Question 1

Component percentages indicate the relative size of each item included in a total. Which of the following statements is true?

Accepted Answer

A)  Income statement items are expressed as a percentage of net income, while balance sheet items are expressed as a percentage of total assets. 
B)  Income statement items are expressed as a percentage of net sales, while balance sheet items are expressed as a percentage of total assets. 
C)  Income statement items are expressed as a percentage of net income, while balance sheet items are expressed as a percentage of net worth. 
D)  Both income statement and balance sheet items are expressed as a percentage of net worth. 
A)  Income statement items are expressed as a percentage of net income, while balance sheet items are expressed as a percentage of total assets. 
B)  Income statement items are expressed as a percentage of net sales, while balance sheet items are expressed as a percentage of total assets. 
C)  Income statement items are expressed as a percentage of net income, while balance sheet items are expressed as a percentage of net worth. 
D)  Both income statement and balance sheet items are expressed as a percentage of net worth.

Question 2

One number expressed as a percentage of another is called:

Accepted Answer

A)  Money changes. 
B)  Trend percentages. 
C)  Component percentages. 
D)  Ratios. 
A)  Money changes. 
B)  Trend percentages. 
C)  Component percentages. 
D)  Ratios.

Question 3

If the return on total assets ratio is substantially below the cost of borrowing, common stockholders will benefit from a high debt ratio.

Accepted Answer

A) True 
 B)False

Question 4

From a creditor's point of view, the lower the debt ratio; the safer the creditor's position.

Accepted Answer

A) True 
 B)False

Question 5

The return on assets ratio usually is computed as:

Accepted Answer

A)  Net sales divided by average total assets. 
B)  Gross profit divided by average total assets. 
C)  Operating income divided by average total assets. 
D)  Net income divided by average total assets. 
A)  Net sales divided by average total assets. 
B)  Gross profit divided by average total assets. 
C)  Operating income divided by average total assets. 
D)  Net income divided by average total assets.

Question 6

A transaction that will increase the quick ratio but cause the current ratio to decline is:

Accepted Answer

A)  Short-term borrowing. 
B)  Investing cash in plant assets. 
C)  Sale of inventory at a price below cost. 
D)  Collection of an account receivable. 
A)  Short-term borrowing. 
B)  Investing cash in plant assets. 
C)  Sale of inventory at a price below cost. 
D)  Collection of an account receivable.

Question 7

All of the following ratios are considered measures of profitability except:

Accepted Answer

A)  Earnings per share. 
B)  Gross profit rate. 
C)  Price earnings ratio. 
D)  Return on assets. 
A)  Earnings per share. 
B)  Gross profit rate. 
C)  Price earnings ratio. 
D)  Return on assets.

Question 8

What is Compro's debt ratio?

Accepted Answer

A)  75%. 
B)  25%. 
C)  60%. 
D)  33%. 
A)  75%. 
B)  25%. 
C)  60%. 
D)  33%.

Question 9

Below are eight ratios. Match each equation to the correct ratio. If there is no match, use "None" as your response.
$$\begin{array} { | l | l | } 
\hline \text { Current ratio } & \text { Working capital } \
\hline \text { A/R turnover rate } & \text { Debt ratio } \
\hline \text { Earnings per share } & \text { Return on assets } \
\hline \text { Return on equity } & \text { Price-earnings ratio } \
\hline
\end{array}$$
________ (a.) Net income - preferred dividends divided by average number of common shares outstanding.
________ (b.) Net sales divided by average accounts receivable.
________ (c.) Operating income divided by average total assets.
________ (d.) Current assets divided by current liabilities.
________ (e.) Annual dividend divided by current stock price.
________ (f). Current assets minus current liabilities.
________ (g.) Total liabilities divided by total assets.
________ (h.) Net income divided by average total equity.
________ (i.) Common stockholder's equity divided by shares of common stock outstanding.
________ (j ) Current stock price divided by earnings per share.

Accepted Answer

(a.) Earnings per share (b.) A/R turnove

Question 10

ROE - return on equity - is measured by dividing net income by average number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 11

The lower the current ratio, the more liquid the company appears.

