.

Question 44

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

A) Debt-to-assets ratio
B) Fixed asset turnover ratio
C) Return on equity ratio
D) Quality of income ratio

Question 45

During the current accounting period, revenue from credit sales is $671,000. The accounts receivable balance is $51,480 at the beginning of the period and $52,200 at the end of the period. Which of the following statements is true?

A) The receivables turnover ratio is 12.9.
B) On average, it takes 12.9 days to collect payment from credit customers.
C) The receivables turnover ratio is 28.3.
D) On average, the company sells its inventory every 28.3 days.

Question 46

How competitors calculate depreciation is most likely to affect comparisons between competitors if property, plant and equipment:

A) makes up a large percentage of assets and average useful lives are fairly different.
B) makes up a small percentage of assets and assets are financed in a different way.
C) makes up a small percentage of assets and average useful lives are fairly similar.
D) is primarily leased in the industry, not purchased.

Question 47

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

A) 0.53
B) 2.50
C) 3.33
D) 0.80

Question 48

A Times Interest Earned ratio of 11 means that the company's:

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

Question 49

Company X has net sales revenue of $780,000, cost of goods sold of $343,200, and all other expenses of $327,600. The gross profit percentage is:

A) 32%
B) 56%
C) 86%
D) 14%

Question 50

Company X has net sales revenue of $780,000, cost of goods sold of $343,200 and all other expenses of $327,600 for the current year. At the beginning of the year, 503,000 shares of common stock were outstanding,
And, at the end of the year, 537,000 shares of common stock were outstanding. The basic EPS for the company is:

A) $1.50
B) $0.84
C) $0.21
D) $0.87

Question 51

Company X has net sales revenue of $436,000, cost of goods sold of $343,000, and all other expenses of $90,000. What is the times interest earned ratio, if interest expense is $10,000 and income tax expense is
$1,000?

A) 1.4
B) .33
C) 1.3
D) .40

Question 52

If a company generates $3.15 in operating cash flows for every $1 of net income, then the company's:

A) capital acquisition ratio is 3.15.
B) net profit margin is 3.15.
C) return on equity is 3.15.
D) quality of income ratio is 3.15.

Question 53

Company X has net sales revenue of $780,000, cost of goods sold of $343,200, and all other expenses of $327,600. The net profit margin is:

A) 0.32
B) 0.56
C) 0.86
D) 0.14

Question 54

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

A) low fixed asset turnover ratio.
B) high days to collect number.
C) high inventory turnover ratio.
D) high debt-to-equity ratio.

Question 55

A company has $72,500 in inventory at the beginning of the accounting period and $65,500 at the end of the accounting period. Sales revenue is $986,400, cost of goods sold is $572,700, and net income is $124,200 for the accounting period. On average, this company has inventory on hand for approximately

A) 203 days.
B) 44 days.
C) 61 days.
D) 26 days.

Question 56

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

A) Company A
B) Company B
C) Company C
D) Company D

Question 57

Although the inventory turnover ratio is an important analytical tool for many companies, it would be most crucial for a company that

A) provides legal services.
B) sells cell phones and electronic organizers.
C) manufactures steel.
D) sells paint.

Question 58

How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:

A) large percentage of assets and inventory costs are stable.
B) large percentage of assets and inventory costs are not stable.
C) small percentage of assets and inventory costs are not stable.
D) small percentage of assets and inventory costs are stable.

Question 59

The debt-to-assets ratio is the:

A) ratio of current liabilities to current assets.
B) ratio of long term liabilities to fixed assets.
C) ratio of total liabilities to total assets.
D) proportion of short-term liabilities to total liabilities. Debt to assets ratio = Total liabilities/Total assets.

Question 60

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

A) operating expenses are falling.
B) operating expenses are rising.
C) cost of goods sold is falling.
D) cost of goods sold is rising.

Question 61

A share of stock sells for $20. The company has $64 million in earnings and 200 million outstanding shares. The P/E ratio for the company is:

A) 62.5.
B) 200.
C) 0.31.
D) 6.4.

Question 62

What is the gross profit percentage for 2011?

A) 42%
B) 13.5%
C) 57.7%
D) 21.15%

Question 63

What is the fixed asset turnover ratio for 2011?

