Chapter 14—Financial Statement Analysis Key
1. In horizontal analysis, the base year is the most current year being examined.
2. A primary purpose of vertical analysis is to observe trends over a three-year period.
3. Common size analysis expresses each item in a financial statement as a percent of a base amount.
4. In vertical analysis of the income statement, net sales are represented by 100 percent.
5. In vertical analysis of the income statement, each item is expressed as a percentage of net income.
6. In vertical analysis of the balance sheet, total assets are represented by 100%.
7. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.
8. The use of common-size analysis makes comparisons more meaningful because percentages eliminate the
effects of size.
9. Liquidity ratios measure the ability of a company to survive over a long period of time.
10. The current ratio is a measure of all the ratios calculated for the current year.
11. The inventory turnover ratio measures the number of times the average inventory turns over or was sold
during the period.
12. Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.
13. Two major forms of common-size analysis are horizontal analysis and vertical analysis.
14. Horizontal analysis involves comparing two or more years’ financial data for a single company.
15. Common-size statements are statements of companies of similar size and operations.
16. The dividend payout ratio is equal to the current earnings per share divided by the dividend per share.
17. Dividing the market price of a share of stock by the dividends per share gives the price-earnings ratio.
18. The quick ratio should be smaller than the current ratio.
19. All debt is considered in the computation of the quick ratio.
20. When computing the quick ratio, a short-term note receivable would be included.
21. An example of horizontal analysis is the increase in cost of goods sold by 25% from 2006 to 2007.
22. For meaningful analysis, ratios should be compared with a standard.
23. Jill’s Market has an inventory turnover of 120 times. Scott’s Market has a turnover of 128 times. Scott’s is
more effective in managing inventory.
24. A measure of a company’s overall long-term financial health is the debt-to-equity ratio.
25. Leverage ratios assess the ability of a company to meets its long- and short-term obligations.
26. Companies in the same industry may use different accounting methods, diminishing the usefulness of some
industrial averages.
27. Small sample sizes for an industrial report rarely cause a comparability problem in using standards.
28. Labor markets can impact industrial statistics and standards.
29. Industrial statistics should be taken as absolute norms as far as standards for comparability.
30. Terms of sale can produce statistical variations among companies within the same industry.
31. A number of online sources contain competitive information on individual company’s ratios.
32. Industrial figures, standards and statistics need so much care to use that they are not a very good reference
point to compare companies.
33. Which one of the following would be considered a leverage ratio?
34. The two major techniques for financial analysis are:
35. Horizontal analysis is also known as:
36. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time
37. In horizontal analysis, each item is expressed as a percentage of the
38. In vertical analysis, line items on the balance sheet are generally expressed as a percentage of
39. In vertical analysis, line items on the income statement are generally expressed as a percentage of
40. Vertical analysis is a technique that expresses each item in a financial statement
41. In vertical analysis
42. The type of analysis that is concerned with the relationships among the components of the financial
statements is to prepare
43. Which one of the following is not a characteristic generally evaluated in ratio analysis?
44. Short-term creditors are usually most interested in assessing
45. A common measure of liquidity is
46. A common measure of profitability is
47. The current ratio is a
48. The quick ratio
49. The accounts receivable turnover and inventory turnover ratios are used to analyze
50. A high accounts receivable turnover ratio indicates
51. Which one of the following would not be considered a liquidity ratio?
52. The return on sales ratio is calculated by dividing
53. The ratios that are used to determine a company’s short-term debt paying ability are:
54. Swanson Company had $250,000 of current assets and $90,000 of current liabilities before borrowing
$60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on
Swanson Company’s current ratio?
55. If equal amounts are added to the numerator and the denominator of a current ratio equal to one, the ratio
will
56. The quick ratio
57. The inventory turnover is calculated by dividing
58. A successful grocery store would probably have
59. An aircraft company would most likely have
60. Horizontal analysis is analysis
61. Trend analysis is analysis
62. Which of the following is an example of liquidity analysis?
63. Which of the following is considered a profitability ratio?
64. Which of the following is considered a liquidity analysis ratio?
65. Which profitability ratio requires the use of earnings per share in its calculation?
66. Which profitability ratio requires the use of earnings per share and the current market price?
67. The Gift Shoppe’s inventory turned over five times during the year. Similar gift shops have an inventory
turnover equal to ten times per year. What explains the Gift Shoppe’s inventory management?
68. The quick ratio differs from the current ratio in that it
69. Which of the following formulas would be used to determine the inventory turnover ratio?
70. Earnings per share is an indication of how much
71. Chaney Inc. wants to measure the relationship between profitability and the investment made by
stockholders. Chaney should use the
72. ABC Company issued additional shares of stock for cash. The effect of the transaction is
73. Presented below are selected data from the financial statements of Russell Corp. for 2008 and 2007.
2008
2007
Net income
$100,000
$123,000
Cash dividends paid on preferred stock
12,000
15,000
Cash dividends paid on common stock
42,000
38,000
Weighted average number of common shares outstanding
105,000
95,000
Earnings per share is reported on the 2008 income statement as
74. Presented below are selected data from the financial statements of Korn Corp. for 2008 and 2007.
2008
2007
Net income
$100,000
$123,000
Weighted average number of common shares outstanding
105,000
95,000
Market price per share of common stock at the end of the
year
$12.00
$10.00
Earnings per share
$2.00
$1.83
The price/earnings ratio for 2008 is
75. Presented below are selected data from the financial statements of DeBruce Corp. for 2008 and 2007.
2008
2007
Net income
$110,000
$123,000
Cash dividends paid on common stock
$42,000
$38,000
Market price per share of common stock at the end of the
year
$16.00
$13.00
Earnings per share
$0.84
$0.74
Shares of common stock outstanding
140,000
100,000
The dividend payout ratio for 2008 is
76. If year one equals $800,000, year two equals $840,000, and year three equals $896,000, the percentage to be
assigned for year three in a trend analysis, assuming that year 1 is the base year, is:
77. Assume the following sales data for a company:
2008
$1,000,000
2007
900,000
2006
750,000
2005
500,000
If 2005 is the base year, what is the percentage increase in sales from 2005 to 2006?
78. Pine Hardware Store had net credit sales of $3,900,000 and cost of goods sold of $3,000,000 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 ratio was
79. The Walker Department Store had net credit sales of $8,000,000 and cost of goods sold of $6,000,000 for
the year. The average inventory for the year amounted to $2,000,000.
The inventory turnover ratio for the year is
80. Figure 14-5.
Starbuck Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000 in
2007. The weighted average number of shares outstanding in 2007 was 50,000 shares. Starbuck Corporation’s
common stock is selling for $40 per share on the New York Stock Exchange.
Starbuck’s price-earnings ratio is
81. Figure 14-5.
Starbuck Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000 in
2007. The weighted average number of shares outstanding in 2007 was 50,000 shares. Starbuck Corporation’s
common stock is selling for $40 per share on the New York Stock Exchange.
Starbuck’s dividend payout ratio for 2007 is
82. Grant 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. Grant Company’s times interest earned was
83. A company has an account receivable turnover ratio of 10. The average accounts receivable during the
period are $400,000. What is the amount of net sales for the period?
84. If the accounts receivable turnover is 50 days, what is the account receivable turnover ratio?
85. Pratt Company’s net income last year was $70,000. The company paid preferred dividends of $30,000 and
its average common stockholders’ equity was $520,000. The company’s return on common stockholders’ equity
for the year was closest to:
86. Fastlane Company has 50,000 shares of common stock and 20,000 shares of preferred stock
outstanding. There was no change in the number of common or preferred shares outstanding during the year.
Preferred stockholders received dividends this year totaling $120,000. Common stockholders received
dividends totaling $200,000. If the dividend payout ratio for the year was 80%, then the net income was:
87. The following data have been taken from your company’s financial records for the current year:
Earnings per share
$8
Market price per share
$60
Dividend per share
$6
Book value per share
$75
The price-earnings ratio is:
88. Last year the return on total assets in Justin Company was 8.5%. The total assets were $2,900,000 at the
beginning of the year and $3,100,000 at the end of the year. The tax rate was 30%, interest expense totaled
$110,000, and sales were $5,200,000. Net income for the year was:
89. Brown Company’s net income last year was $90,000 and its interest expense was $15,000. Total assets at
the beginning of the year were $640,000 and total assets at the end of the year were $680,000. The company’s
income tax rate was 40%. The company’s return on total assets for the year was closest to:
90. Dartmouth Company has an quick ratio of 2.5 to 1. It has current liabilities of $40,000 and noncurrent assets
of $70,000. If Dartmouth’s current ratio is 3.1 to 1, its inventory and prepaid expenses must be
91. Eagle Company has $12,000 in cash, $4,000 in marketable securities, $23,000 in current receivables,
$22,000 in inventories, and $32,000 in current liabilities. The company’s quick ratio is closest to:
92. Erin Company has $15,000 in cash, $5,000 in marketable securities, $20,000 in current receivables, $25,000
in inventories, and $45,000 in current liabilities. The company’s quick ratio is closest to:
93. Franklin Company had $100,000 in sales on account last year. The beginning accounts receivable balance
was $10,000 and the ending accounts receivable balance was $16,000. The company’s accounts receivable
turnover was closest to:
94. Forest Company had $170,000 in sales on account last year. The beginning accounts receivable balance was
$14,000 and the ending accounts receivable balance was $12,000. The company’s accounts receivable turnover
was closest to:
95. Freeman Company had $130,000 in sales on account last year. The beginning accounts receivable balance
was $16,000 and the ending accounts receivable balance was $18,000. The company’s accounts receivable
turnover was closest to:
96. Harold Company, a retailer, had cost of goods sold of $190,000 last year. The beginning inventory balance
was $28,000 and the ending inventory balance was $22,000. The company’s inventory turnover was closest to:
97. Harley Company, a retailer, had cost of goods sold of $190,000 last year. The beginning inventory balance
was $20,000 and the ending inventory balance was $26,000. The company’s inventory turnover was closest to:
98. Hamlin Company, a retailer, had cost of goods sold of $190,000 last year. The beginning inventory balance
was $22,000 and the ending inventory balance was $28,000. The company’s inventory turnover was closest to:
99. Irene’s Dress Company, a retailer, had cost of goods sold of $260,000 last year. The beginning inventory
balance was $20,000 and the ending inventory balance was $26,000. The company’s average inventory turnover
in days was closest to:
100. Ivan Men’s Wear Company, a retailer, had cost of goods sold of $210,000 last year. The beginning
inventory balance was $28,000 and the ending inventory balance was $20,000. The company’s average
inventory turnover in days was closest to:
101. The following information pertains to Barkley Company.:
Merchandise purchased
$1,800,000
Cost of goods sold
$2,000,000
Inventory at the end of the year
$400,000
The inventory turnover for the year was:
102. Last year Janis Company had a net income of $290,000, income tax expense of $58,000, and interest
expense of $20,000. The company’s times interest earned was closest to:
103. Last year Jimilea Company had a net income of $260,000, income tax expense of $58,000, and interest
expense of $20,000. The company’s times interest earned was closest to:
104. Cottle Company has total assets of $220,000 and total liabilities of $70,000. The company’s debt-to-equity
ratio is closest to
105. Crystal Company has total assets of $190,000 and total liabilities of $60,000. The company’s debt-to–
equity ratio is closest to:
106. Selected financial data from Harlow Company for the most recent year appear below:
Sales
$100,000
Cost of goods sold
$60,000
Dividends declared and paid
$5,000
Interest expense
$8,000
Operating expenses
$18,000
The income tax rate is 30%.
The Return on Sales ratio was closest to:
107. Craft Company’s net income last year was $50,000. The company paid preferred dividends of $20,000 and
its average common stockholders’ equity was $480,000. The company’s return on common stockholders’ equity
for the year was closest to
108. The average stockholders equity for Holloway Co. last year was $2,000,000. Included in this figure was
$200,000 par value of 8% preferred stock. If the return on common shareholders’ equity was 12.5% for the year,
net income was:
109. Wellston Company’s net income last year was $300,000. The company has 100,000 shares of common
stock and 30,000 shares of preferred stock outstanding. There was no change in the number of common or
preferred shares outstanding during the year. The company declared and paid dividends last year of $1.90 per
share on the common stock and $1.70 per share on the preferred stock. The earnings per share of common stock
is closest to:
110. Lew Company’s net income was $80,000 last year. The company has 20,000 shares of common stock and
5,000 shares of $100 par value, 7 percent preferred stock outstanding. There was no change in the number of
common or preferred shares outstanding during the year. The earnings per share of common stock was:
111. Data concerning Bouerneuf Company’s common stock follow:
Book value per share
$24.00
Market value per share
$18.00
Earnings per share
$6.00
Par value per share
$4.00
Dividend per share
$1.00
The price-earnings ratio would be
112. Bogart Company has 40,000 shares of common stock outstanding. The book value per share of this stock
was $60.00 and the market value per share was $75.00 at the end of the year. Net income for the year was
$400,000. Interest on long-term debt was $40,000. Dividends paid to common shareholders were $3.00 per
share. The tax rate was 30%. The company’s price-earnings ratio at the end of the year was:
113. Many industrial averages and figures are published in the each of the following except?
114. For meaningful analysis, ratios are best compared with