Accepted Answer

A) True 
 B)False

Question 12

Inventory is an example of a quick asset.

Accepted Answer

A) True 
 B)False

Question 13

What is the quick ratio?

Accepted Answer

A)  5%. 
B)  1.5 to 1. 
C)  20%. 
D)  1.09 to 1. 
A)  5%. 
B)  1.5 to 1. 
C)  20%. 
D)  1.09 to 1.

Question 14

The current ratio may be less than, equal to, or greater than the quick ratio.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is considered a quick asset?

Accepted Answer

A)  Accounts receivable. 
B)  Inventory. 
C)  Automobiles. 
D)  Prepaid expenses. 
A)  Accounts receivable. 
B)  Inventory. 
C)  Automobiles. 
D)  Prepaid expenses.

Question 16

Use and interpretation of financial measurements
Shown below are various financial measurements for two companies which are similar in size and sell similar products:
 
Instructions: You are to enter code letters in the spaces provided in the two right-hand columns.
In the first column, indicate which of the following three groups probably would be most interested in the specified financial measurement. Identify one group, using the following code letters: STC = indicating short-term creditors, LTC = indicating long-term creditors, and S = indicating stockholders.
In the second column, enter an X or a Y to indicate whether your "most interested group" would prefer the measurement results reported by Co. X or Co. Y.
Consider each financial measurement independently of the others.

Accepted Answer

The answer of Use and interpretation of financial measurements
Shown below...

Question 17

The return on equity ratio usually is computed as:

Accepted Answer

A)  Net income divided by average total assets. 
B)  Net income divided by average total stockholders' equity. 
C)  Gross profit divided by average total stockholders' equity. 
D)  Net income less preferred dividends, divided by average common stockholders' equity. 
A)  Net income divided by average total assets. 
B)  Net income divided by average total stockholders' equity. 
C)  Gross profit divided by average total stockholders' equity. 
D)  Net income less preferred dividends, divided by average common stockholders' equity.

Question 18

Noble's operating income was:

Accepted Answer

A)  $1,610. 
B)  $675. 
C)  $935. 
D)  $115. 
A)  $1,610. 
B)  $675. 
C)  $935. 
D)  $115.

Question 19

Effects of events on financial measurements
Indicate the probable effects of each of the following strategies or events upon the financial measurements of Lindsay Corp. listed below. Use the code letters I = Increase, D = Decrease, and NE = No Effect.

Accepted Answer

The answer of Effects of events on financial measurements
Indicate the...

Question 20

The debt ratio is used primarily as a measure of:

Accepted Answer

A)  Short-term liquidity. 
B)  Creditors' long-term risk. 
C)  Profitability. 
D)  Return on Investment. 
A)  Short-term liquidity. 
B)  Creditors' long-term risk. 
C)  Profitability. 
D)  Return on Investment.

Exam 14: Financial Statement Analysis

Component percentages indicate the relative size of each item included in a total. Which of the following statements is true?

One number expressed as a percentage of another is called:

If the return on total assets ratio is substantially below the cost of borrowing, common stockholders will benefit from a high debt ratio.

From a creditor's point of view, the lower the debt ratio; the safer the creditor's position.

The return on assets ratio usually is computed as:

A transaction that will increase the quick ratio but cause the current ratio to decline is:

All of the following ratios are considered measures of profitability except:

What is Compro's debt ratio?

ROE - return on equity - is measured by dividing net income by average number of shares outstanding.

The lower the current ratio, the more liquid the company appears.

Inventory is an example of a quick asset.

What is the quick ratio?

The current ratio may be less than, equal to, or greater than the quick ratio.

Which of the following is considered a quick asset?

The return on equity ratio usually is computed as:

Noble's operating income was:

Effects of events on financial measurements Indicate the probable effects of each of the following strategies or events upon the financial measurements of Lindsay Corp. listed below. Use the code letters I = Increase, D = Decrease, and NE = No Effect.

The debt ratio is used primarily as a measure of:

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Inventories and the Cost of Goods Sold

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Incremental Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Capital Budgeting

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values Answer Key

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