• A vertical analysis is best used to make comparisons between multiple companies.
  • true
  • False
• In vertical analysis of the income statement, we usually express each income statement item as a percentage of:
  • net income
  • operating expenses
  • tax expense
  • Sales
• Provided below is summary income statement data for Freedom Corporation.

Amount

Sales $800,000

Cost of goods sold 350,000

Operating expenses 180,000

Other expense 30,000

Income tax expense 20,000

Net income $220,000
Using vertical analysis, what percentage is applicable to Cost of Goods Sold?

• • 35.0%
  • 43.8%
  • 56.2%
  • 62.9%
• In vertical analysis of the balance sheet, we usually express each balance sheet item as a percentage of:
  • total assets
  • Total liabilities
  • Total stockholders equity
  • retained earnings
• Provided below is a partial balance sheet for Goodwin Corporation.

Amount

Cash $500,000

Accounts receivable 400,000

Inventory 300,000

Long-term assets 900,000

Total assets $2,100,000
Using vertical analysis, what percentage is applicable to Inventory?

• • 14.3%
  • 30.0%
  • 60.0%
  • 85.7%
• We use horizontal analysis to _____
  • Distinguished persistent earnings from one-time items
  • compare two companies of different sizes
  • Make company comparisons to industry averages
  • analyze trends in financial statement data for a company over time
• Which of the following is the denominator in the formula used to calculate the percentage increase or decrease of an item in horizontal analysis?
  • Current-year amount - prior-year amount
  • Prior-year amount
  • Current-year amount
  • Prior-year amount - current-year amount
• Kentwood Corporation reports net sales of $880,000 in Year 1 and $720,000 in Year 2. Using horizontal analysis, what is the percentage increase or decrease in sales?
  • 18.2%
  • (18.2%)
  • 22.2%
  • (22.2%)
• Big Hit, Inc., reported a net loss of $30 million in the current year and net income of $60 million in the prior year. Which of the following will be the percentage change in income?
  • 150%
  • 50%
  • (50%)
  • (150%)
• Using horizontal analysis, it is important to look at both the amount of change and the percentage change.
  • True
  • False
• Piper, Inc. reports cash of $260,000 in Year 1 and $210,000 in Year 2. Using horizontal analysis, what is the percentage increase or decrease in cash?
  • (19.2%)
  • 19.2%
  • (23.8%)
  • 23.8%
• Provided below is a partial balance sheet for Lilac Corporation.

Year 1 Year 2

Cash $540,000 $500,000

Accounts receivable 460,000 400,000

Inventory 350,000 300,000

Long-term assets 880,000 900,000

Total assets $2,230,000 $2,100,000


Using horizontal analysis, what percentage is applicable to Accounts Receivable?

• • (13.0%)
  • 13.0%
  • 15.0%
  • 20.6%
• Partial financial information for Fleetwood Corporation is provided below. Assume all sales are on credit.

Year 2 Year 1

Accounts receivable

$150,000 $90,000

Inventory 195,000 130,000

Net sales 930,000 810,000

Cost of goods sold 520,000 480,000


Fleetwood’s Year 2 receivables turnover ratio is:

• • 4.3 times
  • 6.2 times
  • 7.3 times
  • 7.8 times
• A low receivables turnover ratio could be due to any of the following except _____
  • the company hired an outside agency to expedite the collection of accounts that have been outstanding for an extended period of time
  • the company loosened its credit terms in an effort to generate additional sales
  • the company is inefficient in collecting on its receivables
  • the company regularly makes large sales to customers with bad credit
• A high inventory turnover ratio indicates all of following except _____.
  • there are no inventory shortages
  • Inventory is selling quickly
  • less cash is tied up in inventory
  • the risk is outdated inventory is lower
• Partial financial information for Fleetwood Corporation is provided below. Assume all sales are on credit.

Year 2 Year 1

Accounts receivable

$150,000 $90,000

Inventory 195,000 130,000

Net sales 930,000 810,000

Cost of goods sold 520,000 480,000


Fleetwood’s Year 2 average days in inventory is:

