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Financial Analysis: The Big Picture
13-21
99. A balance sheet that displays only component percentages is called a ________ balance
sheet.
a. condensed
b. common size
c. comparative
d. trendy
100. Vertical analysis is a technique that expresses each item in a financial statement
a. in dollars and cents.
b. as a percent of the item in the previous year.
c. as a percent of a base amount.
d. starting with the highest value down to the lowest value.
101. 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.
102. The best way to study the relationship of the components within a financial statement is to
prepare
a. common size statements.
b. a trend analysis.
c. profitability analysis.
d. ratio analysis.
103. In performing a vertical analysis, the base for prepaid expenses is
a. total current assets.
b. total assets.
c. total liabilities.
d. prepaid expenses in a previous year.
104. In performing a vertical analysis, the base for sales revenues on the income statement is
a. net sales.
b. sales revenue.
c. net income.
d. cost of goods available for sale.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-22
105. In performing a vertical analysis, the base for sales returns and allowances is
a. sales revenue.
b. sales discounts.
c. net sales.
d. total revenues.
106. In performing a vertical analysis, the base for cost of goods sold is
a. total selling expenses.
b. net sales.
c. total revenues.
d. total expenses.
107. Salamagundi, Inc. has the following Income Statement (in millions):
SALAMAGUNDI, INC.
Income Statement
For the Year Ended December 31, 2017
Net Sales $160
Cost of Goods Sold 100
Gross Profit 60
Operating Expenses 40
Net Income $ 20
Using vertical analysis, what percentage is assigned to net sales?
a. 160%
b. Can’t be computed.
c. 60%
d. 100%
108. Salamagundi, Inc. has the following Income Statement (in millions):
SALAMAGUNDI, INC.
Income Statement
For the Year Ended December 31, 2017
Net Sales $160
Cost of Goods Sold 100
Gross Profit 60
Operating Expenses 40
Net Income $ 20
Using vertical analysis, what percentage is assigned to gross profit?
a. 37.5%
b. 100%
c. 60%
d. 62.5%
Financial Analysis: The Big Picture
13-23
109. Cochran Corporation, Inc. has the following income statement (in millions):
COCHRAN CORPORATION, INC.
Income Statement
For the Year Ended December 31, 2017
Net Sales $240
Cost of Goods Sold 150
Gross Profit 90
Operating Expenses 65
Net Income $ 25
Using vertical analysis, what percentage is assigned to cost of goods sold?
a. 37%
b. 63%
c. 100%
d. 50%
110. Cochran Corporation, Inc. has the following income statement (in millions):
COCHRAN CORPORATION, INC.
Income Statement
For the Year Ended December 31, 2017
Net Sales $240
Cost of Goods Sold 150
Gross Profit 90
Operating Expenses 65
Net Income $ 25
Using vertical analysis, what percentage is assigned to net income?
a. 100%
b. 90%
c. 10%
d. 17%
111. Given the following data for the King Company:
Current liabilities $ 400
Long-term debt 480
Common stock 700
Retained earnings 920
Total liabilities & stockholders’ equity $2,500
How would common stock appear on a common size balance sheet?
a. 20%
b. 70%
c. 28%
d. 30%
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-24
112. The following schedule is a display of what type of analysis?
Amount Percent
Current assets $100,000 25%
Property, plant, and equipment 300,000 75%
Total assets $400,000 100%
a. Horizontal analysis
b. Differential analysis
c. Vertical analysis
d. Ratio analysis
113. In vertical analysis, the base amount for salaries and wages expense is generally
a. net sales.
b. salary & wages expense in a previous year.
c. gross profit.
d. net income.
114. Which one of the following is not a characteristic generally evaluated in ratio analysis?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency
115. Ratios are most useful in identifying
a. trends.
b. differences.
c. causes.
d. relationships.
116. Short-term creditors are usually most interested in assessing
a. solvency.
b. liquidity.
c. marketability.
d. profitability.
117. A common measure of liquidity is
a. return on assets.
b. accounts receivable turnover.
c. profit margin.
d. debt to equity.
Financial Analysis: The Big Picture
13-25
118. A common measure of profitability is the
a. current ratio.
b. times interest earned.
c. return on common stockholders’ equity.
d. debt to assets.
119. A common measure of long-term solvency is
a. the debt to assets ratio.
b. the current ratio.
c. the asset turnover.
d. inventory turnover.
120. Return on assets is most closely related to
a. profit margin and debt to assets ratio.
b. profit margin and asset turnover.
c. times interest earned and debt to stockholders’ equity.
d. profit margin and free cash flow.
