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Quiz 8 Chapter18
FINANCIALSTATEMENTANALYSIS
CHAPTERSTUDYOBJECTIVES
1.Discusstheneedforcomparativeanalysis.
2.Identifythetoolsoffinancialstatementanalysis.
3.Explainandapplyhorizontal(trend)analysis.
4.Describeandapplyverticalanalysis.
5.Identifyandcomputeratiosusedinanalyzingafirm'sliquidity,profitability,andsolvency.
6.Understandtheconceptofearningpower,andindicatehowirregularitemsarepresented.
7.Understandtheconceptofqualityofearnings.
TRUE-FALSESTATEMENTS
1. Intracompanycomparisonsofthesamefinancialstatementitemscanoftendetect
changes infinancialrelationships
andsignificanttrends.
2. Calculatingfinancialratiosisafinancialreportingrequirementundergenerallyaccepted accountingprinciples.
3. Measuresofacompany'sliquidityareconcernedwiththefrequencyandamountsof dividend
payments.
4. Analysisof financialstatementsis enhancedwith theuseof
comparativedata.
5. Comparisonsofcompanydatawithindustryaveragescanprovidesomeinsightintothe company's
relativepositionintheindustry.
6. Verticalandhorizontalanalysesareconcernedwiththeformatusedtopreparefinancial
statements.
7. Horizontal,vertical,andcircularanalysesarethemostcommontoolsoffinancial statementanalysis.
8. Horizontalanalysisisatechniqueforevaluatingafinancialstatementiteminthecurrent yearwith otheritemsinthecurrentyear.
9. Anothernamefortrendanalysisishorizontalanalysis.
10. Ifacompanyhassalesof$110in2008and$154in2009,thepercentageincreasein sales from2008to2009is140%.
11. Inhorizontalanalysis,ifanitemhasanegativeamountinthebaseyear,andapositive
amount inthefollowingyear,nopercentagechangeforthatitemcanbecomputed.
12. Commonsizeanalysisexpresseseachitemwithinafinancialstatementintermsofa percent of a baseamount.
13. Verticalanalysisisa
moresophisticatedanalyticaltoolthanhorizontal analysis.
14. Verticalanalysisisusefulinmakingcomparisonsofcompaniesofdifferentsizes.
15. Meaningfulanalysisoffinancialstatementswillincludeeitherhorizontalorvertical analysis,butnotboth.
16. Usingvertical analysisoftheincomestatement,acompany'snetincome asapercentage
ofnetsalesis10%;therefore,thecostofgoodssoldasapercentageofsalesmustbe
90%.
17. Intheverticalanalysisoftheincomestatement,eachitemisgenerallystatedasa percentage of net
income.
18. A ratiocanbeexpressedasapercentage,arate,oraproportion.
19. Asolvencyratiomeasurestheincomeoroperatingsuccessofanenterpriseforagiven
period of time.
20. Thecurrentratiois ameasure
of alltheratioscalculatedforthe
currentyear.
21. Inventoryturnovermeasuresthenumberoftimesontheaveragetheinventorywassold
during theperiod.
22. Profitabilityratiosarefrequentlyusedasabasisforevaluatingmanagement'soperating effectiveness.
23. Therateofreturnontotalassetswillbegreaterthantherateofreturnoncommon stockholders' equity ifthe
companyhas beensuccessful intrading ontheequityat
again.
24. Fromacreditor's pointofview,thehigherthetotaldebttototalassetsratio,thelowerthe risk that thecompanymaybeunableto payits obligations.
25. Acurrentratioof1.2to1indicatesthatacompany'scurrentassetsexceeditscurrent liabilities.
26. Usingborrowedmoneytoincreasetherateofreturnoncommonstockholders'equityis called
"tradingontheequity."
27. Whenthedisposalofasignificantsegmentoccurs,theincomestatementshouldreport both incomefromcontinuingoperationsandincome(loss)fromdiscontinuedoperations.
28. Aneventortransactionshouldbeclassifiedasanextraordinaryitemifitisunusualin nature orifit occurs infrequently.
29. Variationsamongcompaniesintheapplicationofgenerallyacceptedaccounting
principles mayreducequalityofearnings.
30. Proformaincomeusuallyexcludesitemsthatthecompanythinksareunusualor
nonrecurring.
Additional
True-FalseQuestions
31. Thethreebasictoolsofanalysisarehorizontalanalysis,verticalanalysis,andratio
analysis.
32. A percentagechangecan becomputedonlyif thebaseamountiszeroorpositive.
33. Inverticalanalysis, the baseamountinanincomestatementisusuallynetsales.
34. Profitabilityratiosmeasuretheabilityoftheenterprisetosurviveoveralongperiodof time.
35. Thedaysin inventoryiscomputedbymultiplyinginventoryturnoverby365.
36. Extraordinaryitemsarereportednetofapplicabletaxesinaseparatesectionofthe income statement.
MULTIPLECHOICEQUESTIONS
37. Whichoneof
thefollowingisprimarilyinterestedintheliquidityof acompany? a.Federalgovernment
b.Stockholders
c.Long-termcreditors d.Short-termcreditors
38. Whichoneof thefollowing isnot a characteristic generallyevaluatedin
analyzingfinancial statements?
a.Liquidity
b.Profitabilityc.Marketability
d.Solvency
39. Inanalyzingthefinancialstatementsofacompany,asingleitemonthefinancial statements
a.shouldbereported inbold-facetype.
b.ismoremeaningfulif comparedtootherfinancialinformation.
c.is significantonlyifit is large.
d.shouldbeaccompaniedbyafootnote.
40. Short-termcreditorsareusuallymostinterestedinevaluating a.solvency.
b.liquidity.
c.marketability. d.profitability.
41. Long-termcreditorsareusuallymostinterestedinevaluating
a.liquidityandsolvency.
b.solvencyandmarketability.
c.liquidityandprofitability.
d.profitabilityandsolvency.
42. Stockholdersaremostinterestedinevaluating a.liquidityandsolvency.
b.profitabilityandsolvency. c.liquidityandprofitability.
d.marketabilityandsolvency.
FinancialStatementAnalysis 18-7
43. A stockholderis interestedintheabilityof
afirmto
a.payconsistentdividends.
b.appreciateinshareprice.c.surviveovera longperiod.
d.all of these.
44. Comparisonsoffinancialdatamadewithina companyarecalled
a.intracompanycomparisons.
b.interiorcomparisons.
c.intercompanycomparisons.
d.intramuralcomparisons.
45. Atechniqueforevaluatingfinancialstatementsthatexpressestherelationshipamong
selected items offinancialstatementdatais
a.commonsizeanalysis. b.horizontalanalysis.
c.ratioanalysis.
d.verticalanalysis.
46. Whichoneof
thefollowingisnotatool
infinancialstatementanalysis? a.Horizontalanalysis
b.Circularanalysis c.Verticalanalysis
d.Ratioanalysis
47. Inanalyzingfinancialstatements,horizontalanalysis is
a a.requirement.
b.tool.
c.principle.
d.theory.
48. Horizontalanalysisis also
called a.linearanalysis.
b.verticalanalysis. c.trendanalysis.
d.commonsizeanalysis.
49. Verticalanalysisisalsoknownas
a.perpendicularanalysis.
b.commonsizeanalysis. c.trendanalysis.
d.straight-lineanalysis.
50. Inratioanalysis,theratiosareneverexpressedasa a.rate.
b.negativefigure.
c.percentage.
d.simpleproportion.
18-8
51. Theformulaforhorizontalanalysisofchangessincethebaseperiodisthecurrentyear amount
a.dividedbythebaseyearamount.
b.minusthebaseyearamountdividedbythe
base
yearamount.c.minusthebase yearamountdividedbythe
currentyearamount. d.plusthebaseyearamountdividedbythebase yearamount.
52. Horizontalanalysisevaluatesaseriesoffinancialstatementdataovera periodof time a.that hasbeenarrangedfromthehighestnumbertothelowestnumber.
b.that hasbeenarrangedfromthelowestnumbertothehighestnumber. c.todeterminewhichitemsareinerror.
d.todeterminetheamountand/orpercentageincreaseordecreasethathastaken place.
53. Horizontalanalysisevaluatesfinancialstatementdata
a.withina
periodof time.
b.overa periodof time.
c.onacertaindate.
d.as it mayappearinthefuture.
54. Assumethefollowingsalesdatafor a company:
2010 $1,000,000 2009 900,000 2008 750,000 2007 600,000
If2007isthebaseyear, whatis
thepercentageincreaseinsalesfrom2007to 2009?
a.100%
b.150% c.50%d.66.7%
55. Comparativebalancesheetsareusuallypreparedfor a.oneyear.
b.twoyears.c.threeyears.
d.four
years.