• • 3.2 days
  • 63.8 days
  • 114.1 days
  • 136.9 days
• A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due.
  • true
  • False
• A current ratio of 2.20 indicates that:
  • for each $1 in current assets, the company has $2.20 in current liabilities
  • for each $1 in current liabilities, the company has $2.20 in current assets
  • for each $1 in total assets, the company has $2.20 in total liabilities
  • for each $1 in total liabilities, the company has $2.20 in total assets
• Why is the acid-test ratio considered to be a more conservative measure of liquidity than the current ratio?
  • because it considers assets available to pay long-term liabilities
  • Because it eliminates items like accounts receivable and current investments
  • because it only considers cash available to pay current liabilities
  • because it eliminates current assets such as inventories and prepaid expenses
• Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy.
  • true
  • false
• A debt to equity ratio of 58% indicates that:
  • for each $1 in liabilities, the company has $0.58 in stockholders equity
  • for each $1 in liabilities the company has $0.58 in retained earnings
  • for $1 in stockholders equity the company has $0.58 in assets
  • for each $1 in stockholders equity the company has $0.58 in liabilities
• Which of the following is the numerator used in calculating the times interest earned ratio?
  • net income + interest expense + tax expense
  • net income + interest expense
  • net income + tax expense
  • Net income
• Other things being equal, the higher the times interest earned ratio, the higher the likelihood of meeting interest payments as they become due.
  • true
  • False
• A gross profit ratio of 55% indicates that:
  • for each $1 of gross profit the company generates $0.55 in net income
  • for each $1 of gross profit, the company generates $0.55 in sales
  • for each $1 of net income the company generates $0.55 in gross profit
  • for $1 of sales the company generates $0.55 in gross profit
• A country recently allowed foreign companies to operate in an industry, which was previously open only to domestic producers. Gross profit ratios are more likely to decline in this industry in the future.
  • true
  • False
• Park Corporation reports net income of $180,000 and net sales of $450,000. Total assets were $760,000 and $920,000 at the beginning and end of the year, respectively. Calculate return on assets.
  • 19.6%
  • 21.4%
  • 23.7%
  • 53.6%
• _____ measures sales volume in relation to the investment in assets.
  • asset turnover
  • inventory turnover
  • return on assets
  • profit margin
• Beatle, Inc., earned a return on assets of 10% for the current year. Its asset turnover is 1.5 and its return on equity is 12%. Calculate Beatle's profit margin.
  • 8.3 %
  • 15%
  • 1.2%
  • 6.7%
• Wildwood, Inc. reports net income of $160,000, net sales of $380,000, average total assets of $940,000 and average total liabilities of $450,000. Calculate return on equity.
  • 17.0%
  • 32.7%
  • 35.6%
  • 77.6%
• Both Alpha Corporation and Beta Corporation operate in the same industry. Alpha's return on assets is 4 percentage points higher than Beta. However, Alpha’s return on equity is over 9 percentage points higher than Beta. Which of the following helps explain this?
  • betas profit margin is much higher than that of alpha
  • Alpha focuses more on asset turnover than profit margin
  • Alpha has a higher debt to equity ratio than beta
  • Alpha relies more on stockholder’s equity than debt for financing
• Use the information provided relating market price per share and earnings per share for four companies to answer the following questions.

Market price Earnings per share

Allied Services $6.00 $0.20

Cairns Corp. 120.00 10.00

Lucida Corp. 30.00 2.00

Redmond, Inc. 10.00 0.60

Which company has the lowest PE ratio?

• • allied
  • Cairo
  • Lucida
  • Redmond
• Use the information provided relating market price per share and earnings per share for four companies to answer the following questions.

Market price Earnings per share

Allied Services $6.00 $0.20

Cairns Corp. 120.00 10.00

Lucida Corp. 30.00 2.00

Redmond, Inc. 10.00 0.60

Which company is most likely to be classified as a growth stock?

• • allied
  • Cairo
  • Lucida
  • Redmond
• Discontinued operations are not expected to persist into future periods.
  • true
  • false
• Lilly’s Boutique has two divisions: clothing and shoes. The shoes division had another good year with net sales of $80,000, cost of goods sold of $35,000, operating expenses of $10,000, and income tax expense of $5,000. The clothing division did not do as well and was sold during the year. The loss from operations and sale of the clothing division was $12,000 before taxes and $8,000 after taxes. Assuming the sale of the clothing division is reported as a discontinued operation, at what amount did Lilly’s Boutique report net income?
  • $18,000
  • $22,000
  • $30,000
  • $38,000
• What is the correct order to present the following items in the income statement?

I Discontinued operations

II Income tax expense

III Net income

IV Other revenues and expenses

• • IV, II, I, III
  • IV, I, II, III
  • I, IV, II, III
  • I, II, IV, III
• Other revenue and expense items are included as part of income from continuing operations.
  • true
  • False
• Which of the following is not an example of an other revenue or expense item?
  • loss due to the write-down of inventory
  • loss of disposal of a major line of business
  • loss on the sale of equipment
  • Uninsured loss due to a flood
• Quality of earnings describes the ability of reported earnings to reflect the company’s true earnings.
  • true
  • false
• Writing down inventory in the current year because of obsolescence will have no effect on net income in the current year.
  • true
  • False
• After the preparation of preliminary financial statements, Saturn Corporation changes the depreciation estimate of the factory building. It reduces the estimated useful life to 15 years from the earlier estimate of 20 years. This change will __________ net income reported.
  • increase
  • decrease
  • have no effect on
• In preparing the preliminary financial statement for the current year, the accountant estimated that future bad debts will be 5% of current accounts receivable. He recorded an allowance for this estimate and prepared the financial statements. His manager later asked him to change the estimate to be 8% of accounts receivable. This change will __________ the net cash flows from operating activities in the statement of cash flows.
  • increase
  • decrease
  • have no effect on
• Conservative accounting practices result in lower income, lower assets, and higher liabilities.
  • true
  • False
• A manager’s decision to increase the estimate of future uncollectible accounts is an example of aggressive accounting.
  • true
  • false
• A manager’s decision to delay the write-down of inventory is an example of aggressive accounting.
  • true
  • False