Deck 13: Measuring and Evaluating Financial Performance

Question 1

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.

Answer 1

True
Explanation:While most gains and losses are included in the computation of net income,some (such as gains or losses relating to changes in the value of certain balance sheet accounts)are excluded from net income and included only in comprehensive income.

Question 2

The primary objective of external financial reporting is to:

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

Answer 2

D
Explanation:The primary goal of accounting is to provide information that allows decision makers to evaluate the results of business activities.Financial statements are used in making a variety of decisions.

Question 3

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

Answer 3

False
Explanation:The higher the times interest earned ratio,the better able the company is to meet its interest obligations.

Question 4

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

Question 5

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

Question 6

The fixed asset turnover ratio is a profitability ratio.

Question 7

Benchmarks are useful when evaluating a company's performance.

Question 8

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

Question 9

Horizontal analysis involves:

A)Comparing individual financial statement line items with each other to understand the relationships between line items.
B)Comparing individual financial statement line items to some benchmark,typically similar competitors' financial statement line items.
C)Comparing individual financial statement line items over time.
D)Comparing individual financial statement line items that have been arranged horizontally from highest to lowest dollar amounts.

Question 10

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

Question 11

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

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

Question 12

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

Question 13

According to the full disclosure principle,financial reports should present detailed information about every transaction.

Question 14

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

Question 15

Which of the following statements is not true?

A)Horizontal analyses help financial statement users recognize changes that unfold over time.
B)Vertical analyses focus on relationships between items on the same financial statement.
C)Ratio analyses focus on relationships between items on one or more of the financial statements.
D)Horizontal analyses help financial statement users recognize changes that occur between companies.

Question 16

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

Question 17

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

Question 18

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 19

Trend data can be measured in dollar amounts or percentages.

Question 20

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

Question 21

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

A)net income.
B)gross profit.
C)total expenses.
D)sales revenue.

Question 22

The following information is taken from the financial statements of Clybourn Company for the current year: $\begin{array}{lr}\text { Current Assets } & \$ 32,000 \\\text { Total Assets } & 1,424,000 \\\text { Cost of Goods Sold } & 1,040,000 \\\text { Gross Profit } & 320,000 \\\text { Net Income } & 192,000\end{array}$ The gross profit percentage for the current year rounded to the nearest whole percent is closest to:

A)24%.
B)76%.
C)60%.
D)31%.

Question 23

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

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

Question 24

Which of the following statements about trend analysis is correct?

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

Question 25

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

A)horizontal analysis.
B)vertical analysis.
C)cross-section analysis.
D)ratio analysis.

Question 26

Horizontal analysis:

A)is used to identify trends over time.
B)identifies the relative contribution made by each financial statement line item.
C)provides an understanding of the relationships among various items on financial statements.
D)involves comparing amounts across different financial statements.

Question 27

Vertical analysis:

A)identifies the relative contribution made by each financial statement line item.
B)identifies trends over time.
C)provides an understanding of the relationships among various items on financial statements by expressing the differences in terms of dollars.
D)involves comparing amounts across different financial statements.

Question 28

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

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

Question 29

Ratio analysis:

A)is required by GAAP as part of every company's income statement and balance sheet.
B)will always identify the best investment decision.
C)will tell you how a company will perform in the future.
D)allows you to evaluate how well a company has performed relative to other different-sized companies within the same industry.

Question 30

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

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

Question 31

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

A)financial statements.
B)chart of accounts.
C)bank statements.
D)charter.

Question 32

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

A)total assets.
B)total liabilities.
C)net income.
D)total stockholders' equity.

Question 33

Financial statement analysis is useful for:

A)evaluating a company's success in meeting the challenges that it faces.
B)selecting the most appropriate accounting rules to follow.
C)determining the market price of a company's stock.
D)comparing US companies with foreign companies.

Question 34

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

A)10%.
B)9%.
C)5%.
D)4%.

