Name:
Class:
Date:
chapter 9
Indicate whether the statement is true or false.
1. Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive
guides for action.
a. True
b. False
2. The days’ sales in inventory are one means of expressing the relationship between net sales and accounts receivable.
a. True
b. False
3. “Working capital” is another term for the current ratio.
a. True
b. False
4. If a company has current assets totaling $56,000 and current liabilities totaling $40,500, then the company’s working
capital totals $15,500.
a. True
b. False
5. The rate earned on total common stockholders’ equity for most thriving businesses will be less than the return on total
assets.
a. True
b. False
6. The return on total assets is one of the measures of profitability.
a. True
b. False
7. The percentage analysis of the relationship of each component in a financial statement to a total within the statement is
referred as vertical analysis.
a. True
b. False
8. The ratio of current assets to current liabilities is referred to as the acid-test ratio.
a. True
b. False
9. The terms acid-test ratio and quick ratio refer to the same ratio, which measures the instant debt-paying ability of a
company.
a. True
b. False
10. If a company has issued only one class of stock, the earnings per share are determined by dividing net income by the
number of shares outstanding.
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Class:
Date:
chapter 9
a. True
b. False
11. If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.
a. True
b. False
12. A balance sheet shows cash, $75,000; marketable securities, $110,000; receivables, $90,000; and $225,000 of
inventories. Current liabilities are $200,000. The current ratio is 1.375 to 1.
a. True
b. False
13. Solvency analysis focuses on the ability of a business to make a profit.
a. True
b. False
14. The relationship of 120 to 100 can be expressed as 1.2, 1.2:1, or 120%.
a. True
b. False
15. The comparison of the financial data of a single company for two or more years is called horizontal analysis.
a. True
b. False
16. A company’s assets are composed of the following: Cash, $25,000; Receivables, $5,600; Marketable Securities,
$7,200; and Equipment, $65,000. The total of quick assets is $37,800.
a. True
b. False
17. Using vertical analysis of the income statement, a company’s net income as a percentage of net sales is 10%; therefore,
the income tax expenses as a percentage of net sales must be 90%.
a. True
b. False
18. The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred
to as the price-earnings ratio.
a. True
b. False
19. Current position analysis indicates a company’s ability to liquidate current liabilities.
a. True
b. False
20. In computing the return on total assets, interest expense is added to net income before dividing by average total assets.
Name:
Class:
Date:
chapter 9
a. True
b. False
21. Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the general
economic conditions.
a. True
b. False
22. The relationship of each asset item as a percentage of total assets is an example of horizontal analysis.
a. True
b. False
23. Statements in which all items are expressed as percentages with no dollar amounts are called common-sized
statements.
a. True
b. False
24. A decrease in the ratio of liabilities to stockholders‘ equity indicates an improvement in the margin of safety for
creditors.
a. True
b. False
25. The percentage analysis of increases and decreases in corresponding items in comparative financial statements is
referred to as horizontal analysis.
a. True
b. False
26. The Sarbanes-Oxley Act requires management to prepare a report on internal control.
a. True
b. False
27. Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for
sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year
indicates an improvement in the management of inventory.
a. True
b. False
28. If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding
year, there has been an acceleration in the collection of receivables.
a. True
b. False
29. The excess of current liabilities over quick assets is referred to as working capital.
a. True
b. False
Name:
Class:
Date:
chapter 9
30. If the current credit terms are 2/10, n/30 for Jones Inc., an accounts receivable turnover of 3 for the current year would
be considered normal.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
31. The return on stockholders’ equity is computed as _____.
a. income from operations divided by average operating assets
b. net income divided by preferred dividends
c. net income divided by average total stockholders’ equity
d. gross income divided by total retained earnings
32. Which of the following is true of liquidity?
a. Liquidity metrics include assets turnover, price-earnings ratio, and dividend yield.
b. Liquidity is the ability to convert assets to cash.
c. Liquidity is the ability of a company to generate net income related to its invested assets.
d. Liquidity metrics include debt ratio, times interest earned, and ratio of liabilities to stockholders’ equity.
