Question 1

The rule of thumb for the quick ratio is 1:1.When would a quick ratio below this threshold not necessarily be a concern for a company?
A)When inventories are high
B)When accounts receivable balances are high
C)When cash flows are steady and reliable
D)None of these choices are correct

Accepted Answer

A quick ratio below 1:1 might not be a concern if a company has steady and reliable cash flows, as it indicates the company can still meet its short-term liabilities without needing to liquidate assets quickly.

Question 2

In a popular business journal, JMR Ltd.financial data for the last five years was compared.This is an example of:
A)Yearly comparison.
B)Longitudinal comparison.
C)Industrial comparison.
D)Cross-sectional comparison.

Accepted Answer

Longitudinal comparison involves analyzing data over a period of time to identify trends, patterns, or changes. In this case, comparing JMR Ltd.'s financial data over the last five years is a classic example of a longitudinal study, as it tracks the company's performance over time.

Question 3

Upon reading the notes to the financial statements of JMR Ltd., you notice that the policies they have chosen tend to recognize revenue early in the earnings cycle while deferring costs to later periods.This approach leads you to believe that JMR Ltd.is employing a(n):
A)Profit maximization strategy.
B)Income tax minimization strategy.
C)Income tax maximization strategy.
D)Smoothing strategy.

Accepted Answer

Recognizing revenue early and deferring costs can inflate profits in the short term, suggesting a profit maximization strategy.

Question 4

All of the following are examples of regulatory decisions except:
A)impact of past regulatory decisions.
B)need for rate or price increases.
C)negotiating collective agreements.
D)ability to withstand competition.

Accepted Answer

Negotiating collective agreements is typically a labor relations activity, not a regulatory decision. Regulatory decisions often involve considerations like rate increases, competition, and impacts of past decisions, but not the specifics of labor negotiations.

Question 5

A company has a current ratio of 2 to 1.This ratio will decrease if the company:
A)sells merchandise for more than cost and records the sale using the perpetual inventory method.
B)pays a large account payable which had been a current liability.
C)borrows cash on a six-month note.
D)receives a 5 percent stock dividend on one of its marketable securities.
E)None of these choices are correct.

Accepted Answer

Borrowing cash on a six-month note increases current liabilities without affecting current assets, thus decreasing the current ratio.

Question 6

You are given the following information about JMR Corp.:  What is JMR's current ratio? (Round final answer to 2 decimal places)
A)1)67:1
B)0)37:1
C)1)23:1
D)0)62:1

Accepted Answer

The answer of You are given the following information about...

Question 7

Which of the following represent situations where financial statements should be recast?
A)Amortization or depreciation is removed yielding earnings before interest taxes and depreciation.
B)Interest expense is removed from net income.
C)Income statement and balance sheet are revised to reflect a different capitalization policy.
D)All of these choices are correct.

Accepted Answer

Financial statements are recast to provide a clearer picture of a company's financial health by adjusting for non-operational or non-recurring items. This includes adjustments for amortization or depreciation (A), removing interest expense to better understand operational profitability (B), and revising statements to reflect different capitalization policies (C), making all choices correct.

Question 8

Disclosure of significant accounting policies should include all of the following items except:
A)the depreciation methods.
B)the inventory costing methods.
C)the amortization methods.
D)the valuation method used for operational assets.

Accepted Answer

The valuation method used for operational assets is not typically considered a significant accounting policy that needs to be disclosed. Significant accounting policies usually include principles and methods that are critical for financial statement preparation, such as depreciation, inventory costing, and amortization methods.

Question 9

If business conditions are stable, an increase in the number of accounts receivable turnover from one year to the next (based upon a company's accounts receivable at year-end)might indicate:
A)a stiffening of the company's credit policies.
B)a significant decrease in the volume of sales of the second year.
C)that the second year's sales were made at lower prices than the first year's sales.
D)that a longer discount period and a more distant due date were extended to customers in the second year.
E)None of these choices are correct.

Accepted Answer

An increase in the number of accounts receivable turnover indicates that the company is collecting its receivables more quickly. This could be due to a stiffening of the company's credit policies, meaning they are being stricter about how and when they extend credit to customers, leading to faster collections.

Question 10

It is important for the user to understand the financial statements in order to make an informed decision.A user must generally do all of the following except:
A)If a lender, will generally use unconsolidated statements.
B)All users must be able to evaluate risks.
C)If an equity investor, will generally use consolidated statements.
D)All of these choices are correct.

Accepted Answer

The statement "All of these choices are correct" is incorrect because option A is not generally true; lenders often use consolidated statements to get a complete picture of a company's financial health.

Question 11

Which of the following transactions would increase a company's positive current ratio?
A)Borrow money on a short-term note
B)Use the equity method to reflect earnings of an investee
C)Repay the principal on a short-term note
D)Sell a temporary investment at a loss
E)None of these choices would increase a company's positive current ratio

Accepted Answer

Repaying the principal on a short-term note decreases current liabilities without affecting current assets, thus increasing the current ratio, which is calculated as current assets divided by current liabilities.

