978-1337276337 Test Bank Chapter 13 Part 1

Chapter 13

Page 1

True / False

1. If two companies in the same industry use different methods to value inventory, this makes comparisons more difficult

but not impossible.

a. True

b. False

2. Comparing one company with another in the same industry should cause no problems since companies in the same

industry are required to use the same GAAP.

a. True

b. False

3. The FASB requires a separate note in the financial statements to show the effects of inflation so that investors are able

to compare statements more accurately.

a. True

b. False

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4. The analysis of common-size statements is called horizontal analysis.

a. True

b. False

5. An example of horizontal analysis is the increase in cost of goods sold by 29% from 2017 to 2018.

a. True

b. False

6. Vertical analysis is a comparison of financial statement items for a single company over a period of time.

a. True

b. False

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7. An increase in a company’s revenue and expense accounts will automatically cause an increase in net income for the

period.

a. True

b. False

8. Common-size financial statements exclude the dollar amount as a relevant variable in the analysis, which makes

comparison of one period with the next more meaningful.

a. True

b. False

9. The base, or benchmark, on which all items on the income statement are compared is net sales.

a. True

b. False

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10. The profit margin ratio reflects the amount of income for each dollar of sales.

a. True

b. False

11. All line items in common-size comparative income statements are stated as a percentage of net income.

a. True

b. False

12. Inventories and prepaid assets are excluded from the numerator used to compute the quick ratio.

a. True

b. False

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13. Three measures of liquidity are working capital, the acid-test ratio, and the debt-to-equity ratio.

a. True

b. False

14. Inventory is more liquid than accounts receivable because receivables must be collected and some customers may not

be willing to pay, while inventory need only be sold in a retail store.

a. True

b. False

15. The most liquid of all assets is cash.

a. True

b. False

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16. The amount of working capital is more meaningful to users than the current ratio because it provides information on

the composition of the current accounts.

a. True

b. False

17. The acid-test ratio is a stricter test of a company’s ability to pay its current debts as they are due than the current ratio

is.

a. True

b. False

18. Ratios that focus on cash are more useful than those that focus on income in the evaluation of the liquidity of a

company.

a. True

b. False

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19. Apple Company had terms of net 60 days for customers. The number of days’ sales in accounts receivable for Apple

was 42 days. Apple is efficient in the collection of its receivables.

a. True

b. False

20. Spring Market has an inventory turnover ratio of 15 times. Fall Market has a turnover of 14 times. Fall is more

effective in managing inventory.

a. True

b. False

21. The number of days’ sales in inventory is the same as a company’s accounting cycle.

a. True

b. False

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22. Solvency is the company’s ability to pay its current debts when they become due.

a. True

b. False

23. One measure of a company’s overall long-term financial health is the debt-to-equity ratio.

a. True

b. False

24. A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to

pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities.

a. True

b. False

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25. Solvency is concerned with the ability of a company to pay next year’s debts as they come due.

a. True

b. False

26. The denominator of a return ratio will be some measure of the company’s income for the period.

a. True

b. False

27. The income number used in the rate of return on assets is income after interest expense is added back.

a. True

b. False

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28. Because net income is on an after-tax basis, interest in the return on assets ratio must be placed on a before-tax basis.

a. True

b. False

29. The return on sales ratio is a variation of the profit margin ratio.

a. True

b. False

30. The concept of leverage refers to the practice of using borrowed funds and amounts received from preferred

stockholders in an attempt to earn an overall return that is higher than the cost of these funds.

a. True

b. False

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31. If a company must pay more for the amounts provided by creditors and preferred stockholders than it can earn overall,

as indicated by the return on assets, there will be favorable leverage.

a. True

b. False

32. A high P/E ratio always indicates that a stock is overpriced by the market.

a. True

b. False

33. The selection of a particular inventory valuation method has a significant effect on certain key ratios.

a. True

b. False

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34. Various organizations publish summaries of selected ratios organized by industry for a sample of U.S. companies.

a. True

b. False

35. The definition of a conglomerate is a company that operates in one industry and uses different inventory valuation

techniques.

a. True

b. False

36. Since inflation is an important consideration in analyzing financial statements, the FASB requires the submission of

all financial statements in an inflation-adjusted format to the SEC.

a. True

b. False

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37. Kingston Company’s accounts receivable turned over nine times during the year. This translates into strict adherence

of the company’s net/30 credit terms by Kingston‘s customers.

a. True

b. False

38. Since almost all debts require payment with quick assets, the quick ratio is more useful than the cash flow from

operations to current liabilities ratio.

a. True

b. False

39. Which of the following considerations is most important for a stockholder when evaluating whether to purchase stock

in a company?

a. Will earnings per share be distributed to stockholders?

b. Will the company earn a fair return on the amount invested by the stockholders?

c. Will the key ratios be reported on the balance sheet?

d. Will cash flows from operations exceed the amount of net income for the period?

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40. Which of the following is least useful in evaluating a company’s financial statements?

a. Comparison of the company’s current period data with accounting data from five years ago

b. Comparison with other companies in the same industry

c. Comparison with government economic data for the economy as a whole.

d. Comparison of the company’s current period data with that of the last year

41. Which of the following is the most serious limitation to financial statement analysis of publicly traded companies?

a. Some companies do not use GAAP.

b. Inflation can distort comparisons between years.

c. Some companies report nonoperating items such as extraordinary gains and losses, while others do not.

d. Different industries use different account names.

42. A banker is analyzing a company that operates in the petroleum industry. Which of the following might be a major

consideration in determining whether the company should receive a loan?

a. The petroleum industry suffers from political pressures concerning the selling price of its products.

b. Inflation has been high for several years in a row.

c. All companies in the petroleum industry use the same accounting principles.

d. The company has a large amount of interest payments related to many outstanding loans.

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43. A financial analyst is comparing two companies. Which of the following would cause major problems in the

evaluation process?

a. One company has a fiscal year that ends on October 31, while the other company has a fiscal year that ends on

August 31.

b. One company reported nonoperating activities, while the other company did not.

c. The companies operate in different industries.

d. Inflation has been low for the past several years.

44. Which of the following statements is true regarding valuation amounts on the balance sheet?

a. Stockholders’ equity reflects the amount the stockholders would receive upon liquidation.

b. Assets are recorded at current cost.

c. Stockholders’ equity reflects the current market value of the stock

d. A variety of assumptions are used in determining amounts reported on the balance sheet.

45. To review the current market price of the stock, one should review the

a. balance sheet.

b. income statement.

c. statement of cash flows.

d. None of these are correct.

46. Horizontal analysis is analysis

a. of dollar changes and percentage changes over two or more years.

b. in which all items are presented as a percentage of one selected item on a financial statement.

c. in which a statistic is calculated for the relationship between two items on a single financial statement or for two

items on different financial statements

d. of all ratios that increased or decreased over past accounting periods.

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47. Trend analysis is analysis

a. of dollar changes and percentage changes over several years.

b. in which all items are presented as a percentage of one selected item on a financial statement.

c. in which a statistic is calculated for the relationship between two items on a single financial statement or for two

items on different financial statements.

d. of all ratios that increased or decreased over past accounting periods.

48. The dollar change and percentage change in the Accounts Receivable account from 2017 to 2018 is calculated for

Allison Corporation. This is an example of

a. horizontal analysis.

b. vertical analysis.

c. profitability analysis.

d. solvency assessment.

49. Which of the following statements is true regarding horizontal analysis?

a. Horizontal analysis can only be used with balance sheet accounts.

b. Horizontal analysis can only be used with income statement accounts.

c. Horizontal analysis can only be used with retained earnings accounts.

d. Time series analysis is an advanced statistical technique for horizontal analysis.

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53. Refer to the data for Mother Nature Supplies.

Which of the following would not result from a vertical analysis of its balance sheet?

a. Accounts receivable increased $22,000, or 36.7%, during 2017.

b. Accounts receivable is five times larger than merchandise inventory in 2017.

c. Accounts receivable is 13.3% of total assets for 2017.

d. Merchandise inventory is 2.7% of total assets for 2018.

54. Refer to the data for Mother Nature Supplies.

Which of the following would result from a vertical analysis of its income statement?

a. Accounts receivable increased $22,000, or 57.9%, during 2018.

b. Gross profit is 57.9% of net sales for 2018.

c. Cost of goods sold increased $50,000, or 23.8%, during 2018.

d. Net sales increased $110,000, or 28.9%, during 2018.

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55. Refer to the data for Mother Nature Supplies.

Which of the following results would be found through a vertical analysis of the balance sheet or the income statement of

Mother Nature Supplies?

a. Accounts receivable increased $22,000 during 2018.

b. Total assets increased $70,000 during 2018.

c. Cost of goods sold increased $50,000, or 23.8%, during 2018.

d. Gross profit is 57.9% of net sales for 2018.

56. Which of the following statements is true regarding vertical analysis?

a. Common-size financial statements can be used to compare businesses of different sizes.

b. Vertical analysis can only be used with balance sheet accounts.

c. Vertical analysis can only be used with income statement accounts.

d. Vertical analysis can only be used with retained earnings accounts.