121. Return on common stockholders’ equity is most closely related to
a. gross profit rate and operating expenses to sales ratio.
b. profit margin and free cash flow.
c. times interest earned and debt to stockholders’ equity ratio.
d. return on asset and leverage (debt to assets ratio).
122. Long-term creditors are usually most interested in evaluating
a. liquidity.
b. marketability.
c. profitability.
d. solvency.
123. Which one of the following would be considered a long-term solvency ratio?
a. Accounts receivable turnover
b. Return on assets
c. Current ratio
d. Debt to assets ratio
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-26
124. Stockholders are most interested in evaluating
a. liquidity.
b. solvency.
c. profitability.
d. marketability.
125. In ratio analysis, the ratios are never expressed as a
a. rate.
b. logarithm.
c. percentage.
d. simple proportion.
126. The current ratio is
a. calculated by dividing current liabilities by current assets.
b. used to evaluate a company's liquidity and short-term debt paying ability.
c. used to evaluate a company's solvency and long-term debt paying ability.
d. calculated by subtracting current liabilities from current assets.
127. The current ratio is a
a. liquidity ratio.
b. profitability ratio.
c. long-term solvency ratio.
d. cash flow ratio.
128. A company with $60,000 in current assets and $35,000 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.
129. The accounts receivable turnover and inventory turnover are used to analyze
a. long-term solvency.
b. profitability.
c. liquidity.
d. leverage.
Financial Analysis: The Big Picture
13-27
130. Winsor Clothing Store had a balance in the Accounts Receivable account of $760,000 at
the beginning of the year and a balance of $840,000 at the end of the year. Net credit
sales during the year amounted to $7,200,000. The average collection period of the
accounts receivable in terms of days was
a. 30 days.
b. 81.1 days.
c. 42.4 days.
d. 40.6 days.
131. Bill's Dollar Store had a balance in the Accounts Receivable account of $760,000 at the
beginning of the year and a balance of $840,000 at the end of the year. Net credit sales
during the year amounted to $6,400,000. The accounts receivable turnover was
a. 7.6 times.
b. 8.4 times.
c. 8.0 times.
d. 4.0 times.
132. A high accounts receivable turnover 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.
133. LKN Company had net credit sales of $5,005,000 and cost of goods sold of $3,500,000 for
the year. The Accounts Receivable balances at the beginning and end of the year were
$600,000 and $700,000, respectively. The accounts receivable turnover was
a. 8.4 times.
b. 7.7 times.
c. 3.9 times.
d. 7.1 times.
134. Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at
the beginning of the year and a balance of $900,000 at the end of the year. Net credit
sales during the year amounted to $8,040,000. The accounts receivable turnover was
a. 9.5 times.
b. 10.1 times.
c. 8.9 times.
d. 9.8 times.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-28
135. Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at
the beginning of the year and a balance of $900,000 at the end of the year. Net credit
sales during the year amounted to $8,040,000. The average collection period of the
receivables in terms of days was
a. 36.1 days.
b. 38.4 days.
c. 37.2 days.
d. 4 days.
136. Somen to Park Corporation had net credit sales of $5,075,000 and cost of goods sold of
$3,750,000 for the year. The Accounts Receivable balances at the beginning and end of
the year were $650,000 and $750,000, respectively. The accounts receivable turnover was
a. 7.8 times.
b. 6.8 times.
c. 7.3 times.
d. 5.4 times.
137. Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of
$9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The
inventory turnover for the year is
a. 7.4 times.
b. 10.4 times.
c. 3.0 times.
d. 1.4 times.
138. Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of
$9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The
average days in inventory during the year was approximately
a. 261 days.
b. 122 days.
c. 49 days.
d. 35 days.
Financial Analysis: The Big Picture
13-29
139. Savory Thymes, Inc. had net credit sales of $9,000,000 and cost of goods sold of
$5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The
inventory turnover for the year is
a. 7.2 times.
b. 5.6 times.
c. 5.2 times.
d. 4.2 times.
140. Savory Thymes, Inc. had net credit sales of $9,000,000 and cost of goods sold of
$5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The
average days in inventory during the year was approximately
a. 51 days.
b. 65 days.
c. 70 days.
d. 87 days.
141. Which one of the following would not be considered a liquidity ratio?
a. Current ratio
b. Inventory turnover
c. Average collection period
d. Return on assets
142. The asset turnover is
a. net sales divided by net income.
b. average total assets divided by net income.
c. net sales divided by average total assets.
d. average total assets divided by net sales.
