1.

Short-term creditors are usually most interested in assessing

a. marketability.
b. profitability.
c. solvency.
d. operating results.
2. Horizontal analysis of comparative financial statements includes the
a. evaluation of financial statement data
b. development of common size statements
c. calculation of liquidity ratios.
d. calculation of dollar amount changes and percentage changes from the previous to the current year.
3. One reason that a common-size statement is a useful tool in financial analysis is that it enables the user to
a. determine which companies in a single industry are of the same size.
b. determine which companies in a single industry are of the same value.
c. make a better comparison of two companies of different sizes in the same industry.
d. judge the relative potential of two companies of similar size in different industries.
4. Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or
bondholders and also gives an indication of the potential ability of the business to borrow additional funds on
a long-term basis?
a. rate earned on stockholders' equity
b. ratio of net sales to assets
c. ratio of fixed assets to long-term liabilities
d. number of days' sales in receivables
5. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is
referred to as
a. solvency and equity
b. solvency and liquidity
c. solvency and profitability
d. solvency and leverage
6. Which of the following is not an analysis used in assessing solvency?
a. current position analysis
b. inventory analysis
c. number of times interest charges are earned
d. ratio of net sales to assets
7. Vertical analysis is also known as
a. perpendicular analysis.
b. trend analysis.
c. straight-line analysis.
d. common size analysis
8. A balance sheet that displays only component percentages is called
a. trend balance sheet
b. common-sized balance sheet
c. comparative balance sheet
d. condensed balance sheet
9. Which of the following is an appropriate computation for return on investment?
a. Sales divided by stockholders' equity
b. Net income divided by total assets
c. Sales divided by total assets
 d. Net income divided by sales
10. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to
a. remain the same
b. either increase or decrease
c. increase
d. decrease
11. A common measure of liquidity is
a. receivable turnover.
b. dividends per share of common stock.
c. profit margin.
d. ratio of net sales to assets.
12. Which of the following is included in the calculation of the acid-test (quick) ratio?
a. Accounts receivable (Yes); Inventories (Yes)
b. Accounts receivable (No); Inventories (Yes)
c. Accounts receivable (Yes); Inventories (No)
d. Accounts receivable (No); Inventories (No)
13. Once inventory is excessive which item below is not true?
a. increase storage costs
b. reduce solvency
c. increase taxes
d. increase ordering costs
14. Which of the following is true about a pro forma earnings number?
a. Reporting pro forma earnings by companies subject to SEC regulation is illegal.
b. A pro forma earnings number is regular GAAP earnings with certain exclusions.
c. A pro forma earnings number is in total conformity with GAAP.
d. A pro forma earnings number is a forecast of earnings in future periods.
15. A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the following sets
of ratios characterizes the firm with the greatest amount of financial risk?
a. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity
b. High debt-to-equity ratio, high interest coverage ratio, stable return on equity
c. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
d. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity