Question 1

Last year,Allen Company's average collection period for accounts receivable was 40 days;this year,it increased to 60 days.Which of the following would most likely account for this change?
A) A decrease in accounts receivable relative to sales.
B) A decrease in sales.
C) A relaxation of credit policies.
D) An increase in sales.

Accepted Answer

An increase in the average collection period means that it is taking the company longer to collect payments from its customers. This could be due to a relaxation in credit policies, meaning customers are given more time to pay back their debts.

Question 2

How is horizontal analysis of financial statements accomplished?
A) By placing statement items on an after-tax basis.
B) By common-size statements.
C) By calculating both earnings per share and the price-earnings ratio.
D) By trend percentages.

Accepted Answer

Horizontal analysis of financial statements is accomplished by trend percentages. Trend percentages reveal the percentage changes in financial statement amounts over time. This analysis technique helps investors and financial analysts understand if a company's financial performance is improving or declining.

Question 3

Rahner Company has a current ratio of 1.75 to 1.This ratio will decrease if Rahner Company engages in which of the following transactions?
A) Borrows cash using a six-month note.
B) Pays the taxes payable that have been a current liability.
C) Pays the following month's rent on the last day of the year.
D) Sells inventory for more than its cost.

Accepted Answer

A

Question 4

Financial leverage is negative in which of the following situations?
A) When the return on total assets is less than the rate of return on common shareholders' equity.
B) When total liabilities are less than shareholders' equity.
C) When total liabilities are less than total assets.
D) When the return on total assets is less than the rate of return demanded by creditors.

Accepted Answer

Financial leverage is a measure of the extent to which a company uses debt to finance its operations. It is negative when the return on total assets is less than the rate of return demanded by creditors. This means that the company is not generating enough income to meet its debt obligations, which could lead to default and bankruptcy.

Question 5

If a company's bonds bear an interest rate of 8%,its tax rate is 30%,and its assets are generating an after-tax return of 7%,what would be the leverage?
A) Positive.
B) Negative.
C) Neither positive nor negative.
D) Impossible to determine without knowing the return on common shareholders' equity.

Accepted Answer

Leverage is considered positive when the return on assets (after-tax) exceeds the cost of debt. Here, the after-tax return on assets is 7%, and the after-tax cost of debt is 5.6% (8%*(1-0.30)). Since 7% > 5.6%, leverage is positive.

Question 6

The market price of XYZ Company's common shares dropped from $25 to $21 per share.The dividend paid per share remained unchanged.How would the company's dividend payout ratio change?
A) Increase.
B) Decrease.
C) Remain unchanged.
D) Impossible to determine without more information.

Accepted Answer

The answer of The market price of XYZ Company's common...

Question 7

Which of the following is true regarding the calculation of return on total assets?
A) The numerator of the ratio consists only of net income.
B) The denominator of the ratio consists of the balance of total assets at the end of the period under consideration.
C) The numerator of the ratio consists of net income plus interest expense multiplied by the tax rate.
D) The numerator of the ratio consists of net income plus interest expense multiplied by one minus the tax rate.

Accepted Answer

The correct calculation for return on total assets (ROTA) includes in the numerator net income plus interest expense after adjusting for taxes (i.e., multiplied by one minus the tax rate). This adjustment is made because interest expense is tax-deductible, and adding it back (after adjusting for taxes) provides a clearer picture of the company's operational efficiency in utilizing its assets to generate earnings.

Question 8

A company's current ratio and acid-test ratios are both greater than 1.0 to 1.If obsolete inventory is written off,what would be the effect?
A) A decrease in the acid-test ratio.
B) An increase in the acid-test ratio.
C) An increase in net working capital.
D) A decrease in the current ratio.

Accepted Answer

The answer of A company's current ratio and acid-test ratios...

Question 9

Desktop Co.presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1.What will be effect of prepaying next year's office rent of $50,000?
A) No effect on either the company's current ratio or its acid-test ratio.
B) No effect on the company's current ratio but will decrease its acid-test ratio.
C) A decrease in both the company's current ratio and its acid-test ratio.
D) An increase in both the company's current ratio and its acid-test ratio.

Accepted Answer

Prepaying next year's office rent of $50,000 will decrease the company's current assets (cash) without affecting its current liabilities, thus not changing the current ratio. However, since prepaid rent is not considered a quick asset, the acid-test ratio, which excludes inventory and prepaid expenses from current assets, will decrease as the numerator of the ratio (quick assets) decreases while the denominator (current liabilities) remains unchanged.

Question 10

Which of the following is NOT a potential source of financial leverage?
A) Bonds payable.
B) Accounts payable.
C) Preferred shares.
D) Retained earnings.

Accepted Answer

Retained earnings are not a potential source of financial leverage, as they are simply profits that have been reinvested in the business and do not involve outside financing like bonds, accounts payable or preferred shares.

Question 11

If a loss resulting from an earthquake is classified as extraordinary,which of the following disclosures meets the minimum requirements in Canada?
A) Two earnings per share figures,one before and the other after the net of tax effect of the extraordinary loss.
B) One earnings per share figure that ignores the extraordinary loss.
C) One earnings per share figure,net of the before-tax effect of the extraordinary loss.
D) One earnings per share figure,net of the after-tax effect of the extraordinary loss.

Accepted Answer

The answer of If a loss resulting from an earthquake...

Question 12

If a firm has a high current ratio but a low acid-test ratio,one can conclude which of the following?
A) The firm has a large outstanding accounts receivable balance.
B) The firm has a large investment in inventory.
C) The firm has a large amount of current liabilities.
D) The firm's financial leverage is very high.

