Question 1

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.

Accepted Answer

A) True 
 B)False

Question 2

The evaluation of company performance and financial condition focuses solely on past performance.

Accepted Answer

A) True 
 B)False

Question 3

Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

Accepted Answer

A) True 
 B)False

Question 4

Gains and losses that are neither unusual nor infrequent are reported as:

Accepted Answer

A)  A prior period adjustment on the statement of retained earnings. 
B)  A gain or loss from disposing of the discontinued segment's net assets. 
C)  Part of continuing operations in before tax dollars. 
D)  A gain or loss from operation of a discontinued segment. 
E)  Part of continuing operations in after-tax dollars. 
A)  A prior period adjustment on the statement of retained earnings. 
B)  A gain or loss from disposing of the discontinued segment's net assets. 
C)  Part of continuing operations in before tax dollars. 
D)  A gain or loss from operation of a discontinued segment. 
E)  Part of continuing operations in after-tax dollars.

Question 5

Analysis of a single financial number is often of limited value.

Accepted Answer

A) True 
 B)False

Question 6

A component of operating efficiency and profitability, calculated by expressing net income as a percent of net sales, is the:

Accepted Answer

A)  Price earnings ratio. 
B)  Profit margin ratio. 
C)  Accounts receivable turnover. 
D)  Acid-test ratio. 
E)  Merchandise turnover. 
A)  Price earnings ratio. 
B)  Profit margin ratio. 
C)  Accounts receivable turnover. 
D)  Acid-test ratio. 
E)  Merchandise turnover.

Question 7

External users of accounting information manage and operate the company.

Accepted Answer

A) True 
 B)False

Question 8

Guidelines (rules-of-thumb) are general standards of comparison developed from:

Accepted Answer

A)  Industry statistics from the government. 
B)  Relations between financial items. 
C)  Analysis of competitors. 
D)  Past experience. 
E)  Dun and Bradstreet. 
A)  Industry statistics from the government. 
B)  Relations between financial items. 
C)  Analysis of competitors. 
D)  Past experience. 
E)  Dun and Bradstreet.

Question 9

Refer to the following selected financial information from Shakley's Incorporated. Compute the company's profit margin for Year 2. $$\begin{array} { | l | r | r | } 
\hline &{ \text { Year 2 } } & \text { Year 1 } \
\hline \text { Net sales } & \$ 478,500 & \$ 426,250 \
\hline \text { Cost of goods sold } & 276,300 & 250,120 \
\hline \text { Interest expense } & 9,700 & 10,700 \
\hline \text { Net income before tax } & 67,250 & 52,680 \
\hline \text { Net income after tax } & 46,050 & 39,900 \
\hline \text { Total assets } & 317,100 & 288,000 \
\hline \text { Total liabilities } & 181,400 & 167,300 \
\hline \text { Total equity } & 135,700 & 120,700 \
\hline
\end{array}$$

Accepted Answer

A)  14.1%. 
B)  33.9%. 
C)  11.7%. 
D)  9.6%. 
E)  16.7%. 
A)  14.1%. 
B)  33.9%. 
C)  11.7%. 
D)  9.6%. 
E)  16.7%.

Question 10

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Accepted Answer

A) True 
 B)False

Question 11

Horizontal analysis is used to reveal patterns in data covering successive periods.

Accepted Answer

A) True 
 B)False

Question 12

The current ratio is calculated as current liabilities divided by current assets.

Accepted Answer

A) True 
 B)False

Question 13

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

Accepted Answer

A) True 
 B)False

Question 14

Refer to the following selected financial information from McCormik, LLC. Compute the company's acid-test ratio for Year 2. $$\begin{array} { | l | r | r | } 
\hline & { \text { Year 2 } } & { \text { Year 1 } } \
\hline \text { Cash } & \$ 37,500 & 3 6 , 8 5 0 \
\hline \text { Short-term investments } & 90,000 & 90,000 \
\hline \text { Accounts receivable, net } & 85,500 & 86,250 \
\hline \text { Merchandise inventory } & 121,000 & 117,000 \
\hline \text { Prepaid expenses } & 12,100 & 13,500 \
\hline \text { Plant assets } & 388,000 & 392,000 \
\hline \text { Accounts payable } & 113,400 & 111.750 \
\hline \text { Net sales } & 711,000 & 706,000 \
\hline \text { Cost of goods sold } & 390,000 & 385,500 \
\hline
\end{array}$$

Accepted Answer

A)  1.98. 
B)  3.05. 
C)  1.88. 
D)  2.26. 
E)  2.95. 
A)  1.98. 
B)  3.05. 
C)  1.88. 
D)  2.26. 
E)  2.95.

Question 15

A financial statement analysis report does not include:

Accepted Answer

A)  Evidential matter. 
B)  Qualitative and quantitative key factors. 
C)  An analysis overview. 
D)  Inferences such as forecasts. 
E)  An auditor statement. 
A)  Evidential matter. 
B)  Qualitative and quantitative key factors. 
C)  An analysis overview. 
D)  Inferences such as forecasts. 
E)  An auditor statement.

Question 16

The gross margin ratio, return on total assets, and basic earnings per share are all ________ ratios.

Accepted Answer

The answer of The gross margin ratio, return on total...

Question 17

External users of accounting information make the strategic and operating decisions of a company.

Accepted Answer

A) True 
 B)False

Question 18

The following selected financial information for a company was reported for the current year end. Calculate the following company ratios:
(a) Accounts receivable turnover.
(b) Inventory turnover.
(c) Days' sales uncollected
Accounts receivable, beginning-year……………. $170,000
 $\begin{array}{llr}
  \text {Accounts receivable, year-end.  } &190,000\
 \text {Merchandise inventory, beginning-year.  } &80,000\
 \text { Merchandise inventory, year-end.  } &60,000\
 \text { Cost of goods sold. } &580,000\
\end{array}$
 $\begin{array}{llr}
  \text { Accounts receivable, year-end } &190,000\
 \text { Merchandise inventory, beginning-year. } &80,000\
 \text { Merchandise inventory, year-end. } &60,000\
 \text {  Cost of goods sold.} &580,000\
\end{array}$
 Credit sales………………………………………... 1,000,000

Accepted Answer

(a) Accounts receivable turnov

Question 19

The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

Accepted Answer

A) True 
 B)False

Question 20

Internal users of financial information:

Accepted Answer

A)  Are those individuals involved in managing and operating the company. 
B)  Are not directly involved in operating a company. 
C)  Include directors and customers. 
D)  Include suppliers, regulators, and the press. 
E)  Include shareholders and lenders. 
A)  Are those individuals involved in managing and operating the company. 
B)  Are not directly involved in operating a company. 
C)  Include directors and customers. 
D)  Include suppliers, regulators, and the press. 
E)  Include shareholders and lenders.

Exam 17: Analysis of Financial Statements

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.

The evaluation of company performance and financial condition focuses solely on past performance.

Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

Gains and losses that are neither unusual nor infrequent are reported as:

Analysis of a single financial number is often of limited value.

A component of operating efficiency and profitability, calculated by expressing net income as a percent of net sales, is the:

External users of accounting information manage and operate the company.

Guidelines (rules-of-thumb) are general standards of comparison developed from:

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Horizontal analysis is used to reveal patterns in data covering successive periods.

The current ratio is calculated as current liabilities divided by current assets.

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

A financial statement analysis report does not include:

The gross margin ratio, return on total assets, and basic earnings per share are all ________ ratios.

External users of accounting information make the strategic and operating decisions of a company.

The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

Internal users of financial information:

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories and Cost of Sales

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Plant Assets Natural Resoures and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments

Reporting the Statement of Cash Flows

Managerial Accounting Concepts and Principles

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Capital Budgeting and Managerial Decisions

Present and Future Values in Accounting

Activity-Based Costing

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