56. Horizontalanalysisisappropriatelyperformed a.onlyonthe incomestatement.
b.onlyonthebalancesheet.
c.onlyonthestatementof
retainedearnings. d.onallthreeofthesestatements.
57. Ahorizontalanalysisperformedonastatementofretainedearningswouldnotshowa percentagechangein
a.dividendspaid.
b.netincome.
c.expenses.
d.beginningretained
earnings.
FinancialStatementAnalysis 18-9
58. Under whichofthefollowingcasesmaya
percentagechangebecomputed? a.Thetrendofthe balancesisdecreasingbutallbalancesarepositive.
b.Thereis nobalanceinthebaseyear.
c.There
is apositivebalancein
thebaseyear andanegativebalancein
thesubsequent year.
d.There is anegativebalancein
thebaseyearandapositivebalanceinthe
subsequent year.
59. Assumethefollowingsalesdatafor a company:
2009 $945,000 2008 780,000 2007 650,000
If2007isthebaseyear,whatis
thepercentageincreaseinsalesfrom2007to 2008?
a.25%
b.20%c.125% d.143%
60. Assumethefollowingcost
ofgoodssolddatafora
company:
2009 $1,500,000 2008 1,200,000 2007 900,000
If2007isthebaseyear,whatisthepercentage increase
incostofgoodssoldfrom2007 to2009?
a.167% b.67%c.60% d.40%
Usethefollowing
informationforquestions61–62:
MoonBeam,Inc.hasthefollowingincomestatement(inmillions):
MOON BEAM, INC.
IncomeStatement
FortheYearEndedDecember31,2008
NetSales $180 CostofGoodsSold
120 GrossProfit
60 OperatingExpenses 33NetIncome $27
61. Usingverticalanalysis,whatpercentageisassignedto Costof
GoodsSold? a. 67%
b. 33%
c.100%
d.Noneof theabove
18-10
62. Usingverticalanalysis,whatpercentageis assignedto NetIncome? a.100%
b.85% c.15%
d.Noneof theabove
63. Verticalanalysisisalsocalled a.commonsizeanalysis.
b.horizontalanalysis.
c.ratioanalysis.
d.trendanalysis.
64. Verticalanalysisisa
techniquewhichexpresseseachitemwithinafinancialstatement a.in dollarsandcents.
b.intermsof apercentageoftheiteminthepreviousyear. c.in terms of apercentofa baseamount.
d.starting withthe highestvaluedowntothe
lowestvalue.
65. Incommonsizeanalysis,
a.a
baseamountisrequired.
b.abase amountisoptional.
c.thesamebaseisusedacross
allfinancialstatementsanalyzed.
d.theresultsof thehorizontalanalysisarenecessaryinputsforperformingtheanalysis.
66. Inperforminga verticalanalysis,thebaseforprepaid
expensesis
a.totalcurrentassets.
b.totalassets.
c.totalliabilitiesandstockholders'equity. d.prepaidexpenses.
67. Inperforminga verticalanalysis,thebaseforsalesrevenuesontheincomestatementis a.netsales.
b.sales.
c.net income.
d.costof goodsavailablefor
sale.
68. Inperforminga verticalanalysis,thebaseforsalesreturnsandallowancesis
a.sales.
b.salesdiscounts.
c.netsales.
d.totalrevenues.
69. Inperforminga verticalanalysis,thebaseforcost
ofgoodssoldis
a.totalsellingexpenses.
b.netsales.
c.totalrevenues.
d.totalexpenses.
FinancialStatementAnalysis 18-11
70. Eachof thefollowingisa liquidityratioexceptthe
a.acid-testratio.
b.currentratio.
c.debttototal assetsratio.
d.inventoryturnover.
71. A ratiocalculatedinthe
analysisof financialstatements
a.expressesamathematicalrelationshipbetweentwonumbers. b.showsthepercentageincreasefromone yeartoanother.
c.restatesallitemsonafinancialstatementintermsofdollarsofthesamepurchasing
power.
d.ismeaningfulonlyifthenumeratorisgreaterthanthedenominator.
72. A liquidityratiomeasuresthe
a.incomeoroperatingsuccessof
anenterpriseovera periodoftime. b.abilityoftheenterpriseto surviveovera longperiodof
time.
c.short-termabilityoftheenterprisetopayitsmaturingobligationsandtomeet unexpectedneedsforcash.
d.numberoftimesinterestisearned.