Accepted Answer

A high current ratio indicates that the firm has a relatively high level of current assets compared to its current liabilities, which is generally considered favorable. However, if the acid-test ratio is low, it suggests that a significant portion of those current assets are tied up in inventory, which may be difficult to convert to cash quickly in order to pay off short-term liabilities. Therefore, choice B is the best answer, as a high investment in inventory would explain the low acid-test ratio.

Question 13

The Miller Company's current ratio is greater than 1.0 to 1.By paying off some of its accounts payable using cash,what would be the effect on the company's current ratio?
A) An increase.
B) A decrease.
C) Remain unchanged.
D) Impossible to determine from the information given.

Accepted Answer

Paying off accounts payable with cash decreases both current liabilities and current assets, but because the current ratio is greater than 1.0, the reduction in current liabilities has a proportionally larger positive impact on the current ratio than the reduction in current assets, leading to an increase in the current ratio.

Question 14

Earnings per common share will immediately increase as a result of which of the following?
A) The sale of additional common shares by the company.
B) An increase in the dividends paid to common shareholders by the company.
C) An increase in the company's net income.
D) The issuance of bonds by the company to finance construction of new buildings.

Accepted Answer

Earnings per common share will increase with an increase in the company's net income because earnings per share is calculated by dividing net income by the number of outstanding common shares. An increase in net income without a corresponding increase in the number of outstanding shares will result in a higher earnings per share. The sale of additional common shares (A), an increase in dividends (B), and the issuance of bonds (D) will not necessarily lead to an immediate increase in earnings per share.

Question 15

Which of the following accounts would be included in the calculation of the acid-test ratio? 
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The answer of Which of the following accounts would be...

Question 16

If a company converts a short-term note payable into a long-term note payable,what would be the effect of this transaction?
A) A decrease in working capital and an increase in the current ratio.
B) A decrease in both working capital and the current ratio.
C) A decrease in both the current ratio and the acid-test ratio.
D) An increase in both working capital and the current ratio.

Accepted Answer

Converting a short-term note payable into a long-term note payable increases the amount of time the company has to pay off the debt, which can increase working capital (the difference between current assets and current liabilities) and increase the current ratio (current assets divided by current liabilities). This is because the amount of current liabilities decreases with the shift to a long-term classification, which could result in a lower percentage of these in relation to the current assets.

Question 17

The gross margin percentage is most likely to be used to assess which of the following?
A) How quickly accounts receivables can be collected.
B) How quickly inventories are sold.
C) The efficiency of administrative departments.
D) The overall profitability of the company's products.

Accepted Answer

The gross margin percentage is a measure of the profitability of a company's products, calculated as the difference between revenue and the cost of goods sold, divided by revenue. It represents the percentage of each dollar of revenue that is available to cover the company's other expenses and profit. Therefore, it is most likely to be used to assess the overall profitability of the company's products.

Question 18

What will be the effect of a sale of a piece of equipment at book value for cash?
A) An increase in working capital.
B) A decrease in working capital.
C) A decrease in the debt-to-equity ratio.
D) An increase in net income.

Accepted Answer

A sale of equipment at book value for cash will result in an increase in cash, but since the book value represents the original cost of the equipment less its accumulated depreciation, there will be no gain or loss on the sale. Therefore, there will be no impact on the net income. However, since the cash received from the sale increases the current assets, there will be an increase in working capital.

Question 19

Which one of the following would increase the working capital of a company?
A) Cash payment of payroll taxes payable.
B) Refinancing a short-term note payable with a two-year note payable.
C) Cash collection of accounts receivable.
D) Payment of a 20-year mortgage payable with cash.

Accepted Answer

The answer of Which one of the following would increase...

Question 20

An increase in the market price of a company's common shares will immediately affect which of the following?
A) Dividend yield ratio.
B) Debt-to-equity ratio.
C) Earnings per common share.
D) Dividend payout ratio.

Accepted Answer

An increase in the market price of a company's common shares will immediately affect the dividend yield ratio, as this ratio is calculated by dividing the annual dividends per share by the market price per share. As the market price increases, the dividend yield decreases if the dividend amount remains constant.

Quiz 14: Financial Statement Analysis Online

Last year,Allen Company's average collection period for accounts receivable was 40 days;this year,it increased to 60 days.Which of the following would most likely account for this change?

How is horizontal analysis of financial statements accomplished?

Rahner Company has a current ratio of 1.75 to 1.This ratio will decrease if Rahner Company engages in which of the following transactions?

Financial leverage is negative in which of the following situations?

If a company's bonds bear an interest rate of 8%,its tax rate is 30%,and its assets are generating an after-tax return of 7%,what would be the leverage?

The market price of XYZ Company's common shares dropped from $25 to $21 per share.The dividend paid per share remained unchanged.How would the company's dividend payout ratio change?

Which of the following is true regarding the calculation of return on total assets?

A company's current ratio and acid-test ratios are both greater than 1.0 to 1.If obsolete inventory is written off,what would be the effect?

Desktop Co.presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1.What will be effect of prepaying next year's office rent of $50,000?

Which of the following is NOT a potential source of financial leverage?

If a loss resulting from an earthquake is classified as extraordinary,which of the following disclosures meets the minimum requirements in Canada?

If a firm has a high current ratio but a low acid-test ratio,one can conclude which of the following?

The Miller Company's current ratio is greater than 1.0 to 1.By paying off some of its accounts payable using cash,what would be the effect on the company's current ratio?

Earnings per common share will immediately increase as a result of which of the following?

Which of the following accounts would be included in the calculation of the acid-test ratio?

If a company converts a short-term note payable into a long-term note payable,what would be the effect of this transaction?

The gross margin percentage is most likely to be used to assess which of the following?

What will be the effect of a sale of a piece of equipment at book value for cash?

Which one of the following would increase the working capital of a company?

An increase in the market price of a company's common shares will immediately affect which of the following?