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Chapter 9
1. Solvency analysis focuses on the ability of a business to make a profit.
a.
True
b.
False
2. The percentage analysis of increases and decreases in corresponding items in comparative financial statements is
referred to as horizontal analysis.
a.
True
b.
False
3. The percentage analysis of the relationship of each component in a financial statement to a total within the statement is
referred as vertical analysis.
Chapter 9
a.
True
b.
False
4. The relationship of each asset item as a percent of total assets is an example of horizontal analysis.
a.
True
b.
False
5. Statements in which all items are expressed as percentages with no dollar amounts are called common-sized statements.
a.
True
b.
False
Chapter 9
6. The comparison of the financial data of a single company for two or more years is called horizontal analysis.
a.
True
b.
False
7. 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
Chapter 9
8. The relationship of 120 to 100 can be expressed as 1.2, 1.2:1, or 120%.
a.
True
b.
False
9. “Working capital” is another term for the current ratio.
a.
True
b.
False
Chapter 9
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
Chapter 9
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
Chapter 9
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
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
Chapter 9
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 a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.
a.
True
b.
False
Chapter 9
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
Chapter 9
20. The 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
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 return 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 return on total
assets.
Chapter 9
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 return on total assets is one of the measures of profitability.
a.
True
b.
False
Chapter 9
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
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 Sarbanes-Oxley Act requires management to prepare a report on internal control.
a.
True
b.
False
Chapter 9
31. Which one of the following is not a characteristic generally evaluated in ratio analysis?
a.
Profitability
b.
Liquidity
c.
Solvency
d.
Marketability
32. 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.
Chapter 9
33. 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.
34. 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.
Chapter 9
d.
Liquidity metrics include debt ratio, times interest earned, and ratio of liabilities to stockholders' equity.
35. 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.
36. The percentage analysis of increases and decreases in related items in comparative financial statements is called:
Chapter 9
a.
profitability analysis.
b.
vertical analysis.
c.
horizontal analysis.
d.
solvency analysis.
37. 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.
Chapter 9
38. 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.
39. 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
Chapter 9
40. 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.
41. 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.
