Financial Analysis: The Big Picture
13–21
100. Assume the following sales data for a company:
2015 $960,000
2014 720,000
2013 600,000
If 2013 is the base year, what is the percentage increase in sales from 2013 to 2014?
a. 60%
b. 20%
c. 120%
d. 160%
101. Comparative balance sheets
a. are usually prepared for at least one year.
b. are usually prepared for at least two years.
c. do not show both dollar amount and percentage changes.
d. do not show a comparison of total stockholders’ equity.
102. Assume the following cost of goods sold data for a company:
2015 $1,300,000
2014 1,200,000
2013 1,000,000
If 2013 is the base year, what is the percentage increase in cost of goods sold from 2013
to 2015?
a. 130%
b. 30%
c. 70%
d. 20%
103. In horizontal analysis, each item is expressed as a percentage of the
a. net income amount.
b. stockholders’ equity amount.
c. total assets amount.
d. base-year amount.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–22
104. Boone Trading Company reported net sales of $400,000, $440,000, and $520,000 in the
years 2013, 2014, and 2015, respectively. If 2013 is the base year, what is the trend
percentage for 2015?
a. 77%
b. 118%
c. 130%
d. 78%
105. Comparisons of data within a company are an example of the following comparative basis
a. industry averages.
b. intercompany.
c. intracompany.
d. interregional.
106. Vertical analysis is also known as
a. perpendicular analysis.
b. common size analysis.
c. trend analysis.
d. straight-line analysis.
107. In a common size balance sheet, the 100 percent figure is
a. total current assets.
b. total property, plant and equipment.
c. total liabilities.
d. total assets.
108. In a common size financial statement, which of the following is given a percentage of 100
percent?
a. Total liabilities
b. Net income
c. Total assets
d. Cost of goods sold
109. In a common size income statement, the 100% figure is
a. net income.
b. cost of goods sold.
c. gross profit.
d. net sales.
Financial Analysis: The Big Picture
13–23
110. A balance sheet that displays only component percentages is called a ________ balance
sheet.
a. condensed
b. common size
c. comparative
d. trendy
111. Vertical analysis is a technique that expresses each item in a financial statement
a. in dollars and cents.
b. as a percent of the item in the previous year.
c. as a percent of a base amount.
d. starting with the highest value down to the lowest value.
112. In vertical analysis
a. a base amount is required.
b. a base amount is optional.
c. the same base is used across all financial statements analyzed.
d. the results of the horizontal analysis are necessary inputs for performing the analysis.
113. The best way to study the relationship of the components within a financial statement is to
prepare
a. common size statements.
b. a trend analysis.
c. profitability analysis.
d. ratio analysis.
114. In performing a vertical analysis, the base for prepaid expenses is
a. total current assets.
b. total assets.
c. total liabilities.
d. prepaid expenses in a previous year.
115. In performing a vertical analysis, the base for sales revenues on the income statement is
a. net sales.
b. sales revenue.
c. net income.
d. cost of goods available for sale.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–24
116. In performing a vertical analysis, the base for sales returns and allowances is
a. sales revenue.
b. sales discounts.
c. net sales.
d. total revenues.
117. In performing a vertical analysis, the base for cost of goods sold is
a. total selling expenses.
b. net sales.
c. total revenues.
d. total expenses.
118. Salamagundi, Inc. has the following Income Statement (in millions):
SALAMAGUNDI, INC.
Income Statement
For the Year Ended December 31, 2014
Net Sales $160
Cost of Goods Sold 90
Gross Profit 70
Operating Expenses 40
Net Income $ 30
Using vertical analysis, what percentage is assigned to net sales?
a. 150%
b. Can’t be computed.
c. 60%
d. 100%
119. Salamagundi, Inc. has the following Income Statement (in millions):
SALAMAGUNDI, INC.
Income Statement
For the Year Ended December 31, 2014
Net Sales $160
Cost of Goods Sold 90
Gross Profit 70
Operating Expenses 40
Net Income $ 30
Using vertical analysis, what percentage is assigned to gross profit?
a. 43.8%
b. 100%
c. 60%
d. 56.3%
Financial Analysis: The Big Picture
13–25
120. Cochran Corporation, Inc. has the following income statement (in millions):
COCHRAN CORPORATION, INC.
Income Statement
For the Year Ended December 31, 2014
Net Sales $240
Cost of Goods Sold 80
Gross Profit 160
Operating Expenses 65
Net Income $ 95
Using vertical analysis, what percentage is assigned to cost of goods sold?
a. 67%
b. 33%
c. 100%
d. 30%
121. Cochran Corporation, Inc. has the following income statement (in millions):
COCHRAN CORPORATION, INC.
Income Statement
For the Year Ended December 31, 2014
Net Sales $240
Cost of Goods Sold 80
Gross Profit 160
Operating Expenses 65
Net Income $ 95
Using vertical analysis, what percentage is assigned to net income?
a. 100%
b. 60%
c. 40%
d. 33%
122. Given the following data for the King Company:
Current liabilities $ 400
Long-term debt 480
Common stock 700
Retained earnings 520
Total liabilities & stockholders’ equity $2,100
How would common stock appear on a common size balance sheet?
a. 25%
b. 58%
c. 33%
d. 30%
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–26
123. The following schedule is a display of what type of analysis?
Amount Percent
Current assets $100,000 25%
Property, plant, and equipment 300,000 75%
Total assets $400,000 100%
a. Horizontal analysis
b. Differential analysis
c. Vertical analysis
d. Ratio analysis
124. In vertical analysis, the base amount for salaries and wages expense is generally
a. net sales.
b. salary & wages expense in a previous year.
c. gross profit.
d. net income.
125. Which one of the following is not a characteristic generally evaluated in ratio analysis?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency
126. Ratios are most useful in identifying
a. trends.
b. differences.
c. causes.
d. relationships.
127. Short-term creditors are usually most interested in assessing
a. solvency.
b. liquidity.
c. marketability.
d. profitability.
128. A common measure of liquidity is
a. return on assets.
b. accounts receivable turnover.
c. profit margin.
d. debt to equity.
Financial Analysis: The Big Picture
13–27
129. A common measure of profitability is the
a. current ratio.
b. current cash debt coverage.
c. return on common stockholders’ equity.
d. debt to assets.
130. A common measure of long-term solvency is
a. the cash debt coverage.
b. the current ratio.
c. the asset turnover.
d. inventory turnover.
131. Return on assets is most closely related to
a. profit margin and debt to assets ratio.
b. profit margin and asset turnover.
c. times interest earned and debt to stockholders’ equity.
d. profit margin and free cash flow.
132. Return on common stockholders’ equity is most closely related to
a. gross profit rate and operating expenses to sales ratio.
b. profit margin and free cash flow.
c. times interest earned and debt to stockholders’ equity ratio.
d. return on asset and leverage (debt to assets ratio).
133. Long-term creditors are usually most interested in evaluating
a. liquidity.
b. marketability.
c. profitability.
d. solvency.
134. Which one of the following would be considered a long-term solvency ratio?
a. Accounts receivable turnover
b. Return on assets
c. Current cash debt coverage
d. Debt to assets ratio
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–28
135. Stockholders are most interested in evaluating
a. liquidity.
b. solvency.
c. profitability.
d. marketability.
136. In ratio analysis, the ratios are never expressed as a
a. rate.
b. logarithm.
c. percentage.
d. simple proportion.
137. The current ratio is
a. calculated by dividing current liabilities by current assets.
b. used to evaluate a company’s liquidity and short-term debt paying ability.
c. used to evaluate a company’s solvency and long-term debt paying ability.
d. calculated by subtracting current liabilities from current assets.
138. The current ratio is a
a. liquidity ratio.
b. profitability ratio.
c. long-term solvency ratio.
d. cash flow ratio.
139. A company with $60,000 in current assets and $35,000 in current liabilities pays a $1,000
current liability. As a result of this transaction, the current ratio and working capital will
a. both decrease.
b. both increase.
c. increase and remain the same, respectively.
d. remain the same and decrease, respectively.
140. The accounts receivable turnover and inventory turnover are used to analyze
a. long-term solvency.
b. profitability.
c. liquidity.
d. leverage.
Financial Analysis: The Big Picture
13–29
141. Winsor Clothing Store had a balance in the Accounts Receivable account of $760,000 at
the beginning of the year and a balance of $840,000 at the end of the year. Net credit
sales during the year amounted to $6,800,000. The average collection period of the
accounts receivable in terms of days was
a. 30 days.
b. 365 days.
c. 45.1 days.
d. 42.9 days.
142. Bill’s Dollar Store had a balance in the Accounts Receivable account of $760,000 at the
beginning of the year and a balance of $840,000 at the end of the year. Net credit sales
during the year amounted to $6,880,000. The accounts receivable turnover was
a. 8.2 times.
b. 9.1 times.
c. 8.6 times.
d. 4.3 times.
143. A high accounts receivable turnover indicates
a. customers are making payments quickly.
b. a large portion of the company’s sales are on credit.
c. many customers are not paying their receivables.
d. the company’s sales have increased.
144. LKN Company had net credit sales of $4,290,000 and cost of goods sold of $3,000,000 for
the year. The Accounts Receivable balances at the beginning and end of the year were
$600,000 and $700,000, respectively. The accounts receivable turnover ratio was
a. 7.2 times.
b. 6.6 times.
c. 3.3 times.
d. 6.1 times.
145. Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at
the beginning of the year and a balance of $900,000 at the end of the year. Net credit
sales during the year amounted to $7,310,000. The accounts receivable turnover was
a. 8.6 times.
b. 8.3 times.
c. 8.2 times.
d. 8.9 times.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–30
146. Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at
the beginning of the year and a balance of $900,000 at the end of the year. Net credit
sales during the year amounted to $7,310,000. The average collection period of the
receivables in terms of days was
a. 44 days.
b. 42.4 days.
c. 365 days.
d. 41 days.
147. Somen to Park Corporation had net credit sales of $4,060,000 and cost of goods sold of
$3,000,000 for the year. The Accounts Receivable balances at the beginning and end of
the year were $650,000 and $750,000, respectively. The accounts receivable turnover was
a. 6.7 times.
b. 6.2 times.
c. 5.8 times.
d. 6.4 times.
148. Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of
$9,250,000 for the year. The average inventory for the year amounted to $2,500,000. The
inventory turnover for the year is
a. 3.7 times.
b. 5.3 times.
c. 3.1 times.
d. 1.4 times.
149. Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of
$9,250,000 for the year. The average inventory for the year amounted to $2,500,000. The
average days in inventory during the year was approximately
a. 260 days.
b. 120 days.
c. 99 days.
d. 70 days.
Financial Analysis: The Big Picture
13–31
150. Savory Thymes, Inc. had net credit sales of $9,000,000 and cost of goods sold of
$5,250,000 for the year. The average inventory for the year amounted to $2,500,000. The
inventory turnover for the year is
a. 3.2 times.
b. 2.8 times.
c. 2.6 times.
d. 2.1 times.
151. Savory Thymes, Inc.had net credit sales of $9,000,000 and cost of goods sold of
$5,250,000 for the year. The average inventory for the year amounted to $2,500,000. The
average days in inventory during the year was approximately
a. 115 days.
b. 130 days.
c. 139 days.
d. 174 days.
152. Which one of the following would not be considered a liquidity ratio?
a. Current ratio
b. Inventory turnover
c. Current cash debt coverage
d. Return on assets
153. The asset turnover is
a. net sales divided by net income.
b. average total assets divided by net income.
c. net sales divided by average total assets.
d. average total assets divided by net sales.
154. The asset turnover measures
a. how often a company replaces its assets.
b. how efficiently a company uses its assets to generate sales.
c. the portion of the assets that have been financed by creditors.
d. the overall rate of return on assets.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–32
155. The profit margin is calculated by dividing
a. sales by cost of goods sold.
b. gross profit by net sales.
c. net income by stockholders’ equity.
d. net income by net sales.
156. Tito Corporation had net income of $2,000,000 and paid dividends to common
stockholders of $500,000 in 2014. The weighted average number of shares outstanding in
2014 was 500,000 shares. Tito Corporation’s common stock is selling for $50 per share on
the NASDAQ. Tito Corporation’s price-earnings ratio is
a. 3 times.
b. 10 times.
c. 12.5 times.
d. 4 times.
