Chapter 13 Connect Practice

A (n) ____ - size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage.

common

The ____ ratio is found by dividing current assets by current liabilities.

current

The gross margin percentage is computed by dividing ____ ____ by ____.

gross margin, sales

The ratio that measure how efficiently company's assets are being used to generate sales is the ____ ____ turnover ratio.

total asset

To compute a(n) ____ percentage, a base year is selected and the data for all years are stated as a percentage of the base year.

trend

Current assets minus current liabilities is known as ____ ____.

working capital

If a company has accounts receivable turnover of 10, what is the average collection period? a. 36.5 days b. 40 days c. 3 days d. 10 days

a. 36.5 days

If sales are $600, gross margin is $400, and cost of goods sold is $200, what is the gross margin percentage? a. 67% b. 133% c. 150% d. 33%

a. 67%

If a company had earnings before interest expense and income taxes of $4,000,000 and Interest expense of $500,000, what is the times interest earned ratio? a. 8 b. 9 c. 0.125 d. 7

a. 8

In addition to financial ratios, which of the following are typical ways used to analyze a company? (select all that apply) a. Evaluation of changes within the company b. Evaluation of industry trends c. Evaluation of changes in consumer tastes d. Evaluation of how much production takes place each day

a. Evaluation of changes within the company b. Evaluation of industry trends c. Evaluation of changes in consumer tastes

Which of the following are examples of performing financial statement analysis? (select all that apply) a. Examining trends in key financial data b. Examining trends in key economic data c. Analyzing financial data across companies d. Comparing financial data across companies e. Understanding how an income statement works

a. Examining trends in key financial data c. Analyzing financial data across companies d. Comparing financial data across companies

True or false: A company with a current ratio of at least 2 will never have difficult meeting its financial obligations. a. False b. True

a. False

____ value reflects expectations about future earnings and dividends, whereas ____ value reflects the results of events that have occurred in the past.

market, book

The elapsed time from when inventory is received from suppliers until cash is collected from customers is the ____ ____.

operating cycle

Profits relative to the book value of stockholder's equity is measured by the ____ on ____.

return, equity

A company with an inventory turnover ratio that is much ____ than the average for its industry may have too much inventory.

slower

Given sales of $650,000, a gross margin of $320,000 and net income of $78,000 calculate the net profit margin. a. 24.4 % b. 8.33% c. 49.2% d. 12%

d. 12%

A times interest earned ratio of less than ____ is inadequate because interest expense exceeds the earning that are available for paying that interest.

1

____ ____ per share measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.

Book value

If a company has average total assets of $2,000,000, net income of $400,000, interest expense of $10,000 and a tax rate of 35%, what is the return on total assets? a. 20.33% b. 20% c. 13.33% d. 20.18%

a. 20.33% {Return on total assets = Net Income + (Interest expense * (1-Tax rate)]} / Average total assets}

Sam's has a market price per share of $30 and a dividends per share of $3. What is the dividend yield ratio? a. 10% b. 110% c. 1000% d. 90%

a. 10% (Dividend yield ratio = Dividends per share / Market price per share)

If a company has a cash of $30,000, marketable securities of $40,000, accounts receivables of $50,000, inventory of $20,000, short-term notes receivable of $30,000, and current liabilities of $60,000, what is its acid-test ratio? a. 2.5 b. 2.83 c. 1.2 d. 1.83

a. 2.5

When evaluating the trend in a company's current ratio, a(n) ____ ratio might b a sign of eliminating obsolete inventory whereas a(n) ____ ratio might be the result of stockpiling inventory. a. declining, improving b. improving, declining

a. declining, improving

The goal for the operating cycle is to: a. reduce it to as few days as possible b. make it equal to the average payment period c. increase it to as many days as possible

a. reduce it to as few days possible

On a common-size balance sheet, items are usually expressed as a percentage of total ____.

assets

The return on total ____ is a measure of operating performance.

