Question 1

Asset turnover measures a company's solvency.

Accepted Answer

Asset turnover is one of the ratios used to evaluate a firm's profitability. It measures how efficiently a firm uses its assets to generate sales revenue.

Question 2

Vertical analysis examines changes in financial data across time.

Accepted Answer

Vertical analysis is a method that attempts to overcome the size of a company by stating financial information is a ratio form. Horizontal analysis examines changes in financial data across time.

Question 3

Return on assets can be disaggregated into return on sales and return on common stockholders' equity ratio.

Accepted Answer

Return on assets can be disaggregated into return on sales and asset turnover.

Question 4

Austin Plumbing Supplies has a return on assets of 25%, while the industry average of similar companies is 15%. This means that Austin Plumbing Supplies' asset turnover is higher than the industry average.

Accepted Answer

This is not necessarily the case, since the return on assets is made up of two components, return on sales times asset turnover.

Question 5

One benefit of using ratio analysis to compare two firms in the same industry is that ratios are immune to size and current accounting rules.

Accepted Answer

By using percentage comparisons, ratio analysis makes firms of different sizes more comparably. However, two firms in the same industry may use very different accounting methods, which would flow through to the ratios and make them non-comparable.

Question 6

One key measure of profitability is the debt-to-equity ratio.

Accepted Answer

The debt-to-equity ratio is a measure of long-term solvency when looking at credit risk.

Question 7

A debt-to-equity ratio of greater than 1.0 means that a firm's liabilities exceed its owners' equity.

Accepted Answer

A debt-to-equity ratio greater than 1.0 indicates that a company has more debt than equity, meaning its liabilities exceed its shareholders' equity.

Question 8

Earnings per share is the amount a company earns and pays out as dividends for each share of common stock outstanding.

Accepted Answer

Earnings per share is the amount a company earns for each share of common stock outstanding. It is not tied to the amount of dividends paid.

Question 9

A change in an accounting principle is reflected through adjustments to future financial statements and, therefore, requires no retroactive or present adjustments to financial statements.

Accepted Answer

Financial statements of prior years, issued in comparative form with current year financial statements, must be presented using the new accounting principles as if the new method had been used all along.

Question 10

Changing from straight-line depreciation to double declining-balance depreciation is an example of a change in an accounting principle.

Accepted Answer

Changing from straight-line depreciation to double declining balance depreciation represents a change in the method of applying an accounting principle, which is considered a change in accounting principle. This change affects the way assets are depreciated over time, altering the pattern of expense recognition.

Question 11

Determining gross profit is the first step in a multiple-step income statement for a merchandising firm.

Accepted Answer

Gross profit is calculated by subtracting the cost of goods sold from net sales, and it is indeed the first step in preparing a multiple-step income statement for a merchandising firm. This step is crucial for determining the profitability of the company's core business activities before accounting for other operating expenses and revenues.

Question 12

The price-earnings ratio indicates how much an investor would have to earn to be able to purchase the stock.

Accepted Answer

Price-earnings ratio is used to assess a stock's fair value. Assuming that companies have equivalent persistent earnings and financial risk profiles, the company with the lowest price-earnings ratio may represent the best investment opportunity.

Question 13

Revenues from discontinued operations of a company are reported separately from revenues from continuing operations on the income statement.

Accepted Answer

Revenues from discontinued operations are reported separately from revenues from continuing operations on the income statement to provide a clear view of ongoing business activities and those that are being phased out or sold.

Question 14

Income effects of discontinued operations are reported separately from continuing operations on the income statement.

Accepted Answer

Income effects of discontinued operations are reported separately from continuing operations on the income statement to provide a clearer picture of ongoing business performance and the impact of operations that will not continue in the future.

Question 15

Which one of the following ratios does not involve assets?

Accepted Answer

Return on sales is a profitability ratio that measures how much profit a company generates from its sales, not directly involving assets in its calculation.

Question 16

Which ratio can provide an indication of the salability of the company's products?

Accepted Answer

Inventory turnover provides an indication of the salability of a company's products by showing how often the company sells and replaces its inventory over a certain period. A higher inventory turnover ratio suggests high sales and efficient management of inventory, indicating good salability of products.

Question 17

Which of the following is one measure of liquidity?

Accepted Answer

The quick ratio, also known as the acid-test ratio, is a measure of liquidity. It assesses a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.

Question 18

Return on assets is computed as:

Accepted Answer

Return on assets (ROA) can be computed directly by dividing net income by average total assets (B), or indirectly by multiplying return on sales (net income divided by sales) by asset turnover (sales divided by average total assets), which is option (C). Therefore, both B and C are correct ways to compute ROA, making D the correct answer.

Question 19

Aladdin Grocer's 2019 balance sheet shows average stockholders' equity of $18,000 million, net operating profit after tax of $1,710 million, net income of $665 million, and common shares issued of $2,874 million.
The company has no preferred shares issued. Aladdin Grocer's return on common stockholders' equity for the year is:

Accepted Answer

The answer of Aladdin Grocer's 2019 balance sheet shows average...

Question 20

Dils Brothers' 2019 balance sheet shows average stockholders' equity of $36,000 million, net operating profit after tax of $2,280 million, net income of $760 million, and common shares issued of $3,832 million.
The company has no preferred shares issued. Dils Brothers' return on common stockholders' equity for the year is:

Accepted Answer

The answer of Dils Brothers' 2019 balance sheet shows average...

Quiz 14: Analysis and Interpretation of Financial Statements