Question 35

Which balance sheet line item has the highest percentage increase from the prior year to the current year? $\begin{array}{lrr}&\text { Current Year } & \text { Prior Year }\\\text { Cash } & \$ 54,00 C & \$ 36,000 \\\text { Accounts Receivable } & 18,00 \mathrm{C} & 72,000 \\\text { Inventory } & 108,00 \mathrm{C} & 54,000 \\\text { Prepaid Insurance } & 18,00 C & 27,000\end{array}$

A)Inventory
B)Cash
C)Accounts receivable
D)Prepaid insurance

Question 36

The following information is taken from the financial statements of Clybourn Company for the current year: $\begin{array}{lr}\text { Current Assets } & \$ 32,000 \\\text { Total Assets } & 1,424,000 \\\text { Cost of Goods Sold } & 1,040,000 \\\text { Gross Profit } & 320,000 \\\text { Net Income } & 192,000\end{array}$ On a common size income statement for this year,what is the percentage that would be shown next to the dollar amount of cost of goods sold?

A)76%
B)24%
C)31%
D)18%

Question 37

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

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

Question 38

The following information is taken from the financial statements of Clybourn Company for the current year: $\begin{array}{lr}\text { Current Assets } & \$ 32,000 \\\text { Total Assets } & 1,424,000 \\\text { Cost of Goods Sold } & 1,040,000 \\\text { Gross Profit } & 320,000 \\\text { Net Income } & 192,000\end{array}$ On a common size income statement for the year,what is the percentage that would be shown next to the dollar amount of sales revenue?

A)100%
B)14%
C)60%
D)Cannot be determined

Question 39

Assume the following sales data for a company: $\begin{array}{lll}\text { Year 1 } & \$, 200,000 \\\text { Year 2 } & 5,880,000 \\\text { Year 3 } & 5,250,000\end{array}$ By what percentage did sales differ between Years 1 and 2 and Years 2 and 3,respectively?

A)40.0% and (10.7%)
B)28.6% and (12.0%)
C)40.0% and (15.0%)
D)32.0% and (10.7%)

Question 40

Which income statement line item had the largest percentage increase from the prior year to the current year? $\begin{array}{lrr}&\text { Current Year } & \text { Prior Year }\\\text { Sales } & \$ 216,000 & \$ 180,000 \\\text { Cost of Goods Sold } & 144,00 C & 108,000 \\\text { Depreciation Expense } & 54,00 C & 36,000 \\\text { Interest Expense } & 3,600 & 9,000\end{array}$

A)Depreciation Expense
B)Cost of Goods Sold
C)Interest Expense
D)Sales

Question 41

Which of the following is a profitability measure?

A)Net income ÷ Revenues
B)Total assets ÷ Total stockholders' equity
C)Total liabilities ÷ Total stockholders' equity
D)Cost of goods sold ÷ Average inventory

Question 42

Stockton Co.prepared its income statement containing the information below.Using vertical analysis,what percentages would apply to cost of sales,gross profit,and interest expense,respectively? $\begin{array}{lr}\text { Net Sales Revenue } & \$ 508,000 \\\text { Cost of Sales } & 328,000 \\\text { Gross Profit } & 180,000 \\\text { Operating and Other Expenses } & 65,200 \\\text { Interest Expense } & 20,400 \\\text { Income Tax Expense } & 25,600 \\\text { Net Income } & \$ 68,800\end{array}$ $\begin{array}{lrrr}&\text { Cost of Sales}&\text {Gross Profit }&\text {Interest Expense }\\\text { A) } & 182.2 \% & 100.6 \% & 14.2 \% \\\text { B) } & 476.7 \% & 261.6 \% & 37.2 \% \\\text { C) } & 100.0 \% & 54.9 \% & 7.8 \% \\\text { D) } & 64.6 \% & 35.4 \% & 4.0 \%\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 43

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

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

Question 44

Which of the following is not a profitability ratio?

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

Question 45

The following information is taken from the financial statements of Clybourn Company for the current year: $\begin{array}{lr}\text { Current Assets } & \$ 32,000 \\\text { Total Assets } & 1,424,000 \\\text { Cost of Goods Sold } & 1,040,000 \\\text { Gross Profit } & 320,000 \\\text { Net Income } & 192,000\end{array}$ On a common size balance sheet what is the percentage that would be shown next to the dollar amount of current assets?