A) 1.28
B) 1.24
C) 0.75
D) 1.64

Question 64

The primary objective of external financial reporting is:

A) to enhance the ability of the company to acquire financial capital from external sources.
B) to accurately provide financial results for tax purposes.
C) to comply with external regulations and requirements of government and professional associations.
D) to provide useful information to decision makers, especially investors and creditors.

Question 65

Which of the following financial factors is most likely to be a cause of a going-concern problem?

A) Excessive reliance on debt financing.
B) A high inventory turnover ratio.
C) A high current ratio.
D) Stable net income growth.

Question 66

An increase in a gross profit percentage indicates that:

A) cost of goods sold as a percentage of sales has decreased.
B) cost of goods sold as a percentage of sales has increased.
C) operating expenses as a percentage of sales have increased.
D) operating expenses as a percentage of sales have decreased.

Question 67

A decrease in accounts receivable turnover ratio is indicative of:

A) an increase in sales revenue.
B) slower selling inventory.
C) an increase in accounts receivable.
D) a decline in cost of good sold.

Question 68

A company's sales in 2010 are $200,000 and in 2011 sales are $285,000. The percentage change is:

A) 42.5%
B) 70%
C) 29.8%
D) 130%

Question 69

What of the following would be shown on

A) An increase in sales revenue of 23%.
B) An increase in gross profit of 41.5%.
B) Darin's horizontal analysis when calculating percentage changes from 2010 to 2011?
C) An increase in interest expense of 100%.
D) An increase in net income of 57%.

Question 70

The cost-benefit constraint recognizes that:

A) the costs of providing information to users should be less than the benefits.
B) the expenses of an operation should be less than the revenues.
C) the expenses and revenues associated with a transaction should be reported at the same time.
D) all the information that is possible to be gathered should be reported.

Question 71

Which of the following types of items would you be most likely to see below the Income Tax Expense line on an Income Statement prepared in 2011?

A) Gain on Sale of Discontinued Operations, Net of Tax
B) Gross Profit
C) Cumulative Effect of Accounting Change
D) Salaries Expense

Question 72

Which of the following nonfinancial factors is most likely to be a cause of a going- concern problem?

A) Hiring a new CEO.
B) Loss of a key patent.
C) Announcing a new stock issue.
D) Replacing an old product line.

Question 73

A company has current assets of $450,000 and a current ratio is 2.5. Assume that the company prepays rent for 9 months in the amount of $20,000. What is the amount of the current ratio after t his transaction?

A) 2.39
B) 2.61
C) 2.5
D) 2.81

Question 74

Nonrecurring items such as a loss from discontinued operations is reported on the income statement:

A) net of income tax.
B) before income tax expense.
C) below the net income line.
D) Nonrecurring items are not subject to income taxes; therefore, they are not reported on the income statement.

Question 75

Nonrecurring items reported separately on an income statement might include:

A) gains or losses on discontinued operations.
B) salaries expense.
C) sales returns and allowances.
D) gross profit.

Question 76

A trend analysis to determine a year-to-year dollar amount change is calculated by:

A) subtracting the previous period amount from the current amount.
B) subtracting the current period amount from the previous period amount.
C) subtracting the current period amount from the previous period amount and then dividing the result by the previous period amount.
D) subtracting the previous period amount from the current period amount and then dividing the result by the

Question 77

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

A) accounts payable, there is $2.50 of cash.
B) current liabilities, there is $2.50 of current assets.
C) current assets, there is $2.50 of current liabilities.
D) total liabilities, there is $2.50 of current liabilities.

Question 78

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

A) Quick ratio
B) Solvency ratio
C) Debt ratio
D) Current ratio

Question 79

An increase in the inventory turnover rate is indicative of:

A) a reduction in the cost of goods sold.
B) a decrease in the supply of inventory.
C) an increase in the supply of inventory.
D) an increase in sales revenue.

Question 80

The going-concern assumption states that the:

A) company will always maximize the profit for stockholders.
B) company is not expected to go out of business in the near future.
C) company is a separate concern from the stockholders.
D) company's results will be reported in a consistent manner from period to period.