Finance Chapter 13 If two companies in the same industry use different methods to value inventory 

Document Type
Test Prep
Book Title
Financial Accounting: The Impact on Decision Makers 10th Edition
Authors
Curtis L. Norton, Gary A. Porter
Chapter 13: Financial Statement Analysis
True / False
1. If two companies in the same industry use different methods to value inventory, this makes comparisons more difficult
but not impossible.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Remembering
2. Comparing one company with another in the same industry should cause no problems since companies in the same
industry are required to use the same GAAP.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Understanding
3. The FASB requires a separate note in the financial statements to show the effects of inflation so that investors are able
to compare statements more accurately.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Remembering
4. The analysis of common-size statements is called horizontal analysis.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Remembering
5. An example of horizontal analysis is the increase in cost of goods sold by 29% from 2016 to 2017.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Remembering
6. Vertical analysis is a comparison of financial statement items for a single company over a period of time.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Remembering
7. An increase in a company's revenue and expense accounts will automatically cause an increase in net income for the
period.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Remembering
8. Common-size financial statements exclude the dollar amount as a relevant variable in the analysis, which makes
comparison of one period with the next more meaningful.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Remembering
9. The base, or benchmark, on which all items on the income statement are compared is net sales.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Remembering
10. The profit margin ratio reflects the amount of income for each dollar of sales.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Remembering
11. All line items in common-size comparative income statements are stated as a percentage of net income.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Remembering
12. Inventories and prepaid assets are excluded from the numerator used to compute the quick ratio.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
13. Three measures of liquidity are: working capital, the acid-test ratio, and the debt-to-equity ratio.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
14. Inventory is more liquid than accounts receivable because receivables must be collected and some customers may not
be willing to pay, while inventory need only be sold in a retail store.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
15. The most liquid of all assets is cash.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
16. The amount of working capital is more meaningful to users than the current ratio because it provides information on
the composition of the current accounts.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
17. The acid-test ratio is a stricter test of a company's ability to pay its current debts as they are due than the current ratio
is.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
18. Ratios that focus on cash are more useful than those that focus on income in the evaluation of the liquidity of a
company.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
19. Apple Company had terms of net 60 days for customers. The number of days' sales in accounts receivable for Apple
was 42 days. Apple is efficient in the collection of its receivables.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
20. Spring Market has an inventory turnover ratio of 15 times. Fall Market has a turnover of 14 times. Fall is more
effective in managing inventory.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
21. The number of days' sales in inventory is the same as a company’s accounting cycle.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
22. Solvency is the company's ability to pay its current debts when they become due.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 - LO: 13-05
KEYWORDS:
Bloom's: Remembering
23. One measure of a company's overall long-term financial health is the debt-to-equity ratio.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 - LO: 13-05
KEYWORDS:
Bloom's: Remembering
24. A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to
pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 - LO: 13-05
KEYWORDS:
Bloom's: Remembering
25. Solvency is concerned with the ability of a company to pay next year’s debts as they come due.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-05 - LO: 13-05
KEYWORDS:
Bloom's: Remembering
26. The denominator of a return ratio will be some measure of the company’s income for the period.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 - LO: 13-06
KEYWORDS:
Bloom's: Remembering
27. The income number used in the rate of return on assets is income after interest expense is added back.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 - LO: 13-06
KEYWORDS:
Bloom's: Remembering
28. Because net income is on an after-tax basis, interest in the return on assets ratio must be placed on a before-tax basis.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 - LO: 13-06
KEYWORDS:
Bloom's: Remembering
29. The return on sales ratio is a variation of the profit margin ratio.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 - LO: 13-06
KEYWORDS:
Bloom's: Remembering
30. The concept of leverage refers to the practice of using borrowed funds and amounts received from preferred
stockholders in an attempt to earn an overall return that is higher than the cost of these funds.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 - LO: 13-06
KEYWORDS:
Bloom's: Remembering
31. If a company must pay more for the amounts provided by creditors and preferred stockholders than it can earn overall,
as indicated by the return on assets, there will be favorable leverage.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 - LO: 13-06
KEYWORDS:
Bloom's: Remembering
32. A high P/E ratio always indicates that a stock is overpriced by the market.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-06 - LO: 13-06
KEYWORDS:
Bloom's: Remembering
33. Analysts trying to make investment decisions may very well ignore discontinued operations, and extraordinary items.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-07 - LO: 13-07
KEYWORDS:
Bloom's: Remembering
34. Because discontinued segments of a business will not be part of the company’s future operations, discontinued
operations are disclosed separately on the income statement.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-07 - LO: 13-07
KEYWORDS:
Bloom's: Remembering
35. Discontinued operations and extraordinary items are two components of the income statement that are reported after
income from operations or are reported separately because of their unique nature.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-07 - LO: 13-07
KEYWORDS:
Bloom's: Remembering
36. The selection of a particular inventory valuation method has a significant effect on certain key ratios.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Remembering
37. Various organizations publish summaries of selected ratios organized by industry for a sample of U.S. companies.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Remembering
38. The definition of a conglomerate is a company that operates in one industry and uses different inventory valuation
techniques.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Remembering
39. Since inflation is an important consideration in analyzing financial statements, the FASB requires the submission of
all financial statements in an inflation-adjusted format to the SEC.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Remembering
40. Kingston Company’s accounts receivable turned over nine times during the year. This translates into strict adherence
of the company's net/30 credit terms by Kingston's customers.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
41. Since almost all debts require payment with quick assets, the quick ratio is more useful than the cash flow from
operations to current liabilities ratio.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
Multiple Choice
42. Which of the following considerations is most important for a stockholder when evaluating whether to purchase stock
in a company?
a.
Will earnings per share be distributed to stockholders?
b.
Will the company earn a fair return on the amount invested by the stockholders?
c.
Will the key ratios be reported on the balance sheet?
d.
Will cash flows from operations exceed the amount of net income for the period?
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Understanding
43. Which of the following is least useful in evaluating a company's financial statements?
a.
Comparison of the company's current period data with accounting data from 5 years ago
b.
Comparison with other companies in the same industry
c.
Comparison with government economic data for the economy as a whole.
d.
Comparison of the company’s current period data with that of the last year
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Understanding
44. Which of the following is the most serious limitation to financial statement analysis of publicly traded companies?
a.
Some companies do not use GAAP.
b.
Inflation can distort comparisons between years.
c.
Some companies report nonoperating items such as extraordinary gains and losses, while others do not.
d.
Different industries use different account names.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Understanding
45. A banker is analyzing a company which operates in the petroleum industry. Which of the following might be a major
consideration in determining whether the company should receive a loan?
a.
b.
c.
d.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Applying
46. A financial analyst is comparing two companies. Which of the following would cause major problems in the
evaluation process?
a.
One company has a fiscal year that ends on October 31, while the other company has a fiscal year that ends on
August 31.
b.
One company reported nonoperating activities, while the other company did not.
c.
The companies operate in different industries.
d.
Inflation has been low for the past several years.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Applying
47. Which of the following statements is true regarding valuation amounts on the balance sheet?
a.
Stockholders' equity reflects the amount the stockholders would receive upon liquidation.
b.
Assets are recorded at current cost.
c.
Stockholders' equity reflects the current market value of the stock
d.
There are a variety of assumptions used in determining amounts reported on the balance sheet.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Understanding
48. To review the current market price of the stock, one should review the
a.
balance sheet.
b.
income statement.
c.
statement of cash flows.
d.
none of these; it is not on the financial statements.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-01 - LO: 13-01
KEYWORDS:
Bloom's: Understanding
49. Horizontal analysis is analysis
a.
of dollar changes and percentage changes over two or more years.
b.
in which all items are presented as a percentage of one selected item on a financial statement.
c.
in which a statistic is calculated for the relationship between two items on a single financial statement or for
two items on different financial statements
d.
of all ratios that increased or decreased over past accounting periods.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Remembering
50. Trend analysis is analysis
a.
of dollar changes and percentage changes over several years.
b.
in which all items are presented as a percentage of one selected item on a financial statement.
c.
in which a statistic is calculated for the relationship between two items on a single financial statement or for
two items on different financial statements.
d.
of all ratios that increased or decreased over past accounting periods.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Remembering
51. The dollar change and percentage change in the accounts receivable account from 2016 to 2017 is calculated for
Allison Corporation. This is an example of
a.
horizontal analysis
b.
vertical analysis
c.
profitability analysis
d.
solvency assessment
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Applying
52. Which of the following statements is true regarding horizontal analysis?
a.
Horizontal analysis can only be used with balance sheet accounts.
b.
Horizontal analysis can only be used with income statement accounts.
c.
Horizontal analysis can only be used with retained earnings accounts.
d.
Time series analysis is an advanced statistical technique for horizontal analysis.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Understanding
53. What is the minimum number of years for which publicly traded companies must include the following statements in
their annual report filed with the SEC?
Balance Sheet Income Statements and Statements of Cash Flows
a.
3 Years
3 Years
b.
2 Years
2 Years
c.
2 Years
3 Years
d.
3 Years
2 Years
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Understanding
Mother Nature Supplies
Following are selected data from the financial statements of Mother Nature Supplies:
2017
2016
Accounts receivable
$ 60,000
$ 38,000
Merchandise inventory
12,000
16,000
Total assets
450,000
380,000
Net sales
380,000
270,000
Cost of goods sold
160,000
210,000
54. Refer to the data for Mother Nature Supplies.
Which of the following would result from a horizontal analysis of its balance sheet?
a.
Accounts receivable increased $22,000 or 57.9% during 2017.
b.
Accounts receivable is five times larger than Merchandise inventory in 2017.
c.
Accounts receivable is 13.3% of total assets for 2017.
d.
Merchandise inventory is 2.7% of total assets for 2017.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Analyzing
55. Refer to the data for Mother Nature Supplies.
Which of the following would result from a horizontal analysis of its income statement?
a.
Cost of goods sold is 45.5% of net sales for 2017.
b.
Gross profit is 42.1% of net sales for 2017.
c.
Cost of goods sold decreased $50,000 or 23.8% during 2017.
d.
Accounts receivable total 13.3% of total assets for 2017.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-02 - LO: 13-02
KEYWORDS:
Bloom's: Analyzing
56. Refer to the data for Mother Nature Supplies.
Which of the following would not result from a vertical analysis of its balance sheet?
a.
Accounts receivable increased $22,000 or 36.7% during 2017.
b.
Accounts receivable is five times larger than Merchandise inventory in 2017.
c.
Accounts receivable is 13.3% of total assets for 2017.
d.
Merchandise inventory is 2.7% of total assets for 2017.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Analyzing
57. Refer to the data for Mother Nature Supplies.
Which of the following would result from a vertical analysis of its income statement?
a.
Accounts receivable increased $22,000 or 57.9% during 2017.
b.
Gross profit is 57.9% of net sales for 2017.
c.
Cost of goods sold increased $50,000 or 23.8% during 2017.
d.
Net sales increased $110,000 or 28.9% during 2017.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Analyzing
58. Refer to the data for Mother Nature Supplies.
Which of the following results would be found through a vertical analysis of the balance sheet or the income statement of
Mother Nature Supplies?
a.
Accounts receivable increased $22,000 during 2017.
b.
Total assets increased $70,000 during 2017.
c.
Cost of goods sold increased $50,000 or 23.8% during 2017.
d.
Gross profit is 57.9% of net sales for 2017.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Analyzing
59. Which of the following statements is true regarding vertical analysis?
a.
Common-size financial statements can be used to compare businesses of different sizes.
b.
Vertical analysis can only be used with balance sheet accounts.
c.
Vertical analysis can only be used with income statement accounts.
d.
Vertical analysis can only be used with retained earnings accounts.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Understanding
60. The calculations for some profitability ratios are the same as the calculations for common-size analysis of the income
statement. Which of the following profitability ratios would also be determined through a common-size analysis of the
income statement?
a.
gross profit ratio
b.
debt-to-equity ratio
c.
acid-test ratio
d.
earnings per share
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Understanding
61. Starship Inc.'s gross profit ratio decreased from 36.5% in 2016 to 28.6% in 2017. What is the trend in this change?
a.
An upward trend
b.
A downward trend
c.
It depends on whether net sales increased or decreased during the period
d.
Trends cannot be determined without the dollar amount of the increase provided
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Analyzing
62. In a vertical analysis of the income statement, the 100% amount is
a.
Net income
b.
Gross profit
c.
Operating income
d.
Net sales
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Understanding
63. In a vertical analysis of the balance sheet, the 100% amount is
a.
Current assets
b.
Working capital
c.
Total assets
d.
Total stockholders equity
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Understanding
64. You want to know whether selling and administrative expenses were reasonable for the past year, based on the level of
sales. The best analysis for obtaining this information is:
a.
trend analysis
b.
vertical analysis
c.
horizontal analysis
d.
liquidity analysis
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-03 - LO: 13-03
KEYWORDS:
Bloom's: Understanding
65. What numerators are used in the computation of the following ratios?
Inventory turnover ratio Accounts receivable turnover ratio
a.
Cost of Goods Sold
Cost of Goods Sold
b.
Net Credit Sales
Net Credit Sales
c.
Net Credit Sales
Cost of Goods Sold
d.
Cost of Goods Sold
Net Credit Sales
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
66. Which of the following is considered a liquidity analysis tool?
a.
gross profit ratio
b.
acid-test ratio
c.
dividend yield ratio
d.
return on assets ratio
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
67. Which of the following ratios is least useful in evaluating a company's ability to pay its current debts as they become
due?
a.
current ratio
b.
debt-to-equity ratio
c.
debt service coverage ratio
d.
acid-test ratio
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: Understanding
68. Which of the following is a total dollar measure of liquidity?
a.
accounts receivable turnover ratio
b.
cash to cash operating cycle
c.
number of days’ sales in inventory
d.
working capital
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Remembering
69. If Tommy's Subs Company has a current ratio of 2.5 and current assets of $195,000, the amount of working capital is:
a.
$117,000
b.
$330,000
c.
$380,000
d.
$78,000
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
70. If Mussel Company has working capital of $540,000 and a current ratio of 3 to 1, the amount of current assets is:
a.
$540,000
b.
$810,000
c.
$270,000
d.
$405,000
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
Fawnsworth Industries
Below is financial data for Fawnsworth Industries’ current year.
Net sales on account during year
$500,000
Cost of merchandise sold during year
300,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
71. Refer to the data for Fawnsworth Industries.
Based on this information, what is the accounts receivable turnover for the current period?
a.
10.0 times
b.
12.5 times
c.
11.1 times
d.
14.3 times
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
72. Refer to the data for Fawnsworth Industries.
Based on this information, what is Fawnsworth’s number of days’ sales in receivables (assuming a 360 day year)?
a.
32.4 days
b.
36.0 days
c.
28.8 days
d.
25.2 days
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
73. Refer to the data for Fawnsworth Industries.
Based on this information, what is Fawnsworth’s inventory turnover ratio for the current period?
a.
1.67 times
b.
2.73 times
c.
0.33 times
d.
3.00 times
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
74. Refer to the data for Fawnsworth Industries.
Based on this information, what is Fawnsworth’s number of days’ sales in inventory (assuming a 360 day year)?
a.
132 days
b.
216 days
c.
1,091 days
d.
120 days
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
75. Which of the following is a measure of the time that it takes to convert current assets into cash?
a.
accounts receivable turnover ratio
b.
cash to cash operating cycle
c.
number of days’ sales in inventory
d.
working capital
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Understanding
Pinecrest Company
Use the selected data from Pinecrest Company’s financial statements to answer the following question.
2017
2016
Cash
$ 22,000
$ 14,000
Accounts receivable
42,000
16,000
Merchandise inventory
22,000
83,000
Prepaid expenses
23,000
18,000
Total current assets
$109,000
$131,000
Total current liabilities
$ 65,000
$ 72,000
Net credit sales
221,000
326,000
Cost of goods sold
168,000
299,000
Net cash flow from operating activities
16,000
29,000
76. Refer to the data for Pinecrest Company.
The current ratio for 2017 is
a.
0.60 to 1
b.
0.99 to 1
c.
1.34 to 1
d.
1.68 to 1
ANSWER:
d
RATIONALE:
$109,000 (Current Assets) / $65,000 (Current Liabilities) = 1.68
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
77. Refer to the data for Pinecrest Company.
The amount of working capital at the end of 2017 is
a.
$36,000
b.
$44,000
c.
$99,000
d.
$174,000
ANSWER:
b
RATIONALE:
$109,000 (Current Assets) $65,000 (Current Liabilities) = $44,000
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing
78. Refer to the data for Pinecrest Company.
Which of the following statements is true?
a.
The current ratio increased from 2016 to 2017.
b.
The acid-test ratio decreased from 2016 to 2017.
c.
The amount of working capital decreased from 2016 to 2017.
d.
Assuming extreme conditions do not exist, the company appears to be in a worse position to pay its current
debts at the end of 2017 compared to 2016.
ANSWER:
c
RATIONALE:
Working capital 2016: $131,000 72,000 = $59,000
Working capital 2017: $109,000 65,000 = $44,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.13-04 - LO: 13-04
KEYWORDS:
Bloom's: Analyzing

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