Question 1

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

A)  Since working capital is an absolute amount, other factors such as size of the company and materiality will help to determine liquidity of these two companies. 
B)  Since Harmon's working capital exceeds Lilly's working capital, it is safe to conclude that Harmon is more liquid than Lilly. 
C)  If Lilly Corporation is smaller than Harmon or has lower current liabilities; Lilly could be more liquid than Harmon. 
D)  None of these answers is correct. 
A)  Since working capital is an absolute amount, other factors such as size of the company and materiality will help to determine liquidity of these two companies. 
B)  Since Harmon's working capital exceeds Lilly's working capital, it is safe to conclude that Harmon is more liquid than Lilly. 
C)  If Lilly Corporation is smaller than Harmon or has lower current liabilities; Lilly could be more liquid than Harmon. 
D)  None of these answers is correct.

Question 2

Alpha Company provided the following balance sheet for Year 2:   What is the company's plant assets to long-term liabilities ratio?

Accepted Answer

A)  2.5 
B)  4.5 
C)  1.7 
D)  None of these answers is correct. 
A)  2.5 
B)  4.5 
C)  1.7 
D)  None of these answers is correct.

Question 3

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

Accepted Answer

A)  Solvency 
B)  Liquidity 
C)  Profitability 
D)  None of these answers is correct. 
A)  Solvency 
B)  Liquidity 
C)  Profitability 
D)  None of these answers is correct.

Question 4

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

Accepted Answer

A) True 
 B)False

Question 5

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Accepted Answer

A)  Liquidity 
B)  Solvency 
C)  Profitability 
D)  All of these answers are correct. 
A)  Liquidity 
B)  Solvency 
C)  Profitability 
D)  All of these answers are correct.

Question 6

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?

Accepted Answer

A)  No impact 
B)  Increase it 
C)  Decrease it 
D)  Not enough information is provided to answer the question. 
A)  No impact 
B)  Increase it 
C)  Decrease it 
D)  Not enough information is provided to answer the question.

Question 7

The Crestar Company reported net income of $112,000 on 20,000 average outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $95. What is this company's current price-earnings ratio?

Accepted Answer

A)  19 
B)  17 
C)  20 
D)  None of these answers is correct. 
A)  19 
B)  17 
C)  20 
D)  None of these answers is correct.

Question 8

Financial statement analysis involves forms of comparison including:

Accepted Answer

A)  Comparing changes in the same item over a number of periods. 
B)  Comparing key relationships within the same year. 
C)  Comparing key items to industry averages. 
D)  All of these answers are correct. 
A)  Comparing changes in the same item over a number of periods. 
B)  Comparing key relationships within the same year. 
C)  Comparing key items to industry averages. 
D)  All of these answers are correct.

Question 9

As of December 31, Year 1, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, Year 2, Gant recorded cost of goods sold of $4,100. As a result of this transaction, Gant's quick ratio will:

Accepted Answer

A)  Decrease. 
B)  Increase. 
C)  Remain the same. 
D)  Cannot be determined. 
A)  Decrease. 
B)  Increase. 
C)  Remain the same. 
D)  Cannot be determined.

Question 10

The study of an individual financial statement item over several accounting periods is called:

Accepted Answer

A)  Horizontal analysis. 
B)  Vertical analysis. 
C)  Ratio analysis. 
D)  Time and motion analysis. 
A)  Horizontal analysis. 
B)  Vertical analysis. 
C)  Ratio analysis. 
D)  Time and motion analysis.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is correct?

Accepted Answer

A)  Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions. 
B)  Earnings per share is calculated for a company's preferred stock. 
C)  The most widely quoted measure of a company's earnings performance is return on equity. 
D)  The book value per share measures the market value of a corporation's stock. 
A)  Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions. 
B)  Earnings per share is calculated for a company's preferred stock. 
C)  The most widely quoted measure of a company's earnings performance is return on equity. 
D)  The book value per share measures the market value of a corporation's stock.

Question 13

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

Accepted Answer

A)  Earnings per share 
B)  Acid-test ratio 
C)  Debt to assets ratio 
D)  Return on equity 
A)  Earnings per share 
B)  Acid-test ratio 
C)  Debt to assets ratio 
D)  Return on equity

Question 14

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Accepted Answer

A) True 
 B)False

Question 15

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Accepted Answer

A) True 
 B)False

Question 16

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 17

The following balance sheet information was provided by O'Connor Company:   Assuming that net credit sales for Year 2 totaled $270,000, what is the company's most recent accounts receivable turnover?

Accepted Answer

A)  18 times 
B)  20 times 
C)  22.5 times 
D)  7.7 times 
A)  18 times 
B)  20 times 
C)  22.5 times 
D)  7.7 times

Question 18

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

Accepted Answer

A)  Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area. 
B)  To correctly evaluate an absolute amount, the analyst must consider its relative importance. 
C)  Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses. 
D)  Using absolute amounts eliminates the problem of varying materiality levels. 
A)  Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area. 
B)  To correctly evaluate an absolute amount, the analyst must consider its relative importance. 
C)  Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses. 
D)  Using absolute amounts eliminates the problem of varying materiality levels.

Question 19

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

Accepted Answer

A)  Net margin 
B)  Plant assets to long-term liabilities 
C)  Asset turnover 
D)  Inventory turnover 
A)  Net margin 
B)  Plant assets to long-term liabilities 
C)  Asset turnover 
D)  Inventory turnover

Question 20

As of December 31, Year 1, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, Year 2, Gant issued common stock at par value for $10,000 cash. Which of the following statement is correct?

Accepted Answer

A)  Gant's current ratio will decrease. 
B)  Gant's current ratio will increase. 
C)  Gant's quick ratio will decrease. 
D)  Gant's working capital will decrease. 
A)  Gant's current ratio will decrease. 
B)  Gant's current ratio will increase. 
C)  Gant's quick ratio will decrease. 
D)  Gant's working capital will decrease.

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?

Alpha Company provided the following balance sheet for Year 2: What is the company's plant assets to long-term liabilities ratio?

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

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?

The Crestar Company reported net income of $112,000 on 20,000 average outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $95. What is this company's current price-earnings ratio?

Financial statement analysis involves forms of comparison including:

The study of an individual financial statement item over several accounting periods is called:

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

Which of the following statements is correct?

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

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Long-term creditors are usually most interested in evaluating:

The following balance sheet information was provided by O'Connor Company: Assuming that net credit sales for Year 2 totaled $270,000, what is the company's most recent accounts receivable turnover?

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

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

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

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?

Alpha Company provided the following balance sheet for Year 2: What is the company's plant assets to long-term liabilities ratio?

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

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?

The Crestar Company reported net income of $112,000 on 20,000 average outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $95. What is this company's current price-earnings ratio?

Financial statement analysis involves forms of comparison including:

The study of an individual financial statement item over several accounting periods is called:

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

Which of the following statements is correct?

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

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Long-term creditors are usually most interested in evaluating:

The following balance sheet information was provided by O'Connor Company: Assuming that net credit sales for Year 2 totaled $270,000, what is the company's most recent accounts receivable turnover?

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

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

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