Question 1

Working capital is current assets minus current liabilities.

Accepted Answer

A) True 
 B)False

Question 2

Accrual accounting requires the use of many estimates, including:

Accepted Answer

A)  Uncollectible accounts expense. 
B)  Warranty costs. 
C)  Assets' useful lives. 
D)  All of these answers are correct. 
A)  Uncollectible accounts expense. 
B)  Warranty costs. 
C)  Assets' useful lives. 
D)  All of these answers are correct.

Question 3

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

Accepted Answer

A)  $12,000. 
B)  $52,000. 
C)  $144,000. 
D)  $84,000. 
A)  $12,000. 
B)  $52,000. 
C)  $144,000. 
D)  $84,000.

Question 4

Which of the following statements regarding the information disclosed in financial statements is incorrect?

Accepted Answer

A)  The costs of providing all possible information about a firm would be prohibitively high for the business. 
B)  Some information disclosed in financial statements may be irrelevant to some users. 
C)  Financial statements should be detailed enough to answer any financial-related question an investor might have. 
D)  When too much information is presented, users may suffer from information overload. 
A)  The costs of providing all possible information about a firm would be prohibitively high for the business. 
B)  Some information disclosed in financial statements may be irrelevant to some users. 
C)  Financial statements should be detailed enough to answer any financial-related question an investor might have. 
D)  When too much information is presented, users may suffer from information overload.

Question 5

The accounts receivable turnover ratio can be used to asses a firm's solvency.

Accepted Answer

A) True 
 B)False

Question 6

Many companies have to monitor some of their financial statement ratios, such as the current ratio, due to debt covenants. Selected transactions are provided below for a company that uses a perpetual inventory system, sells its merchandise at a selling price that exceeds cost, and had a current ratio of 1.85 before the event occurred.
   Required:
In the above table, indicate whether each transaction would increase (+), decrease (−), or not affect (0) the company's working capital and the current ratio.

Accepted Answer

The answer of Many companies have to monitor some of...

Question 7

Various ratios are computed to assess different aspects of a company's financial condition and (or) strength.
Required:
In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Accepted Answer

The answer of Various ratios are computed to assess different...

Question 8

Long-term creditors are usually most interested in evaluating:

Accepted Answer

A)  Liquidity. 
B)  Managerial effectiveness. 
C)  Solvency. 
D)  Profitability. 
A)  Liquidity. 
B)  Managerial effectiveness. 
C)  Solvency. 
D)  Profitability.

Question 9

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 components of the current ratio?

Accepted Answer

A)  Current assets decrease and current liabilities increase by the same amount. 
B)  Current liabilities decrease. 
C)  Current assets and current liabilities decrease by the same amount. 
D)  Current assets increase. 
A)  Current assets decrease and current liabilities increase by the same amount. 
B)  Current liabilities decrease. 
C)  Current assets and current liabilities decrease by the same amount. 
D)  Current assets increase.

Question 10

The following balance sheet information was provided by O'Connor Company: $\begin{array}{lrr}
\text { Assets } & \text { Year 2 } & \text { Year 1 } \
\text { Cash } & \$ 3,600 & \$ 2,600 \
\text { Accounts receivable } & \$ 8,600 & \$ 6,600 \
\text { Inventory } & \$ 36,000 & \$ 37,000
\end{array}$ Assuming that net credit sales for Year 2 totaled $161,000, what is the company's most recent accounts receivable turnover?

Accepted Answer

A)  18.72 times 
B)  10.59 times 
C)  24.39 times 
D)  21.18 times 
A)  18.72 times 
B)  10.59 times 
C)  24.39 times 
D)  21.18 times

Question 11

For Perez Corporation, return on equity is substantially higher than return on investment. What does that tell you about the company?

Accepted Answer

Answers will vary.
Return on equity is h

Question 12

Indicate whether each of the following statements is true or false.
Some forms of financial statement analysis involve identifying changes in the same item for the same company over a period of time. ______
Some forms of financial statement analysis involve comparing operations of different companies in the same industry. ______
Vertical analysis is also called trend analysis. ______
Vertical analysis refers to studying the behavior of individual financial statement items over several periods. ______
Horizontal analysis could be done using changes in the absolute dollar amount of an item or trends in percentages. ______

Accepted Answer

Some forms of financial statement analys

Question 13

Which of the following statements regarding ratio analysis is incorrect?

Accepted Answer

A)  Ratio analysis is a specific form of horizontal analysis. 
B)  There are many different ratios available for evaluating a firm's performance. 
C)  Some ratios involve an account from the balance sheet and one from the income statement. 
D)  Ratio analysis involves making comparisons between different accounts in the same set of financial statements. 
A)  Ratio analysis is a specific form of horizontal analysis. 
B)  There are many different ratios available for evaluating a firm's performance. 
C)  Some ratios involve an account from the balance sheet and one from the income statement. 
D)  Ratio analysis involves making comparisons between different accounts in the same set of financial statements.

Question 14

The following balance sheet information is provided for Greene Company for Year 2: $\begin{array}{lr}
\text { Assets }\
\text { Cash } & \$ 6,600 \
\text { Accounts receivable } & 12,750 \
\text { Inventory } & 15,300 \
\text { Prepaid expenses } & 2,100 \
\text { Plant and equipment, net of depreciation } & 20,000 \
\text { Land } & \underline{ 13,900 }\
\text { Total assets } &\underline{ \$ 70,650}\
\text { Liabilities and Stockholders' Equity }\
\text { Accounts payable } & \$ 3,090 \
\text { Salaries payable } & 7,730 \
\text { Bonds payable (Due in ten years) } & 14,500 \
\text { Common stock, no par } & 14,000 \
\text { Retained earnings } &\underline{ 31,330} \
\text { Total liabilities and stockholders' equity }& \$ 70,650
\end{array}$  What is the company's quick (acid-test) ratio? (Round your answer to 2 decimal places.)

Accepted Answer

A)  3.40 
B)  1.37 
C)  0.76 
D)  1.79 
A)  3.40 
B)  1.37 
C)  0.76 
D)  1.79

Question 15

Vertical analysis always involves comparing financial statement elements over a span of time.

Accepted Answer

A) True 
 B)False

Question 16

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

Accepted Answer

A) True 
 B)False

Question 17

Selected financial information for Martin Company for Year 2 follows:
 $\begin{array}{llr}
  \text { Sales } &\$498,000\
 \text { Cost of goods sold } &320,000\
 \text { Merchandise inventory } &\
 &\
 \text {Beginning of year  } &72,000\
 \text {  End of year} &80,000\
\end{array}$
 Required:
How many times did Martin's merchandise inventory turnover during Year 2? (Round your answer to one decimal place.)

Accepted Answer

The inventory turnover ratio is calculat

Question 18

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

Accepted Answer

A)  Return on assets 
B)  Return on equity 
C)  Earnings per share 
D)  Net margin 
A)  Return on assets 
B)  Return on equity 
C)  Earnings per share 
D)  Net margin

Question 19

The Fortune Company reported the following income for Year 2: $\begin{array}{lr}
\text {Sales}&\$135,000\
\text {Cost of goods sold}&\underline{82,500}\
\text {Gross margin}&\$52,500\
\text {Selling and administrative expense}&\underline{20,000}\
\text { Operating income } & \$ 32,500 \
\text { Interest expense } &  \underline{5,500} \
 \text {Income before taxes } & \$ 27,000 \
\text { Income tax expense } & \underline{ 8,100} \
\text { Net income } &  \underline{\$ 18,900}
\end{array}$  What is the company's number of times interest is earned ratio?

Accepted Answer

A)  3.4 times 
B)  4.9 times 
C)  5.9 times 
D)  None of these answers are correct. 
A)  3.4 times 
B)  4.9 times 
C)  5.9 times 
D)  None of these answers are correct.

Question 20

While horizontal analysis examines one item over many time periods, vertical analysis examines many items in the same interval of time.

Accepted Answer

A) True 
 B)False

Working capital is current assets minus current liabilities.

Accrual accounting requires the use of many estimates, including:

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

Which of the following statements regarding the information disclosed in financial statements is incorrect?

The accounts receivable turnover ratio can be used to asses a firm's solvency.

Various ratios are computed to assess different aspects of a company's financial condition and (or) strength. Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Long-term creditors are usually most interested in evaluating:

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 components of the current ratio?

For Perez Corporation, return on equity is substantially higher than return on investment. What does that tell you about the company?

Which of the following statements regarding ratio analysis is incorrect?

Vertical analysis always involves comparing financial statement elements over a span of time.

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

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

While horizontal analysis examines one item over many time periods, vertical analysis examines many items in the same interval of time.

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Planning for Capital Investments

Filters

Exam 9: Financial Statement Analysis

Working capital is current assets minus current liabilities.

Accrual accounting requires the use of many estimates, including:

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

Which of the following statements regarding the information disclosed in financial statements is incorrect?

The accounts receivable turnover ratio can be used to asses a firm's solvency.

Various ratios are computed to assess different aspects of a company's financial condition and (or) strength. Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Long-term creditors are usually most interested in evaluating:

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 components of the current ratio?

For Perez Corporation, return on equity is substantially higher than return on investment. What does that tell you about the company?

Which of the following statements regarding ratio analysis is incorrect?

Vertical analysis always involves comparing financial statement elements over a span of time.

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

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

While horizontal analysis examines one item over many time periods, vertical analysis examines many items in the same interval of time.

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Planning for Capital Investments

Filters