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Home Chapter 18 Multiple Choice Questions
Multiple Choice Questions
This activity contains 15 questions.
Evaluating financial statement information can be divided into broad categories
including


vertical analysis (shows the relationship between numbers on a financial
statement for one year)

horizontal analysis (compares financial statement amounts to amounts from
previous years in terms of the percentage of change)

ratio analysis (expresses the relationship of one number to another number)

all of the above
Use the following information and horizontal analysis to compute the
percentage increase in sales: 2007 sales were $200,000 and 2008 sales were
$250,000.

sales increased by 125%
sales increased by 25%
sales increased by 80%
sales increased by 20%
2006 sales were $200,000, 2007 sales were $220,000, 2008 sales were
$240,000, and 2009 sales were $300,000. 2006 is the base year. Using the
previous information and your knowledge of trend analysis, select the
statement that is false.

The trend analysis % for 2009 is 125%.
Trend analysis is a type of horizontal analysis.
The trend analysis % for 2006 is 100%.
Amounts are always compared to, or divided by, the base year amount.
2007 net sales $200,000; 2007 Cost of Goods Sold $130,000; 2001 operating
expenses $50,000; and 2007 net income $20,000. Use this information and
your knowledge of vertical analysis to select the statement that is false.


On the income statement, all amounts are usually compared to, or divided by, net
sales.

On the balance sheet, all amounts are compared to, or divided by, total liabilities.
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The vertical analysis % for Cost of Goods Sold is 65%.

Vertical analysis shows the relative importance of each income statement item.
2007 current assets $100,000; 2007 long-term assets $300,000; 2007 total
liabilities $150,000; and 2007 total shareholders' equity $250,000. Using the
previous information and your knowledge of common-sized statements, select
the statement that is false.


Common-size statements allow companies of different sizes to be more easily
compared.

The common-size % for total liabilities is 37.5%.

Common-size statements are a type of vertical analysis.

The common-size % for current assets is 33.3%.
All of the following are true regarding benchmarking except


benchmarking includes comparing one company with a key competitor

if the industry average for cost of goods sold (COGS) is 50% and your company
average is 60%, this would be considered favourable

if the industry average for gross profit is 35% and your company average is 40%,
this would be considered favourable

benchmarking includes comparing one company with the industry average
Ratio analysis expresses the relationship of one number to another number. To
add meaning to a ratio it can be compared to

industry averages
ratios of prior years or accounting periods
budgeted ratios
all of the above
All of the following statements are true regarding ratios that measure a
company's ability to pay current liabilities except


in most industries, a current ratio of 2.0 is considered adequate

a higher current ratio is always preferred to a lower current ratio
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working capital = current assets - current liabilities

inventory and prepaid expense are included in the numerator of the current ratio,
but not in the numerator of the acid-test ratio
All of the following statements are true regarding ratios that measure a
company's ability to sell inventory and collect receivables except


an increased accounts receivable turnover ratio indicates an increased ability to
collect cash from credit customers

the formula for the inventory turnover ratio is sales/average inventory

an increased inventory turnover ratio indicates a company is selling merchandise
more quickly than in previous accounting periods; in general, this translates into
more merchandise being sold and higher profitability

a decreased days' sales in receivables ratio indicates the company is collecting
cash from credit customers more quickly. In general, this results in greater cash
inflows
All of the following statements are true regarding ratios that measure a
company's ability to pay short-term and long-term debt except


a debt ratio of 60% indicates 60% of assets are financed with debt

a debt ratio of 90% indicates lower financial risk than a debt ratio of 60%; in
general, lower financial risk results in lower interest rates

a high times-interest-earned ratio indicates a company can pay interest expense
with relative ease

the average debt ratio is between 0.57 and 0.67 according to Robert Morris
Associates
All of the following statements are true regarding ratios that measure a
company's profitability except


return on assets includes interest expense plus net income in the numerator
because these are the returns to the two groups that have financed company
assets

companies strive for a high return on sales

earnings per share is the only ratio that must appear on the face of the income
statement

return on assets (ROA) is usually greater than return on equity (ROE) because
creditors demand a higher return than shareholders
All of the following statements are true regarding ratios that analyze a stock
investment except

in general, an increased price/earnings ratio indicates increased investor
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confidence in the future of the company

many experts argue that book value is the most useful ratio for investment
analysis

two ways for shareholders to earn a return on a share investment are receiving
dividends and selling the stock investment at a gain

shareholders who invest primarily to receive dividends pay special attention to the
dividend yield ratio
Given the following information: Cash 29,000, Accounts Receivable $114,000,
Inventory $113,000, Prepaid Expenses $6,000, Total capital assets $525,000,
Total current liabilities $142,000, Long-term debt $289,000, Total shareholders'
equity $356,000' Net sales $858,000, Cost of goods sold $513,000, Gross
Margin $345,000, Net income $48,000. The acid test ratio is:

55%
1.85
75%
1.01
Given the following information: Cash 29,000, Accounts Receivable $114,000,
Inventory $113,000, Prepaid Expenses $6,000, Total capital assets $525,000,
Total current liabilities $142,000, Long-term debt $289,000, Total shareholders'
equity $356,000' Net sales $858,000, Cost of goods sold $513,000, Gross
Margin $345,000, Net income $48,000. The debt ratio is:

101%
185%
75%
55%
Given the following information: Cash 29,000, Accounts Receivable $114,000,
Inventory $113,000, Prepaid Expenses $6,000, Total capital assets $525,000,
Total current liabilities $142,000, Long-term debt $289,000, Total shareholders'
equity $356,000' Net sales $858,000, Cost of goods sold $513,000, Gross
Margin $345,000, Net income $48,000. The inventory turnover ratio is:

5.56
4.54
8.62
7.52
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