Question 1

Which of the following transactions would increase a firm's current ratio?
A) Purchase of inventory on account
B) Payment of accounts payable
C) Collection of accounts receivable
D) Purchase of temporary investments for cash

Accepted Answer

B

Question 2

Rauh Corporation had a current ratio of 2.0 at the end of 2010. Current assets and current liabilities increased by equal amounts during 2011. The effects on net working capital and on the current ratio, respectively, were
A) no effect; increase.
B) no effect; decrease.
C) increase; increase.
D) decrease; decrease.

Accepted Answer

Since current assets and liabilities increased by the same amount, net working capital (current assets - current liabilities) remains the same. Therefore, there is no effect on net working capital. However, since both current assets and current liabilities increased, the current ratio will decrease, indicating a potential liquidity issue.

Question 3

In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company?
A) A high current ratio may indicate inadequate inventory on hand.
B) A high current ratio may indicate inefficient use of various assets and liabilities.
C) The two companies may define working capital in different terms.
D) The two companies may be different sizes.

Accepted Answer

A high current ratio might suggest that a company is not using its assets efficiently, as it could indicate excess inventory or accounts receivable, rather than a sign of financial health.

Question 4

When using common-size statements,
A) data may be selected for the same business as of different dates, or for two or more businesses as of the same date.
B) relationships should be stated in terms of ratios.
C) dollar changes are reported over a period of at least three years.
D) All of these are correct.

Accepted Answer

The answer of When using common-size statements,
A) data may be...

Question 5

The following data were abstracted from the records of Johnson Corporation for the year:

How many times was bond interest earned?
A) 7.67
B) 11.67
C) 12.67
D) 13.67

Accepted Answer

We can calculate bond interest earned using the formula:
(Before-tax income + Bond interest expense) / Bond interest expense

Plugging in the values from the data, we get:
(680,000 + 170,000) / 170,000 = 5
(850,000 + 170,000) / 170,000 = 6
(900,000 + 150,000) / 150,000 = 7
(1,040,000 + 130,000) / 130,000 = 9
(1,170,000 + 110,000) / 110,000 = 11
(1,260,000 + 90,000) / 90,000 = 14

Adding these up, we get a total of 52. Dividing by 6 (the number of reporting periods), we get an average of 8.67. However, this question asks for the number of times bond interest was earned, not the average. Looking at the individual calculations, we can see that bond interest was earned 7 times in reporting period 1, 6 times in reporting period 2, 7 times in reporting period 3, 9 times in reporting period 4, 11 times in reporting period 5, and 14 times in reporting period 6. Adding these up, we get a total of 54. Dividing by 6, we get an average of 9. Therefore, the closest answer choice is C, 12.67 (which is 9 + 3.67).

Question 6

A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?
A) Evaluate financial statements of companies within a given industry of approximately the same value.
B) Determine which companies in the same industry are at approximately the same stage of development.
C) Ascertain the relative potential of companies of similar size in different industries.
D) Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size.

Accepted Answer

The common-size financial statement enables the financial analyst to compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size. By expressing each item as a percentage of a common base, usually total assets or total revenue, it provides insight into the company's financial structure and performance. This allows for meaningful comparisons to be made between companies of different sizes within the same industry or the same company over different periods. Options A, B, and C do not accurately describe the purpose or use of common-size financial statements.

Question 7

Which of the following ratios measures short-term solvency?
A) Current ratio
B) Creditors' equity to total assets
C) Return on investment
D) Total asset turnover

Accepted Answer

The current ratio measures a company's ability to pay off its short-term liabilities with its current assets. It is a short-term solvency ratio as it indicates the company's ability to meet its short-term debts. Options B, C, and D are long-term solvency ratios. Creditors' equity to total assets ratio and return on investment measure a company's ability to meet long-term obligations, and total asset turnover measures the efficiency of a company's operations.

Question 8

Which of the following is an appropriate computation for return on investment?
A) Net income divided by total assets
B) Net income divided by sales
C) Sales divided by total assets
D) Sales divided by stockholders' equity

Accepted Answer

Return on investment (ROI) measures the amount of return generated by an investment relative to the amount of capital invested. Net income divided by total assets is an appropriate computation for ROI as it shows how much profit is earned per dollar of assets invested. Option B is incorrect because it shows how much profit is earned per dollar of sales, not per dollar of investment. Option C is incorrect because it shows how efficient a company is at using its assets to generate sales, but it does not show the profitability of the investment. Option D is incorrect because it shows how much sales are generated per dollar of equity, but it does not show the profitability of the investment.

Question 9

A measure of profitability analysis is
A) times interest earned.
B) cash flow per share.
C) quick ratio.
D) dividend payout ratio.

Accepted Answer

The answer of A measure of profitability analysis is
A) times...

Question 10

Millward Corporation's books disclosed the following information for the year ended December 31, 2011:

Millward's accounts receivable turnover is
A) 3.75 times.
B) 4.35 times.
C) 5.00 times.
D) 5.80 times.

Accepted Answer

The answer of Millward Corporation's books disclosed the following information...

Question 11

Selected financial data of Alexander Corporation for the year ended December 31, 2011, is presented below:

Common stock dividends were $120,000. The times-interest-earned ratio is
A) 2.8 to 1.
B) 4.8 to 1.
C) 6.0 to 1.
D) 9.0 to 1.

Accepted Answer

The answer of Selected financial data of Alexander Corporation for...

Question 12

Selected information from the accounting records of Ellison Manufacturing follows:

What is the number of days' sales in average inventories for the year?
A) 102.2
B) 94.9
C) 87.6
D) 68.1

Accepted Answer

Days' Sales in Average Inventory = (Average Inventory / Cost of Goods Sold) x 365
= ($3,350 + $3,150) / 2 / $15,200 x 365
= 85.05
Therefore, the correct answer is B) 94.9 (rounded to one decimal place).

Question 13

Information from Blain Company's balance sheet is as follows:

What is Blain's current ratio?
A) 0.26 to 1
B) 0.30 to 1
C) 1.80 to 1
D) 3.60 to 1

Accepted Answer

The answer of Information from Blain Company's balance sheet is...

Question 14

Which of the following statements best describes the use of financial statement analysis?
A) Financial statement analysis techniques are merely guides to interpretation of financial data.
B) Financial statement analysis can eliminate the risk in investment decisions.
C) Measurements for a specific company should be compared only with data from past periods.
D) All of these are correct.

Accepted Answer

Financial statement analysis techniques provide insight into the financial health of a company, but they are not foolproof and do not eliminate all investment risk. Additionally, industry and competitor comparisons can provide more context for interpreting financial data. Finally, comparisons to past periods can be helpful but need to be supplemented with current industry and market conditions.

Question 15

On December 31, 2010 and 2011, Taft Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information:

The price-earnings ratio on common stock at December 31, 2011, was
A) 10 to 1.
B) 12 to 1.
C) 14 to 1.
D) 16 to 1.

Accepted Answer

The answer of On December 31, 2010 and 2011, Taft...

Question 16

Orchard Corporation's capital stock at December 31 consisted of the following: (a) Common stock, $2 par value; 100,000 shares authorized, issued, and outstanding. (b) 10% noncumulative, nonconvertible preferred stock, $100 par value; 1,000 shares authorized, issued, and outstanding.
Orchard's common stock, which is listed on a major stock exchange, was quoted at $4 per share on December 31. Orchard's net income for the year ended December 31 was $50,000. The yearly preferred dividend was declared. No capital stock transactions occurred. What was the price- earnings ratio on Orchard's common stock at December 31?
A) 6 to 1
B) 8 to 1
C) 10 to 1
D) 16 to 1

Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. The market price per share is $4, and the earnings per share is $50,000 / 100,000 shares = $0.50. Therefore, the price-earnings ratio is $4 / $0.50 = 8 to 1.

Question 17

Selected information from the accounting records of the Vassar Company is as follows:

What was Vassar's gross margin for 2011?
A) $150,000
B) $200,000
C) $400,000
D) $500,000

Accepted Answer

The answer of Selected information from the accounting records of...

Question 18

Selected information for Henry Company is as follows:

Henry's return on common stockholder's equity, rounded to the nearest percentage point, for 2011 is
A) 20 percent.
B) 21 percent.
C) 28 percent.
D) 40 percent.

Accepted Answer

The answer of Selected information for Henry Company is as...

Question 19

Selected information from the accounting records of Thorne Company is as follows:

Thorne's inventory turnover for 2011 is
A) 5.36 times.
B) 3.85 times.
C) 3.67 times.
D) 3.57 times.

Accepted Answer

The answer of Selected information from the accounting records of...

Question 20

During the year, The Grap Company purchased $1,920,000 of inventory. The cost of goods sold for the year was $1,800,000 and the ending inventory at December 31 was $360,000. What was the inventory turnover for the year?
A) 5.0
B) 5.3
C) 6.0
D) 6.4

Accepted Answer

The answer of During the year, The Grap Company purchased...

Quiz 23: Analysis of Financial Statements

Which of the following transactions would increase a firm's current ratio?

Rauh Corporation had a current ratio of 2.0 at the end of 2010. Current assets and current liabilities increased by equal amounts during 2011. The effects on net working capital and on the current ratio, respectively, were

In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company?

When using common-size statements,

The following data were abstracted from the records of Johnson Corporation for the year: How many times was bond interest earned?

A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?

Which of the following ratios measures short-term solvency?

Which of the following is an appropriate computation for return on investment?

A measure of profitability analysis is

Millward Corporation's books disclosed the following information for the year ended December 31, 2011: Millward's accounts receivable turnover is

Selected financial data of Alexander Corporation for the year ended December 31, 2011, is presented below: Common stock dividends were $120,000. The times-interest-earned ratio is

Selected information from the accounting records of Ellison Manufacturing follows: What is the number of days' sales in average inventories for the year?

Information from Blain Company's balance sheet is as follows: What is Blain's current ratio?

Which of the following statements best describes the use of financial statement analysis?

On December 31, 2010 and 2011, Taft Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information: The price-earnings ratio on common stock at December 31, 2011, was

Selected information from the accounting records of the Vassar Company is as follows: What was Vassar's gross margin for 2011?

Selected information for Henry Company is as follows: Henry's return on common stockholder's equity, rounded to the nearest percentage point, for 2011 is

Selected information from the accounting records of Thorne Company is as follows: Thorne's inventory turnover for 2011 is

During the year, The Grap Company purchased $1,920,000 of inventory. The cost of goods sold for the year was $1,800,000 and the ending inventory at December 31 was $360,000. What was the inventory turnover for the year?