73. Thecurrentratiois
a.calculatedbydividingcurrentliabilitiesbycurrentassets.
b.usedtoevaluateacompany'sliquidityandshort-termdebtpayingability. c.usedtoevaluate
acompany's solvencyandlong-term debtpayingability.
d.calculatedbysubtractingcurrentliabilitiesfromcurrentassets.
74. Theacid-test(quick)ratio
a.isusedtoquickly
determineacompany'ssolvencyand long-termdebtpayingability.
b.relatescash, short-terminvestments,andnetreceivablestocurrentliabilities.
c.iscalculatedbytakingoneitemfromtheincomestatementandoneitemfromthe balance sheet.
d.isthesameasthecurrentratioexceptitis roundedtothenearest
wholepercent.
75. WalkerClothingStorehadabalanceintheAccountsReceivableaccountof$780,000at thebeginningoftheyearandabalanceof$820,000attheendoftheyear.Netcredit salesduringtheyearamountedto$8,000,000.Theaveragecollectionperiodofthe receivables
interms ofdays was
a.30 days.b.365days. c.10days. d.37days.
76. ParrHardwareStorehadnetcreditsalesof$5,200,000andcostofgoodssoldof
$4,000,000fortheyear.TheAccountsReceivablebalancesatthebeginningandendof theyearwere$600,000and$700,000,respectively.Thereceivablesturnover
was
a.7.4times. b.8.7times. c.6.2times. d.8times.
18-12
Usethefollowing
informationforquestions77–78.
WatersDepartmentStorehadnetcreditsalesof$12,000,000andcostofgoodssoldof
$9,000,000fortheyear.Theaverageinventoryfor the
year amountedto $2,000,000.
77. Inventoryturnoverforthe yearis a.6
times.
b.10.5times.
c.4.5times. d.3times.
78. Theaveragenumberof
daysininventoryduringthe yearwas a.122days.
b.81days.
c.61days. d.35days.
79. Eachof
thefollowingis includedincomputingtheacid-testratio except a.cash.
b.inventory.c.receivables.
d.short-terminvestments.
80. Whichoneof
thefollowing wouldnot beconsidereda liquidityratio? a.Currentratio
b.Inventoryturnover c.Acid-testratio
d.Returnonassets
81. Assetturnovermeasures
a.howoftenacompanyreplacesitsassets.
b.howefficientlyacompanyusesits
assetstogeneratesales.c.theportionof
theassetsthathavebeenfinancedbycreditors. d.theoverallrateof
returnonassets.
82. Profitmarginis calculatedbydividing a.salesbycost ofgoodssold.
b.grossprofitbynetsales.
c.net incomebystockholders'equity. d.netincomebynetsales.
Usethefollowing
informationforquestions83–84.
RaneyCorporationhadnetincomeof$200,000andpaiddividendstocommonstockholdersof $50,000in2008.Theweightedaveragenumberofsharesoutstandingin2008was50,000 shares.RaneyCorporation'scommonstockissellingfor$40pershareontheNewYorkStock
Exchange.
83. RaneyCorporation's price-earningsratiois a.2.5times.
b.10times.c.13.3times.
d.4times.
FinancialStatementAnalysis 18-13
84 RaneyCorporation's payout
ratiofor2008is a.$4pershare.
b33.3%. c.25%.d.10%.
85 Holt Companyreportedthefollowingon its
income
statement:
Incomebeforeincometaxes
Incometaxexpense
Netincome
$420,000
120,000$300,000
Ananalysisoftheincomestatementrevealedthatinterestexpensewas$50,000.Holt Company'stimesinterestearnedwas
a.9 times.
b.8times. c.7times. d.6times.
86. Thedebttototalassetsratiomeasures a.thecompany'sprofitability.
b.whetherinterest
canbepaidondebtinthecurrentyear.
c.theproportionofinterestpaidrelativetodividendspaid.
d.thepercentageofthetotalassetsprovidedbycreditors.
87. Tradingontheequity(leverage)referstothe
a.amountof workingcapital.
b.amountof capitalprovidedbyowners.
c.useof borrowedmoneyto increasethereturnto
owners. d.numberoftimesinterestis earned.
88. ThecurrentassetsofKileCompanyare$150,000.Thecurrentliabilitiesare$120,000. Thecurrentratioexpressedasaproportion is
a.125%. b.1.25:1 c..80:1
d.$150,000÷$120,000.
89. Thecurrentratiomayalso
bereferredto
asthe a.shortrunratio.
b.acid-testratio.
c.workingcapitalratio.
d.contemporaryratio.
90. A weaknessofthecurrentratiois a.thedifficultyof thecalculation.
b.that itdoesn'ttakeintoaccountthecompositionof
thecurrentassets. c.thatitis
rarelyusedbysophisticatedanalysts.
d.that itcanbeexpressedasapercentage,asarate,
orasaproportion.
18-14
91. A suppliertoacompanywouldbemostinterestedinthecompany’s a.asset turnover.
b.profitmargin. c.currentratio.
d.earningspershare.
92. Whichoneofthefollowingratioswouldnotlikelybeusedbyashort-termcreditorin evaluatingwhethertoselloncreditto acompany?
a.Currentratio b. Acid-testratio c. Assetturnover
d.Receivablesturnover
93. Ratiosareusedastoolsinfinancialanalysisa.insteadof horizontal and
verticalanalyses.
b.becausetheymayprovideinformationthatisnotapparentfrominspectionofthe individualcomponents
of theratio.
c.becauseevensingleratiosbythemselvesarequitemeaningful. d.becausetheyareprescribedbyGAAP.
94. Theratiosthat
areusedto determineacompany'sshort-termdebtpaying abilityare
a.assetturnover,timesinterest earned,currentratio, andreceivablesturnover.
b.timesinterestearned,inventory
turnover,currentratio,andreceivables turnover. c.timesinterestearned,acid-test ratio,currentratio,andinventoryturnover.
d.currentratio,acid-testratio,
receivablesturnover,andinventoryturnover.
95. A measureof thepercentage of eachdollarof
salesthatresultsinnetincome is a.profit margin.
b.returnonassets.
c.returnoncommon
stockholders'equity. d.earningspershare.
Usethefollowing
informationforquestions96–97.
RisenCompanyhad$250,000ofcurrentassetsand$90,000ofcurrentliabilitiesbefore borrowing$50,000fromthebankwitha 3-monthnotepayable.
96. WhateffectdidtheborrowingtransactionhaveontheamountofRisenCompany's working capital?
a.Noeffect
b. $50,000increase
c. $90,000increase d.$50,000decrease
97. WhateffectdidtheborrowingtransactionhaveonRisenCompany'scurrentratio?
a.Theratioremained unchanged.
b.Thechangeinthecurrentratiocannotbedetermined.
c.The ratiodecreased.
d.Theratioincreased.
FinancialStatementAnalysis 18-15
98. Ifequal
amountsareaddedtothenumeratorand
thedenominatorofthecurrent
ratio, the ratiowill always
a.increase. b.decrease.
c.staythesame.
d.equalzero.
99. Theacid-testratio
a.isaquick calculationofanapproximationof thecurrentratio. b.doesnot includeallcurrentliabilitiesinthecalculation.
c.doesnotincludeinventoryaspart
ofthenumerator.
d.doesincludeprepaidexpensesas
part of the numerator.
100. Ifacompanyhasanacid-testratioof1.2:1,whatrespectiveeffectswilltheborrowingof
cash byshort-termdebtandcollectionof accountsreceivablehaveontheratio?
Short-termBorrowing a. Increase
b. Increase c. Decrease d. Decrease
Collection
ofReceivableNoeffectIncrease
Noeffect
Decrease
101. Acompanyhasareceivablesturnoverof10times.Theaveragenetceivablesduringthe period
are$500,000.Whatistheamount of
netcreditsalesfortheperiod?
a.$50,000
b.$5,000,000
c.$600,000
d.Cannotbedeterminedfromtheinformationgiven
102. If theaveragecollectionperiodis
35days,whatisthereceivablesturnover? a.9.49times
b.10.43times c.5.22times
d.Noneof these
103. Ageneralruleto useinassessingtheaveragecollectionperiodisthat a.it shouldnotexceed30days.
b.itcanbeany lengthas long asthecustomercontinuestobuymerchandise. c.it shouldnotgreatlyexceedthediscountperiod.
d.itshouldnotgreatlyexceedthecredittermperiod.
104. Inventoryturnoveriscalculatedbydividing
a.costofgoodssoldbythe
endinginventory.
b.costofgoodssoldbythe
beginninginventory. c.costofgoodssoldbytheaverageinventory.d.averageinventorybycostofgoodssold.
