CHAPTER 9: FINANCIAL STATEMENT ANALYSIS
1. The percentage analysis of increases and decreases in corresponding items in comparative
financial statements is referred to as horizontal analysis.
a. True
b. False
2. 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
3. The relationship of each asset item as a percent of total assets is an example of horizontal
analysis.
a. True
b. False
4. Statements in which all items are expressed as percentages with no dollar amounts are called
common-sized statements.
a. True
b. False
5. The comparison of the financial data of a single company for two or more years is called
horizontal analysis.
a. True
b. False
6. 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
7. The relationship of 120 to 100 can be expressed as 1.2, 1.2:1, or 120%.
a. True
b. False
Chapter 9: Financial Statement Analysis
8. Solvency analysis focuses on the ability of a business to make a profit.
a. True
b. False
9. “Working capital” is another term for the current ratio.
a. True
b. False
10. Current position analysis indicates a company’s ability to liquidate current liabilities.
a. True
b. False
11. 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
12. 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
13. The excess of current liabilities over quick assets is referred to as working capital.
a. True
b. False
14. 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
Chapter 9: Financial Statement Analysis
15. 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
16. The ratio of current assets to current liabilities is referred to as the acid-test ratio.
a. True
b. False
17. If a firm has an quick ratio of 1, the subsequent payment of an account payable will cause the
ratio to increase.
a. True
b. False
18. A company’s assets are comprised 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
19. 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
20. The number of days’ sales in inventory is one means of expressing the relationship between net
sales and accounts receivable.
a. True
b. False
21. 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
Chapter 9: Financial Statement Analysis
22. A decrease in the ratio of liabilities to stockholders’ equity indicates an improvement in the
margin of safety for creditors.
a. True
b. False
23. In computing the rate earned on total assets, interest expense is added to net income before
dividing by average total assets.
a. True
b. False
24. The rate earned on total common stockholders’ equity for most thriving businesses will be less
than the rate earned on total assets.
a. True
b. False
25. If a company has issued only one class of stock, the earnings per share is determined by
dividing net income by the number of shares outstanding.
a. True
b. False
26. The rate earned on total assets is one of the measures of profitability.
a. True
b. False
27. 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
28. 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
Chapter 9: Financial Statement Analysis
29. Interpreting financial analysis should be considered in light of conditions peculiar to the
industry and the general economic conditions.
a. True
b. False
30. The effects of differences in accounting methods are of little importance when analyzing
comparable data from competing businesses.
a. True
b. False
31. The percentage analysis of increases and decreases in related items in comparative financial
statements is called:
a. vertical analysis.
b. solvency analysis.
c. profitability analysis.
d. horizontal analysis.
32. The percentage change in long-term liabilities between two balance sheet dates is an example
of:
a. vertical analysis.
b. solvency analysis.
c. profitability analysis.
d. horizontal analysis.
33. The percent of fixed assets to total assets is an example of:
a. vertical analysis.
b. solvency analysis.
c. profitability analysis.
d. horizontal analysis.
Chapter 9: Financial Statement Analysis
34. What type of analysis is indicated by the following?
Increase (Decrease)
2013 2012 Amount Percent
Current assets $ 380,000 $ 500,000 $(120,000) (24%)
Fixed assets 1,680,000 1,500,000 180,000 12%
a. Vertical analysis
b. Horizontal analysis
c. Liquidity analysis
d. Common-size analysis
35. The relationship of $320,000 to $200,000, expressed as a ratio, is:
a. 3.0 to 2.
b. 3.8 to 2.
c. 3.2 to 2.
d. 3.5 to 2.
36. An analysis in which all the components of an income statement are expressed as a percentage
of net sales is called:
a. vertical analysis.
b. horizontal analysis.
c. liquidity analysis.
d. solvency analysis.
37. Basic analytical method in which all items are expressed only in relative terms (percentages of a
common base) and are often useful for comparing one company with another or for comparing
a company with industry averages are:
a. horizontal analysis.
b. percentage statements.
c. profitability analysis.
d. common-sized statements.
38. 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 leverage.
b. solvency and profitability.
c. solvency and liquidity.
d. solvency and equity.
Chapter 9: Financial Statement Analysis
39. The ability of a business to earn a reasonable amount of income is referred to as the factor of:
a. leverage.
b. profitability.
c. wealth.
d. solvency.
40. Profitability refers to the ability of the business to:
a. earn a reasonable amount of income.
b. provide owners with dividends.
c. pay its current and noncurrent liabilities.
d. manage its accounts receivable and inventory.
