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Chapter 15 Financial Statement Analysis Answer Key
True / False Questions
1. Horizontal analysis involves comparing two or more years’ financial data for a single
company.
2. The gross margin percentage is computed by dividing the gross margin by sales.
3. If a company’s return on assets is substantially higher than its cost of borrowing, then the
common stockholders would normally want the company to have a relatively high debt/equity
ratio.
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4. Dividing the market price of a share of stock by the dividends per share gives the price-
earnings ratio.
5. The dividend yield ratio is calculated by dividing dividends per share by earnings per
share.
6. Financial leverage is positive if the interest rate on debt is lower than the return on total
assets.
7. Issuing common stock will increase a company’s financial leverage.
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8. If the assets in which borrowed funds are invested are able to earn a rate of return greater
than the interest rate required by the lender, then financial leverage is positive.
9. One would expect the book value of a share of stock to be about the same as the stock’s
market value.
10. The acid-test ratio is always smaller than the current ratio.
11. All debt is considered in the computation of the acid-test ratio.
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12. When computing the acid-test ratio, a short-term note receivable would be included in the
numerator.
13. The purchase of marketable securities for cash will lower a firm’s acid-test ratio.
14. As the inventory turnover increases, the number of days required to sell the inventory one
time also increases.
15. Negative working capital indicates that the sum of all current assets is negative.
Multiple Choice Questions
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16. The formula for the gross margin percentage is:
17. The gross margin percentage is most likely to be used to assess:
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18. The market price of XYZ Company’s common stock dropped from $25 to $21 per share.
The dividend paid per share remained unchanged. The company’s dividend payout ratio
would:
19. A drop in the market price of a firm’s common stock will immediately affect its:
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20. Financial leverage is negative when:
21. Which of the following is not a potential source of financial leverage?
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22. Issuing new shares of stock in a five-for-one split of common stock would:
23. A company’s current ratio and acid-test ratios are both greater than 1. Issuing bonds to
finance purchase of an office building with the first installment of the bonds due in the current
year would:
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24. What is the effect of a purchase of inventory on account on the current ratio and on
working capital, respectively? (Assume a current ratio greater than one prior to this
transaction.)
25. At the beginning of the year, a company’s current ratio is 2.2. At the end of the year, the
company has a current ratio of 2.5. Which of the following could help explain the change in
the current ratio?
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26. A company’s current ratio and acid-test ratios are both greater than 1. The collection of a
current accounts receivable of $29,000 would:
27. Assume a company has a current ratio that is greater than 1. Which of the following
transactions will reduce the company’s current ratio?
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28. Higgins Company presently has a current ratio of 0.6. It is currently negotiating a loan,
but it has been informed it must improve its current ratio before the loan will be approved.
Which of the following actions would improve its current ratio?
29. The ratio of cash, trade receivables, and marketable securities to current liabilities is:
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30. Wolbers Company has an acid-test ratio of 1.4. Which of the following events will cause
this ratio to decrease?
31. Park Company purchased $100,000 in inventory from its suppliers, on account. The
company’s acid-test ratio would:
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32. Assuming stable business conditions, an increase in the accounts receivable turnover ratio
could be explained by:
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33. Ozols Corporation’s most recent income statement appears below:
The gross margin percentage is closest to:
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34. Crandler Company’s net income last year was $60,000. The company paid preferred
dividends of $20,000 and its average common stockholders’ equity was $500,000. The
company’s return on common stockholders’ equity for the year was closest to:
35. The average stockholders’ equity for Horn Co. last year was $2,000,000. Included in this
figure was $200,000 of preferred stock. Preferred dividends were $16,000. If the return on
common stockholders’ equity was 12.5% for the year, net income was:
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36. Artist Company’s net income last year was $500,000. The company has 150,000 shares of
common stock and 40,000 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 $1.70 per share on the common stock and $0.70 per share on
the preferred stock. The earnings per share of common stock is closest to:
37. Archer Company had net income of $40,000 last year. The company has 5,000 shares of
common stock and 2,500 shares of preferred stock outstanding. There was no change in the
number of common or preferred shares outstanding during the year. Preferred dividends were
$2 per share. The earnings per share of common stock was:
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38. The following data have been taken from your company’s financial records for the current
year:
The price-earnings ratio is:
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39. The following data have been taken from your company’s financial records for the current
year:
The price-earnings ratio is:
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40. Data concerning Bouerneuf Company’s common stock follow:
The price-earnings ratio would be:
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41. Boggs 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 stockholders were $3.00 per share. The tax rate was 30%. The
company’s price-earnings ratio at the end of the year was: