113) Match each of the following items with the appropriate definition. Each item is used only
once.
a. profitability ratios
b. debt-to-equity ratio
c. return on equity ratio
d. solvency ratios
e. dividend yield ratio
f. market indicator ratios
g. vertical analysis
h. price/earnings ratio
i. liquidity ratios
_____ 1. An analytical technique in which each item on a financial statement is expressed as a
percentage of a selected item on the financial statement
_____ 2. Ratios that measure the ability of a company to survive over a long period of time
_____ 3. Ratios that measure the income or operating success of a company for a given period
of time
_____ 4. Ratios that measure the ability of a company to pay its debts and to meet unexpected
needs for cash in the short run
_____ 5. Ratios that measure whether or not the stock of a company is a good investment
_____ 6. Dividends per share divided by the current market price per share
_____ 7. The market price per share of stock divided by the earnings per share of the stock
_____ 8. Net income divided by average common shareholders’ equity
_____ 9. Total liabilities divided by total shareholders’ equity
114) Indicate which of the following analytical tools is described in each situation below. Each
ratio is used only once.
a. debt-to-equity ratio
b. return on assets ratio
c. return on equity ratio
d. gross profit ratio
_____ 1. A small downward shift in this ratio is causing concern for the management of Axon
Corporation.
_____ 2. Bonuses for the division managers of Cotton Works are based on how much profit is
earned by each division on the assets assigned to it.
_____ 3. Sara is trying to determine whether Team Shirts is making enough profit to satisfy
investors.
_____ 4. First Bank is considering a loan application from Team Shirts for $5,000 and wants to
determine whether Team Shirts will have too much debt.
115) Indicate which of the following analytical tools should be used in each situation. Each ratio
is used only once.
a. price/earnings ratio
b. dividend yield ratio
c. return on assets ratio
d. return on equity ratio
e. gross profit ratio
_____ 1. An upward shift in this ratio helped managers to earn bonuses for the quarter.
_____ 2. Donna Squires, a retired teacher, is looking for stock in companies which will pay her
high dividends on her investment.
_____ 3. Block Investors Group is reviewing its investment in Team Shirts. The members of the
group are concerned about the amount of income earned on the assets invested in Team Shirts.
_____ 4. Ana Gutierrez is researching the market’s opinion about the future earnings of
companies as a way of finding bargain stocks.
_____ 5. Larry Hines is concerned that XYZ Company is producing less income based on
shareholders’ equity than the industry average.
116) Match each of the following items with the appropriate definition. Each item is used only
once.
a. profitability ratios
b. discontinued operations
c. horizontal analysis
d. extraordinary items
e. market indicator ratios
f. vertical analysis
g. liquidity ratios
h. solvency ratios
_____ 1. An analytical technique in which each item on a financial statement is expressed as a
percentage of a selected item on that financial statement
_____ 2. Ratios that measure the ability of a company to survive over a long period of time
_____ 3. Ratios that measure the income or operating success of a company for a given period
of time
_____ 4. Ratios that measure the ability of a company to pay its debts and to meet unexpected
needs for cash in the short run
_____ 5. Ratios that measure whether or not the stock of a company is a good investment
_____ 6. Operations that a company has eliminated, usually by selling a segment or division
_____ 7. Events that are both unusual and infrequent
_____ 8. A technique used to evaluate a series of financial statement data over a period of time
Learning Objective 10-4
1) Investors diversify in order to ________.
A) guarantee that they will earn a profit on their investments in stocks
B) minimize the risks of stock ownership
C) develop an appreciation of other cultures
D) earn a lower rate of return for a given amount of risk
2) ________ will help give an investor some protection against losses.
A) Learning financial accounting and financial statement analysis
B) Being a close friend of a company’s CEO
C) Buying the most popular stocks
D) Buying a company’s IPO (Initial Public Offering)
3) One way to diversify is to ________.
A) invest only in stocks
B) invest only in bonds
C) invest in both stocks and bonds, but always from companies in the same industry, so that you
become an industry expert
D) invest in both stocks and bonds from companies in different industries
4) One way to diversify is to ________.
A) invest in both the stocks and bonds of a particular company
B) invest in both stocks and bonds from companies in different industries
C) learn both financial accounting and financial statement analysis
D) invest unlimited amounts of money
5) Investors diversify in order to ________.
A) earn the highest possible return from each investment in their portfolios
B) offset losses from one investment with gains from another investment
C) take maximum advantage of increases in earnings per share
D) buy low and sell high
6) Investors can minimize risk by owning a diversified portfolio.
7) Understanding financial accounting helps to minimize the risk of investing in the stock
market.
8) Owning many different stocks is riskier than a large investment in a single company.
9) Owning bonds as well as stocks is riskier than a large investment in a single company.
10) Owning only stocks is riskier than owning both stocks and bonds.
Learning Objective 10-5
1) Comprehensive income is the total ________.
A) income earned by a company over an entire fiscal year
B) of all items that affect shareholders’ equity except transactions with the owners
C) of all items that affect shareholders’ equity
D) income earned by a company including all of its business segments
2) Comprehensive income is ________.
A) income earned by a company over an entire fiscal year
B) included in the calculation of net income
C) not included in the calculation of net income
D) income earned by a company including all of its business segments
3) Comprehensive income includes ________.
A) revenues, expenses, and extraordinary items
B) unrealized gains and losses from foreign currency transactions
C) unrealized gains and losses on certain types of investments
D) all of these
4) Comprehensive income includes all changes in equity resulting from ________.
A) contributions by owners
B) dividends
C) net losses
D) purchases of treasury stock
5) Comprehensive income is ________.
A) a footnote to the income statement
B) a line item on the balance sheet
C) a line item on the statement of changes in shareholders’ equity
D) never reported on any financial statement
6) Which of these is part of OTHER comprehensive income?
A) unrealized gains and losses on foreign currency translation
B) gains and losses from selling property, plant and equipment
C) gains and losses from selling treasury stock
D) gains and losses from issuing a stock dividend
7) Which of these is part of OTHER comprehensive income?
A) dividends paid to owners
B) revenues minus expenses
C) unrealized gains and losses on certain types of investments
D) net income
8) Comprehensive income equals ________.
A) net income minus preferred dividends
B) net income
C) net income plus other comprehensive income
D) net income plus all non-operating gains and losses
9) Comprehensive income is the total of all items that affect shareholders’ equity except
transactions with the owners.
10) Items included in other comprehensive income include realized gains and losses from foreign
currency translation.
Learning Objective 10-6
1) One classification for investments in securities that is allowed by U.S. GAAP is ________.
A) mature
B) immature
C) available-for-sale
D) traded
2) If a company plans to hold debt securities until they mature, they are called ________.
A) held-to-maturity securities
B) trading securities
C) available-for-sale securities
D) conservative investments
3) Investments in debt and equity securities that a company has purchased to make a short-term
profit are called ________.
A) held-to-maturity securities
B) trading securities
C) available-for-sale securities
D) speculative investments
4) Investments in debt and equity securities that a company may either hold or sell are called
________.
A) held-to-maturity securities
B) trading securities
C) available-for-sale securities
D) discretionary investments
5) Held-to-maturity securities are ________.
A) investments the company may hold or sell
B) investments in debt securities that a company plans to hold until they mature
C) investments in debt and equity securities that a company has purchased to make a short-term
profit
D) investments in stocks that a company plans to hold until they mature
6) Trading securities are ________.
A) investments the company may hold or sell
B) investments in debt securities that a company plans to hold until the securities mature
C) investments in debt and equity securities that a company has purchased to make a short-term
profit
D) discretionary investments with a specific maturity date
7) Available-for-sale securities are ________.
A) investments the company may hold or sell
B) investments in debt securities that a company plans to hold until the securities mature
C) investments in debt and equity securities that a company has purchased to make a short-term
profit
D) discretionary investments with a specific maturity date
8) Abala Corporation purchased one hundred $1,000 bonds. The corporation intends to hold the
bonds until they mature in two years. This investment is characterized as ________ securities.
A) held-to-maturity
B) discretionary
C) trading
D) available-for-sale
9) Abala Corporation purchased $50,000 worth of ABC Company stock. The corporation
believes that the stock price will double within a few months and plans to sell the stock as soon
as its target price is reached. This investment is characterized as ________ securities.
A) held-to-maturity
B) discretionary
C) trading
D) available-for-sale
10) Centrex Corporation purchased 500 shares of Pfizer stock. The managers of Centrex
Corporation intend to sell the shares as soon as their target price is reached, which will probably
be within the next three months. This investment is characterized as ________ securities.
A) available-for-sale
B) held-to-maturity
C) discretionary
D) trading
11) Centrex Corporation purchased 500 shares of Pfizer stock at $50 per share. The managers of
Centrex Corporation intend to sell the shares as soon as their target price is reached, which will
probably be within the next three months. During the holding period, the market price of the
stock went down $5 per share. How should Centrex account for the change in value?
A) A footnote describing the decline in value should be part of the financial statements.
B) An unrealized loss of $2,500 should be shown on the income statement.
C) A realized loss of $2,500 should be shown on the income statement.
D) The decline should not be reported, since stock prices go up and down on a daily basis.
12) Centrex Corporation purchased 500 shares of Pfizer stock at $50 per share. The managers of
Centrex Corporation intend to sell the shares as soon as their target price is reached, which will
probably be within the next three months. During the holding period, the market price of the
stock went up $5 per share. How should Centrex account for the change in value?
A) A footnote describing the increase in value should be part of the financial statements.
B) An unrealized gain of $2,500 should be shown on the income statement.
C) A realized gain of $2,500 should be shown on the income statement.
D) The gain should not be reported, since stock prices go up and down on a daily basis.
13) Which of the following might be classified as held-to-maturity securities?
A) only equity securities
B) only debt securities
C) both debt and equity securities
D) only investments in real estate
14) No matter how much these investments are actually worth, when the balance sheet is
prepared these investments will always be reported at original cost, plus or minus any discount or
premium amortization.
A) held-to-maturity securities
B) discretionary securities
C) trading securities
D) available-for-sale securities
15) Markot Corporation purchased $400,000 of securities and classified them as available-for-
sale. The market value of the securities went down to $375,000. Markot Corporation should
________.
A) show these securities on its balance sheet at their market value
B) report a holding gain on its income statement
C) report a holding loss on its income statement
D) report an unrealized loss on its income statement
16) Markot Corporation purchased $400,000 of securities and classified them as available-for-
sale. The market value of the securities went up to $475,000. Markot Corporation should
________.
A) show these securities on its balance sheet at their market value
B) report a holding gain on its income statement
C) report a holding loss on its income statement
D) report an unrealized gain on its income statement
17) An increase or decrease in the market value of a company’s investments in securities is
________.
A) a realized gain or loss
B) considered to be either other gain or other loss on the income statement
C) an unrealized gain or loss
D) treated as an operating income or expense
18) Firms must classify their investments in securities into one of three categories: held-to–
maturity, trading, and available-for-sale.
19) If a company buys securities solely to trade them and to make a short-term profit, the
securities are classified as available-for-sale securities.
20) Only investments in debt securities can be classified as held-to-maturity.
21) Only investments in equity securities can be classified as held-to-maturity.
22) An increase or decrease in the market value of a company’s investments in securities is an
unrealized gain or loss.
23) Held-to-maturity securities are investments in debt securities that a company plans to hold
until the securities mature.