143. The asset turnover measures
a. how often a company replaces its assets.
b. how efficiently a company uses its assets to generate sales.
c. the portion of the assets that have been financed by creditors.
d. the overall rate of return on assets.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-30
144. The profit margin is calculated by dividing
a. sales by cost of goods sold.
b. gross profit by net sales.
c. net income by stockholders' equity.
d. net income by net sales.
145. Tito Corporation had net income of $2,000,000 and paid dividends to common
stockholders of $300,000 in 2017. The weighted average number of shares outstanding in
2017 was 400,000 shares. Tito Corporation's common stock is selling for $50 per share on
the NASDAQ. Tito Corporation's price-earnings ratio is
a. 20 times.
b. 12 times.
c. 10 times.
d. 5 times.
146. Tito Corporation had net income of $2,000,000 and paid dividends to common
stockholders of $300,000 in 2017. The weighted average number of shares outstanding in
2017 was 400,000 shares. Tito Corporation's common stock is selling for $50 per share on
the NASDAQ. Tito Corporation's payout ratio for 2017 is
a. $5 per share.
b. 12%.
c. 15%.
d. 7%.
147. BVI Corporation had net income of $1,600,000 and paid dividends to common
stockholders of $400,000 in 2017. The weighted average number of shares outstanding in
2017 was 500,000 shares. BVI Corporation's common stock is selling for $40 per share on
the NASDAQ. BVI Corporation's price-earnings ratio is
a. 3.2 times.
b. 12.5 times.
c. 8 times.
d. 4 times.
Financial Analysis: The Big Picture
13-31
148. BVI Corporation had net income of $1,600,000 and paid dividends to common
stockholders of $320,000 in 2017. The weighted average number of shares outstanding in
2017 was 500,000 shares. BVI Corporation's common stock is selling for $50 per share on
the NASDAQ. BVI Corporation's payout ratio for 2017 is
a. $5 per share.
b. 20%.
c. 32%.
d. 5%.
149. The debt to assets ratio measures
a. the company's profitability.
b. whether interest can be paid on debt in the current year.
c. the proportion of interest paid relative to dividends paid.
d. the percentage of the total assets provided by creditors.
150. Aps Company reported the following on its income statement:
Income before income taxes $420,000
Income tax expense 120,000
Net income $300,000
An analysis of the income statement revealed that interest expense was $60,000. Aps
Company's times interest earned was
a. 6 times.
b. 9 times.
c. 8 times.
d. 5 times.
151. Trading on the equity (leverage) refers to the
a. amount of working capital.
b. amount of capital provided by owners.
c. use of borrowed money to increase the return to owners.
d. number of times interest is earned.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-32
152. Rama Company reported the following on its income statement:
Income before income taxes $500,000
Income tax expense 150,000
Net income $350,000
An analysis of the income statement revealed that interest expense was $80,000. Rama
Company's times interest earned was
a. 5.4 times.
b. 7.3 times.
c. 6.3 times.
d. 4.4 times.
153. A company that is leveraged is one that
a. has a high earnings per share.
b. contains debt financing.
c. contains equity financing.
d. has a high current ratio.
154. The current assets of Orangette Company are $292,500. The current liabilities are
$130,000. The current ratio expressed as a proportion is
a. 225%.
b. 2.25:1.
c. .44:1.
d. $130,000 ÷ $292,500.
155. A weakness of the current ratio is
a. the difficulty of the calculation.
b. it uses year-end balances of current asset and current liability accounts.
c. it is rarely used by sophisticated analysts.
d. it can be expressed as a percentage, as a rate, or as a proportion.
156. A supplier to a company would be most interested in the
a. asset turnover.
b. profit margin.
c. current ratio.
d. earnings per share.
Financial Analysis: The Big Picture
13-33
157. Which one of the following ratios would not likely be used by a short-term creditor in
evaluating whether to sell on credit to a company?
a. Current ratio
b. Inventory turnover
c. Asset turnover
d. Accounts receivable turnover
158. Ratios are used as tools in financial analysis
a. instead of horizontal and vertical analyses.
b. because they can provide information that may not be apparent from inspection of the
individual components of the financial statements.
c. because even single ratios by themselves are quite meaningful.
d. because they are prescribed by GAAP.
159. 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 accounts receivables turnover.
b. times interest earned, inventory turnover, current ratio, and receivables turnover.
c. times interest earned, accounts receivable turnover ratio, current ratio, and inventory
turnover.
d. current ratio, account receivable turnover, and inventory turnover.
160. Ed's Drive-In had $175,000 of current assets and $80,000 of current liabilities before
borrowing $60,000 from the bank with a 3-month note payable. What effect did the
borrowing transaction have on Ed's Drive-In'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.
161. A liquidity ratio measures the
a. income or operating success of an enterprise over a period of time.
b. ability of the enterprise to survive over a long period of time.
c. short-term ability of the enterprise to pay its maturing obligations and to meet
unexpected needs for cash.
d. number of times interest is earned.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-34
162. If equal amounts are added to the numerator and the denominator of the current ratio and
the ratio is over one, the ratio will always
a. increase.
b. decrease.
c. stay the same.
d. equal zero.
163 If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash
by short-term debt and collection of accounts receivable have on the ratio?
Short-term Borrowing Collection of Receivable
a. Increase No effect
b. Increase Increase
c. Decrease No effect
d. Decrease Decrease
164. A company has an accounts receivable turnover of 10. The average net accounts
receivable during the period are $900,000. What is the amount of net credit sales for the
period?
a. $90,000
b. $9,000,000
c. $900,000
d. $990,000
165. If the average collection period is 73 days, what is the accounts receivable turnover?
a. 5 times
b. 20 times
c. 10 times
d. 6 times
166. A general rule to use in assessing the average collection period is that it
a. should not exceed 30 days.
b. can be any length as long as the customer continues to buy merchandise.
c. should not greatly exceed the return period.
d. should not greatly exceed the credit term period.
Financial Analysis: The Big Picture
FOR INSTRUCTOR USE ONLY
13-35
167. The inventory turnover is calculated by dividing
a. cost of goods sold by the ending inventory.
b. cost of goods sold by the beginning inventory.
c. cost of goods sold by the average inventory.
d. average inventory by cost of goods sold.
168. A company has an average inventory on hand of $90,000 and its average days in
inventory is 36.5 days. What is the cost of goods sold?
a. $900,000
b. $2,102,400
c. $2,106,000
d. $1,051,200
169. A successful grocery store would probably have
a. a low inventory turnover.
b. a high inventory turnover.
c. zero profit margin.
d. low volume.
170. Net sales are $2,700,000, beginning total assets are $700,000, and the asset turnover is
3.0. What is the ending total asset balance?
a. $900,000
b. $1,100,000
c. $700,000
d. $800,000
171. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $295,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 85,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $295,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
13-36
MC 171. (Cont.)
Income Statement
Sales revenue $ 85,000
Cost of goods sold 45,000
Gross profit 40,000
Operating expenses 20,000
Net income $ 20,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the current ratio for this company?
a. 1.42
b. 0.80
c. 1.16
d. 0.60
172. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $295,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 85,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $295,000
Income Statement
Sales revenue $ 85,000
Cost of goods sold 45,000
Gross margin 40,000
Operating expenses 20,000
Net income $ 20,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
Financial Analysis: The Big Picture
13-37
MC 172. (Cont.)
What is the accounts receivable turnover for this company?
a. 2.8 times
b. 2 times
c. 3.4 times
d. 3 times
173. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $295,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 85,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $295,000
Income Statement
Sales revenue $ 85,000
Cost of goods sold 45,000
Gross margin 40,000
Operating expenses 20,000
Net income $ 20,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the inventory turnover for this company?
a. 2 times
b. 2.25 times
c. 1 time
d. .44 times
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-38
174. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $295,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 85,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $295,000
Income Statement
Sales revenue $ 85,000
Cost of goods sold 45,000
Gross margin 40,000
Operating expenses 20,000
Net income $ 20,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the return on assets for this company?
a. 6.8%
b. 10.0%
c. 11.7%
d. 26.7%
Financial Analysis: The Big Picture
FOR INSTRUCTOR USE ONLY
13-39
175. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $295,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 85,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $295,000
Income Statement
Sales revenue $ 85,000
Cost of goods sold 45,000
Gross margin 40,000
Operating expenses 20,000
Net income $ 20,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the profit margin for this company?
a. 42.9%
b. 18.8%
c. 23.5%
d. 15.0%
176. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $295,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 85,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $295,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
13-40
MC 176. (Cont.)
Income Statement
Sales revenue $ 85,000
Cost of goods sold 45,000
Gross margin 40,000
Operating expenses 20,000
Net income $ 20,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the return on common stockholders’ equity for this company?
a. 13.3%
b. 5.0%
c. 23.3%
d. 53.3%
177. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $295,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 85,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $295,000
Income Statement
Sales revenue $ 85,000
Cost of goods sold 45,000
Gross margin 40,000
Operating expenses 20,000
Net income $ 20,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