41. Which of the following is an analysis used in assessing solvency?
a. Accounts receivable analysis
b. Fixed assets turnover
c. Earnings per share
d. P/E ratio
42. The current ratio is computed by dividing current assets by .
a. fixed assets
b. inventories
c. current liabilities
d. accounts receivable
43. The ability to convert assets into cash is called .
a. Solvency
b. Profitability
c. Working capital
d. Liquidity
44. Which of the following measures the liquidity position of a corporation?
a. Earnings per share
b. Inventory turnover
c. Current ratio
d. Number of times interest charges earned
Chapter 9: Financial Statement Analysis
45. Univeo Company reported the following on its income statement:
Income before income taxes
$210,000
Income tax expense
60,000
Net income
$150,000
An analysis of the income statement revealed that interest expense was $35,000. Univeo
Company’s number of times interest charges are earned was:
a. 7 times.
b. 7.7 times.
c. 4.1 times.
d. 4 times.
46. A company with working capital of $600,000 and a current ratio of 3.25 pays a $200,000 short-
term liability. The amount of working capital immediately after payment is:
a. $400,000.
b. $600,000.
c. $800,000.
d. $200,000.
47. 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. both decrease.
b. both increase.
c. increase and remain the same, respectively.
d. remain the same and decrease, respectively.
48. The ratio of the sum of cash and other current assets that can be easily converted to cash to
current liabilities is called as:
a. price-earnings ratio.
b. earnings ratio.
c. quick ratio.
d. current ratio.
49. Which of the following is included in the computation of the quick ratio?
a. Prepaid rent
b. Accounts receivable
c. Inventory
d. Supplies
Chapter 9: Financial Statement Analysis
50. Which of the following is included in the computation of the quick ratio?
a. Net Sales
b. Working capital
c. Average daily sales
d. Accounts receivable
Transic Corporation has the following financial data for 2015 and 2016.
2016
ASSETS
Current Assets:
Cash
$ 48,000
Marketable Securities
9,000
Accounts Receivable
35,000
Other Current Assets
15,000
Total Current Assets
107,000
Fixed Assets (net)
140,000
Total Assets
$247,000
Liabilities
Current Liabilities
$ 72,000
Long-term Liabilities
50,000
Total Liabilities
$122,000
Total Stockholders’ Equity
$125,000
Total Liabilities And Stockholders’ Equity
$247,000
51. What is Transic’s working capital for 2016?
a. $35,000
b. $90,000
c. $125,000
d. $18,000
52. What is Transic’s current ratio for 2016?
a. 2.14
b. 0.88
c. 0.21
d. 1.49
Chapter 9: Financial Statement Analysis
53. Based on Washington’s current ratio, which of the following statements is true regarding the
company?
a. Washington’s current ratio has increased, indicating that the company is in a more favorable
position to obtain short-term credit than in 2015.
b. Washington’s current ratio has decreased, indicating that the company is in a less favorable
position to obtain short-term credit than in 2015.
c. Washington’s current ratio has increased, indicating that the company is in a less favorable
position to obtain short-term credit than in 2015.
d. Washington’s current ratio has decreased, indicating that the company is in a more favorable
position to obtain short-term credit than in 2015.
54. Based on the following data for the current year, determine the accounts receivable turnover.
Net sales on account during the year
$545,500
Cost of merchandise sold during the
363,000
Accounts receivable, beginning of
65,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
117,000
Inventory, end of year
a. 10.9
138,000
b. 8.4
c. 5.5
d. 1.3
55. 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
a. 11.7
125,000
b. 9.2
c. 18.3
d. 7.5
Chapter 9: Financial Statement Analysis
56. Based on the following data for the current year, compute the number of days’ sales in accounts
receivable.
Net sales on account during the year
$820,000
Cost of merchandise sold during the year
385,000
Accounts receivable, beginning of year
38,000
Accounts receivable, end of year
32,000
Inventory, beginning of year
87,000
Inventory, end of year
a. 31.2
116,000
b. 14.2
c. 16.9
d. 15.6
57. Based on the following data for the current year, determine the number of days’ sales in
accounts receivable.
Net sales on account during the year
$1,080,000
Cost of merchandise sold during the year
750,000
Accounts receivable, beginning of year
46,500
Accounts receivable, end of year
36,500
Inventory, beginning of year
170,000
Inventory, end of year
232,000
a.
13.79
b.
11.3
c.
14.03
d.
12.5
58. Based on the following data for the current year, determine the inventory turnover.
Net sales on account during the year
$515,700
Cost of merchandise sold during the year
440,000
Accounts receivable, beginning of year
58,000
Accounts receivable, end of year
43,000
Inventory, beginning of year
118,000
Inventory, end of year
142,000
a.
3.4
b.
1.7
c.
2
d.
1.1