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Chapter 15: Financial Statement Analysis

1. A long-term creditor looks to profitability and solvency measures that indicate the
company's ability to survive over a long period of time.
A. True

B. False

2. Vertical analysis is a technique for evaluating a series of financial statement data over a
period of time.
A. True

B. False

3. The purpose of horizontal analysis is to determine the increase or decrease that has taken
place, expressed as an amount or a percentage.
A. True

B. False

4. Vertical analysis is also called trend analysis.


A. True

B. False

5. Solvency ratios measure the short-term ability of the company to pay its maturing
obligations and to meet unexpected needs for cash.
A. True

B. False

6. The acid-test ratio is a measure of a company's immediate short-term liquidity.


A. True

B. False

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7. Inventory turnover and profit margin are profitability ratios.
A. True

B. False

8. Asset turnover measures how efficiently a company uses its assets to generate sales.
A. True

B. False

9. Extraordinary items are events and transactions that are unusual in nature or infrequent in
occurrence.
A. True

B. False

10. Pro forma income usually excludes items that the company thinks are unusual or
nonrecurring.
A. True

B. False

11. A short-term creditor, such as a bank, is primarily interested in the borrower's:


A. liquidity.

B. profitability.

C. solvency.

D. growth potential.

12. Comparisons can be made on all of the following bases except:


A. industry averages.

B. intercompany basis.

C. intracompany basis.

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D. All of these options are bases for comparison.

13. A technique for evaluating a series of financial statement data over a period of time is:
A. horizontal analysis.

B. ratio analysis.

C. vertical analysis.

D. common-size analysis.

14. A technique for evaluating financial statements that expresses the relationship among
selected items of financial statement data is:
A. horizontal analysis.

B. ratio analysis.

C. vertical analysis.

D. common-size analysis.

15. Horizontal analysis is also called:


A. common-size analysis.

B. ratio analysis.

C. trend analysis.

D. vertical analysis.

16. In vertical analysis, the base amount for each income statement item is:
A. gross profit.

B. net income.

C. net sales.

D. sales.

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17. A ratio can be expressed in terms of a:
A. percentage.

B. rate.

C. simple proportion.

D. All of these options.

18. Ratios that measure the short-term ability of the company to pay its maturing obligations
are:
A. liquidity ratios.

B. profitability ratios.

C. solvency ratios.

D. trend ratios.

19. A ratio that is a measure of a company's immediate short-term liquidity is the:


A. acid-test ratio.

B. current ratio.

C. debt to total assets ratio.

D. receivables turnover.

20. An overall measure of profitability is the:


A. asset turnover.

B. profit margin.

C. return on assets.

D. return on common stockholders' equity.

21. When a company has preferred stock, the return on common stockholders' equity is
computed by dividing:
A. net income by ending common stockholders' equity.

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B. net income by average common stockholders' equity.

C. net income less preferred dividends by ending common stockholders' equity.

D. net income less preferred dividends by average common stockholders' equity.

22. Which of the following is a solvency ratio?


A. Inventory turnover ratio.

B. Times interest earned.

C. Profit margin.

D. Price-earnings ratio.

23. Times interest earned is computed by dividing interest expense into:


A. net income.

B. income before income taxes.

C. income before interest expense.

D. income before income taxes and interest expense.

24. Which of the following includes all changes in stockholders' equity during a period
except those resulting from investments by stockholders and distributions to
stockholders?
A. Net income.

B. Gross income.

C. Continuing operations income.

D. Comprehensive income.

25. Extraordinary items include each of the following except the:


A. effects of major natural casualties if rare in the area.

B. effects of a newly enacted law or regulation.

C. expropriation of property by a foreign government.

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D. write-down of inventories.

This is the end of the test. When you have completed all the questions and reviewed your
answers, press the button below to grade the test.

Grade the Test

0% (0 out of 25 correct)

1. A long-term creditor looks to profitability and solvency measures that indicate the
company's ability to survive over a long period of time.
A. True
B. False

2. Vertical analysis is a technique for evaluating a series of financial statement data


over a period of time.
A. True
B. False

3. The purpose of horizontal analysis is to determine the increase or decrease that has
taken place, expressed as an amount or a percentage.
A. True
B. False

4. Vertical analysis is also called trend analysis.


A. True
B. False

5. Solvency ratios measure the short-term ability of the company to pay its maturing
obligations and to meet unexpected needs for cash.
A. True

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B. False

6. The acid-test ratio is a measure of a company's immediate short-term liquidity.


A. True
B. False

7. Inventory turnover and profit margin are profitability ratios.


A. True
B. False

8. Asset turnover measures how efficiently a company uses its assets to generate
sales.
A. True
B. False

9. Extraordinary items are events and transactions that are unusual in nature or
infrequent in occurrence.
A. True
B. False

10. Pro forma income usually excludes items that the company thinks are unusual or
nonrecurring.
A. True
B. False

11. A short-term creditor, such as a bank, is primarily interested in the borrower's:


A. liquidity.
B. profitability.
C. solvency.
D. growth potential.

12. Comparisons can be made on all of the following bases except:


A. industry averages.

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B. intercompany basis.
C. intracompany basis.
D. All of these options are bases for comparison.

13. A technique for evaluating a series of financial statement data over a period of
time is:
A. horizontal analysis.
B. ratio analysis.
C. vertical analysis.
D. common-size analysis.

14. A technique for evaluating financial statements that expresses the relationship
among selected items of financial statement data is:
A. horizontal analysis.
B. ratio analysis.
C. vertical analysis.
D. common-size analysis.

15. Horizontal analysis is also called:


A. common-size analysis.
B. ratio analysis.
C. trend analysis.
D. vertical analysis.

16. In vertical analysis, the base amount for each income statement item is:
A. gross profit.
B. net income.
C. net sales.
D. sales.

17. A ratio can be expressed in terms of a:


A. percentage.
B. rate.
C. simple proportion.

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D. All of these options.

18. Ratios that measure the short-term ability of the company to pay its maturing
obligations are:
A. liquidity ratios.
B. profitability ratios.
C. solvency ratios.
D. trend ratios.

19. A ratio that is a measure of a company's immediate short-term liquidity is the:


A. acid-test ratio.
B. current ratio.
C. debt to total assets ratio.
D. receivables turnover.

20. An overall measure of profitability is the:


A. asset turnover.
B. profit margin.
C. return on assets.
D. return on common stockholders' equity.

21. When a company has preferred stock, the return on common stockholders' equity
is computed by dividing:
A. net income by ending common stockholders' equity.
B. net income by average common stockholders' equity.
C. net income less preferred dividends by ending common stockholders'
equity.
D. net income less preferred dividends by average common stockholders'
equity.

22. Which of the following is a solvency ratio?


A. Inventory turnover ratio.
B. Times interest earned.
C. Profit margin.

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D. Price-earnings ratio.

23. Times interest earned is computed by dividing interest expense into:


A. net income.
B. income before income taxes.
C. income before interest expense.
D. income before income taxes and interest expense.

24. Which of the following includes all changes in stockholders' equity during a
period except those resulting from investments by stockholders and distributions
to stockholders?
A. Net income.
B. Gross income.
C. Continuing operations income.
D. Comprehensive income.

25. Extraordinary items include each of the following except the:


A. effects of major natural casualties if rare in the area.
B. effects of a newly enacted law or regulation.
C. expropriation of property by a foreign government.
D. write-down of inventories.

Retake Test

Self Study
1. Comparisons of data within a company are an example of the following comparative
basis:
A. Industry averages.

B. Intracompany.

C. Intercompany.

D. Both (b) and (c).

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2. In horizontal analysis, each item is expressed as a percentage of the:
A. net income amount.

B. stockholders' equity amount.

C. total assets amount.

D. base year amount.

3. In vertical analysis, the base amount for depreciation expense is generally:


A. net sales.

B. depreciation expense in a previous year.

C. gross profit.

D. fixed assets.

4. The following schedule is a display of what type of analysis?


Amount Percent
Current assets $200,000 25%
Property, plant, and equipment 600,000 75%
Total assets $800,000
A. Horizontal analysis.

B. Differential analysis.

C. Vertical analysis

D. Ratio analysis.

5. Sammy Corporation reported net sales of $300,000, $330,000, and $360,000 in the years,
2006, 2007, and 2008, respectively. If 2006 is the base year, what is the trend percentage
for 2008?
A. 77%.

B. 108%.

C. 120%.

D. 130%.

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6. Which of the following measures is an evaluation of a firm's ability to pay current
liabilities?
A. Acid-test ratio.

B. Current ratio.

C. Both (a) and (b).

D. None of the above.

7. A measure useful in evaluating the efficiency in managing inventories is:


A. inventory turnover.

B. average days to sell inventory.

C. Both (a) and (b).

D. None of the above.

8. In reporting discontinued operations, the income statement should show in a special


section:
A. gains and losses on the disposal of the discontinued segment.

B. gains and losses from operations of the discontinued segment.

C. Both (a) and (b).

D. Neither (a) nor (b).

9. Scout Corporation has income before taxes of $400,000 and an extraordinary loss of
$100,000. If the income tax rate is 25% on all items, the income statement should show
income before extraordinary items and extraordinary items, respectively, of:
A. $325,000 and $100,000.

B. $325,000 and $75,000.

C. $300,000 and $100,000.

D. $300,000 and $75,000.

10. Which situation below might indicate a company has a low quality of earnings?

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A. The same accounting principles are used each year.

B. Revenue is recognized when earned.

C. Maintenance costs are expensed as incurred.

D. The company is continually reporting pro forma income numbers.

This is the end of the test. When you have completed all the questions and reviewed your
answers, press the button below to grade the test.

Grade the Test

0% (0 out of 10 correct)

1. Comparisons of data within a company are an example of the following


comparative basis:
A. Industry averages.
B. Intracompany.
C. Intercompany.
D. Both (b) and (c).

2. In horizontal analysis, each item is expressed as a percentage of the:


A. net income amount.
B. stockholders' equity amount.
C. total assets amount.
D. base year amount.

3. In vertical analysis, the base amount for depreciation expense is generally:


A. net sales.
B. depreciation expense in a previous year.
C. gross profit.
D. fixed assets.

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4. The following schedule is a display of what type of analysis?
Amount Percent
Current assets $200,000 25%
Property, plant, and equipment 600,000 75%
Total assets $800,000
A. Horizontal analysis.
B. Differential analysis.
C. Vertical analysis
D. Ratio analysis.

5. Sammy Corporation reported net sales of $300,000, $330,000, and $360,000 in the
years, 2006, 2007, and 2008, respectively. If 2006 is the base year, what is the
trend percentage for 2008?
A. 77%.
B. 108%.
C. 120%.
D. 130%.

6. Which of the following measures is an evaluation of a firm's ability to pay current


liabilities?
A. Acid-test ratio.
B. Current ratio.
C. Both (a) and (b).
D. None of the above.

7. A measure useful in evaluating the efficiency in managing inventories is:


A. inventory turnover.
B. average days to sell inventory.
C. Both (a) and (b).
D. None of the above.

8. In reporting discontinued operations, the income statement should show in a


special section:
A. gains and losses on the disposal of the discontinued segment.
B. gains and losses from operations of the discontinued segment.
C. Both (a) and (b).

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D. Neither (a) nor (b).

9. Scout Corporation has income before taxes of $400,000 and an extraordinary loss
of $100,000. If the income tax rate is 25% on all items, the income statement
should show income before extraordinary items and extraordinary items,
respectively, of:
A. $325,000 and $100,000.
B. $325,000 and $75,000.
C. $300,000 and $100,000.
D. $300,000 and $75,000.

10. Which situation below might indicate a company has a low quality of earnings?
A. The same accounting principles are used each year.
B. Revenue is recognized when earned.
C. Maintenance costs are expensed as incurred.
D. The company is continually reporting pro forma income numbers.

Retake Test

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