assets

A company with Current assets of $100,000 and Current liabilities of $60,000 has a working captial of: a. $160,000 b. $40,000 c. 1.67% d. $(40,000)

b. $40,000

Company C has total liabilities of $400,000 and stockholders' equity of $600,000. What is the debt-equity ratio? a. 1.67 b. 0.67 c. 1.5 d. 0.5

b. 0.67

If a company has a sales on account of $400,000 and average accounts receivable balance of $50,000, what is the accounts receivable turnover? a. $350,000 b. 8 c. 0.125 d. $450,000

b. 8

What is calculated with a company takes 365 days and divides it by the accounts receivable turnover to determine the average number of days requires to receive payment on account? a. Inventory turnover b. Average collection period c. Acid-test (quick) ratio d. Working capital

b. Average collection period

Which of the following is not an element of return on equity calculated using the DuPont method? a. Total asset turnover b. Earnings per share c. Equity multiplier d. Net profit margin percentage

b. Earning per share

Why would an investor be interested in knowing a company's earnings per share? a. The greater the earnings per share, the higher the dividends payment will be. b. Earning form the basis of dividends payments and future increases in the value of shares. c. An investor's only goal in purchasing stock is to receive high dividends, and the higher the net income, the greater the dividends payout. d. The greater the number of shares an investor owns, the greater the value per share.

b. Earnings form the basis of dividends payments and future increases in the value of shares.

In addition to financial ratios, which of the following are typical ways used to analyze a company? a. Evaluation of how much production takes place each day b. Evaluation of industry trends c. Evaluation of changes within the company d. Evaluation of changes in consumer tastes

b. Evaluation of industry trends c. Evaluation of changes within the company d. Evaluation of changes in consumer tastes

True or false: If a company's rate of return on total assets is less than the rate of return the company pays its creditors, financial leverage is positive. a. True b. False

b. False

True or false: on a common-size income statement, each item is expressed as a percentage of net income. a. True b. False

b. False

Which of the following is the correct way to compute earning per share? a. Average number of common shares outstanding / Net income b. Net income / Average number of common shares outstanding c. Net income X Average number of common shares outstanding

b. Net income / Average number of common shares outstanding

What are the three types of analytical techniques that are widely used when comparing financial statements? (select all that apply) a. Interviewing key executives b. Ratios c. Common-size statements d. Dollar and percentage changes on statements

b. Ratios c. Common-size statements d. Dollar and percentage changes on statements

Which of the following measures a company's ability to protect its long term creditors? a. Accounts receivable turnover b. Times interest earned ratio c. Price-earning ratio d. Current ratio

b. Times interest earned ratio

Which of the following can increase asset turnover? (select all that apply) a. increase investment in assets b. increased sales c. increased accumulated depreciation

b. increased sales c. increased accumulate depreciation

Companies with excellent prospects for profitable growth: a. tend to pay high percentage of their cash flow as dividends b. often pay little or no dividends

b. often pay little or no dividends

Vertical analysis focuses on: a. relations among financial statement items in the future b. relations among financial statement items at a given point in time c. trend percentages d. relations among financial statement items over time

b. relations among financial statements items at a given point in time

What is the book value per share for a company that has total stockholders' equity of $10,000,000, additional paid in capital of of $50,000, and 300,000 common shares outstanding? a. $33.17 b. $33.50 c. $33.33 d. $28.57

c. $33.33 (Book value per share = Total stockholders' equity / Number of common shares outstanding)

A company has a market price per share of $100 and earnings per share of $5. What is the price-earning ratio? a. 0.05 b. 500 c. 20 d. 50

c. 20

If a company has a dividend per share of $1.50 and earnings per share of $4.00, what is the dividend payout ratio? a. 64% b. 600% c. 37.5% d. 267%

c. 37.5% (Dividend payout ratio = Dividends per share / Earnings per share)

A company has current liabilities of $20,000 and current assets of $100,000. What is the current ratio? a. $120,000 b. $80,000 c. 5 d. 0.2

c. 5

If a company has an inventory turnover of 4, what is the average sales period? a. 365 days b. 93 days c. 91.25 days d. 4 days

c. 91.25 days

Which ratio is used to measure how quickly credit sales are converted into cash? a. Working capital b. Times interest earned c. Accounts receivable turnover d. Inventory turnover

c. Accounts receivable turnover

Which of the following measure excludes inventories and prepaid expenses from total current assets, leaving only the more liquid assets to be divided by current liabilities? a. Accounts receivable turnover b. Current ratio c. Acid-test (quick) ratio d. Working Capital

c. Acid-test (quick) ratio

Which of the following can be limitations of financial statement analysis? (select all that apply) a. Using sources external to the company such as industry average, changes in economy and/or change in consumer tastes b. Using external sources in addition to financial rations c. Comparing financial data across companies that follow the same accounting standards, but different accounting methods d. Analyzing companies just based on the financial ratio calculations

c. Comparing financial data across companies that follow the same accounting standards, but different accounting methods d. Analyzing companies just based on the financial ratio calculations

Why is the times interest earned ratio based on earnings before interest expense and income taxes? a. Income tax expense is unknown at the time the income statement is prepared. b. Interest expense and income taxes are not actual expenses of business operations. c. Earning before interest expense and income taxes is the amount available for making interest payments. d. The amount of interest expense is variable and changes as payments are made or money is borrowed.

c. Earning before interest expense and income taxes is the amount available for making interest payments.

Why do managers want to minimize working capital? a. It is hard to obtain funds for most large companies b. The amount of working capital is critiqued by analysts. c. It must be financed with long-term debt or equity, which is expensive d. Companies do not need much working capital to do business.

c. It must be financed with long-term debt or equity, which is expensive.

If the average collection period for a company is calculated to be 35 days, what does this mean? a. On average, it takes 35 days to process and calculate the balance in accounts receivable. b. On averages, it takes 35 days to sell inventory c. On average, it takes 35 days to collect a credit sale. d. On averages, customer are allowed 35 days to return their purchases.

c. On average, it takes 35 days to collect a credit sale.

Which of the following shows the relationship between the market price of a share of stock and the stock's current earnings per share? a. Dividend payout ratio b. Return on total assets c. Price-earning ratio d. Earning per share

c. Price-Earning Ratio

Which of the following is NOT a common profitability ratio used by managers? a. Return on equity b. Gross margin percentage c. Times interest earned d. Return on total assets

c. Times interest earned (This is a financial ratio used by a company's long-term creditors.)

Average total assets divided by average stockholders' equity equals a. total asset turnover b. return on stockholders' equity c. equity multiplier d. return on total assets

c. equity multiplier

A company had sales of $6.5 million. Assets at the beginning of the year totaled $2.3 million and assets at the end of the year totaled $3.1 million. Total asset turnover for the company was: a. .831 b. 2.10 c. 2.83 d. 2.41

d. 2.41

What is the inventory turnover ratio if a company has a cost of goods sold of $36,000,000 and an average inventory balance of $9,000,000? a. 0.037 b. 0.25 c. 27 d. 4

d. 4

Which of the following would make it difficult to compare one company's financial statements with another company's financial statements? a. Each company operates in different fiscal year. b. Each company has a different number of customers. c. Each company uses a different set of account titles. d. Each company uses different accounting method.

d. Each company uses a different accounting method.

What is analyzed with horizontal analysis? a. Earnings per share b. Return on common stockholders' equity c. Return on total assets d. Financial data over time

d. Financial data over time

Long-term creditors are concerned with a company's ability to keep a reasonable balance between its liabilities and stockholders' equity. This balance is measured by the ____ - to - ____ ratio.

debt, equity

The ____ ____ ratio gauges the portion of current earnings being paid out in dividends.

dividend payout

The ____ ____ ratio measure the rate of return, in the form of cash dividends only, that would be earned by an investor who buys common stock at the current market price.

dividend yield

In a horizontal analysis, the ____ changes highlight the changes that are the most important economically; the ____ changes highlight the changes that are the most unusual.

dollar, percentage

A ____ price-earnings ratio means that investors are willing to pay a premium for the company's stock because the company is expected to have greater than average future earnings growth. On the other hand, if investors believe a company's future earnings growth is limited, then a ____ price-earnings ratio would result.

high, low

In industries with little financial risk, creditors tolerate ____ debt-to-equity ratios, and in industries with more financial risk creditors demand ____ debt-to-equity ratios.

high, low

The acid-test ratio is designed to measure how well a company can meet its obligations without having to liquidate or depend too heavily on its ____.

inventory

The ____ ____ ratio measures how many times a company's inventory has been sold and replaced during the year.

inventory turnover

Financial ____ results form the difference between the rate of return the company earns on investment in its own assets and the rate of return that the company must pay its creditors.

leverage

How quickly an asset can be converted to cash is known as ____.

liquidity