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45. Creditors would like the debt-to-equity ratio to be _______, indicating that stockholders have financed most of the
assets of the firm.
46. ____________________ represents the percentage of each sales dollar that remains after all expenses have been
subtracted.
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47. The ratios that allow investors, creditors, and managers to evaluate the extent to which invested funds are being used
efficiently are called ____________.
48. A company measures how efficiently it is using its assets by calculating the _______________.
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49. The ___________________ is calculated by dividing the market price per share by earnings per share.
50. Investors who prefer gains through appreciation will generally prefer a ___________ dividend payout ratio.
51. Which of the following analysis are the two major techniques of common-size analysis?
a. Standard analysis and regression analysis
b. Receivable analysis and profitability analysis
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c. Linear analysis and budget analysis
d. Horizontal analysis and vertical analysis
52. Which of the following is also referred to as horizontal analysis?
a. Progressive analysis
b. Variance analysis
c. Trend analysis
d. Budget analysis
53. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time
a. that has been arranged from the highest amount to the lowest amount.
b. that has been arranged from lowest amount to the highest amount.
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c. to determine which items are in error.
d. to determine the amount and/or percentage increase or decrease that has taken place.
54. Which of the following expresses each item as a percentage of some prior-period amount?
a. Standard analysis
b. Ratio analysis
c. Vertical analysis
d. Horizontal analysis
55. Which of the following items is generally used as a base in vertical analysis to express as its percentage the line items
on the balance sheet?
a. Owner’s equity
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b. Depreciation expense
c. Total assets
d. Cost of goods sold
56. In vertical analysis, line items on the income statement are generally expressed as a percentage of
a. net income.
b. net sales.
c. cost of goods sold.
d. total assets.
57. Which of the following analysis expresses each item in a financial statement as a percent of a base amount?
a. Variance analysis
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b. Standard analysis
c. Vertical analysis
d. Horizontal analysis
58. In vertical analysis
a. a base amount is required.
b. a base amount is optional.
c. the same base is used across all financial statements analyzed.
d. the results of the horizontal analysis are necessary inputs for performing the analysis.
59. Which of the following types of analysis is useful in computing the relationships among the components of the
financial statements for the same period?
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a. Vertical analysis
b. Horizontal analysis
c. Operational analysis
d. Ratio analysis
60. Horizontal analysis is analysis
a. of 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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61. Which of the following statements is true of trend analysis?
a. It tracks the percentage changes of items in financial statements over several years.
b. It computes percentages by dividing one account or line-item amount by another.
c. It expresses the line item as a percentage of some other line item for the same period.
d. It measure the ability of a company to meet its current obligations.
62. If sales revenue in Year 1 equals $500,000, Year 2 equals $510,000, and Year 3 equals $540,000, the percentage to be
assigned for Year 3 in a trend analysis, assuming that Year 1 is the base year, is:
a. 100%.
b. 159%.
c. 125%.
d. 108%.
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63. Assume the following sales data for a company:
Year 7 $1,000,000
Year 6 900,000
Year 5 750,000
Year 1 500,000
If Year 1 is the base year, what is the percentage increase in sales from Year 1 to Year 5?
a. 100%
b. 180%
c. 50%
d. 55.5%
64. A ratio analysis of financial statements indicates:
a. the investment opportunities available to an organization.
b. the ability of an organization to meet short-term obligations.
c. the competitiveness of an organization.
d. the marketability of the finished product of an organization.
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65. Many industrial averages and figures are published in the each of the following except?
a. Key Business Ratios, Dun and Bradstreet
b. The Almanac of Business and Industrial Financial Ratios, Prentice-Hall
c. Annual Random Studies, Robert Morris Associates
d. Standard and Poor‘s Industry Survey, Standard & Poor‘s
e. Dow Jones-Irwin Business and Investment Almanac, Dow Jones-Irwin
66. For meaningful analysis, ratios are best compared with
a. historical company averages.
b. industrial averages.
c. historical company averages and industrial averages.
d. no standard.