A)100%
B)44%
C)30%
D)33%

Question 46

The following information pertains to Chestnut,Inc.: $\begin{array}{lr}\text { Net Sales Revenue } & \$ 96,460 \\\text { Cost of Sales } & 63,458 \\\text { Gross Profit } & 33,002 \\\text { Operating and Other Expenses } & 25,430 \\\text { Interest Expense } & 560 \\\text { Income Tax Expense } & 2,622 \\\text { Net Income } & \$ 4,390\end{array}$ What would be reported next to Interest Expense on a common sized income statement?

A)12.7%
B)1.7%
C)0.6%
D)0.9%

Question 47

Which of the following is a liquidity ratio?

A)Inventory turnover
B)Price/Earnings ratio
C)Net profit margin
D)Times interest earned

Question 48

Which of the following ratios is used to evaluate solvency?

A)Earnings per share (EPS)
B)Fixed asset turnover
C)Debt-to-assets
D)Current ratio

Question 49

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

A)Return on equity
B)Fixed asset turnover ratio
C)Receivables turnover ratio
D)Times interest earned

Question 50

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 51

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 52

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

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

Question 53

Which of the following ratios is used to evaluate solvency?

A)Fixed asset turnover ratio
B)Days to sell ratio
C)Current ratio
D)Times interest earned

Question 54

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

A)Earnings per share
B)Times interest earned ratio
C)Inventory turnover ratio
D)Debt-to-assets ratio

Question 55

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

A)sales.
B)cost of goods sold.
C)operating expenses.
D)net income.

Question 56

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 57

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

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

Question 58

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 59

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

A)Debt-to-assets and times interest earned
B)Fixed asset turnover and EPS
C)Return on equity and debt-to-assets
D)Current ratio and times interest earned

Question 60

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

A)produce profits.
B)maintain long-term survival and repay its debt.
C)manage its cash flow.
D)provide income for stockholders.

Question 61

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

A)Gross profit margin
B)Current ratio
C)Net profit margin
D)Asset turnover

Question 62

Which of the following will increase earnings per share?

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

Question 63

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

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

Question 64

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

A)Net profit margin
B)Fixed asset turnover
C)Current ratio
D)Return on assets

Question 65

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

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

Question 66

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

A)Days to sell ratio
B)Current ratio
C)Profit margin
D)Receivables turnover ratio

Question 67

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

A)37.50.
B)64.29.
C)2.40.
D)2.00.

Question 68

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

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

Question 69

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

A)An increase in the cost of goods sold
B)The purchase of treasury stock
C)Issuing shares of preferred stock
D)An increase in the income tax rate

Question 70

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

A)Quality of earnings
B)Solvency
C)Profitability
D)Liquidity

Question 71

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

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

Question 72

Which of the measures below is used to assess profitability?

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

Question 73

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

A)Return on equity ratio
B)Current ratio
C)Net profit margin ratio
D)Fixed asset turnover ratio

Question 74

Which ratio is a test of liquidity?

A)Net profit margin
B)Inventory turnover
C)Times interest earned
D)Debt-to-assets

Question 75

Which of the measures below is used to measure liquidity?

A)Current ratio
B)Debt-to-assets ratio
C)Price ÷ Earnings ratio
D)Times interest earned

Question 76

Webster,Inc.has the following information: $\begin{array} { ll } \text {Net income }&30.000\\ \text { Stock price (per share)}&\$20\\ \text { Average number of shares outstanding}&10,000\\ \text {Average amount of stockholders' equity }&\$90,000\\\end{array}$
What is the Price/Earnings ratio?

A)2.2
B)4.0
C)6.7
D)20.0

Question 77

Which of the following ratios is a solvency ratio?

A)Net profit margin ratio
B)Current ratio
C)Fixed asset turnover ratio
D)Debt-to-assets ratio

Question 78

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

A)Net profit margin
B)Fixed asset turnover
C)Total asset turnover
D)Current ratio

Question 79

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

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

Question 80

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

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