Question 1

Which type of approach should be used when evaluating corporate results using horizontal analysis?

Accepted Answer

Horizontal analysis,also called trend analysis,refers to studying the behavior of individual financial statement items over several accounting periods.These periods may be several quarters within the same fiscal year or they may be several different years.The analysis of a given item may focus on trends in the absolute dollar amount of the item or trends in percentages.

Question 2

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?

Accepted Answer

The purchase of the equipment will reduce current assets (by $30,000) and increase current liabilities (by the same amount), leading to a decrease in the current ratio.

Question 3

In vertical analysis, each item is expressed as a percentage of:

Accepted Answer

In vertical analysis, each item is expressed as a percentage of sales on the income statement. This allows the analyst to see what portion of the sales was spent on each expense and other items, and therefore helps to identify areas of possible inefficiencies or opportunities for improvement.

Question 4

Lilly's Corporation has working capital of $620,000, and Harmon Corporation has working capital of $840,000. Which of the following statements is incorrect?

Accepted Answer

The statement in option B is incorrect because working capital alone cannot determine the liquidity of a company. The liquidity of a company also depends on other factors such as the nature of its current assets and liabilities, cash flow, and market conditions, among others. Therefore, it is not safe to conclude that Harmon is more liquid than Lilly solely based on its working capital exceeding Lilly's working capital. Option A, C, and D are correct statements.

Question 5

Short-term creditors are usually most interested in assessing:

Accepted Answer

Short-term creditors are most interested in assessing the liquidity of a company, as they want to make sure that the company has enough current assets to cover its current liabilities and can meet its short-term obligations. Solvency, managerial effectiveness, and profitability are also important factors, but they are more relevant to long-term creditors and investors.

Question 6

Which of the following statement is correct regarding the quick ratio?

Accepted Answer

The quick ratio is a more conservative measure of liquidity than the current ratio because it excludes inventory from current assets, focusing on the most liquid assets.

Question 7

Assume that you are considering purchasing some of a company's long-term bonds as an investment. Which of the company's financial statement ratios would you probably be most interested in?

Accepted Answer

The debt to assets ratio measures the percentage of a company's assets that are financed by debt.The debt to equity ratio compares creditor financing to owner financing.Financial statement users may analyze a firm's ability to obtain long-term financing on the strength of its asset base.Short-term assets should be financed with short-term liabilities;the current ratio,introduced earlier,indicates how well a company manages current debt.Long-lived assets should be financed with long-term liabilities,and the plant assets to long-term liabilities ratio shows the amount of assets per each dollar of long term debt.

Question 8

Net income divided by sales is the formula for which of these analytical measures?

Accepted Answer

Net margin measures the percentage of sales that result in net income.

Question 9

Which ratio measures how effectively a company is using assets to generate revenue?

Accepted Answer

Asset turnover measures how effectively a company is using its assets to generate revenue. It is calculated by dividing total revenue by total assets. A higher asset turnover ratio indicates that the company is generating more revenue with the given amount of assets, which is a positive sign for investors.

Question 10

Starwood Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $1,300,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starwood's accounts receivable turnover?

Accepted Answer

Accounts receivable turnover = Net credit sales / Average accounts receivable

Average accounts receivable = (beginning accounts receivable + ending accounts receivable) / 2
Average accounts receivable = ($65,000 + $69,000) / 2 = $67,000

Accounts receivable turnover = $1,300,000 / $67,000 = 19.4 times

Therefore, the best choice is B, which is 19.4 times.

Question 11

Benson Company received cash of $5,000,000 by issuing 20-year bonds payable. As a result of the this transaction, the company's current ratio will:

Accepted Answer

The receipt of cash from the issuance of bonds is an asset source transaction;the asset account Cash increases and the liability account Bonds Payable also increases.The current ratio is calculated by dividing current assets by current liabilities.This transaction impacts both the numerator but not the denominator.As a result,this transaction causes the current ratio to increase.

Question 12

Cost of goods sold/average inventory is the formula for which of these analytical measures?

Accepted Answer

The formula Cost of goods sold/average inventory is used to calculate inventory turnover, which measures how efficiently a company is managing its inventory.