157. Tito Corporation had net income of $2,000,000 and paid dividends to common
stockholders of $500,000 in 2014. The weighted average number of shares outstanding in
2014 was 500,000 shares. Tito Corporation’s common stock is selling for $50 per share on
the NASDAQ. Tito Corporation’s payout ratio for 2014 is
a. $5 per share.
b. 20%.
c. 25%.
d. 10%.
158. BVI Corporation had net income of $1,600,000 and paid dividends to common
stockholders of $400,000 in 2014. The weighted average number of shares outstanding in
2014 was 500,000 shares. BVI Corporation’s common stock is selling for $50 per share on
the NASDAQ. BVI Corporation’s price-earnings ratio is
a. 3.2 times.
b. 15.6 times.
c. 10 times.
d. 5 times.
Financial Analysis: The Big Picture
13–33
159. BVI Corporation had net income of $1,600,000 and paid dividends to common
stockholders of $400,000 in 2014. The weighted average number of shares outstanding in
2014 was 500,000 shares. BVI Corporation’s common stock is selling for $50 per share on
the NASDAQ. BVI Corporation’s payout ratio for 2014 is
a. $5 per share.
b. 25%.
c. 20%.
d. 12.5%.
160. The debt to assets ratio measures
a. the company’s profitability.
b. whether interest can be paid on debt in the current year.
c. the proportion of interest paid relative to dividends paid.
d. the percentage of the total assets provided by creditors.
161. Aps Company reported the following on its income statement:
Income before income taxes $420,000
Income tax expense 120,000
Net income $300,000
An analysis of the income statement revealed that interest expense was $70,000. Aps
Company’s times interest earned was
a. 5.3 times.
b. 9 times.
c. 7 times.
d. 4.3 times.
162. Trading on the equity (leverage) refers to the
a. amount of working capital.
b. amount of capital provided by owners.
c. use of borrowed money to increase the return to owners.
d. number of times interest is earned.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–34
163. Rama Company reported the following on its income statement:
Income before income taxes $500,000
Income tax expense 150,000
Net income $350,000
An analysis of the income statement revealed that interest expense was $60,000. Rama
Company’s times interest earned was
a. 6.8 times.
b. 9.3 times.
c. 8.3 times.
d. 5.8 times.
164. A company that is leveraged is one that
a. has a high earnings per share.
b. contains debt financing.
c. contains equity financing.
d. has a high current ratio.
165. The current assets of Orangette Company are $227,500. The current liabilities are
$130,000. The current ratio expressed as a proportion is
a. 175%.
b. 1.75:1.
c. .57:1.
d. $210,000 ÷ $120,000.
166. A weakness of the current ratio is
a. the difficulty of the calculation.
b. it uses year-end balances of current asset and current liability accounts.
c. it is rarely used by sophisticated analysts.
d. it can be expressed as a percentage, as a rate, or as a proportion.
167. A supplier to a company would be most interested in the
a. asset turnover.
b. profit margin.
c. current ratio.
d. earnings per share.
Financial Analysis: The Big Picture
13–35
168. Which one of the following ratios would not likely be used by a short-term creditor in
evaluating whether to sell on credit to a company?
a. Current ratio
b. Inventory turnover
c. Asset turnover
d. Accounts receivables turnover
169. Ratios are used as tools in financial analysis
a. instead of horizontal and vertical analyses.
b. because they can provide information that may not be apparent from inspection of the
individual components of the financial statements.
c. because even single ratios by themselves are quite meaningful.
d. because they are prescribed by GAAP.
170. The ratios that are used to determine a company’s short-term debt paying ability are
a. asset turnover, times interest earned, current ratio, and accounts receivables turnover.
b. times interest earned, inventory turnover, current ratio, and receivables turnover.
c. times interest earned, accounts receivable turnover ratio, current ratio, and inventory
turnover.
d. current ratio, current debt coverage, receivable turnover, and inventory turnover.
171. Ed’s Drive-In $175,000 of current assets and $80,000 of current liabilities before borrowing
$60,000 from the bank with a 3-month note payable. What effect did the borrowing
transaction have on Ed’s Drive-In’s current ratio?
a. The ratio remained unchanged.
b. The change in the current ratio cannot be determined.
c. The ratio decreased.
d. The ratio increased.
172. A liquidity ratio measures the
a. income or operating success of an enterprise over a period of time.
b. ability of the enterprise to survive over a long period of time.
c. short-term ability of the enterprise to pay its maturing obligations and to meet
unexpected needs for cash.
d. number of times interest is earned.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–36
173. If equal amounts are added to the numerator and the denominator of the current ratio and
the ratio is over one, the ratio will always
a. increase.
b. decrease.
c. stay the same.
d. equal zero.
174. If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash
by short-term debt and collection of accounts receivable have on the ratio?
Short-term Borrowing Collection of Receivable
a. Increase No effect
b. Increase Increase
c. Decrease No effect
d. Decrease Decrease
175. A company has an accounts receivable turnover ratio of 10. The average net accounts
receivable during the period are $700,000. What is the amount of net credit sales for the
period?
a. $70,000
b. $7,000,000
c. $700,000
d. $770,000
176. If the average collection period is 52 days, what is the accounts receivable turnover?
a. 7.0 times
b. 14.2 times
c. 14.0 times
d. 5.2 times
177. A general rule to use in assessing the average collection period is that it
a. should not exceed 30 days.
b. can be any length as long as the customer continues to buy merchandise.
c. should not greatly exceed the return period.
d. should not greatly exceed the credit term period.
Financial Analysis: The Big Picture
13–37
178. The inventory turnover is calculated by dividing
a. cost of goods sold by the ending inventory.
b. cost of goods sold by the beginning inventory.
c. cost of goods sold by the average inventory.
d. average inventory by cost of goods sold.
179. A company has an average inventory on hand of $75,000 and its average days in
inventory is 36.5 days. What is the cost of goods sold?
a. $750,000
b. $1,752,000
c. $1,680,000
d. $876,000
180. A successful grocery store would probably have
a. a low inventory turnover.
b. a high inventory turnover.
c. zero profit margin.
d. low volume.
181. Net sales are $2,400,000, beginning total assets are $700,000, and the asset turnover is
3.0. What is the ending total asset balance?
a. $800,000
b. $900,000
c. $700,000
d. $750,000
182. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 30,000
Inventory 20,000
Property, plant and equipment 210,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
13–38
182. (Cont.)
Total Liabilities and Stockholders’ Equity $300,000
Income Statement
Sales revenue $ 90,000
Cost of goods sold 45,000
Gross profit 45,000
Operating expenses 20,000
Net income $ 25,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the current ratio for this company?
a. 1.5
b. 1.0
c. 1.17
d. 0.67
183. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 30,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $300,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 90,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $300,000
Financial Analysis: The Big Picture
FOR INSTRUCTOR USE ONLY
13–39
183. (Cont.)
Income Statement
Sales revenue $ 90,000
Cost of goods sold 45,000
Gross margin 45,000
Operating expenses 20,000
Net income $ 25,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the accounts receivable turnover for this company?
a. 1.5 times
b. 2 times
c. 3.0 times
d. 6 times
184. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 30,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $300,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 90,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $300,000
Income Statement
Sales revenue $ 90,000
Cost of goods sold 45,000
Gross margin 45,000
Operating expenses 20,000
Net income $ 25,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
13–40
184. (Cont.)
What is the inventory turnover for this company?
a. 2 times
b. 2.25 times
c. 1 time
d. .44 times
185. The following information pertains to Unique Company. Assume that all balance sheet
amounts represent both average and ending balance figures. Assume that all sales were
on credit.
Assets
Cash and short-term investments $ 40,000
Accounts receivable (net) 30,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $300,000
Liabilities and Stockholders’ Equity
Current liabilities $ 60,000
Long-term liabilities 90,000
Stockholders’ equity—common 150,000
Total Liabilities and Stockholders’ Equity $300,000
Income Statement
Sales revenue $ 90,000
Cost of goods sold 45,000
Gross margin 45,000
Operating expenses 20,000
Net income $ 25,000
Number of shares of common stock 6,000
Market price of common stock $20
Dividends per share on common stock 0.90
Cash provided by operations $30,000
What is the return on assets for this company?
a. 8.3%
b. 10.0%
c. 11.9%
d. 16.7%