Chapter 12—Financial Statement Analysis
MULTIPLE CHOICE
1. Which of the following statements regarding financial analysis is true?
a.
Financial analysis will show how a company is guaranteed to perform in the future.
b.
Financial analysis should not be relied upon as an indicator of future performance.
c.
Financial analysis should be performed by only managers and creditors.
d.
Financial analysis provides supplemental information not provided directly by the
financial statements.
2. Ratio analysis is least likely to indicate:
a.
past performance.
b.
future performance.
c.
the effects of inflation.
d.
trends in a company’s performance.
3. The easiest part of ratio analysis is:
a.
the interpretation of the ratio.
b.
analyzing trends or changes in them.
c.
using the ratio to make decisions.
d.
the computation of the ratio.
4. Which of the following is not a limitation in performing financial statement analysis on a
company that uses generally accepted accounting principles?
a.
Variety of methods used by different companies.
b.
Use of estimates by a company.
c.
Use of assumptions by a company.
d.
Use of technology by a company.
5. Which of the following statements is true regarding ratio analysis?
a.
A ratio for a particular company is often compared to industry standards using various
publications.
b.
A ratio for a particular company is unique and, therefore, should not be compared to other
companies’ ratios.
c.
Ratio analysis should be kept as simple as possible, often accomplished by using just one
ratio to measure a company’s performance.
d.
Ratio analysis will not be affected by different accounting methods or assumptions.
6. Bingham Inc. is a retailer with annual sales of less that $10 million. At the end of 2009, ratio analysis
is performed on Bingham’s financial statements by various stakeholders. Bingham’s 2009 ratios are not
likely to be compared to:
a.
Bingham’s 2008 ratios.
b.
Bingham’s 2009 budgeted ratios.
c.
Other retailers with annual sales of less than $10 million.
d.
A manufacturer with annual sales of less than $10 million.
7. Which of the following items is not typically used to prepare financial statements?
a.
Historical costs
b.
Inflation adjustments
c.
Estimations
d.
Assumptions
8. Financial statements prepared using generally accepted accounting principles:
a.
use historical costs and are not adjusted for the effects of increasing prices.
b.
use historical costs and are adjusted for the effects of increasing prices.
c.
use market-based costs and are adjusted for the effects of increasing prices.
d.
use market-based costs and are not adjusted for the effects of decreasing prices.
9. Analyzing financial statement account balances over time for the same company is called:
a.
vertical analysis.
b.
horizontal analysis.
c.
common-size analysis.
d.
price analysis.
10. Which of the following statements regarding horizontal analysis is false?
a.
Horizontal analysis can include more than two years of financial data.
b.
Horizontal analysis is facilitated by computing dollar and percentage changes in financial
statement items.
c.
Horizontal analysis analyzes ratio differences occurring between companies.
d.
Horizontal analysis can include the statement of cash flows.
11. Drucker Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$500,000
$700,000
Performing a horizontal analysis on current assets shows that they have:
a.
Increased 40 percent.
b.
Increased 28.6 percent.
c.
Increased 2.5 percent.
d.
Increased 3.5 percent.
12. Hansen Inc. has the following information available for 2008 and 2009:
2008
2009
Net income
$600,000
$500,000
Which of the following statements is true regarding horizontal analysis with respect to Hansen?
a.
It would show net income has decreased by 20 percent.
b.
It would show net income has decreased by 16.7 percent.
c.
There is not enough information available to perform horizontal analysis.
d.
Horizontal analysis can not be performed using net income.
13. Michaud Ltd. has the following information available for 2008 and 2009:
2008
2009
Total Assets
$2,600,000
$4,000,000
Which of the following statements is true regarding horizontal analysis with respect to Michaud?
a.
It would show total assets has increased by 30 percent.
b.
It would show total assets has increased by 53.8 percent.
c.
There is not enough information available to perform horizontal analysis.
d.
Horizontal analysis can not be performed using total assets.
14. Comparing financial statements of different companies and financial statements of the same company
across time after controlling for differences in size is called:
a.
liquidity analysis.
b.
vertical analysis.
c.
price-earnings analysis.
d.
horizontal analysis.
15. To perform vertical analysis:
a.
items on the balance sheet need to be restated to their fair market values.
b.
items on the balance sheet need to be indexed for inflation.
c.
common-size financial statements need to be prepared.
d.
horizontal analysis needs to have already been done.
16. On a common-size balance sheet, current assets should be stated as a percentage of:
a.
net income.
b.
current assets.
c.
cash.
d.
total assets.
17. On a common-size balance sheet, current liabilities should be stated as a percentage of:
a.
net income.
b.
current liabilities.
c.
total liabilities.
d.
total liabilities and stockholders’ equity.
18. On a common-size income statement, net income should be stated as a percentage of:
a.
net income.
b.
sales.
c.
gross profit.
d.
total assets.
19. On a common-size income statement, operating income should be stated as a percentage of:
a.
net income.
b.
sales.
c.
operating income.
d.
total assets.
20. On a common-size income statement, operating expenses should be stated as a percentage of:
a.
sales.
b.
net income.
c.
operating income.
d.
total assets.
21. Sellars Ltd. has the following information available for 2008 and 2009:
2008
2009
Current assets
$600,000
$ 800,000
Long-term assets
300,000
200,000
Total assets
$900,000
$1,000,000
Converting the 2009 column into a common-size statement would show current assets as being:
a.
33.33 percent higher than 2008 current assets.
b.
80 percent of 2009 total assets.
c.
88.9 percent of 2008 total assets.
d.
75 percent higher than 2009 long-term assets.
22. Hollandsworth Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$500,000
$ 400,000
Long-term assets
300,000
600,000
Total assets
$800,000
$1,000,000
Converting the 2009 column into a common-size statement would show current assets as being:
a.
40 percent of 2009 total assets.
b.
20 percent lower than 2008 current assets.
c.
50 percent of 2008 total assets.
d.
25 percent lower than 2009 long-term assets.
23. Zabar Inc. has the following information available for 2008 and 2009:
2008
2009
Current liabilities
$ 80,000
$ 50,000
Long-term liabilities
100,000
150,000
Total liabilities
$180,000
$200,000
Capital stock
$ 25,000
$ 25,000
Retained earnings
90,000
300,000
Total stockholders’ equity
$115,000
$325,000
Total liabilities and stockholders’ equity
$295,000
$525,000
Converting the 2009 column into a common-size statement would show current liabilities as being:
a.
25 percent of 2009 total liabilities.
b.
37.5 percent lower than 2008 current liabilities.
c.
15.4 percent of total stockholders’ equity.
d.
9.52 percent of total liabilities and stockholders’ equity.
24. Working capital is a measure of:
a.
solvency.
b.
profitability.
c.
liquidity.
d.
marketability.
25. Working capital is computed as follows:
a.
Long-term assets − Long-term liabilities
b.
Current assets Current liabilities
c.
Current assets − Long-term assets
d.
Current assets − Current liabilities
26. McCabe Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$500,000
$600,000
Current liabilities
200,000
400,000
McCabe’s working capital in 2009 is:
a.
$100,000
b.
$200,000
c.
$300,000
d.
$400,000
27. Blaise Inc. has the following information available for 2008 and 2009:
2008
2009
Current assets
$400,000
$400,000
Current liabilities
200,000
600,000
Blaise’s working capital in 2009 is:
a.
$(200,000)
b.
$ 200,000
c.
$ 400,000
d.
$ 0
28. Liquidity measures a company’s ability:
a.
to meet long-term obligations as they become due.
b.
to meet short-term obligations as they become due.
c.
to make a profit in the short-run.
d.
to make a profit in the long-run.
Managerial ACCT Test Bank Chapter 12 7
29. Which of the following ratios is the best measure of liquidity?
a.
Debt-to-equity ratio
b.
Times-interest-earned ratio
c.
Return on assets ratio
d.
Acid-test ratio
30. Which of the following ratios is the best measure of liquidity?
a.
Return on assets ratio
b.
Cash flow from operations to capital expenditures ratio
c.
Current ratio
d.
Earnings per share
31. Which ratio measures the length of time between the purchase of inventory and the eventual collection
of cash from sales?
a.
Quick ratio
b.
Cash-to-cash operating cycle ratio
c.
Accounts receivable turnover ratio
d.
Inventory turnover ratio
NARRBEGIN: Partin Manufacturing
Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/09 and 12/31/08 financial
statements:
12/31/09
12/31/09
Cash
$ 12,000
Accounts payable
$ 10,000
Accounts receivable
6,000
Salaries payable
3,000
Inventory
40,000
Taxes payable
9,000
Prepaid insurance
2,000
Total current liabilities
$ 22,000
Total current assets
$ 60,000
Notes payable
50,000
Property and equipment
80,000
Total long-term liabilities
$ 50,000
Land
20,000
Total liabilities
$ 72,000
Long-term assets
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
Total assets
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2009
$25,000
Inventory (12/31/08)
50,000
Credit sales in 2009
80,000
Cost of goods sold in 2009
45,000
Accounts receivable (12/31/08)
10,000
NARREND
32. Refer to the Partin Manufacturing information above. Partin’s working capital at 12/31/09 is:
a.
$138,000
b.
$ 38,000
c.
$ 88,000
d.
$ 78,000
33. Refer to the Partin Manufacturing information above. Partin’s current ratio at 12/31/09 is: (round to
two decimal places)
a.
2.73
b.
2.67
c.
1.39
d.
.82
34. Refer to the Partin Manufacturing information above. Partin’s acid-test (or quick) ratio at 12/31/09 is:
(round to two decimal places)
a.
2.73
b.
2.67
c.
1.39
d.
.82
35. Refer to the Partin Manufacturing information above. Partin’s accounts receivable turnover ratio at
12/31/09 is: (round to two decimal places)
a.
3.13
b.
5.00
c.
10.00
d.
13.33
36. Refer to the Partin Manufacturing information above. Partin’s inventory turnover ratio at 12/31/09 is:
(round to two decimal places)
a.
1.00
b.
.50
c.
.56
d.
2.00
37. Refer to the Partin Manufacturing information above. Partin’s debt-to–equity ratio at 12/31/09 is:
(round to two decimal places)
a.
.25
b.
.82
c.
.45
d.
.14
NARRBEGIN: Bernstein Inc.
Bernstein Inc.
Bernstein Inc. is a local retailer. The following selected information is available from their 2008 and
2009 financial statements:
Accounts receivable at 12/31/08
$ 160,000
Accounts receivable at 12/31/09
240,000
Inventory at 12/31/08
300,000
Inventory at 12/31/09
360,000
Net credit sales for 2009
3,400,000
Cost of goods sold for 2009
1,980,000
Net income for 2009
1,000,000
NARREND
38. Refer to the Bernstein Inc. information above. What was Bernstein’s accounts receivable turnover
ratio for 2009? (round to two decimal places)
a.
2.50
b.
5.00
c.
8.50
d.
17.00
39. Refer to the Bernstein Inc. information above. What was Bernstein’s average number of days sales in
receivables for 2009? (round to two decimal places)
a.
21.47 days
b.
42.94 days
c.
73.00 days
d.
146.00 days
40. Refer to the Bernstein Inc. information above. What was Bernstein’s inventory turnover ratio for
2009? (round to two decimal places)
a.
3.03
b.
1.52
c.
6.00
d.
3.00
41. Refer to the Bernstein Inc. information above. What was Bernstein’s number of days inventory was
held for sale in 2009? (round to two decimal places)
a.
121.67 days
b.
60.83 days
c.
120.46 days
d.
240.13 days
42. Which of the following accounts should not be included in the calculation of the acid-test (or quick)
ratio?
a.
Accounts payable
b.
Accounts receivable
c.
Cash
d.
Inventory
43. Which of the following account balances would not be used in the calculation of the current ratio?
a.
Inventory
b.
Accounts payable
c.
Sales revenue
d.
Prepaid insurance
44. Plumeria Inc. has recently calculated the accounts receivable turnover for the current year to be 15. In
prior years, the same ratio was always higher. Which of the following statements would be the best
interpretation for the reason for the ratio’s change?
a.
The company had less sales in the current year than in prior years.
b.
The company had more sales in the current year than in prior years.
c.
The company had fewer accounts receivables in the current year than in prior years.
d.
The company took longer to collect on their accounts receivables in the current year than
in prior years.
45. Torrence Inc. has recently calculated the inventory turnover for the current year to be 30. In prior
years, the same ratio was always lower. Which of the following statements would be the best
interpretation for the reason for the ratio’s change?
a.
The company had less sales in the current year than in prior years.
b.
The company purchased less inventory in the current year than in prior years.
c.
The company took fewer days to sell its inventory in the current year than in prior years.
d.
The company took more days to sell its inventory in the current year than in prior years.
46. As a company’s accounts receivable turnover ratio increases from one year to the next, they will find
that the number of days’ sales in receivables:
a.
decreases.
b.
increases.
c.
stays the same.
d.
can not be determined.
47. As a company’s inventory turnover ratio decreases from one year to the next, they will find that the
number of days inventory is held before sale:
a.
decreases.
b.
increases.
c.
stays the same.
d.
can not be determined.
48. A quick ratio ____ is often a concern for creditors and managers.
a.
of more than one
b.
of less than one
c.
equal to one
d.
of more than two
49. ABC Inc. has determined that it needs to increase its current ratio in order to be in compliance with a
creditor’s loan agreement. All else being equal, which of the following ways would be best for
increasing their current ratio?
a.
Increasing long-term assets
b.
Decreasing current assets
c.
Decreasing current liabilities
d.
Increasing long-term liabilities
50. Which of the following types of companies would you expect to have the highest inventory turnover
ratio?
a.
A law firm
b.
A construction company
c.
A fine jewelry retailer
d.
A grocery store
51. Solvency measures a company’s ability:
a.
to meet long-term obligations as they become due.
b.
to meet short-term obligations as they become due.
c.
to make a profit in the short-run.
d.
to make a profit in the long-run.
52. Which of the following ratios would be the best measure of solvency?
a.
Return on assets ratio
b.
Price earnings ratio
c.
Current ratio
d.
Times-interest-earned ratio
53. Which of the following ratios would not be the best measure of solvency?
a.
Return on assets ratio
b.
Debt-to-equity ratio
c.
Debt service coverage ratio
d.
Times-interest-earned ratio
54. Which of the following statements would be the best interpretation of a company’s low debt–to-equity
ratio?
a.
The company chooses to pay cash for most of its major purchases.
b.
The company is not liquid.
c.
The company prefers to pay stockholders high dividends out of their retained earnings.
d.
The company prefers to raise funds by issuing capital stock than long-term borrowing.
55. Which ratio would be best for measuring a company’s ability to repay both principal and interest on
outstanding loans from cash generated from operating activities?
a.
Current ratio
b.
Times-interest-earned ratio
c.
Debt service coverage ratio
d.
Debt-to-equity ratio
56. During 2009, Mark Walker, Inc. had cash flow from operations of $675,000, dividends paid totaling
$20,000, and equipment purchases of $200,000. The cash flow from operations to capital
expenditures ratio is:
a.
3.275
b.
3.475
c.
3.375
d.
3.750
NARRBEGIN: Hardister Corp.
Hardister Corp.
Hardister Corp. has the following information available from its financial statements for 2009:
Balance sheet information:
Income statement information:
Assets
Current assets
$ 400,000
Sales (all on account)
$3,000,000
Long-term assets
600,000
Cost of goods sold
1,500,000
Total assets
$1,000,000
Salary expense
200,000
Miscellaneous expenses
400,000
Liabilities
Interest expense
100,000
Current liabilities
$ 200,000
Income before taxes
$ 800,000
Long-term liabilities
100,000
Income tax expense
300,000
Total liabilities
$ 300,000
Net income
$ 500,000
Stockholders’ Equity
Capital stock
$ 300,000
Retained earnings
400,000
Total Stockholders’ Equity
$ 700,000
NARREND
57. Refer to the Hardister Corp. information above. Hardister’s current ratio is: (round to two decimal
places)
a.
3.33
b.
.67
c.
.50
d.
2.00
58. Refer to the Hardister Corp. information above. Hardister’s debt-to-equity ratio is: (round to two
decimal places)
a.
.50
b.
.43
c.
.75
d.
.25
59. Refer to the Hardister Corp. information above. Hardister’s times-interest-earned ratio is: (round to
two decimal places)
a.
8.00
b.
9.00
c.
6.00
d.
5.00
60. Refer to the Hardister Corp. information above. Assuming Hardister has no preferred stock and the
average number of common shares outstanding was 10,000, what would be earnings per share for
2009? (round to two decimal places)
a.
$ 80.00
b.
$ .02
c.
$ 50.00
d.
$300.00
61. Refer to the Hardister Corp. information above. Assuming Hardister had total assets at the end of 2008
of $800,000 and an income tax rate of 37.5 percent, what would be return on assets for 2009? (round
to the nearest whole percent)
a.
63%
b.
43%
c.
57%
d.
59%
62. Refer to the Hardister Corp. information above. At the end of 2009, Hardister’s common stock was
listed on the stock exchange as having a market price of $65 per share and there are 10,000 shares
outstanding. Hardister has no preferred stock. What would be Hardister’s price earnings (P/E) ratio
for 2009? (round to two decimal places)
a.
7.69 to 1
b.
12.31 to 1
c.
1.30 to 1
d.
.77 to 1
63. Which of the following ratios would be the best measure of profitability?
a.
Current ratio
b.
Debt-to-equity ratio
c.
Times-interest-earned ratio
d.
Return on assets
64. Which of the following ratios would not be the best measure of profitability?
a.
Earnings per share
b.
Debt-to-equity ratio
c.
Return on common stockholders’ equity
d.
Return on assets
NARRBEGIN: Grogan Inc.
Grogan Inc.
Grogan Inc. had the following information available from its 2008 and 2009 financial statements:
Balance sheet information:
2008
2009
Current assets
$ 30,000
$ 80,000
Long-term assets
100,000
200,000
Total assets
$130,000
$280,000
Current liabilities
$ 15,000
$ 10,000
Long-term liabilities
30,000
40,000
Total liabilities
$ 45,000
$ 50,000
Common stock
$ 60,000
$100,000
Retained earnings
25,000
130,000
Total stockholders’ equity
$ 85,000
$230,000
Income statement information:
Income before interest and taxes
$ 30,000
$200,000
Interest expense
3,000
8,000
Tax expense
2,000
50,000
Net income
$ 25,000
$142,000
Other information:
Dividends paid to stockholders
$ 0
$ 37,000
Average income tax rate
23%
26%
Net cash flows from operations
$ 25,000
$150,000
Cash paid for acquisitions
$ 10,000
$ 75,000
NARREND
65. Refer to the Grogan Inc. information above. Performing a horizontal analysis on Grogan’s total assets
shows that they have:
a.
increased by 97.18%.
b.
increased by 215.38%.
c.
increased by 115.38%.
d.
increased by 53.57%
66. Refer to the Grogan Inc. information above. Converting the 2009 column into a common-size
statement would show current assets as being: (round to two decimal places)
a.
40.00 percent of long-term assets.
b.
28.57 percent of total assets.
c.
56.34 percent of net income.
d.
266.67 percent of 2008’s current assets.
67. Refer to the Grogan Inc. information above. Grogan’s working capital for 2009 is:
a.
$ 70,000
b.
$230,000
c.
$ 50,000
d.
$150,000
68. Refer to the Grogan Inc. information above. Grogan’s current ratio for 2009 is: (round to two decimal
places)
a.
2.67
b.
5.60
c.
.29
d.
8.00
69. Refer to the Grogan Inc. information above. Grogan’s cash flow from operations to current
liabilities ratio for 2009 is: (round to two decimal places)
a.
12.00
b.
15.00
c.
3.00
d.
1.06
70. Refer to the Grogan Inc. information above. Grogan’s debt-to-equity ratio for 2009 is: (round to two
decimal places)
a.
.25
b.
.22
c.
.39
d.
.18
71. Refer to the Grogan Inc. information above. Grogan’s times-interest-earned ratio for 2009 is:
(round to two decimal places)
a.
17.75
b.
19.38
c.
25.00
d.
18.75
72. Refer to the Grogan Inc. information above. Grogan’s cash flow from operations to capital
expenditures ratio for 2009 is: (round to two decimal places)
a.
249.33%
b.
150.67%
c.
200.00%
d.
50.00%
73. Refer to the Grogan Inc. information above. Grogan’s return on assets (ROA) ratio for 2009 is:
(round to two decimal places)
a.
72.16%
b.
73.17%
c.
69.27%
d.
50.71%
74. Refer to the Grogan Inc. information above. Grogan’s return on common stockholders’ equity
(ROCSE) ratio for 2009 is: (round to two decimal places)
a.
177.50%
b.
76.92%
c.
61.74%
d.
90.16%
75. Refer to the Grogan Inc. information above. Grogan had an average of 5,000 shares of common
stock outstanding during 2009. The company’s earnings per share for 2009 is: (round to two
decimal places)
a.
$26.00
b.
$46.00
c.
$28.40
d.
$20.00