Indicate whether each of the following statements is true or false.
1> Some forms of financial statement analysis involve identifying changes in the same
item for the same company over a period of time.
2> Some forms of financial statement analysis involve comparing operations of
different companies in the same industry.
3> Vertical analysis is also called trend analysis.
4> Vertical analysis refers to studying the behavior of individual financial statement
items over several periods.
5> Horizontal analysis could be done using changes in the absolute dollar amount of an
item or trends in percentages.
According to the Sarbanes-Oxley Act, a company’s audit committee is responsible for
its system of internal controls.
The payback method shows how long will be required to recover the cost of an
investment in a capital asset.
Assuming that the number of units produced exceeds the number of units sold,
misclassifying period costs as product costs will overstate net income relative to what
net income would be without this error.
Indicate whether each of the following statements about financial statement analysis is
true or false.
1> Working capital measures a company’s immediate debt-paying ability.
2> Accounts receivable turnover is a direct measure of a company’s uncollectible
accounts expense.
3> Accounts receivable turnover is calculated by using the following formula: net credit
sales/average accounts receivable.
4> Net credit sales is sales on account plus sales returns and discounts.
5> The amount of average receivables can be calculated using the amount of
receivables shown on balance sheets for the current year and previous year.
Indicate whether each of the following statements about financial statement analysis is
true or false.
1> Working capital is a measure of the amount of current assets a company would have
left after paying its current liabilities.
2> If a transaction causes a company’s working capital to increase, the transaction
caused the company to become less liquid.
3> Interpretation of a company’s current ratio can be difficult because it is an absolute
amount.
4> The quick ratio is a more conservative variation of the current ratio.
5> The quick ratio is usually calculated by using the following equation: cash +
receivables + current marketable securities/current liabilities.
Indicate whether each of the following statements about financial statement analysis is
true or false.
1> The value of a corporation’s price-earnings ratio indicates how optimistic investors
are about a company’s growth potential.
2> The dividend yield ratio indicates the percentage of a company’s net income that it
paid out in dividends.
3> Conservatism produces a positive bias in a company’s financial statements and thus
in the ratios calculated from the financial statements.
4> Changes in general economic conditions (such as rate of inflation) can cause the
values for a company’s financial statement ratios to change from one year to the next.
5> Comparing financial statement ratios of companies in different industries can give
misleading results.
Financial analysis typically involves some form of comparison such as changes in the
same item over a number of years.
Upstream costs are classified as product costs and downstream costs are classified as
period costs for financial reporting purposes.
Vertical analysis always involves comparing financial statement elements over a span of
time.
Indicate whether each of the following statements about financial statement analysis is
true or false.
1> Ratio analysis may involve studying relationships between an item reported on the
balance sheet and another reported on the income statement.
2> Comparing sales in 2014 with sales for 2013 is a form of vertical analysis.
3> Comparing net income in 2014 with sales for 2014 is a form of horizontal analysis.
4> Liquidity ratios measure a company’s ability to generate cash flows in the short
term.
5> Working capital is calculated by using the following formula: current assets – current
liabilities.
Average costs are used for internal decision-making, but actual costs are required for
calculating cost of goods sold.
Just in time systems can be used by both manufacturing and merchandising companies.
An increase in an expense may be accompanied by an increase in a liability.
Indicate whether each of the following statements about responsibility centers is true or
false.
_____ a) A responsibility center controls identifiable revenue or expense items.
_____ b) To be designated as a responsibility center, a department must be a large
segment of an organization.
_____ c) A cost center generates revenues and expenses.
_____ d) Cost centers are commonly found at all levels of the organization chart.
_____ e) The manager of a profit center is evaluated based primarily on his/her ability
to control costs.
A cash flow that only occurs in equal amounts each year is referred to as:
A.a lump sum.
B.a perpetuity.
C.an annuity.
D.None of these.
How should the fresh start reorganization value normally be determined?
A.as the sum of current replacement cost of the company’s assets.
B.by discounting future cash flows for the entity that will emerge.
C.as the sum of the historical cost of net assets.
D.as the sum of the net realizable value of identifiable assets.
E.by adjusting current cash flows for the entity as it emerges from reorganization.
How are assets and liabilities valued on a Statement of Financial Affairs?
A.Option A
B.Option B
C.Option C
D.Option D
E.Option E
Dividends paid by a company are shown on the
A.income statement.
B.statement of changes in stockholders’ equity.
C.statement of cash flows.
D.statement of changes in stockholders’ equity and statement of cash flows.
Indicate whether each of the following statements is true or false.
_____ a) Return on investment often is used to evaluate investment centers within a
company.
_____ b) Residual income measures a manager’s ability to maximize earnings above a
target level.
_____ c) To calculate residual income, a company must first set a target or desired rate
of return on investment.
_____ d) Residual income is stated as a percentage or ratio amount.
_____ e) Suboptimization occurs when a departmental or division manager seeks to
benefit himself/herself at the expense of the company as a whole.
Alpha Company provided the following balance sheet for 2014:
What is the company’s plant assets to long-term liabilities ratio?
A.2.5
B.4.5
C.1.7
D.None of these answers is correct.
A Chapter 7 bankruptcy is a(n)
A.involuntary reorganization.
B.bankruptcy forced by a company’s creditors.
C.liquidation.
D.bankruptcy in which all creditors receive payment in full.
E.voluntary reorganization.
Horizontal analysis is also known as:
A.Liquidity analysis.
B.Trend analysis.
C.Revenue analysis.
D.Variance analysis.
Indicate whether each of the following statements about equity is true or false.
_______ a) Operating expenses reported on the income statement increase retained
earnings.
_______ b) Common Stock is a part of contributed or paid-in capital for a corporation.
_______ c) Retained earnings is increased by loans received from a bank.
_______ d) Dividends paid to stockholders decrease retained earnings.
_______ e) Owners’ equity is the residual interest in the company resulting from the
difference between assets and liabilities.
A company that uses a just in time inventory system:
A.has finished goods inventory on hand at all times in order to speed up shipments of
customer orders.
B.may find that having less inventory actually leads to increased customer satisfaction.
C.assesses its value chain to create new value-added activities.
D.adopts a systematic, problem-solving attitude.
The rate of return that equates the present value of cash inflows and outflows is the:
A.minimum rate of return.
B.internal rate of return.
C.desired rate of return.
D.hurdle rate.
How does the payment of cash dividends to stockholders affect the accounting
equation? Is it considered an asset source, asset use, or asset exchange transaction?
Chichester Company is considering investing in the following two mutually exclusive
projects:
Required:
1) Which project is more desirable strictly in terms of cash inflows? Why?
2) Compute the present value of each project’s cash inflows assuming the company’s
required rate of return is 10%.
3) What is the maximum amount Chichester should be willing to pay for each project?
4) Suppose each project costs $10,000. Which project(s) should be accepted?
How is accounting for a partnership different from accounting for a corporation?
What is an order for relief?
Bruce Company is considering replacing one of its delivery trucks. The truck in
question was purchased two years ago at a cost of $41,000. At the time of purchase the
truck was expected to have a $5,000 salvage value at the end of its six-year life. Given
the use of straight-line depreciation, the truck has a current book value of $29,000. If
sold today, the company could get $22,000 for the truck. It costs $20,000 per year to
operate the existing truck. The new truck would cost $46,000 and would cost only
$14,000 per year to operate. The new truck would be depreciated on a straight-line basis
over its four-year useful life to its expected salvage value of $10,000. The company’s
required rate of return is 14%. Ignore income taxes.
Required:
1) Identify the cash flows for each alternative by completing the following table:
2) The company’s objective is to minimize costs. Complete the following table to
determine whether the existing truck should be replaced. Ignore income taxes. What is
your recommendation?
When must Form 8-K be filed with the SEC?
What is meant by harmonization of accounting standards?
How is the presentation of an income statement during a reorganization different from a
normal income statement?
What is meant by the term ‘stakeholders?”