Question 12

Current monetary assets divided by annual operating expenditures, which is itself divided by 365, is:
A)Debt-to-total capitalization ratio.
B)Defensive-interval ratio.
C)Debt-to-capital employed.
D)None of these choices are correct.

Accepted Answer

The defensive-interval ratio measures the number of days a company can operate without needing to access non-current assets. It is calculated by dividing current monetary assets by daily operating expenses, which aligns with the description given.

Question 13

The main place to look for clues as to management's reporting objectives is:
A)in the financial statements.
B)in the financial statement highlights.
C)in the management discussion and analysis section.
D)in the notes to the financial statements.

Accepted Answer

The answer of The main place to look for clues...

Question 14

Which of the following is a list of the types of auditors' opinions going from worst to best?
A)Unqualified, qualified, adverse, disclaimer
B)Qualified, disclaimer, adverse, unqualified
C)Disclaimer, unqualified, qualified, adverse
D)Disclaimer, unqualified, adverse, qualified
E)None of these choices are correct.

Accepted Answer

The correct order from worst to best is: Adverse, Disclaimer, Qualified, Unqualified. None of the given options correctly list the opinions in this order.

Question 15

A company with sales terms of n/30 would prefer a receivable turnover of:
A)5)
B)20.
C)10.
D)2)
E)All of these choices are equally desirable if sales terms are n/30.

Accepted Answer

A higher receivable turnover ratio indicates that the company is collecting its receivables more frequently throughout the year, which is preferable for cash flow. A turnover of 20 suggests the company collects its receivables about every 18 days (365 days / 20), which is better than n/30 terms, indicating efficient credit and collection processes.

Question 16

Efficiency ratios are also known as:
A)Solvency ratios.
B)Effectiveness ratios.
C)Turnover ratios.
D)Profitability ratios.

Accepted Answer

Efficiency ratios, also known as turnover ratios, measure how well a company uses its assets to generate sales or revenue.

Question 17

To apply a vertical analysis to the balance sheet, the base amount usually selected is:
A)either total liabilities or total shareholders' equity.
B)total revenues.
C)total assets.
D)total liabilities.
E)total shareholders' equity.

Accepted Answer

In a vertical analysis of the balance sheet, the base amount typically used is total assets. This approach involves expressing each item on the balance sheet as a percentage of total assets to assess the relative size and financial composition of the company.

Question 18

Overall management performance is better measured by use of the:
A)return on total assets.
B)profit margin on sales.
C)debt-equity ratio.
D)current ratio.
E)None of these choices are correct.

Accepted Answer

Return on total assets (ROTA) is a comprehensive measure of management performance as it shows how efficiently a company's management is using its assets to generate earnings.

Question 19

Which of the following is not known as a liquidity ratio?
A)Debt-to-equity
B)Quick ratio
C)Current ratio
D)Defensive-interval ratio

Accepted Answer

Debt-to-equity ratio is not a liquidity ratio; it is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. Liquidity ratios, such as the quick ratio, current ratio, and defensive-interval ratio, measure a company's ability to cover its short-term obligations.

Question 20

The accounts receivable turnover ratio is a measure of:
A)The average length of time that it takes to collect the accounts receivable.
B)The amount of time that it takes to create more receivables.
C)The number of days that it takes to collect the receivables.
D)None of these choices are correct.

Accepted Answer

The accounts receivable turnover ratio measures how efficiently a company collects its receivables, indirectly indicating the average length of time it takes to collect those receivables.

Quiz 22: Financial Statement Analysis

The rule of thumb for the quick ratio is 1:1.When would a quick ratio below this threshold not necessarily be a concern for a company?

In a popular business journal, JMR Ltd.financial data for the last five years was compared.This is an example of:

Upon reading the notes to the financial statements of JMR Ltd., you notice that the policies they have chosen tend to recognize revenue early in the earnings cycle while deferring costs to later periods.This approach leads you to believe that JMR Ltd.is employing a(n) :

All of the following are examples of regulatory decisions except:

A company has a current ratio of 2 to 1.This ratio will decrease if the company:

You are given the following information about JMR Corp.: What is JMR's current ratio? (Round final answer to 2 decimal places)

Which of the following represent situations where financial statements should be recast?

Disclosure of significant accounting policies should include all of the following items except:

If business conditions are stable, an increase in the number of accounts receivable turnover from one year to the next (based upon a company's accounts receivable at year-end) might indicate:

It is important for the user to understand the financial statements in order to make an informed decision.A user must generally do all of the following except:

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

Current monetary assets divided by annual operating expenditures, which is itself divided by 365, is:

The main place to look for clues as to management's reporting objectives is:

Which of the following is a list of the types of auditors' opinions going from worst to best?

A company with sales terms of n/30 would prefer a receivable turnover of:

Efficiency ratios are also known as:

To apply a vertical analysis to the balance sheet, the base amount usually selected is:

Overall management performance is better measured by use of the:

Which of the following is not known as a liquidity ratio?

The accounts receivable turnover ratio is a measure of: