Chapter 14: Financial Statement Analysis

True

T or F: Vertical analysis of financial statements is accomplished by preparing common-size statements.

True

T or F: In determining whether a company's financial condition is improving or deteriorating over time, horizontal analysis of financial statement data would be more useful than vertical analysis.

True

T or F: A common-size financial statement is a vertical analysis in which each financial statement account is expressed as a percentage.

False

T or F: The acid-test ratio is usually greater than the current ratio.

True

T or F: Liquidity refers to how quickly an asset can be converted into cash.

False

T or F: If the acid-test ratio is less than one, then paying off some current liabilities with cash will increase the acid-test (quick) ratio.

True

T or F: A company could improve its acid-test ratio by selling some equipment it no longer needs for cash.

True

T or F: Acquiring land by taking out a long-term mortgage will not affect the current ratio.

True

T or F: Purchasing marketable securities with cash will have no effect on a company's acid-test ratio.

True

T or F: As the accounts receivable turnover ratio decreases, the average collection period increases.

True

T or F: If a company's operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable.

False

T or F: All other things the same, when a company increases its inventories in anticipation of later higher sales, the accounts receivable turnover ratio for the current period increases.

True

T or F: All other things the same, purchasing merchandise inventory would have no effect on the accounts receivable turnover ratio at a retailer.

False

T or F: All other things the same, when a customer purchases an item for cash, the accounts receivable turnover ratio increases.

True

T or F: As the inventory turnover increases, the average sales period decreases.

A. increase working capital.

Selling used equipment at book value for cash will: 

A. increase working capital.

B. decrease working capital.

C. decrease the debt-to-equity ratio.

D. increase net income.

C. decrease the acid-test ratio.

If current assets exceed current liabilities, prepaying an expense on the last day of the year will: 

A. decrease the current ratio.

B. increase the acid-test ratio.

C. decrease the acid-test ratio.

D. increase the current ratio.

C. selling merchandise on credit at a profit.

Norton Inc. could improve its current ratio of 2 by: 

A. paying a previously declared stock dividend.

B. writing off an uncollectible receivable.

C. selling merchandise on credit at a profit.

D. purchasing inventory on credit.

C. the acid-test ratio.

The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is: 

A. the debt-to-equity ratio.

B. the current ratio.

C. the acid-test ratio.

D. working capital.

B. decrease the current ratio.

A company's current ratio is greater than 1. Purchasing raw materials on credit would: 

A. increase the current ratio.

B. decrease the current ratio.

C. increase net working capital.

D. decrease net working capital.

C. Sell some equipment for cash.

Sand Company has an acid-test ratio of 0.8. Which of the following actions would improve the acid-test ratio? 

A. Collect some accounts receivable.

B. Acquire some inventory on account.

C. Sell some equipment for cash.

D. Use cash to pay off some accounts payable.

C. Gross Margin/Sales

The gross margin percentage is equal to: 

A. (Net operating income + Selling and administrative expenses)/Sales

B. Net operating income/Sales

C. Gross Margin/Sales

D. Cost of goods sold/Net income

D. Prepaid rent.

Which of the following is not a source of financial leverage? 

A. Bonds payable.

B. Accounts payable.

C. Taxes payable.

D. Prepaid rent.

A. increase.

The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would: 

 

A. increase.

B. decrease.

C. remain unchanged.

D. impossible to determine.

B. Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future.

Which one of the following statements about book value per share is most correct? 

A. Market price per common share usually approximates book value per common share.

B. Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future.

C. A market price per common share that is greater than book value per common share is an indication of an overvalued stock.

D. Book value per common share is the amount that would be paid to stockholders if the company were sold to another company.