33. Based on the following data, what is the quick ratio, rounded to one decimal place?
Accounts payable $ 32,000
Accounts receivable 64,000
Accrued liabilities 7,000
Cash 20,000
Intangible assets 40,000
Inventory 72,000
Long-term investments 100,000
Long-term liabilities 75,000
Marketable securities 35,000
Notes payable (short-term) 25,000
Property, plant, and equipment 625,000
Prepaid expenses 2,000
a. 2.1
b. 1.9
c. 1.4
d. 3.2
34. From the following data for the current year, compute the average accounts receivable.
Net sales on account during the year $ 420,500
Cost of merchandise sold during the year 362,000
Accounts receivable at the beginning of the year 36,120
Accounts receivable at the end of the year 33,200
Inventory at the beginning of the year 63,000
Inventory at the end of the year 92,000
a. 31,140
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Class:
Date:
chapter 9
b. 28,250
c. 34,660
d. 25,200
35. The relationship of $320,000 to $200,000, expressed as a ratio, is _____.
a. 3.8 to 2
b. 3.2 to 2
c. 3.5 to 2
d. 3.0 to 2
36. Which of the following is included in the computation of the quick ratio?
a. Accounts receivable
b. Supplies
c. Prepaid rent
d. Inventory
37. Profitability refers to the ability of the business to _____.
a. pay its current and noncurrent liabilities
b. earn a reasonable amount of income
c. manage its accounts receivable and inventory
d. provide owners with dividends
38. Based on the following data for the current year, determine the accounts receivable turnover.
Net sales on account during the year $ 550,000
Cost of merchandise sold during the year 350,000
Accounts receivable, beginning of year 35,000
Accounts receivable, end of year 25,000
Inventory, beginning of year 80,000
Inventory, end of year 125,000
a. 9.2
b. 11.7
c. 18.3
d. 7.5
39. An analysis in which all the components of an income statement are expressed as a percentage of net sales is called
_____.
a. liquidity analysis
b. horizontal analysis
c. vertical analysis
d. solvency analysis
40. Transic Corporation has the following financial data for 20Y7 and 20Y8.
20Y8 20Y7
ASSETS
Current Assets:
Name:
Class:
Date:
chapter 9
Cash $ 48,000 $ 14,000
Marketable Securities 9,000 13,000
Accounts Receivable 35,000 24,000
Other Current Assets 15,000 18,000
Total Current Assets 107,000 69,000
Fixed Assets (net) 140,000 130,000
Total Assets $247,000 $199,000
LIABILITIES
Current Liabilities $ 72,000 $ 52,000
Long-term Liabilities 50,000 37,000
Total Liabilities $122,000 $ 89,000
Total Stockholders’ Equity $125,000 $110,000
Total Liabilities And Stockholders’ Equity $247,000 $199,000
Based on Transic’s current ratio, which of the following statements regarding the company is true?
a. Transic’s current ratio has decreased, indicating that the company is in a more favorable position to obtain short-
term credit than in 20Y7.
b. Transic’s current ratio has increased, indicating that the company is in a more favorable position to obtain short-
term credit than in 20Y7.
c. Transic’s current ratio has increased, indicating that the company is in a less favorable position to obtain short-term
credit than in 20Y7.
d. Transic’s current ratio has decreased, indicating that the company is in a less favorable position to obtain short-
term credit than in 20Y7.
41. The balance sheets at the end of each of the first two years of operations indicate the following:
20Y8 20Y7
Total current assets $600,000 $560,000
Total investments 60,000 40,000
Total property, plant, and equipment 900,000 700,000
Total current liabilities 125,000 80,000
Total long-term liabilities 350,000 250,000
Preferred 9% stock, $100 par 100,000 100,000
Common stock, $10 par 600,000 600,000
Paid-in capital in excess of par—common stock 60,000 60,000
Retained earnings 325,000 210,000
Based on the preceding information, if net income is $130,000 and interest expense is $40,000 for 20Y8, what is the
return on common stockholders’ equity for 20Y8 (rounded to one decimal place)?
a. 12.3%
b. 17.4%
c. 13.0%
d. 14.0%
42. Using the following data for the current year, determine the accounts receivable turnover.
Net sales on account during the year $ 457,065
Cost of merchandise sold during the year 461,280
Accounts receivable, beginning of year 75,290
Name:
Class:
Date:
chapter 9
Accounts receivable, end of year 26,280
Inventory, beginning of year 185,000
Inventory, end of year 169,570
a. 7
b. 8
c. 10
d. 9
43. From the following data, calculate the amount of working capital.
Accounts payable $ 58,000
Accounts receivable 47,000
Accrued liabilities 3,000
Cash 29,560
Intangible assets 57,000
Inventory 48,000
Long-term investments 127,000
Long-term liabilities 41,000
Marketable securities 32,000
Notes payable (short-term) 28,000
Property, plant, and equipment 784,000
Prepaid expenses 7,500
a. $98,060
b. $72,000
c. $75,060
d. $77,060
44. The ability of a business to earn a reasonable amount of income is referred to as the factor of _____.
a. profitability
b. wealth
c. leverage
d. solvency
45. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as
_____.
a. solvency and profitability
b. solvency and liquidity
c. solvency and equity
d. solvency and leverage
46. Sarbanes-Oxley Act of 2002 requires which of the following report to be prepared by the management of the
company?
a. A report identifying the competency of the company’s board of directors
b. A report assessing the market value of the company’s current stock price
c. A report showing management’s assessment of internal control
d. A report evaluating the probability that the company will remain in business
47. Which one of the following is not a characteristic generally evaluated in ratio analysis?
Name:
Class:
Date:
chapter 9
a. Profitability
b. Liquidity
c. Solvency
d. Marketability
48. _____ is a solvency metric and is computed as total assets minus total liabilities.
a. Ratio of fixed assets to long-term liabilities
b. Debt ratio
c. Asset turnover
d. Net asset
49. Based on the following data for the current year, what is the days’ sales in inventory (rounded to the next whole day)?
Net sales on account during the year $1,204,000
Cost of merchandise sold during the year 630,000
Accounts receivable, beginning of year 75,000
Accounts receivable, end of year 85,000
Inventory, beginning of year 81,600
Inventory, end of year 98,600
a. 58 days
b. 30 days
c. 48 days
d. 53 days
50. Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or
bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term
basis?
a. Ratio of net sales to assets
b. Rate earned on stockholders’ equity
c. Number of days’ sales in receivables
d. Ratio of fixed assets to long-term liabilities
51. From the given data for the current year, determine the inventory turnover.
Net sales on account during the year $ 316,780
Cost of merchandise sold during the year 688,500
Accounts receivable, beginning of year 47,000
Accounts receivable, end of year 62,000
Inventory, beginning of year 157,000
Inventory, end of year 149,000
a. 3.8
b. 5.1
c. 4.5
d. 2.7
52. A company’s ability to pay its current liabilities is called _____.
a. trend analysis
b. global analysis
Name:
Class:
Date:
chapter 9
c. current position analysis
d. inventory analysis
53. The following is an example of _____.
Increase (Decrease)
Current Year Prior Year Amount Percent
Current assets $ 420,000 $ 500,000 $(80,000) (16%)
Fixed assets 1,530,000 1,500,000 30,000 2%
a. net assets analysis
b. horizontal analysis
c. marketability analysis
d. regression analysis
54. Based on the following data for the current year, compute the inventory turnover.
Net sales on account during the year $ 585,000
Cost of merchandise sold during the year 380,000
Accounts receivable, beginning of year 47,000
Accounts receivable, end of year 36,000
Inventory, beginning of year 92,000
Inventory, end of year 113,000
a. 1.1
b. 1.9
c. 3.7
d. 2.9
55. The percentage change in long-term liabilities between two balance sheet dates is an example of _____.
a. profitability analysis
b. solvency analysis
c. horizontal analysis
d. vertical analysis
56. The percentage analysis of accounts payable to total liabilities is an example of _____.
a. liquidity analysis
b. current position analysis
c. vertical analysis
d. component analysis
57. The balance sheets at the end of each of the first two years of operations indicate the following:
20Y8 20Y7
Total current assets $600,000 $560,000
Total investments 60,000 40,000
Total property, plant, and equipment 900,000 700,000
Total current liabilities 125,000 80,000
Total long-term liabilities 350,000 250,000
Preferred 9% stock, $100 par 100,000 100,000
Name:
Class:
Date:
chapter 9
Common stock, $10 par 600,000 600,000
Paid-in capital in excess of par—common stock 60,000 60,000
Retained earnings 325,000 210,000
Based on the preceding information, if net income is $130,000 and interest expense is $40,000 for 20Y8, what is the
return on stockholders’ equity for 20Y8 (rounded to one decimal place)?
a. 16.5%
b. 12.7%
c. 12.0%
d. 13.2%
58. The balance sheet and income statement for the year ended 20Y8 indicate the following:
Bonds payable, 10% (issued 20X8, due 2022) $1,200,000
Preferred 5% stock, $100 par (no change during year) 350,000
Common stock, $50 par (no change during year) 2,100,000
Income before income tax for year 3100,000
Income tax for year 72,000
Common dividends paid 58,000
Preferred dividends paid 16,300
Based on the data presented above, what is the times interest earned?
a. 2.6
b. 0.7
c. 3.6
d. 2.9
59. A basic analytical method in which all items are expressed only in relative terms (percentages of a common base),
often useful for comparing one company with another or for comparing a company with industry averages, is a _____.
a. profitability analysis
b. percentage statement
c. horizontal analysis
d. common-sized statement
60. Transic Corporation has the following financial data for 20Y7 and 20Y8.
20Y8 20Y7
ASSETS
Current Assets:
Cash $ 48,000 $ 14,000
Marketable Securities 9,000 13,000
Accounts Receivable 35,000 24,000
Other Current Assets 15,000 18,000
Total Current Assets 107,000 69,000
Fixed Assets (net) 140,000 130,000
Total Assets $247,000 $199,000
LIABILITIES
Current Liabilities $ 72,000 $ 52,000
Long-term Liabilities 50,000 37,000
Name:
Class:
Date:
chapter 9
Total Liabilities $122,000 $ 89,000
Total Stockholders’ Equity $125,000 $110,000
Total Liabilities And Stockholders’ Equity $247,000 $199,000
What is Transic’s current ratio for 20Y8?
a. 1.49
b. 2.14
c. 0.21
d. 0.88
61. The balance sheets at the end of each of the first two years of operations indicate the following:
20Y8 20Y7
Total current assets $600,000 $560,000
Total investments 60,000 40,000
Total property, plant, and equipment 900,000 700,000
Total current liabilities 125,000 80,000
Total long-term liabilities 350,000 250,000
Preferred 9% stock, $100 par 100,000 100,000
Common stock, $10 par 600,000 600,000
Paid-in capital in excess of par—common stock 60,000 60,000
Retained earnings 325,000 210,000
Based on the above information, if net income is $130,000 and interest expense is $40,000 for 20Y8, what are the
earnings per share on common stock for 20Y8 (round to two decimal places)?
a. $2.17
b. $2.32
c. $2.68
d. $2.02
62. Garnet Company reported the following on its income statement:
Income before income taxes $450,000
Income tax expense 52,000
Net income $398,000
An analysis of the income statement revealed that interest expense was $50,000. Garnet Company’s times interest earned
are earned was _____.
a. 7.8 times
b. 11 times
c. 10 times
d. 8.1 times
63. A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability. As a result
of this transaction, the current ratio and working capital will _____.
a. remain the same and decrease, respectively
b. increase and remain the same, respectively
c. both increase
d. both decrease