Question 13

Two ratios that provide insight on the relationship between credit sales and receivables are:

Accepted Answer

The accounts receivable turnover ratio measures how quickly credit sales are being collected as cash by dividing the average accounts receivable balance by credit sales during a period. The average days to collect receivables gives insight into how long it takes a company to collect its accounts receivable by dividing the number of days in the period by the accounts receivable turnover ratio. These two ratios work together to provide a comprehensive view of a company's management of its accounts receivable.

Question 14

Which ratio would you use to examine a company's ability to pay its debts in the short term?

Accepted Answer

The acid-test ratio, also known as the quick ratio, measures a company's ability to pay its short-term debts with its most liquid assets, such as cash or accounts receivable. The higher the ratio, the better the company's ability to meet its short-term obligations. Earnings per share, return on equity, and debt to assets ratio do not specifically measure a company's ability to pay its short-term debts.

Question 15

The study of an individual item or account over several periods in the same financial year or over many years is known as:

Accepted Answer

Horizontal analysis involves the study of an individual item or account over several periods in the same financial year or over many years. It helps to identify trends, changes, and patterns in a company's financials over time. Liquidity analysis and ratio analysis involve the comparison of different items or accounts within a single period, while vertical analysis involves the comparison of different items or accounts in a single period as a percentage of a common base item.

Question 16

Long-term creditors are usually most interested in evaluating:

Accepted Answer

Long-term creditors are interested in evaluating the solvency of a company since they want to ensure that the company will be able to repay the debt in the long term without defaulting. Liquidity, managerial effectiveness and profitability are more important for short-term creditors such as suppliers or banks providing short-term loans.

Question 17

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

Accepted Answer

The formula "Earnings before interest and taxes divided by interest expense" is used to calculate the number of times interest is earned, which is also known as interest coverage ratio. This ratio measures a company's ability to meet interest payments on its debt obligations. Therefore, choice D is the correct answer.

Question 18

Which ratios measure a company's long-term debt paying ability and its financing structure?

Accepted Answer

Ratios that measure a company's long-term debt paying ability and financing structure fall under the category of solvency ratios. These ratios evaluate a company's capacity to meet its long-term obligations and debts. Examples of solvency ratios include debt-to-equity ratio, debt-to-capital ratio, interest coverage ratio, and debt service coverage ratio.

Question 19

In vertical analysis, each item is expressed as a percentage of:

Accepted Answer

Vertical analysis expresses each item as a percentage of a base figure, which is typically total assets on the balance sheet. This allows for easier comparison of financial statements between periods or companies of different sizes.

Question 20

Horizontal analysis is also known as:

Accepted Answer

Horizontal analysis is also referred to as Trend analysis. It is a financial statement analysis technique that compares a company's financial data over a period of time to identify changes and growth patterns. Liquidity analysis focuses on a company's ability to meet its short-term obligations, revenue analysis looks at a company's sources of revenue, and variance analysis compares actual financial performance to budget or expected results.

Quiz 9: Financial Statement Analysis

Which type of approach should be used when evaluating corporate results using horizontal analysis?

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?

In vertical analysis, each item is expressed as a percentage of:

Lilly's Corporation has working capital of $620,000, and Harmon Corporation has working capital of $840,000. Which of the following statements is incorrect?

Short-term creditors are usually most interested in assessing:

Which of the following statement is correct regarding the quick ratio?

Assume that you are considering purchasing some of a company's long-term bonds as an investment. Which of the company's financial statement ratios would you probably be most interested in?

Net income divided by sales is the formula for which of these analytical measures?

Which ratio measures how effectively a company is using assets to generate revenue?

Starwood Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $1,300,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starwood's accounts receivable turnover?

Benson Company received cash of $5,000,000 by issuing 20-year bonds payable. As a result of the this transaction, the company's current ratio will:

Cost of goods sold/average inventory is the formula for which of these analytical measures?

Two ratios that provide insight on the relationship between credit sales and receivables are:

Which ratio would you use to examine a company's ability to pay its debts in the short term?

The study of an individual item or account over several periods in the same financial year or over many years is known as:

Long-term creditors are usually most interested in evaluating:

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

Which ratios measure a company's long-term debt paying ability and its financing structure?

In vertical analysis, each item is expressed as a percentage of:

Horizontal analysis is also known as: