Chapter 13: Financial Statement Analysis
79. Refer to the data for Pinecrest Company.
Which of the following statements is true?
a.
Net income must be at least $36,000 for 2017.
b.
Net income must be less than $36,000 for 2017.
c.
Cash flows from operating activities is twice as large as net income for 2017.
d.
The amount of net income for 2017 cannot be determined based on the data provided.
ANSWER:
d
DIFFICULTY:
Hard
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Analyzing
80. Refer to the data for Pinecrest Company.
Competitors in Pinecrest Company’s industry have an average inventory turnover of 20.8 times. Its inventory turnover for
2017
a.
indicates that the company has too little inventory on hand at the end of 2017.
b.
indicates that the company is pricing its products too low.
c.
is equal to the number of days’ sales in the company’s inventory.
d.
indicates that the market may be reacting to problems in the sales department by reducing demand for the
company’s products.
ANSWER:
d
RATIONALE:
Inventory Turnover = Cost of Goods Sold / Average Inventory $168,000 / [(22,000 + 83,000)
/ 2] = 3.2
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Analyzing
81. Refer to the data for Pinecrest Company.
Competitors in Pinecrest Company’s industry have an average accounts receivable turnover of 10.8 times. Pinecrest
reported accounts receivable at December 31, 2017, of $42,000 and has normal credit terms requiring payment within 30
days. Pinecrest’s accounts receivable turnover for 2017 is:
a.
probably indicating that the company probably has stricter credit terms and policies than the industry as a
whole, which may repel potential buyers.
b.
of no value to bankers and other creditors.
c.
less efficient in its collection policies in 2017 than the industry as a whole.
d.
less than the industry, which means that its customers are paying on their accounts in a more timely manner
than are customers reflected by the industry average.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Analyzing
82. Liquidity analysis is required
a.
in order to evaluate the profitability over past accounting periods.
b.
to assess the nearness to cash of a company’s assets and liabilities.
c.
to be reported in the financial statements for all companies publicly traded.
d.
when a company reports nonrecurring items in its financial statements.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
83. Which of the following is an example of liquidity analysis?
a.
b.
c.
d.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
84. Which of the following statements is generally considered desirable?
a.
A large decrease in accounts receivable turnover ratio
b.
A decrease in the number of days’ sales in receivables
c.
An increase in sales along with a larger decrease in the gross profit ratio
d.
A decrease in the cash flow from operations to current liabilities ratio
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
85. Which of the following generally indicates a positive change?
a.
Earnings per share decreases
b.
The debt service coverage decreases
c.
The acid-test ratio decreases
d.
The number of days’ sales in inventory decreases
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
86. Moonbeam Gift Shop’s inventory turned over six times during the year. Similar gift shops have an inventory turnover
equal to twelve times per year. What explains Moonbeam’s state of inventory management?
a.
Moonbeam sold too much inventory during the year.
b.
Moonbeam needs to increase sales and decrease the amount of inventory on hand.
c.
Moonbeam is performing twice as well as its competitors.
d.
Moonbeam should increase the amount of goods on hand to accommodate the additional inventory demand.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Applying
87. Sandy Shores, Inc. reported the following amounts in its financial statements:
2017
2016
Average merchandise inventory
$ 200,000
$ 120,000
Cost of goods sold
4,000,000
3,000,000
From 2016 to 2017, the company’s management of inventory is
a.
declining, because the number of days’ sales in inventory is getting larger.
b.
increasing, because the number of days’ sales in inventory is getting larger.
c.
declining, because the number of days’ sales in inventory is getting smaller.
d.
increasing, because the number of days’ sales in inventory is getting smaller.
ANSWER:
a
RATIONALE:
Inventory Turnover = Cost of Goods Sold / Average Inventory
2017: $4,000,000 / 200,000 = 20
2016: $3,000,000 / 120,000 = 25
Days’ Sales in Inventory = Days / Inventory Turnover
2017: 360 / 20 = 18
2016: 360 / 25 = 14.4
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Analyzing
88. The current ratio
a.
is generally smaller than the quick ratio.
b.
decreases when a company becomes more liquid.
c.
increases when a company allows more customers to charge on account instead of collecting cash.
d.
is larger when a company is more liquid.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
89. Seashell Company is considered “very liquid” for the year ended December 31, 2016. This means that Seashell
a.
has a small quick ratio.
b.
must decrease its liquidity in order to appear favorable to stockholders.
c.
should sell plant assets in order to remain in business.
d.
is able to pay its current debts using its current assets.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Applying
90. Most companies
a.
are not concerned with the management of working capital because cash flows are good.
b.
strive for a balance between current assets and current liabilities.
c.
try to maintain protection from the creditors by keeping only a small amount of cash available.
d.
agree that working capital of $3,000,000 is sufficient for business operations.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
91. The acid-test ratio differs from the current ratio in that it
a.
represents the amount of cash on hand instead of the amount of working capital.
b.
excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and
possible nonpayment.
c.
is a stricter test of a company’s ability to pay its current debts as they are due.
d.
signals the need to liquidate marketable securities when it drops below 5 to 1.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
92. The current and quick ratios have two limitations. These ratios
a.
emphasize the ineffectiveness of analysts’ calculations, and focus on liquid assets at a point in time instead of a
period of time.
b.
focus on cash instead of working capital, and they represent a point in time instead of covering a period of
time.
c.
focus on working capital instead of cash, and they represent a point in time instead of covering a period of
time.
d.
are ignored by most creditors, and focus on working capital instead of cash.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
93. Turnover ratios differ from the current and quick ratios in that they
a.
are based on working capital instead of cash.
b.
are based on a point of time instead of a period of time.
c.
are activity ratios.
d.
measure the profitability of a company instead of its liquidity.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
94. The cash-to-cash operating cycle is the number of days’ sales in
a.
receivables and working capital.
b.
receivables and plant assets.
c.
inventory and receivables.
d.
inventory and plant assets.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Remembering
95. The operating cycle of a manufacturer is the length of time between the
a.
purchase of raw materials and the sale of the goods.
b.
sale of the goods and the collection of any outstanding receivables from the sale of the product.
c.
purchase of raw materials and collection of any outstanding receivables from the sale of the product.
d.
purchase of raw materials and the production of goods.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
96. Which of the following formulas gives the inventory turnover ratio?
a.
Net credit sales/Average inventory
b.
Average inventory/Net credit sales
c.
Cost of goods sold/Average inventory
d.
Average inventory/Cost of goods sold
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Remembering
97. Which of the following ratios is used to analyze a company’s liquidity?
a.
Return on assets ratio
b.
Inventory turnover ratio
c.
Earnings per share
d.
Asset turnover ratio
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Remembering
98. If the current ratio is 3 to 1 and the working capital is $100,000, then the current assets are
a.
$150,000
b.
$200,000
c.
$300,000
d.
$450,000
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Analyzing
99. Which of the following is true regarding the relationship of the current ratio to the quick ratio?
a.
The current ratio is based on a more conservative measure of liquidity.
b.
Both focus on the relationship between part or all of the firm’s current assets and all of its current liabilities.
c.
Both focus on the relationship between all of the firm’s current assets and part or all of its current liabilities.
d.
For a company in the service industry, the current ratio and quick ratio will be significantly different.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
100. Assume the current ratio for Allegheny Supply Co. is 2 to 1. If the company purchased supplies on credit, the effect
of this transaction is to:
a.
increase the current ratio
b.
decrease the current ratio
c.
have no effect on the current ratio
d.
decrease cash
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
101. Which of the following will decrease working capital?
a.
collection of accounts receivable
b.
purchase of a new computer with cash
c.
payment of salaries payable
d.
purchase of merchandise on credit
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
102. The net assets of a company are equal to
a.
current assets less current liabilities.
b.
total assets less current assets.
c.
long-term assets less accumulated depreciation.
d.
the stockholders’ equity.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
KEYWORDS:
Bloom’s: Understanding
103. The following items appear on the balance sheet of The Piano Company at the end of 2017 and 2016:
2017
2016
Current assets
$6,000
$3,000
Long-term assets
7,000
4,000
Current liabilities
2,000
3,000
Long-term liabilities
7,000
0
Stockholders’ equity
4,000
4,000
Between 2016 and 2017
a.
The Piano Company’s debt-to–equity ratio and current ratio both increased.
b.
The Piano Company’s debt-to–equity ratio and current ratio both decreased.
c.
The Piano Company’s debt-to–equity ratio increased and its debt-to-total assets ratio decreased.
d.
The Piano Company’s debt-to–equity ratio decreased and its debt-to-total assets ratio increased.
ANSWER:
a
RATIONALE:
Debt-to-equity ratio = Total liabilities/ Total SE
2017: ($2,000 + 7,000) / $4,000 = 2.25
2016: $3,000 / $4,000 = 0.75
Current Ratio = Current Assets / Current Liabilities
2017: $6,000 / $2,000 = 3
2016: $3,000 / $3,000 = 1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
104. Carlton, Inc. presented the following information in a note to its financial statements for the year ending December
31, 2016:
The company has a loan agreement with Beachside Bank that states:
1. The current ratio should remain at least 2.0 to 1 at all times.
2. The debt-to-equity ratio should not exceed .7 to 1 at any time.
3. The times-interest-earned should be 5.0 or better.
4. The inventory-turnover should be 4.0 or better.
The ratios at year-end are: current ratio, 2.3 to 1; debt-to–equity ratio, .6 to 1; times-interest-earned, 7.1; and inventory-
turnover, 3.7. Which of the following statements is true?
a.
Carlton was in default because of the inventory turnover.
b.
Carlton was in default because of the current ratio.
c.
Carlton was in default because of the debt-to-equity ratio.
d.
Carlton was in default because of the times-interest-earned.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
105. Scrubber, Inc. presented the following information in a note to its financial statements for the year ending December
31, 2016:
The company has a loan agreement with Mountain State Bank that states:
1. The current ratio should remain at least 2.0 to 1 at all times.
2. The debt-to-equity ratio should not exceed .7 to 1 at any time.
3. The company must maintain $75,000 cash at all times.
The ratios at year-end are: current ratio, 2.3 to 1 and debt-to-equity ratio, .2 to 1. The amount of cash on the bank
statement is $75,400, but the cash account after the adjustments from the bank reconciliation has a balance of $74,900.
Has Scrubber violated its loan agreement?
a.
No
b.
Yes, the cash balance is less than $75,000.
c.
Yes, the current ratio is .3 or 30% larger than the agreement indicates.
d.
Yes, the cash balance is less than $75,000, and the debt-to-equity ratio is overstated.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
Chapter 13: Financial Statement Analysis
Westmoreland Company
Following are selected data from Westmoreland Company’s financial statements.
2017
2016
Current liabilities
$230,000
$160,000
Long-term debt
120,000
320,000
Stockholders’ equity
420,000
540,000
Cash payments for additions to plant and equipment
45,000
32,000
Net cash flow from operating activities
80,000
51,000
Interest and principal payments
12,000
8,000
Net operating cash flows before interest and taxes
68,000
43,000
Net income
90,000
72,000
Interest expense
8,500
11,500
Income taxes
16,000
14,500
Dividends paid
15,000
30,000
106. Refer to the Westmoreland Company data.
Westmoreland’s debt-to-equity ratio for 2017 is:
a.
an indicator that Westmoreland Company’s ability to meet current interest payments to creditors is increasing.
b.
increasing slightly from 2016 to 2017.
c.
an indicator that for every $1 of capital that stockholders provided, creditors provided $0.83.
d.
an indicator that Westmoreland Company has relied on stockholders for funds more in 2016 than in 2017.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
107. Refer to the Westmoreland Company data.
The company’s times interest earned ratio for 2017
a.
shows an increase in the company’s ability to pay its current debt when it comes due.
b.
indicates the company cannot meet its current year interest payments out of current year earnings.
c.
increased, which indicates the company’s lenders will be pleased.
d.
decreased, which indicates the company has more cash to pay interest on its debt.
ANSWER:
c
RATIONALE:
Times-interest-earned = (NI + Interest Expense + Income Tax Expense) / Interest Expense
2017: ($90,000 + 8,500 + 16,000) / $8,500 = 13.5
2016: ($72,000 + 11,500 + 14,500) / $11,500 = 8.5
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
108. Refer to the Westmoreland Company data.
The cash flow from operations to capital expenditures ratio for 2017 is an indicator that Westmoreland Company
a.
has been effectively able to use operations to finance its acquisitions of productive assets.
b.
has increased profits by $13,000.
c.
has decreased cash, but is offset by the increase in net income.
d.
has net income that is more than it would have been had dividends of $30,000 been paid.
ANSWER:
a
RATIONALE:
2017: ($80,000 – 15,000) / $45,000 = 1.4
2016: ($51,000 – 30,000) / $32,000 = 0.7
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
109. Refer to the Westmoreland Company data.
The company’s debt-to-equity ratio was 0.83 to 1 in 2017 and 0.89 to 1 in 2016. Which of the following statements is true
concerning Westmoreland?
a.
The company has a smaller percentage of capital from owners at the end of 2017 than at the end of 2016.
b.
The company relied more on creditors for financing during 2017 than in 2016.
c.
The company is improving its debt-to-equity ratio.
d.
The company appears to be in a weaker position at the end of 2017 to finance capital expenditures from cash
flow generated by operating activities.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
110. Refer to the Westmoreland Company data.
The company’s debt service coverage ratio for 2017 indicates that the
a.
company’s ability to pay principal and interest to creditors has declined.
b.
company has more net income available to allocate to stockholders after the payment of debt.
c.
company had significantly changes in current assets and current liabilities during the period.
d.
company generates about $2 of cash from operations to cover every $1 of debt.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
111. Which of the following solvency ratios is the best measure of a company’s ability to pay interest and maturing
principal amounts on its long-term debt?
a.
Debt-to-equity ratio
b.
Times interest earned ratio
c.
Debt service coverage ratio
d.
Earnings per share
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
112. Which of the following solvency ratios is the best measure to determine the degree to which a company relies on
outsiders for funds?
a.
Debt-to-equity ratio
b.
Times interest earned ratio
c.
Debt service coverage ratio
d.
Cash flow from operations to capital expenditures ratio
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
113. Which of the following ratios is the best measure in analyzing a company’s ability to pay interest on long-term debt
and to repay the long-term debt over several years?
a.
Debt-to-equity ratio
b.
Times interest earned ratio
c.
Debt service coverage ratio
d.
Acid-test ratio
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
114. Below are selected data from the financial statements of Moriarty Company.
2017
2016
Total liabilities
$1,205,000
$952,000
Common stock ($30 par)
250,000
225,000
Paid-in capital in excess of par—common stock
150,000
135,000
Retained earnings
155,000
145,000
The debt-to-equity ratio for 2017 is
a.
increasing, which should be a major cause of concern for Moriarty Company.
b.
increasing, which should be a good sign in investors’ eyes.
c.
decreasing, which should be a major cause of concern for Moriarty Company.
d.
decreasing, which should be a good sign in investors’ eyes.
ANSWER:
a
RATIONALE:
Debt-to-equity ratio = Total liabilities / Total SE
2017: $1,205,000 / ($250,000 + 150,000 + 155,000) = 2.2
2016: $952,000 / ($225,000 + 135,000 + 145,000) = 1.9
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
115. Solvency and liquidity differ in a company’s ability
a.
to show a profit.
b.
to remain in business over a long or short period of time.
c.
to collect cash from customers during the short- or long-term.
d.
to increase gross profit percentages over long or short periods of time.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
116. The cash flow from operations to capital expenditures ratio measures a company’s ability to
a.
use operations to finance its acquisitions of productive assets.
b.
use cash flows from capital expenditure transactions to maintain working capital.
c.
increase its capital expenditures as a result of profitable operations.
d.
pay its current bills from profits made using productive assets.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
117. Return ratios are measures of the relationship between the
a.
income earned and the investment made in the company by the various groups.
b.
revenue earned and the total equity of a company.
c.
total equity of a company and its cash flows for the period.
d.
profitability and liquidity aspects of a company.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
118. Auto Industries Company reported the following on its income statement:
Income before income taxes
$420,000
Income tax expense
120,000
Net income
$300,000
If the income statement also shows interest expense equal to $80,000, what is the company’s times interest earned ratio?
a.
5 times
b.
8 times
c.
5.25 times
d.
6.25 times
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Analyzing
119. A solvency measure that focuses specifically on the extent to which a company relies on outsiders for funds is:
a.
cash flow from operations to capital expenditures ratio
b.
debt service coverage ratio
c.
times interest earned ratio
d.
debt-to-equity ratio
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
120. In considering equity and debt financing, which of the following statements is true?
a.
Compared to equity financing, debt is a more expensive source of funding.
b.
Interest and dividends payments are required to be made by the issuing corporation.
c.
In general, the higher the proportion of total debt-to-equity ratio, the greater the likelihood the firm will have
difficulty in meeting its obligations in some future period.
d.
Most firms prefer to have no debt and rely on equity financing.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 – LO: 13-05
KEYWORDS:
Bloom’s: Understanding
121. Santana Company issued additional shares of common stock. The effect of the transaction is
a.
the earnings per share increased
b.
the debt-to-equity ratio increased
c.
the earnings per share decreased
d.
the asset turnover ratio decreased
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
122. Crimson Company declared and paid $1,000,000 in dividends to the common stockholders. The effect of this
transaction is that the
a.
earnings per share decreased
b.
current ratio increased
c.
debt-to-equity ratio increased
d.
earnings per share increased
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Analyzing
123. Aleve Company purchased inventory on credit. The effect of this transaction is that the
a.
earnings per share decreased
b.
working capital increased
c.
debt-to-equity ratio increased
d.
earnings per share increased
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
124. Back Company sold merchandise on credit. Its gross profit ratio is 23%. The effect of this transaction is that the
a.
earnings per share decreased
b.
current ratio was unchanged
c.
debt-to-equity ratio increased
d.
earnings per share increased
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
125. Treetop Company paid off a $100,000 two-year note payable. The effect of this transaction is that the
a.
earnings per share increased
b.
current ratio decreased
c.
debt-to-equity ratio increased
d.
debt-to-equity ratio decreased
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Analyzing
126. A non-business entity would be particularly concerned about its
a.
earnings per share
b.
price/earnings ratio
c.
liquidity
d.
income tax rate
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 – LO: 13-04
FACC.PONO.13.13-05 – LO: 13-05
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
127. Which of the following is considered a profitability ratio?
a.
Earnings per share
b.
Debt-to-equity ratio
c.
Acid-test ratio
d.
Inventory turnover ratio
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
128. Which profitability ratio requires the use of earnings per share in its calculation?
a.
Price/earnings ratio
b.
Return on common stockholders’ equity
c.
Dividend yield ratio
d.
Profit margin
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
129. Which profitability ratio requires the use of earnings per share and the current market price?
a.
Return on common stockholders’ equity
b.
Dividend payout ratio
c.
Dividend yield ratio
d.
Price/earnings ratio
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
130. Which of the following profitability ratios is most useful in indicating the “quality” of a company’s earnings?
a.
Price/earnings ratio
b.
Gross profit ratio
c.
Dividend payout ratio
d.
Dividend yield ratio
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
131. Which of the following statements is true?
a.
The return on assets ratio indicates whether the company can pay its current debt when it becomes due.
b.
The causes for an increase or decrease in the return on assets ratio can be examined by calculating its two
components: return on sales and asset turnover.
c.
If a company successfully applies leverage, its return on assets ratio will be greater than its return on common
stockholders’ equity ratio.
d.
If a company’s return on assets ratio increases, the increase can be the result of decreased liquidity.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
132. The return on assets ratio
a.
considers the investment made by all creditors and stockholders.
b.
is a measure of the liquidity of a company.
c.
is based on average stockholders’ equity as compared to net income for the period.
d.
reflects investments made only by the creditors of a company.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
133. Dividends to preferred stockholders are deducted from net income when calculating the return on common
stockholders’ equity ratio because
a.
dividends are not an expense on the income statement.
b.
the ratio is an indicator of the return on “common” stockholders’ equity, not the return on preferred stock.
c.
dividends are only available for distribution to common stockholders.
d.
conservatism indicates that shareholders prefer a smaller numerator.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
134. A company that uses leverage is attempting to earn an overall return that is higher than the cost of funds received
from
a.
preferred and common stockholders.
b.
common stockholders only.
c.
preferred stockholders and borrowed funds.
d.
borrowed funds only.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
135. Presented below are selected data from the financial statements of Wizard Corp.
2017
2016
Net income
$150,000
$120,000
Cash dividends paid on preferred stock
$15,000
$15,000
Cash dividends paid on common stock
$42,000
$38,000
Weighted average number of preferred shares outstanding
20,000
20,000
Weighted average number of common shares outstanding
105,000
95,000
Earnings per share is reported on the 2017 income statement as
a.
$1.08
b.
$1.20
c.
$1.29
d.
$1.43
ANSWER:
c
RATIONALE:
($150,000 – 15,000) / 105,000 = $1.29
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Analyzing
136. Presented below are selected data from the financial statements of Parade Corp.
2016
2017
Net income
$150,000
$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
The price/earnings ratio for 2017 is
a.
.80 to 1
b.
1.43 to 1
c.
8.39 to 1
d.
12.50 to 1
ANSWER:
c
RATIONALE:
EPS = $150,000 / 105,000 = $1.43
$12 / $1.43 = 8.39
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Analyzing
137. Presented below are selected data from the financial statements of Carnival Corp. for 2017 and 2016.
2017
2016
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
Shares of common stock outstanding
140,000
140,000
The dividend yield ratio for 2017 is
a.
1.9%
b.
2.1%
c.
36.3%
d.
38.1%
ANSWER:
a
RATIONALE:
Common Dividends per share = $42,000 / 140,000 = $0.30
$0.30 / $16 = 1.9%
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Analyzing
138. Which of the following yields the return on assets ratio?
a.
(return on common stockholders’ equity) × (asset turnover)
b.
(return on sales) × (asset turnover)
c.
(profit margin) × (return on sales)
d.
(profit margin) × (asset turnover)
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
139. Which combination of ratios will best analyze Stetson’s income statement performance?
a.
Earnings per share, gross profit, and profit margin ratio
b.
Gross profit ratio, return on common stockholders’ equity ratio, debt-to-equity ratio
c.
Debt-to-equity ratio, gross profit ratio, and profit margin ratio
d.
Current ratio, gross profit ratio, and return on common stockholders’ equity ratio
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding
140. Earnings per share is an indication of how much
a.
the company paid as dividends for each share of stock held by stockholders.
b.
the company earned for each share of outstanding common and preferred stock.
c.
the company earned for each share of outstanding common stock.
d.
cash the company has for each share of all outstanding stock.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 – LO: 13-06
KEYWORDS:
Bloom’s: Understanding