Chapter 16—Financial Statement Analysis Key
1. Which of the following statements regarding financial analysis is true?
2. Ratio analysis is least likely to indicate:
3. The easiest part of ratio analysis is:
4. Which of the following is not a limitation in performing financial statement analysis on a company that uses
generally accepted accounting principles?
5. Which of the following statements is true regarding ratio analysis?
6. Bingham Inc. is a retailer with annual sales of less that $10 million. At the end of 2009, ratio analysis is
performed on Bingham’s financial statements by various stakeholders. Bingham’s 2009 ratios are not likely to
be compared to:
7. Which of the following items is not typically used to prepare financial statements?
8. Financial statements prepared using generally accepted accounting principles:
9. Analyzing financial statement account balances over time for the same company is called:
10. Which of the following statements regarding horizontal analysis is false?
11. Drucker Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$500,000
$700,000
Performing a horizontal analysis on current assets shows that they have:
12. Hansen Inc. has the following information available for 2008 and 2009:
2008
2009
Net income
$600,000
$500,000
Which of the following statements is true regarding horizontal analysis with respect to Hansen?
13. Michaud Ltd. has the following information available for 2008 and 2009:
2008
2009
Total Assets
$2,600,000
$4,000,000
Which of the following statements is true regarding horizontal analysis with respect to Michaud?
14. Comparing financial statements of different companies and financial statements of the same company across
time after controlling for differences in size is called:
15. To perform vertical analysis:
16. On a common-size balance sheet, current assets should be stated as a percentage of:
17. On a common-size balance sheet, current liabilities should be stated as a percentage of:
18. On a common-size income statement, net income should be stated as a percentage of:
19. On a common-size income statement, operating income should be stated as a percentage of:
20. On a common-size income statement, operating expenses should be stated as a percentage of:
21. Sellars Ltd. has the following information available for 2008 and 2009:
2008
2009
Current assets
$600,000
$ 800,000
Long-term assets
300,000
200,000
Total assets
$900,000
$1,000,000
Converting the 2009 column into a common-size statement would show current assets as being:
22. Hollandsworth Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$500,000
$ 400,000
Long-term assets
300,000
600,000
Total assets
$800,000
$1,000,000
Converting the 2009 column into a common-size statement would show current assets as being:
23. Zabar Inc. has the following information available for 2008 and 2009:
2008
2009
Current liabilities
$ 80,000
$ 50,000
Long-term liabilities
100,000
150,000
Total liabilities
$180,000
$200,000
Capital stock
$ 25,000
$ 25,000
Retained earnings
90,000
300,000
Total stockholders’ equity
$115,000
$325,000
Total liabilities and stockholders’ equity
$295,000
$525,000
Converting the 2009 column into a common-size statement would show current liabilities as being:
24. Working capital is a measure of:
25. Working capital is computed as follows:
26. McCabe Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$500,000
$600,000
Current liabilities
200,000
400,000
McCabe’s working capital in 2009 is:
27. Blaise Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$400,000
$400,000
Current liabilities
200,000
600,000
Blaise’s working capital in 2009 is:
28. Liquidity measures a company’s ability:
29. Which of the following ratios is the best measure of liquidity?
30. Which of the following ratios is the best measure of liquidity?
31. Which ratio measures the length of time between the purchase of inventory and the eventual collection of
cash from sales?
32. Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/09 and 12/31/08 financial
statements:
12/31/09
12/31/09
$ 12,000
Accounts payable
$ 10,000
6,000
Salaries payable
3,000
40,000
Taxes payable
9,000
2,000
Total current liabilities
$ 22,000
$ 60,000
Notes payable
50,000
80,000
Total long-term liabilities
$ 50,000
20,000
Total liabilities
$ 72,000
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2009
$25,000
Inventory (12/31/08)
50,000
Credit sales in 2009
80,000
Cost of goods sold in 2009
45,000
Accounts receivable (12/31/08)
10,000
Refer to the Partin Manufacturing information above. Partin’s working capital at 12/31/09 is:
33. Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/09 and 12/31/08 financial
statements:
12/31/09
12/31/09
$ 12,000
Accounts payable
$ 10,000
6,000
Salaries payable
3,000
40,000
Taxes payable
9,000
2,000
Total current liabilities
$ 22,000
$ 60,000
Notes payable
50,000
80,000
Total long-term liabilities
$ 50,000
20,000
Total liabilities
$ 72,000
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2009
$25,000
Inventory (12/31/08)
50,000
Credit sales in 2009
80,000
Cost of goods sold in 2009
45,000
Accounts receivable (12/31/08)
10,000
Refer to the Partin Manufacturing information above. Partin’s current ratio at 12/31/09 is: (round to two decimal places)
34. Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/09 and 12/31/08 financial
statements:
12/31/09
12/31/09
$ 12,000
Accounts payable
$ 10,000
6,000
Salaries payable
3,000
40,000
Taxes payable
9,000
2,000
Total current liabilities
$ 22,000
$ 60,000
Notes payable
50,000
80,000
Total long-term liabilities
$ 50,000
20,000
Total liabilities
$ 72,000
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2009
$25,000
Inventory (12/31/08)
50,000
Credit sales in 2009
80,000
Cost of goods sold in 2009
45,000
Accounts receivable (12/31/08)
10,000
Refer to the Partin Manufacturing information above. Partin’s acid-test (or quick) ratio at 12/31/09 is: (round to two decimal places)
35. Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/09 and 12/31/08 financial
statements:
12/31/09
12/31/09
$ 12,000
Accounts payable
$ 10,000
6,000
Salaries payable
3,000
40,000
Taxes payable
9,000
2,000
Total current liabilities
$ 22,000
$ 60,000
Notes payable
50,000
80,000
Total long-term liabilities
$ 50,000
20,000
Total liabilities
$ 72,000
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2009
$25,000
Inventory (12/31/08)
50,000
Credit sales in 2009
80,000
Cost of goods sold in 2009
45,000
Accounts receivable (12/31/08)
10,000
Refer to the Partin Manufacturing information above. Partin’s accounts receivable turnover ratio at 12/31/09 is: (round to two decimal places)
36. Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/09 and 12/31/08 financial
statements:
12/31/09
12/31/09
$ 12,000
Accounts payable
$ 10,000
6,000
Salaries payable
3,000
40,000
Taxes payable
9,000
2,000
Total current liabilities
$ 22,000
$ 60,000
Notes payable
50,000
80,000
Total long-term liabilities
$ 50,000
20,000
Total liabilities
$ 72,000
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2009
$25,000
Inventory (12/31/08)
50,000
Credit sales in 2009
80,000
Cost of goods sold in 2009
45,000
Accounts receivable (12/31/08)
10,000
Refer to the Partin Manufacturing information above. Partin’s inventory turnover ratio at 12/31/09 is: (round to two decimal places)
37. Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/09 and 12/31/08 financial
statements:
12/31/09
12/31/09
$ 12,000
Accounts payable
$ 10,000
6,000
Salaries payable
3,000
40,000
Taxes payable
9,000
2,000
Total current liabilities
$ 22,000
$ 60,000
Notes payable
50,000
80,000
Total long-term liabilities
$ 50,000
20,000
Total liabilities
$ 72,000
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2009
$25,000
Inventory (12/31/08)
50,000
Credit sales in 2009
80,000
Cost of goods sold in 2009
45,000
Accounts receivable (12/31/08)
10,000
Refer to the Partin Manufacturing information above. Partin’s debt-to-equity ratio at 12/31/09 is: (round to two decimal places)
38. Bernstein Inc.
Bernstein Inc. is a local retailer. The following selected information is available from their 2008 and 2009
financial statements:
Accounts receivable at 12/31/08
$ 160,000
Accounts receivable at 12/31/09
240,000
Inventory at 12/31/08
300,000
Inventory at 12/31/09
360,000
Net credit sales for 2009
3,400,000
Cost of goods sold for 2009
1,980,000
Net income for 2009
1,000,000
Refer to the Bernstein Inc. information above. What was Bernstein’s accounts receivable turnover ratio for 2009? (round to two decimal places)
39. Bernstein Inc.
Bernstein Inc. is a local retailer. The following selected information is available from their 2008 and 2009
financial statements:
Accounts receivable at 12/31/08
$ 160,000
Accounts receivable at 12/31/09
240,000
Inventory at 12/31/08
300,000
Inventory at 12/31/09
360,000
Net credit sales for 2009
3,400,000
Cost of goods sold for 2009
1,980,000
Net income for 2009
1,000,000
Refer to the Bernstein Inc. information above. What was Bernstein’s average number of days sales in receivables for 2009? (round to two decimal
places)
40. Bernstein Inc.
Bernstein Inc. is a local retailer. The following selected information is available from their 2008 and 2009
financial statements:
Accounts receivable at 12/31/08
$ 160,000
Accounts receivable at 12/31/09
240,000
Inventory at 12/31/08
300,000
Inventory at 12/31/09
360,000
Net credit sales for 2009
3,400,000
Cost of goods sold for 2009
1,980,000
Net income for 2009
1,000,000
Refer to the Bernstein Inc. information above. What was Bernstein’s inventory turnover ratio for 2009? (round to two decimal places)
41. Bernstein Inc.
Bernstein Inc. is a local retailer. The following selected information is available from their 2008 and 2009
financial statements:
Accounts receivable at 12/31/08
$ 160,000
Accounts receivable at 12/31/09
240,000
Inventory at 12/31/08
300,000
Inventory at 12/31/09
360,000
Net credit sales for 2009
3,400,000
Cost of goods sold for 2009
1,980,000
Net income for 2009
1,000,000
Refer to the Bernstein Inc. information above. What was Bernstein’s number of days inventory was held for sale in 2009? (round to two decimal
places)
42. Which of the following accounts should not be included in the calculation of the acid-test (or quick) ratio?
43. Which of the following account balances would not be used in the calculation of the current ratio?
44. Plumeria Inc. has recently calculated the accounts receivable turnover for the current year to be 15. In prior
years, the same ratio was always higher. Which of the following statements would be the best interpretation for
the reason for the ratio’s change?
45. Torrence Inc. has recently calculated the inventory turnover for the current year to be 30. In prior years, the
same ratio was always lower. Which of the following statements would be the best interpretation for the reason
for the ratio’s change?
46. As a company’s accounts receivable turnover ratio increases from one year to the next, they will find that the
number of days’ sales in receivables:
47. As a company’s inventory turnover ratio decreases from one year to the next, they will find that the number
of days inventory is held before sale:
48. A quick ratio ____ is often a concern for creditors and managers.
49. ABC Inc. has determined that it needs to increase its current ratio in order to be in compliance with a
creditor’s loan agreement. All else being equal, which of the following ways would be best for increasing their
current ratio?
50. Which of the following types of companies would you expect to have the highest inventory turnover ratio?
51. Solvency measures a company’s ability:
52. Which of the following ratios would be the best measure of solvency?
53. Which of the following ratios would not be the best measure of solvency?
54. Which of the following statements would be the best interpretation of a company’s low debt–to-equity ratio?
55. Which ratio would be best for measuring a company’s ability to repay both principal and interest on
outstanding loans from cash generated from operating activities?
56. During 2009, Mark Walker, Inc. had cash flow from operations of $675,000, dividends paid totaling
$20,000, and equipment purchases of $200,000. The cash flow from operations to capital expenditures ratio
is:
57. Hardister Corp.
Hardister Corp. has the following information available from its financial statements for 2009:
Balance sheet
information:
Income statement
information:
Assets
Current assets
$ 400,000
Sales (all on account)
$3,000,000
Long-term assets
600,000
Cost of goods sold
1,500,000
Total assets
$1,000,000
Salary expense
200,000
Miscellaneous expenses
400,000
Liabilities
Interest expense
100,000
Current liabilities
$ 200,000
Income before taxes
$ 800,000
Long-term liabilities
100,000
Income tax expense
300,000
Total liabilities
$ 300,000
Net income
$ 500,000
Stockholders’
Equity
Capital stock
$ 300,000
Retained earnings
400,000
Total Stockholders’ Equity
$ 700,000
Refer to the Hardister Corp. information above. Hardister’s current ratio is: (round to two decimal places)
58. Hardister Corp.
Hardister Corp. has the following information available from its financial statements for 2009:
Balance sheet
information:
Income statement
information:
Assets
Current assets
$ 400,000
Sales (all on account)
$3,000,000
Long-term assets
600,000
Cost of goods sold
1,500,000
Total assets
$1,000,000
Salary expense
200,000
Miscellaneous expenses
400,000
Liabilities
Interest expense
100,000
Current liabilities
$ 200,000
Income before taxes
$ 800,000
Long-term liabilities
100,000
Income tax expense
300,000
Total liabilities
$ 300,000
Net income
$ 500,000
Stockholders’ Equity
Capital stock
$ 300,000
Retained earnings
400,000
Total Stockholders’ Equity
$ 700,000
Refer to the Hardister Corp. information above. Hardister’s debt-to-equity ratio is: (round to two decimal places)