Question 1

Information not reported in the financial statements is also important in evaluating the financial health of a firm.

Accepted Answer

A) True 
 B)False

Question 2

Book value per share of common stock is calculated by dividing the

Accepted Answer

A)  number of common shares outstanding at year end by the common stockholders' equity. 
B)  net income available to common stockholders by the average number of common shares outstanding. 
C)  common stockholders' equity by the number of common shares outstanding at year end. 
D)  total liabilities by the total stockholders' equity.

Question 3

The times interest earned ratio tells a creditor the firm's ability to pay interest on debt.

Accepted Answer

A) True 
 B)False

Question 4

A corporation has 2,000 shares of $50 par, 10% preferred stock, and 6,000 shares of common stock outstanding. The net income for the year is $250,000. The earnings per share of common stock would be

Accepted Answer

A)  $10.83. 
B)  $31.25. 
C)  $40.00. 
D)  $41.67.

Question 5

The cause of changes in key ratios must be investigated before drawing conclusions.

Accepted Answer

A) True 
 B)False

Question 6

Match the terms with the definitions.
-The ratio of net income to net sales.

Accepted Answer

A) profitability measures 
B) operating income ratio 
C) cost of goods sold ratio 
D) ratio of liabilities to stockholders' equity 
E) return on total assets
F)ratio of net sales to assets
G)horizontal analysis
H)leverage
I)net income ratio
J)liquidity
K)liquidity measures
L)merchandise inventory turnover

Question 7

The various methods of financial statement analysis need to be used cautiously, with an awareness of the limitations of accounting data.

Accepted Answer

A) True 
 B)False

Question 8

Profitability measures are intended to indicate the extent to which an entity is being financed by debt and the ability of the entity to meet its debt obligations.

Accepted Answer

A) True 
 B)False

Question 9

Match the terms with the definitions.
-The ratio of common stockholders' equity to the number of common shares outstanding at the end of the year.

Accepted Answer

A) accounts receivable turnover 
B) book value per share 
C) working capital 
D) current ratio (working capital ratio) 
E) earnings per share
F)gross profit ratio
G)vertical analysis
H)times interest earned ratio
I)leverage measures
J)return on common stockholders' equity
K)quick ratio (acid-test ratio)
L)profitability
M)operating expense ratio

Question 10

Match the terms with the definitions.
-Measures that indicate a company's ability to earn income by operating efficiently. They focus primarily on the relationship between key income statement and balance sheet amounts.

Accepted Answer

A) profitability measures 
B) operating income ratio 
C) cost of goods sold ratio 
D) ratio of liabilities to stockholders' equity 
E) return on total assets
F)ratio of net sales to assets
G)horizontal analysis
H)leverage
I)net income ratio
J)liquidity
K)liquidity measures
L)merchandise inventory turnover

Question 11

A company has net sales on account of $1,200,000. Net accounts receivable at the beginning of the year are $500,000 and net accounts receivable at the end of the year are $700,000. The average number of days that the accounts receivables were on the books was

Accepted Answer

A)  8.7 days. 
B)  182.5 days. 
C)  304.0 days. 
D)  439.8 days.

Question 12

Merchandise inventory turnover measures the relationship between

Accepted Answer

A)  assets and current liabilities. 
B)  merchandise inventory and current liabilities. 
C)  expenses and merchandise inventory. 
D)  cost of goods sold and merchandise inventory.

Question 13

A comparison of the amounts for the same item in the financial statements of two or more periods is called horizontal analysis.

Accepted Answer

A) True 
 B)False

Question 14

Match the terms with the definitions.
-The ratio of net income available to common stockholders for the year to the average common stockholders' equity during the year.

Accepted Answer

A) accounts receivable turnover 
B) book value per share 
C) working capital 
D) current ratio (working capital ratio) 
E) earnings per share
F)gross profit ratio
G)vertical analysis
H)times interest earned ratio
I)leverage measures
J)return on common stockholders' equity
K)quick ratio (acid-test ratio)
L)profitability
M)operating expense ratio

Question 15

Match the terms with the definitions.
-The ratio of operating expenses to net sales.

Accepted Answer

A) accounts receivable turnover 
B) book value per share 
C) working capital 
D) current ratio (working capital ratio) 
E) earnings per share
F)gross profit ratio
G)vertical analysis
H)times interest earned ratio
I)leverage measures
J)return on common stockholders' equity
K)quick ratio (acid-test ratio)
L)profitability
M)operating expense ratio

Question 16

Match the terms with the definitions.
-Measures that indicate the extent to which a company is being financed by debt and the ability of the company to meet its debt obligations.

Accepted Answer

A) accounts receivable turnover 
B) book value per share 
C) working capital 
D) current ratio (working capital ratio) 
E) earnings per share
F)gross profit ratio
G)vertical analysis
H)times interest earned ratio
I)leverage measures
J)return on common stockholders' equity
K)quick ratio (acid-test ratio)
L)profitability
M)operating expense ratio

Question 17

Dividing the total stockholders' equity by the average number of shares outstanding at the end of the year (if only common stock is outstanding) is the calculation for

Accepted Answer

A)  book value per share. 
B)  earnings per share. 
C)  return on equity. 
D)  the times interest earned ratio.

Question 18

Match the terms with the definitions.
-The ratio of gross profit to net sales.

Accepted Answer

A) accounts receivable turnover 
B) book value per share 
C) working capital 
D) current ratio (working capital ratio) 
E) earnings per share
F)gross profit ratio
G)vertical analysis
H)times interest earned ratio
I)leverage measures
J)return on common stockholders' equity
K)quick ratio (acid-test ratio)
L)profitability
M)operating expense ratio

Question 19

Book value per share of common stock is the measure of ownership equity represented by each share.

Accepted Answer

A) True 
 B)False

Question 20

Dividing net sales on account by the average amount of net accounts receivable is the calculation for the

Accepted Answer

A)  accounts receivable turnover. 
B)  working capital turnover. 
C)  merchandise inventory turnover. 
D)  plant and equipment turnover.

Exam 24: Analysis of Financial Statements

Information not reported in the financial statements is also important in evaluating the financial health of a firm.

Book value per share of common stock is calculated by dividing the

The times interest earned ratio tells a creditor the firm's ability to pay interest on debt.

A corporation has 2,000 shares of $50 par, 10% preferred stock, and 6,000 shares of common stock outstanding. The net income for the year is $250,000. The earnings per share of common stock would be

The cause of changes in key ratios must be investigated before drawing conclusions.

Match the terms with the definitions. -The ratio of net income to net sales.

The various methods of financial statement analysis need to be used cautiously, with an awareness of the limitations of accounting data.

Profitability measures are intended to indicate the extent to which an entity is being financed by debt and the ability of the entity to meet its debt obligations.

Match the terms with the definitions. -The ratio of common stockholders' equity to the number of common shares outstanding at the end of the year.

Match the terms with the definitions. -Measures that indicate a company's ability to earn income by operating efficiently. They focus primarily on the relationship between key income statement and balance sheet amounts.

A company has net sales on account of $1,200,000. Net accounts receivable at the beginning of the year are $500,000 and net accounts receivable at the end of the year are $700,000. The average number of days that the accounts receivables were on the books was

Merchandise inventory turnover measures the relationship between

A comparison of the amounts for the same item in the financial statements of two or more periods is called horizontal analysis.

Match the terms with the definitions. -The ratio of net income available to common stockholders for the year to the average common stockholders' equity during the year.

Match the terms with the definitions. -The ratio of operating expenses to net sales.

Match the terms with the definitions. -Measures that indicate the extent to which a company is being financed by debt and the ability of the company to meet its debt obligations.

Dividing the total stockholders' equity by the average number of shares outstanding at the end of the year (if only common stock is outstanding) is the calculation for

Match the terms with the definitions. -The ratio of gross profit to net sales.

Book value per share of common stock is the measure of ownership equity represented by each share.

Dividing net sales on account by the average amount of net accounts receivable is the calculation for the