105. Acompanyhasan averageinventoryon handof$100,000andthedaysin inventoryis73 days.Whatisthecostofgoodssold?
a.$500,000b.$7,300,000
c.$1,000,000 d.$3,650,000
18-16
106. A successfulgrocerystorewouldprobablyhave a.a
lowinventoryturnover.
b.a highinventoryturnover.
c.zeroprofitmargin.
d.lowvolume.
107. Anaircraftcompanywouldmostlikelyhave
a.ahighinventoryturnover.
b.lowprofitmargin. c.highvolume.
d.a lowinventoryturnover.
108. Net salesare$4,500,000,beginningtotalassetsare
$2,100,000,andthe assetturnoveris
3.0times.Whatistheending
totalassetbalance?
a.$1,500,000 b.$900,000c.$2,100,000 d.$1,200,000
109. Earningspershareiscalculated
a.onlyfor commonstock.
b.onlyfor preferredstock.
c.forcommonand preferredstock.
d.onlyfortreasurystock.
110. Whichofthefollowingisnot
a profitabilityratio? a.Payoutratio
b.Profitmargin
c.Timesinterestearned
d.Returnoncommonstockholders'equity
111. Timesinterestearnedisalsocalledthe a.moneymultiplier.
b.interestcoverageratio.
c.couponcoverageratio. d.premiumratio.
112. Theratiothatusesweightedaveragecommonsharesoutstandinginthedenominatoris the
a.price-earningsratio.
b.returnoncommonstockholders'equity.
c.earningspershare.
d.payoutratio.
113. Net
incomedoesnotappearinthenumerator ofthe a.profitmargin.
b.returnonassets.
c.returnoncommon stockholders'equity.
d.payoutratio.
FinancialStatementAnalysis 18-17
114. FallClothingStorehadabalanceintheAccountsReceivableaccountof$820,000atthe
beginningoftheyearandabalanceof$880,000attheendoftheyear.Netcreditsales during
theyear amountedto $6,120,000.Thereceivablesturnover
ratiowas
a.7.2times. b.7times.c.6.9times. d.6.8times.
115. FallClothingStorehadabalanceintheAccountsReceivableaccountof$810,000atthe
beginningoftheyearandabalanceof$850,000attheendoftheyear.Netcreditsales duringtheyearamountedto$5,814,980.Theaveragecollectionperiodofthereceivables in
termsofdays was
a.50 days.b.52.1days. c. 365days. d.52.9days.
Usethefollowing
informationforquestions116–117.
LuthorCorporationhadnetincomeof$160,000andpaiddividendstocommonstockholdersof $40,000in2008.Theweightedaveragenumberofsharesoutstandingin2008was50,000 shares.LuthorCorporation'scommonstockissellingfor$50pershareontheNewYorkStock Exchange.
116. LuthorCorporation'sprice-earningsratiois
a.3.2times.
b.15.6times. c.10times.d.5 times.
117. LuthorCorporation'spayout
ratiofor2008is
a.$5pershare.
b.25%. c.20%. d.12.5%.
118. RayeCompany
reportedthefollowingon itsincome statement:
Incomebeforeincometaxes Incometaxexpense
Netincome
$500,000
150,000$350,000
Ananalysisoftheincomestatementrevealedthatinterestexpensewas$80,000.Raye Company'stimesinterestearnedwas
a.8 times.
b.7.25times.
c.6.25times. d.4.4times.
18-18
Usethefollowing
informationforquestions119-125.
ThefollowinginformationpertainstoSohoCompany.Assumethatallbalancesheetamounts
represent both averageandendingbalancefigures. Assumethatallsaleswereoncredit.
Assets
Cashandshort-terminvestments
Accountsreceivable (net)
Inventory
Property,plantandequipment
TotalAssets
Liabilities and Stockholders’EquityCurrentliabilities
Long-termliabilities
Stockholders’equity—common
TotalLiabilitiesandStockholders’Equity
$40,000 25,000
20,000
210,000$295,000
$60,000 85,000
150,000$295,000
Sales
Costofgoodssold Grossmargin Operatingexpenses
Netincome
Income Statement
$85,000
45,000 40,000
20,000$20,000
Numberof sharesof
commonstock 6,000 Marketprice of commonstock
$20 Dividendspershare
.90
119. Whatisthecurrentratioforthiscompany? a.1.42
b..80c.1.16 d..60
120. Whatisthereceivablesturnoverforthiscompany?
a.2.8times
b.2timesc.3.4times
d.3times
121. Whatistheinventoryturnoverforthiscompany? a.2 times
b.2.25times c.1time
d..44times
122. Whatisthereturnonassetsforthiscompany? a.6.8%
b.10.5%
c.11.7% d.26.7%
FinancialStatementAnalysis 18-19
123. Whatisthe
profitmarginforthiscompany?
a.42.86%
b.18.75% c.23.5% d.15.0%
124. Whatisthereturnoncommon
stockholders’equityforthiscompany? a.13.3%
b.5%
c.23.3% d.53.3%
125. Whatisthe
price-earningsratioforthiscompany?
a.6 times
b.2.5times
c.8timesd.4 times
Usethefollowing
informationforquestions126–129.
ThefollowinginformationpertainstoCasheCompany.Assumethatallbalancesheetamounts
represent both averageandendingbalancefigures.Assumethatallsaleswereoncredit.
AssetsCashandshort-terminvestments Accountsreceivable (net)
Inventory
Property,plantandequipment
TotalAssets
$40,000 30,000
25,000
215,000$310,000
Liabilitiesand
Stockholders’Equity
Currentliabilities
Long-termliabilities Stockholders’equity—common
TotalLiabilitiesandStockholders’Equity
$60,000 95,000
155,000$310,000
Sales
Costofgoodssold Grossmargin Operatingexpenses
Netincome
Income Statement
$90,000
45,000 45,000
20,000$25,000
Numberof sharesof
commonstock 6,000 Marketprice of commonstock
$20 Dividendspershare
1.00
126. Whatisthereturnonassetsforthiscompany? a.6.8%
b.10.5% c.8.1% d.16.1%
18-20
127. Whatisthe profitmarginforthiscompany?
a.50.0%
b.55.6% c.23.5% d.27.8%
128. Whatisthereturnoncommon
stockholders’equityforthiscompany? a.7.3%
b.16.1% c.23.5% d.53.3%
129. Whatisthe
price-earningsratioforthiscompany?
a.6 times
b.4.2times
c.8timesd.4.8times
Usethefollowing
informationforquestions130–131.
ThefollowinginformationisavailableforCharlesCompany:
Accountsreceivable Inventory
Netcreditsales
Costofgoodssold Netincome
2008
$360,000
280,000 3,000,000 1,200,000 300,000
2007
$400,000
320,000 1,400,000 1,060,000 170,000
130. Thereceivablesturnoverratiofor2008 is a.8.3times.
b. 3.9times. c.
7.9times. d.10.0times.
131. Theinventoryturnoverratiofor2008is
a.4.3times.
b.4.0times.
c.2.0times. d.2.4times.
Usethefollowing
informationforquestions132–134.
Thefollowingamountsweretakenfromthefinancialstatementsof PalmerCompany:
Totalassets Netsales
Grossprofit Netincome
Weightedaveragenumberof commonsharesoutstanding
Marketprice
of commonstock
2008
$800,000 720,000
352,000 144,000 120,000 $36
2007
$1,000,000
650,000 320,000 117,000 120,000$40
FinancialStatementAnalysis 18-21
132. Thereturnonassetsratiofor2008is
a.18%.
b.16%. c.36%. d.32%.
133. Theprofitmarginratiofor
2008is a.10%.
b.15%. c.20%. d.30%.
134. Theprice-earningsratiofor2008is a.30times.
b.20times. c.10times. d.5times.
Usethefollowing
informationforquestions135–136.
PanzaCorporationhadnetincomeof$250,000andpaiddividendstocommonstockholdersof $50,000in2008.Theweightedaveragenumberofsharesoutstandingin2008was50,000
shares.PanzaCorporation'scommonstockissellingfor$40pershareontheNewYorkStock Exchange.
135. PanzaCorporation'sprice-earningsratiois
a.2 times.
b.8 times.c.10times.
d.5 times.
136. PanzaCorporation'spayout
ratiofor 2008is
a.$5pershare.
b.25%. c.20%. d.12.5%.
137. Ester’sBunnyBarnhasexperienceda$40,000lossduetotornadodamagetoits
inventory.Tornadoshaveneverbeforeoccurredinthisarea.Assumingthatthe company’staxrateis30%,whatamountwillbereportedforthislossontheincome statement?
a.$40,000
b.$28,000 c.$12,000 d.$36,000
138. WengerCompanyreportedincomebeforetaxes
of$600,000andanextraordinarylossof $150,000.Assumethatthecompany’staxrateis30%. Whatamountswillbereportedon theincomestatementforincomebeforeirregularitemsandextraordinaryitems, respectively?
a.$420,000and$150,000
b.$420,000 and$105,000
c.$495,000and$150,000
d.$495,000and $105,000
18-22
139. KandyKaneCorporationhasincomebeforetaxesof$400,000andanextraordinarygain
of$100,000. Iftheincometaxrateis25%onallitems,theincomestatement
shouldshow income beforeirregularitemsandextraordinaryitems,respectively,of
a.$325,000and$100,000. b.$325,000and$75,000.c.$300,000and$100,000.
d.$300,000and$75,000.
140. HardyInc.hasaninvestmentinavailable-for-salesecuritiesof$50,000.Thisinvestment
experiencedanunrealizedlossof$3,000duringthecurrentyear.Assuminga35%tax rate,
the effectof thisloss
oncomprehensiveincomewill be
a.no effect.
b.$50,000increase. c.$17,500decrease. d.$3,000decrease.
141. The
disposalof a significant segmentofabusinessiscalled
a.achangeinaccountingprinciple.
b.an extraordinaryitem.
c.anotherexpense.
d.discontinuedoperations.
142. ABCCompanyreportsincomebeforeincometaxesof$1,800,000andhadanextra-ordinary loss
of$600,000.If
thetaxrateis30%,
a.theincomebeforetheextraordinary
itemis$1,440,000.
b.theextraordinarylosswouldbereportedontheincome statementat$600,000.
c.the incomebeforetheextraordinary itemis$1,260,000.
d.theextraordinarylosswillbereportedat$180,000.
143. Evers,Inc.disposesofanunprofitablesegmentofitsbusiness.Theoperationofthe segmentsuffereda$240,000lossintheyearofdisposal.Thelossondisposalofthe segmentwas$120,000.Ifthetaxrateis30%,andincomebeforeincometaxeswas
$1,500,000,
a.theincometaxexpenseontheincomebeforediscontinuedoperationsis $342,000.
b.theincomefromcontinuingoperationsis$1,050,000.
c.net incomeis$1,140,000.
d.thelossesfrom
discontinuedoperationsarereportednetof incometaxes at $180,000.
144. Eachof
thefollowingisanextraordinaryitemexceptthe a.effectsof
majorcasualties,ifrareinthearea.
b.effectsof anewlyenactedlaworregulation.
c.expropriationof propertybyaforeigngovernment.
d.lossesattributabletolabor
strikes.
145. Thediscontinuedoperationssectionof theincomestatementrefersto
a.discontinuanceof a product line.
b.theincomeor
loss onproductsthathavebeencompletedandsold. c.obsoleteequipment anddiscontinuedinventoryitems.
d.thedisposalof
asignificantsegmentofabusiness.
FinancialStatementAnalysis 18-23
146. Whichoneof thefollowing wouldbeclassifiedasanextraordinaryitem? a.Expropriationof
propertybyaforeigngovernment
b.Lossesattributedtoa laborstrike c.Write-downofinventories
d.Gainsorlossesfromsalesof equipment
147. A
lossonthewritedownofobsoleteinventoryshouldbereported as
a."otherexpensesandlosses."
b.part of discontinuedoperations.
c.anoperatingexpense.
d.an extraordinaryitem.
148. Ifan itemmeetsone(butnotboth)of thecriteriaforanextraordinaryitem,it
a.onlyneedstobedisclosedinthefootnotesof thefinancialstatements.
b.maybetreatedassalesrevenue
(ifitisagain)andasanoperatingexpense
(ifitisa loss).
c.isreportedas an"otherrevenue
orgain"or"otherexpenseandloss,"netof
tax.
d.isreportedatitsgrossamountasan"otherrevenueorgain"or"otherexpenseor
loss."
149. Theorderof presentationofnontypicalitemsthatmayappear ontheincomestatementis
a.Extraordinaryitems,Discontinuedoperations,Otherrevenuesandexpenses.
b.Discontinuedoperations,Extraordinary items,Otherrevenuesandexpenses.
c.Otherrevenuesandexpenses, Discontinuedoperations,Extraordinaryitems. d.Other revenuesandexpenses,Extraordinaryitems,Discontinuedoperations.
150. Eachof
thefollowingisafactoraffectingqualityof
earningsexcept a.alternativeaccountingmethods.
b.improperrecognition.
c.proformaincome.
d.extraordinaryitems.
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