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67. Which of the following ratios is used by short-term creditors to assess the debt-paying ability of a company?
a. Return on sales ratio
b. Current ratio
c. Inventory turnover ratio
d. Equity ratio
68. Which of the following is a common measure of the liquidity of a company?
a. The profit ratio
b. The quick ratio
c. The growth ratio
d. The equity ratio
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69. Which of the following categories of ratios includes the current ratio?
a. Liquidity ratios
b. Leverage ratios
c. Debt ratios
d. Valuation ratios
70. The quick ratio
a. is used to quickly determine a company’s leverage and long-term debt-paying ability.
b. relates cash, marketable securities, and net receivables to current liabilities.
c. is calculated by taking one item from the income statement and one item from the balance sheet.
d. is the same as the current ratio except it is rounded to the nearest whole percent.
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71. Which of the following characteristics of a company’s financial position is analyzed by accounts receivable turnover
and inventory turnover ratios?
a. The marketability
b. The profitability
c. The growth prospects
d. The liquidity
72. A high accounts receivable turnover ratio indicates
a. customers are making payments quickly.
b. a large portion of the company’s sales are on credit.
c. many customers are not paying their receivables.
d. the company’s sales have increased.
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73. Liquidity ratios include the _____.
a. price-earnings ratio
b. debt-equity ratio
c. dividend payout ratio
d. inventory turnover ratio
74. The ratios that are used to determine a company’s short-term debt paying ability are
a. asset turnover, times interest earned, current ratio, and account receivable turnover.
b. times interest earned, inventory turnover, current ratio, and accounts receivable turnover.
c. times interest earned, quick ratio, current ratio, and inventory turnover.
d. current ratio, quick ratio, accounts receivable turnover, and inventory turnover.
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75. Swanson Company had $250,000 of current assets and $90,000 of current liabilities before borrowing $60,000 from
the bank with a 3-month note payable. What effect did the borrowing transaction have on Swanson Company’s current
ratio?
a. The ratio remained unchanged.
b. The change in the current ratio cannot be determined.
c. The ratio decreased.
d. The ratio increased.
76. If equal amounts are added to the numerator and the denominator of a current ratio equal to one, the ratio will
a. increase.
b. decrease.
c. remain the same.
d. equal zero.
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77. Which of the following statements is true about the quick ratio?
a. The quick ratio does not include inventory as part of the numerator.
b. The quick ratio does not include accounts payable in the denominator.
c. The quick ratio is an approximation of the debt ratio.
d. The quick ratio reflects the dividends paid by a company.
78. Which of the following formulas is used to calculate the inventory turnover ratio?
a. Cost of Goods Sold / Ending Inventory
b. Sales / Beginning Inventory
c. Cost of Goods Sold / Average Inventory
d. Sales / Total Inventory
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79. Which of the following ratios signal success in the just-in-time (JIT) manufacturing environment?
a. A low profitability ratio
b. A high inventory turnover ratio
c. A low equity ratio
d. A high times-interest-earned ratio
80. An aircraft company would most likely have
a. a high inventory turnover.
b. a low profit margin.
c. high volume.
d. a low inventory turnover.
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81. Which of the following is an example of liquidity analysis?
a. Bonds payable are divided by total liabilities and stockholders’ equity.
b. Current assets are divided by current liabilities.
c. Net income is divided by the number of shares of stock outstanding.
d. Net income is divided by total assets.
82. The liquidity position of a company is analyzed using its _____.
a. times-interest-earned ratio
b. inventory turnover ratio
c. dividend yield ratio
d. debt-to-equity ratio
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83. The Gift Shoppe’s inventory turned over five times during the year. Similar gift shops have an inventory turnover
equal to ten times per year. What explains the Gift Shoppe’s inventory management?
a. The Gift Shoppe sold too much inventory during the year.
b. The Gift Shoppe needs to increase sales and decrease the amount of goods on hand.
c. The Gift Shoppe is performing twice as well as it competitors.
d. The Gift Shoppe should increase the amount of goods on hand to accommodate the additional inventory demand.
84. The quick ratio differs from the current ratio in that it
a. represents the amount of cash on hand instead of the amount of working capital.
b. is a stricter test of a company’s ability to pay its current debts as they are due.
c. excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and
possible default on payment.
d. is more difficult to calculate.